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F E D E R A L R E S E R V E B A N K O F N EW Y O R K C irc u la r N o. 6634""1 N o v e m b er 9, 1970 | [ REGULATION Z In te rp re ta tio n and P ro p o s e d A m endm ents To A ll State Member Banks, and Others Concerned, in the Second Federal R eserve District: The S y stem : follow ing s ta te m e n t w as r e c e n tly is s u e d by th e B o a rd of G o v e rn o rs of the F e d e ra l R e s e rv e The B o a rd of G o v e rn o rs of the F e d e ra l R e s e rv e S y stem announced th e adoption of one i n te r p r e ta tio n to its T ru th in L ending R eg u lation Z and is s u e d th r e e p ro p o se d am e n d m e n ts of th e R egulation fo r p u b lic c o m m e n t. The in te r p r e ta tio n is s u e d by th e B o a rd s p e lls out th a t a ll p o in ts and d isc o u n ts p aid to a c r e d ito r by a s e l l e r in co n n ectio n w ith a c o n s u m e r c re d it tr a n s a c tio n m u st be in clu d ed in th e fin an ce c h a rg e to th e e x te n t th ey a r e p a s s e d on to th e c u s to m e r. One ex am p le is th e p o in ts p aid by th e s e l l e r to a s s u r e an e x te n sio n of c r e d it in a r e a l e s ta te tra n s a c tio n . H ow ever, th e B o ard w ill not p re s u m e th a t a ll p o in ts and d isc o u n ts a r e p a s s e d on to th e b u y er. A m en d m en ts p ro p o se d by th e B o a rd would: 1. P ro v id e th a t c r e d ito r s m u s t give 15 d ay s n o tice to a c tiv e c u s to m e rs of any change in te r m s of an o p e n -e n d acco u n t. At p r e s e n t, c r e d ito r s m u st give 30 days n o tice of any change in te r m s to a ll c u s to m e r s , w h e th e r they have a c tiv e o r in a c tiv e a c c o u n ts. U nder the p ro p o s a l, in a c tiv e ac co u n ts m u st be n o tified when th ey b eco m e a c tiv e and b e fo re any in c r e a s e in fin an ce c h a rg e s is im p o se d a g a in s t th e acco u n t. U n d er an am en d m en t is s u e d on O cto b er 23, no n o tice is r e q u ire d if th e only change is the re d u c tio n in th e p e rio d ic r a te o r r a te s a p p lic a b le to th e account. 2. P e r m it m o d ific a tio n of th e r e s c is s io n n o tic e u se d in c re d it s a le s of v a c a n t lo ts by s u b s titu t ing th e w o rd " h o m e s ite " fo r "h o m e ." 3. P e r m it th e a d v e rtis in g of m eaningful c r e d it te r m s a p p lica b le u n d e r FHA Section 235 financing b u t p ro h ib it a d v e rtis in g of p a y m e n ts o r annual p e rc e n ta g e ra te , w hich w ould be m isle a d in g to m o st p ro s p e c tiv e c u s to m e r s . The B o a rd fixed D e c e m b e r 4 a s the d ead lin e fo r re c e ip t of co m m e n ts on the th re e p ro p o se d a m e n d m e n ts. F ollow ing a r e e x c e r p ts fro m th e F e d e ra l R e g is te r of N ovem ber 5, co n tain in g the te x ts of the i n t e r p r e ta tio n (p rin ted below ) and of th e th r e e p ro p o se d a m e n d m e n ts (p rin ted on th e r e v e r s e sid e ). C o m m en ts on th e p ro p o se d a m e n d m e n ts should be su b m itte d by D e c e m b e r 4 and m ay be s e n t to o u r C o n su m e r In fo r m a tio n and S e c u ritie s R eg u latio n s D e p a rtm e n t. A lfre d H ayes, P r e s id e n t. Title 12— BANKS AND BANKING Chapter II— Federal Reserve System SU BCH A PTER A — BO A RD O F G O V ER N O R S OF THE FEDERAL RESERVE SYSTEM [Reg. Z] PART 226— TRUTH IN LENDING Seller’s Points and Discounts § 2 2 6 .4 0 6 S e lle r ’s p o in ts a n d d isc o u n ts u n d e r R e g u la t io n Z. (a) S e ctio n 226.4(a) (R e g u la tio n Z) in clu d es in th e fin an c e c h a rg e a n y c h a rg e “p ay ab le d ire c tly o r in d ire c tly by th e c u s to m e r, a n d im posed d irec tly o r in d ire c tly by th e c re d ito r as a n in c id e n t to o r as a co n d itio n o f th e e x te n sio n of c re d it * * *. T h e q u estio n a rise s as to th e p ro p e r tr e a tm e n t of d isco u n ts p a id by th e seller, in c lu d in g p o in ts im posed on th e seller by th e le n d e r in c o n n ectio n w ith a re a l e s ta te tra n s a c tio n . (b) U n d e r th e g e n e ra l ru le in § 226.4 ( a ) , a n y su c h d isco u n t, to th e e x te n t it is p assed on to th e b u y er th ro u g h a n in fin an ce ch a rg e in an y p a rtic u la r class of crease in th e selling price, m u s t be in tra n s a c tio n . O n th e o th e r h a n d , th e in clu d ed in th e fin a n c e c h arg e. H ow ever, as clusion of se lle r’s p o in ts o r d isco u n ts in a p ra c tic a l m a tte r , it m ay be difficult to th e fin an ce ch a rg e will be accep tab le to d e te rm in e w h e th e r o r n o t a d isc o u n t p a id th e B o ard as a c o rrec t disclosure u n d er by th e seller in c o n n e c tio n w ith a re a l R e g u la tio n Z. (d ) T h is p o sitio n re la te s only to th e e s ta te tra n s a c tio n h a s been, in fa c t, p assed alo n g to th e c u sto m e r as a p a r t B o a rd ’s a d m in is tra tiv e en fo rc e m e n t p ro of th e p u rc h a se p rice of th e p ro p e rty . ced u res a n d it is n o t in te n d e d in an y way T h e sam e s itu a tio n m ay e x ist in o th e r to re s tric t o r p re ju d ic e th e rig h ts of any cases, fo r exam ple, th o se in w h ich th e c u sto m e r o r b u y er to b rin g a n ac tio n u n c re d ito r sells a t a d isc o u n t oblig atio n s d e r sectio n s 130 a n d 131 of th e A ct w here p ay ab le in m ore th a n fo u r in sta llm e n ts. h e h a s re a so n to believe h e is or w as re (c) T h e B o ard h a s co n clu d ed t h a t inq u ired to p ay d irectly o r in d ire c tly a a n y su ch tra n s a c tio n com ing w ith in its fin an ce c h a rg e im posed d irectly o r in a d m in is tra tiv e e n fo rc e m e n t a u th o rity , d irectly by th e c re d ito r of th e tr a n s w h ere se lle r’s p o in ts o r d isco u n ts w ere, in a c tio n a n d t h e am o u n t of t h a t fin an ce fa c t, p assed along to th e cu sto m e r or c h a rg e w as n o t disclosed to him . b u y e r a n d th e a m o u n t th e re o f was n o t (Interprets and applies 15 U.S.C. 1605) disclosed a s a fin an ce ch arg e, th e B o ard By o rd e r of th e B o ard of G overnors, will ta k e su c h a c tio n as m ay be a p p ro O cto b er 23, 1970. p ria te in th e circ u m sta n ce s. H ow ever, it [S ea l I K e n n e t h A. K e n y o n , will n o t a tte m p t to p rescrib e ru les c r e a t D ep u ty S ecretary. in g a p re su m p tio n t h a t all d isc o u n ts or p o in ts a re p assed on to th e c u sto m e r or | F.R. Doc 70 14855; Filed, Nov. 4. 1970; b u y e r a n d h en c e m u st be in clu d ed in th e 8:46 a.m.| (Over) th e perio d ic r a te o r ra te s ap p licab le to o p en e n d c re d it acc o u n ts w ith o u t th e n ecessity of a d v an ce n o tice to th e cu sto m e r. 2a. By am e n d in g § 226.9(b) to re a d as follow s: FEDERAL RESERVE SYSTEM [12 CFR Part 226 1 [Reg. Z] TRUTH IN LENDING Notice of Proposed Rule Making § 2 2 6 .9 K iglit to rescin d c e rta in tran s a ctio n * . P u rs u a n t to th e a u th o rity c o n ta in e d in th e T ru th in L ending A ct (15 U.S.C. 1601). th e B o ard of G overnors is c o n sid erin g am en d in g P a r t 226 in th e follow ing resp ects: la . By am en d in g ? 226.7<e> to re a d as follow s: S 2 2 6 .7 O p en en d cred it .sp ecific d isclo su re* . 4 • * a ccou n t*— * * i e ' Change in term s. N ot la te r th a n 15 days p rio r to th e b eg in n in g d a te of th e billing cycle in w h ich an y c h a n g e is to be m ad e in th e te rm s previously disclosed to th e cu sto m er of a n open en d c re d it a cco u n t, th e c re d ito r sh all m ail o r d e liver a w ritte n disclosure of su c h c h a n g e to each cu sto m er re q u ired to be f u r n ish ed a s ta te m e n t u n d e r p a ra g r a p h (b) of th is section. S uch disclosure sh a ll be m ailed o r delivered to each o th e r c u s to m e r n o t la te r th a n th e d a te of m ailin g o r delivery of th e n e x t req u ired billing s ta te m e n t on h is acco u n t. H owever, if th e periodic ra te, o r an y m in im u m , fixed, check service, tra n sa c tio n , activ ity , o r sim ila r c h a rg e is increased , th e in creased a m o u n t m ay n o t be im posed on a n y c u s to m e r w ith o u t n o tice a t le a st 15 days p rio r to th e b eginnin g d a te of th e billing cycle in w hich th e c h a rg e is im posed. No n o tice is necessary if th e only c h a n g e is a re d u c tio n in th e periodic ra te o r ra te s applicable to th e acco u n t. * * * * .* b. T h e m a in purp o se of th e proposed a m e n d m e n t is to allow c red ito rs of a n o p en e n d c re d it ac co u n t to m odify th e te rm s of th e acco u n t w ith o u t th e n e ce s sity of n o tify in g in activ e as well as a c tive custom ers. T h e p re s e n t re q u irem e n ts of R eg u latio n Z n e c essita te a costly n o tificatio n process a n d h ave in h ib ite d c re d ito rs fro m m ak in g ch an g es a d v a n tag eo u s to consum ers. T h e proposed a m e n d m e n t w ould re q u ire p rio r no tice to activ e acco u n ts, b u t w ould c u t th e p erio d to 15 days to allow n o tific atio n to be in clu d ed w ith th e n e x t previous billing s ta te m e n t. A ccounts in a c tiv e a t th e tim e of th e ch an g e w ould receive a no tice w hen th e y becam e active. H owever, if th e c h a n g e involved a n in crease in th e p e riodic ra te o r in a n y m in im u m , fixed, check service, tra n sa c tio n , activ ity , o r sim ila r ch arge, th e in c re a se d a m o u n t m ay n o t be collected fro m a n y cu sto m e r n o t receiving notice a t le a s t 15 d ay s p rio r to th e b eg in in n g of th e billin g cycle in w h ich t h a t in creased a m o u n t is im posed. O n O ctober 23, 1970, th e B o ard am en d e d § 226.7(e) to p e rm it c re d ito rs to red u ce # * * * * <b) N otice o / o p p o rtu n ity to rescind. W h en ev er a cu sto m e r h a s th e rig h t to re sc in d a tra n s a c tio n u n d e r p a ra g ra p h (a ) of th is section, th e c re d ito r sh a ll give n o tice of t h a t fa c t to th e cu sto m er by fu rn ish in g th e c u sto m er w ith tw o copies of th e n o tice se t o u t below, one of w hich m ay be used by th e cu sto m e r to cancel th e tra n sa c tio n . S u c h n o tice sh a ll be p rin te d in c a p ita l an d low er case le tte rs ol n o t less th a n 12 p o in t b o ld -faced type on one side of a s e p a ra te sta te m e n t w hich id en tifies th e tra n s a c tio n to w hich it relates. S u ch s ta te m e n t sh a ll also se t fo r th th e e n tire p a ra g r a p h <d) of th is section, "E ffect of rescissio n .” If su c h p a ra g ra p h a p p e a rs o n th e reverse side of th e sta te m e n t, th e face of th e s ta te m e n t shall s ta te : "S ee reverse side fo r im p o rta n t in fo rm a tio n a b o u t yo u r rig h t of rescission.” B efore fu rn ish in g copies of th e n o tice to th e cu sto m er, th e c re d ito r sh a ll com plete b o th copies w ith th e n am e of th e cred ito r, th e a d d ress of th e c re d i to r ’s place of business, th e d a te of c o n su m m a tio n of th e tra n sa c tio n , an d th e d ate, n o t e a rlie r th a n th e th ird business day follow ing th e d a te of th e tra n sa c tio n , by w hich th e c u sto m er m ay give no tice of c an cellatio n . W here th e re a l p ro p e rty o n w hich th e se c u rity in te re s t m ay arise does n o t in clu d e a dw elling, th e cre d ito r m ay su b s titu te th e w ord "h o m e site ” fo r "h o m e ” w here th a t w ord a p p e a rs in th e notice. Notice to customer required by Federal law: You have entered into a transaction on ___________ which may result in a lien, (Date) mortgage, or other security interest on your home. You have a legal right under Federal law to cancel this transaction, if you desire to do so, without any penalty or obligation within 3 business days from the above date or any later date on which all material disclosures required under the Truth in Lending Act have been given to you. If you so cancel the transaction, any Hen, mort gage, or other security Interest on your home arising from this transaction is autom ati cally void. You are also entitled to receive a refund of any downpayment or other con sideration if you cancel. If you decide to cancel this transaction, you may do so by n o tify in g _________________________ a t ------(Name of creditor) ..............- ........................................— .....................- ..............................b y (Address of creditor’s place of business) mail or telegram sent not later than m id night o f ____________ You may also use any (Date) other form of written notice identifying the transaction If It is delivered to the above address not later than that time. This notice may be used for that purpose by dating and signing below. I hereby cancel this transaction. (Date) (Customer’s signature) b. T h e a m e n d m e n t co n sists of adding a sen te n ce follow ing th e su b sta n tiv e p a r t if § 226.9(b) a n d p rio r to th e te x t of th e req u ired notice. T h e p u rpose of th e a m e n d m e n t is to allow cre d ito rs in v a c a n t lo t tra n sa c tio n s su b je c t to th e r e scission provisions of th e T r u th in L ending A ct a n d R e g u la tio n Z to su b stitu te th e w ord “h o m esite ” in th e spec ified n o tice fo r th e w ord "h o m e.” 3a. By ad d in g § 226.10(e) to read as follows: § 2 2 6 .1 0 * A d v e r tisin g cred it term s. * * * * (e) A dvertisin g of FHA Section 235 financing. No a d v ertise m en t to aid, p ro m ote, o r assist d irectly o r in d irectly th e sale of re sid e n tia l real e s ta te u n d e r title II, section 235, of th e N a tio n al H ousing A ct (12 U.S.C. 1715z) sh all s ta te th e a m o u n t of a n y p a y m e n t scheduled to rep ay th e in d eb ted n ess m a n y ex ten sio n of cre d it u n d e r t h a t p ro g ra m or th e a m o u n t of th e fin an ce c h a rg e expressed as a n a n n u a l p e rc e n ta g e ra te . All o th e r in fo rm a tio n specified in p a ra g r a p h (d) (2) of th is sectio n sh a ll be s ta te d w hen req u ire d by t h a t s u b p a ra g ra p h . A ny a d v e rtise m en t sh all clea rly id e n tify those c re d it te rm s w hich ap p ly to th e FH A sectio n 235 a ssistan ce p ro g ram . b. T h e p u rpose of th e proposed a m e n d m e n t is to en ab le sellers to ad v e r tise th e term s w hich a re ap plicable to m o st qualified p u rc h a se rs u n d e r th e section 235 F e d e ra l a ssista n c e p ro g ram of title I I of th e N a tio n a l H ousing Act (su ch as th e d o w n p ay m en t a n d n u m b er of p a y m e n ts; w ith o u t h av in g to show a figure fo r th e a m o u n t of p ay m en ts or a n n u a l p e rc e n ta g e ra te as p resen tly re q u ired by § 226.10(d) of R e g u latio n Z. T h e purpose of th e p ro h ib itio n a g a in s t s ta tin g a n y p a y m e n t a m o u n t a n d a n n u a l p erce n ta g e ra te is to p re v e n t m isleading a d v e rtise m e n t cau sed by th e wide v a ria tio n in a c tu a l a m o u n ts a n d ra te s a p p li cab le to in d iv id u al cu stom ers as a re su lt of v a ria tio n in th e a m o u n t of th e F e d e ra l subsidy. To aid in th e co n sid e ra tio n of these m a tte rs by th e B o ard , in te re ste d persons a re in v ited to su b m it re le v a n t d a ta , views, o r a rg u m e n ts. Any su c h m a te ria l should be su b m itte d in w ritin g to th e S e c re ta ry , B o ard of G o v ern ors of th e F e d eral R eserve S ystem , W ash in g to n , D.C. 20551, to be received n o t la te r th a n D ecem ber 4, 1970. S u c h m a te ria l will be m ad e av ailab le fo r in sp ectio n a n d copy in g u p o n req u est, e x cep t as provided in § 261.6(a) of th e B o a rd ’s R u les R e g a rd in g A v ailability of In fo rm a tio n . By o rd e r of th e B o ard of G overnors O cto b er 23.1970. [sea lI K enneth A. K enyon, Deputy Secretary. |F.R. Doc 70-14858; Piled, Nov. 4, 1970; 8:46 a.m.]
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