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FEDERAL RESERVE BANK OF NEW YORK F* Circular No. 8 4 1 4 *1 L September 1, 1978 J R EG U LA TIO N Z Amendments and Proposed Interpretation To AH Atcm&er Bon/cs, and Outers Concerned, m Second FoJora^ Reserue DtsMcCF o llo w in g is the text o f a sta tem en t issued b y th e B o a rd o f G o v e r n o rs o f th e F e d e ra l R ese rv e S y ste m : The Hoard of Governors of the Federal Reserve System today (Augu-s-t 24) announced three actions affecting its Truth in Lending Regulation Z. These are: 1. The Hoard adopted an amendment intended to facilitate the computation of the annual percentage rate in long-term credit transactions involving minor irregularities in the repayment schedule. An example would he graduated paym ent mortgages, in which mortgage payments increase annually during the early years of the mortgage. The amendment adopted applies to any credit transaction of 10 years or more with minor variations in the monthly repayment schedule. Adoption of this amendment will simplify use of annual percentage rate (A P R ) computation tables prepared by H U D for homes bought on its plan for graduated paym ent mortgages. The Board proposed such an amendment to Regulation Z on M ay 24. The proposed amendment was adopted with certain changes, chiefly, to make it applicable to all long-term credit transactions (n o t only mortgage credit) with minor irregularities in the repaym ent schedule, and with a maturity of 10 years or more ( not 15 years). 2. The Board proposed for comm ent through September 29 an interpretation of Regulation Z that requires disclosure of loss of interest when a time deposit is used as security for a loan. Under the interpreta tion the amount of such a loss, when caused by State law, need not be disclosed. W h en a time deposit is used as security for a loan, Federal law requires that the interest on the loan be at least 1 percentage point more than the interest the customer is receiving on the time deposit. That is, if the time deposit pays 7 % per cent interest, the interest on a loan for which the time deposit is collateral must be at least 8 % per cent. H ow ever, some State laws fix maximum interest rates. In certain cases, the State maximum w ould be less than the creditor w ould be required to charge on a loan secured by a time deposit. State interest rate maximum might be 8 % per cent. For exam ple, the That would be less than the 8 % per cent interest rate required to maintain the 1 percentage point differential in the exam ple above. In such a case, the rate being paid on the time deposit must be reduced (from 7 % to 714 per ce n t). In this way, when the mandatory 1 percentage point differential for a loan secured by a time deposit is added, the interest charged the customer on the loan remains within the State maximum of 8 % per cent. Such cases have resulted in questions whether the consequent loss of interest on the time deposit should be disclosed as a part of the finance charge. Th e proposed interpretation would rule that it need not be made a part of the finance charge or be disclosed as such, but that the creditor must disclose that there will be a loss of interest. 3. The Board amended Regulation Z with respect to the disclosure of the com plete paym ent schedule in any credit transaction with monthly repayments that are made in varying amounts ( such as a m ortgage with mortgage insurance in which the monthly paym ent amount declin es). T h e am endm ent provides that the required disclosure may be made on a separate sheet ( or more than one sh eet) of paper to be included in the disclosure docum ent required by Truth in Lending. A proposed revision of an interpretation (N o . 226.808) on this subject was published April 24. The interpretation that w ould have been am ended remains unchanged. Enclosed are copies of the interpretation amendment regarding the computation of the annual per centage rate in cases involving minor irregularities in the repayment schedule, and of the regulation amendment regarding disclosure of varying payments scheduled to repay the indebtedness. In addition, printed below is the text of the proposed interpretation on disclosure of interest reduc tion on time deposits used to secure loans. Comments thereon should be submitted by September 29 and may be sent to our Consumer Affairs Division. PAUL A. VOLCKER, P resid e?#. PROPOSED IN T E R P R E T A T IO N [Reg. Z ; Docket No. R-0177] Interest Reduction on Time Deposits Used to Secure Loans A G E N C Y ; Board of Governors of the Federal Reserve System. A C T IO N .- Proposed interpretation. SU A IA IA R Y; The proposed interpretation provides that an interest reduction on a tim e deposit used to secure a loan must be disclosed for Truth in Lending purposes. It w ould not, however, require disclosure of the amount of the interest reduction as a com ponent o f the finance charge or in other items on which the finance charge has a bearing — such as the annual percentage rate, schedule of payments, and total of payments. T h e interpretation would apply only in cases where a creditor must reduce the interest rate on the time deposit in order to com ply with both a State loan rate ceiling and a percentage differential required by Federal or State law as to loans secured by time deposits. If a lending institution could main tain the percentage differential by increasing the interest charged on the loan, but chose instead to reduce the interest payable on the time deposit, the amount of the interest forfeited by the customer would have to be included in the finance charge and taken into account in other applicable Truth in Lending disclosures. D A TE .- C om m ent must be received on or before Sep tember 29, 1978. A D D R E SS.- Secretary, Board of Governors of the Federal Reserve System, W ashington, D .C . 20551. F O R F U R T H E R I N E O R A IA T IO N C O N T A C T . D o lores S. Smith, Section C hief, Division of Consumer Affairs, Board of Governors of the Federal Reserve System, W ashington, D .C . 20551 (2 0 2 -4 5 2 -2 4 1 2 ). S U R R E E A IE N T A R Y I N F O R M A T I O N . (1 ) Regulation Z requires that "a ll charges, payable directly or indirectly by the customer, and imposed directly or indirectly by the creditor as an incident to or as a conditon of the extension of credit, whether paid or payable by the customer, seller, or any other person on behalf of the custom er" be included in the finance charge. A n interpretation has been requested as to whether this requirement applies to interest that is forfeited on a time deposit used by the depositor to secure a loan. Under regulations of the Federal Reserve Board (R egulation Q ) and the other financial regulatory agencies, loans secured by time deposits are subject to a requirement that the lending institution maintain a one percent differential in the interest rates. That is, the lending institution must charge the customer an interest rate on the loan that is not less than one per cent in excess of the interest rate being paid to the customer on the time deposit. The differential is in tended to prevent evasion of regulations which impose a mandatory penalty on depositors for early with drawal of a time deposit, by discouraging loans that enable a depositor indirectly to obtain use of the funds before maturity. In some States the maximum rate of interest allowed on certain types of loans is fixed by statute at a rate that is less than one percent in excess of the rate on the time deposit. This means that in order to maintain the differential, a lending institution must reduce the interest rate on the time deposit for the duration of the loan. For example, if the maximum rate is 8 .5 0 % for loans and the interest on the time deposit is 7 .7 5 % , the lender will pay the borrower a reduced rate of 7 .5 0 % on the time deposit. A lender that fails to maintain the differential will be in violation of F ed eral, and perhaps State, law. The proposed interpretation would apply only in those cases where the combination of a loan rate ceil ing and a differential requirement makes an interest reduction necessary. W h ere the interest rate ceiling on a loan is fixed b y State law at a level that is one percent or more in excess of the rate on the time deposit, a lending institution can com ply with the differential requirement without reducing the interest on the time deposit. If a lender could permissibly charge an increased rate on the loan, but chose in stead to reduce the rate on the time deposit, the lender would have to include the lost interest in the finance charge, as well as in all other applicable Regulation Z disclosures. (2 ) T o aid in the consideration of this matter by the Board, interested persons are invited to submit relevant data, views, comments, or arguments. A ny such materia! should be submited in writing to the Secretary, Board of Governors of the Federal Reserve System, W ashington, D .C . 20551, to be received no later than Septem ber 29, 1978, and should include the docket number R -0177. T h e material submitted will be m ade available for inspection and copying upon request, except as provided in § 2 6 1 .6 (a ) of the Board's Rules Regarding Availability of Information (1 2 C .F .R . 2 6 1 .6 ( a ) ) . (3 ) Pursuant to the authority granted in 15 U .S .C . § 1064 ( 1 9 6 8 ), the Board proposes to revise Regula tion Z, 12 C .F .R . Part 226, by adding the follow ing interpretation: S E C T IO N 226.408 — IN T E R E S T R E D U C T I O N O N T I M E D E P O S IT S U S E D T O S E C U R E L O A N S Section 2 2 6 .4 ( a ) requires that the amount of the finance charge in a credit transaction be determined as the sum of "a ll charges, payable directly or indi rectly by the customer, and im posed directly or in directly by the creditor as an incident to or ^s a condition of the extension of credit." Th e question is whether this requirement applies to interest forfeited by a depositor on a time deposit because of a percentage differential m andated by Federal or State laws, or both, for loans secured by such deposits. In some States, the interest rate ceiling on loans secured by time deposits is such that the lender can com ply with the differential requirement only by reducing the interest rate on the tim e deposit for the duration of the loan. For example, where the ceiling for loans is fixed at 8 .5 0 % and the interest rate on the time deposit is 7 .7 5 % , a reduction on the time deposit to 7 .5 0 % will be necessary to com ply with the present one per cent differential requirement. It can be argued that in these cases any interest reduction results from a combination of the fixed loan interest rate and the mandatory percentage differen tial and, thus, is not a condition of the transaction imposed by the creditor. The Board concludes, how ever, that the interest forfeiture is so directly related to the loan transaction that it must be deem ed to con stitute a finance charge. T o ignore the forfeiture altogether w ould result in an incom plete and m islead ing disclosure for purposes o f Truth in Lending. Although the Board concludes that the lost interest is a finance charge, a requirement that creditors dis close the amount as part of the finance charge, in a form that would be meaningful to the consumer, raises certain practical problems. These problem s occur, in part, because of the fact that the consumer will not be paying out the lost interest, but rather will be fore going its receipt. T o require disclosure of the lost interest as a part of the finance charge w ould therefore require disclosing this and other amounts ( such as the amount of scheduled payments and the total of pay m ents) in hypothetical terms. Th e Board believes the purposes of Truth in L en d ing will better be satisfied by a disclosure of the inter est forfeiture as a credit term on the Truth in Lending disclosure statement. A creditor m ay satisfy this re quirem ent, for exam ple, by disclosing that "T h e inter est rate on the time deposit offered as security for this loan will be reduced from 7 .7 5 % to 7 .5 0 % for the duration of this loan ." This exception, which permits a lender to omit the amount of the interest forfeiture in com puting the finance charge and in other disclosures that relate in some w ay to the finance charge, is available only if the interest reduction results from the n eed to com ply with a loan rate ceiling in combination with a differential requirement. If a lending institution could maintain the percentage differential by increasing the interest rate charged on the loan, but chose instead to reduce the interest rate payable to the depositor, any lost interest w ould represent a condition of the transaction imposed b y the creditor. In these latter instances the amount of the interest forfeited by the consumer must be included in the finance charge and taken into account in other applicable disclosures. Board of Governors of the Federal Reserve System TRUTH IN LENDING AMENDMENT TO INTERPRETATION OF REGULATION Z M inor Irregularities — M axim um Irregular Period Limits AGENCY: Board of Governors of the Federal Reserve This am endm ent will now allow first periods of up to 62 days to be treated as if they were regular for System. purposes of com puting annual percentage rates in all A C T IO N ; Final interpretation. transactions which are payable m onthly and which have a scheduled term of 10 years or more, whether SC A IA IA R Y ; ment to The Board hereby adopts an am end Interpretation § 226.503 of Regulation Z, which permits certain irregular paym ent amounts and paym ent periods to be considered regular for pur poses of calculating the annual percentage rate on con sumer credit transactions. or not the monthly instalments are equal. believes that this expansion of the minor irregularities provision simplify rate computations in such accuracy of the rate. This amendment provides 10 years or more, an irregular first period of up to 62 may be treated will transactions while having a negligible effect on the that in transactions payable m onthly with a term of days The Board as though it were a regular W h en the com m ent am endm ent was was originally specifically solicited on proposed, whether the restrictions placed on application of the amendment period and the resulting paym ent irregularities may should be relaxed or strengthened. be disregarded. comments, the am endm ent has been revised in its final It is intended to sim plify com puta tion of the annual percentage rate in long term trans In light of the form in four w ays: actions involving unequal payments, including gradu (1 ) ated paym ent mortgages. It has been expanded to apply to all types of transactions instead of being limited to real property E F F E C T IV E D A T E ; Upon publication in the F ed ora/ Register. transactions. As pointed out by several commenters, the accuracy of the annual percentage rate depends on the time periods and paym ent amounts involved F O R F U R T H E R IN F O R A f A T I O N C O N T A C T . Glenn E . Loney, Section C hief, Division of Consumer Affairs, Board of Governors of the Federal Reserve System, W ashington, D .C . 20551 (2 0 2 -4 5 2 -3 8 6 7 ). rather than on the character of the underlying trans action. Therefore, the Board sees no reason to limit this special rule to transactions secured by real prop erty. S C T R E E A IE N T A R Y I N F O R A lA T IO N . (2 ) The minimum term of a transaction qualifying On June 1, 1978, the Board of Governors published for use of this special rule has been reduced from 15 for com m ent an am endm ent to Regulation Z Inter years to 10 years. The Board considers that disregard pretation § 226.503 which w ould expand its coverage ing these slight irregularities will have a negligible to include certain long term real property transac impact on the accuracy of the rate, even in transac tions, such tions with 10 year terms. former as graduated paym ent mortgages. version of § 226.503 allow ed The first payment (3 ) periods betw een 20 and 50 days to be treated as if It has been expanded to apply to irregularities they were regular for purposes of the annual percent in paym ent age rate calculation, only in transactions otherwise period amounts payable in equal instalments. Since graduated pay dealt only with irregular first periods and not with ment mortgages by their very nature involve unequal irregular paym ent amounts. H ow ever, the initial pay irregularities. resulting The from the payment am endm ent as proposed for ment will often be irregular as a result of a first period example, under the I 1 U D /F H A Section 245 Experi irregularity, for example, when interest for the extra instalments, creditors offering such mortgages, mental Financing Program, were formerly unable to days in the first period is collected, not at closing, but take advantage of the minor irregularities provision. either with the first paym ent or one month prior to [Enc. Cir. No. 84141 (O V E R ) the Brst regular paym ent. T h e Bnal am endm ent has undesirable to require creditors to charge customers been revised to provide that such paym ent irregulari where they otherwise might not do so, in order to ties may also be disregarded. qualify for this special treatment. A few commenters questioned whether the am end (4 ) It has been revised to clarify that this special rule applies to certain long term transactions even if they convert to dem and status in less than 10 years. As revised, the am endm ent applies when the "sch ed uled amortization" of the obligation is at least 10 years. This revision was felt necessary to clarify that the special rule w ould apply to long term mortgages with dem and features, but w ould not apply to short term balloon paym ent mortgages. Some mortgages are due ment was intended to eliminate the 20-day minimum for the Brst period, and urged that this minim um be kept so as to avoid any understatement of the annual percentage rate. The Board believes that this restric tion is unnecessary since treating even a Brst period of one day as if it were regular will have a negligible effect on the rate amendment, in therefore, long term will allow transactions. any Brst The period from zero to 62 days to be considered regular. and payable at the end of a stated period, for example, five years, but since the paym ents are based on a Accordingly, in consideration of the foregoing and 20-year amortization schedule, a large "balloon pay pursuant to the authority granted in 15 U .S .C . § 1604 Such (1 9 6 8 ) , the Board amends Official Board Interpreta transactions are not covered by the amendment. Other tion of Regulation Z, 12 C .F .R . Part 226.503, effective mortgages, however, are written for a stated period, im m ediately, by adding to the end thereof the fo l for example, one year, with the provision that they low ing: m ent" must be m ade at the end of Bve years. shall be payable on dem and thereafter, provided that until dem and is m ade, paym ents based on a longer amortization schedule shall continue until the obligation is paid in full. to be m ade S E C T IO N 226.503 — M IN O R IR R E G U L A R IT IE S — M A X IM U M I R R E G U L A R P E R IO D L IM IT S Creditors offering this type of transaction are currently permitted, pur # # a suant to Board Interpretation § 226.816, to make dis closures based on the longer amortization schedule ( provided it is also stated that the loan is payable on dem and after one year and that disclosures are based on the longer p eriod ). on Creditors choosing to disclose this basis, therefore, will be permitted to take Notwithstanding the above or the language in § 226.5(d) that limits the minor irregularities provi sions to transactions that are "otherwise payable in equal instalments scheduled at equal intervals," the following rule may apply. advantage of the am endm ent to § 226.503, provided the specified amortization period is at least 10 years and the other criteria are met. All of the commenters who addressed the question of whether the am endm ent should be limited to pro grams requiring customers to pay interest for the irreg ular portion of the first period opposed such a restric tion, and the Board concurs. Although such a require ment would ensure som ew hat greater accuracy of the calculated rate, the Board believes it unwise to impose that restriction for several reasons: (a ) it does not have a great im pact on accuracy of the rate, whether interest for the irregular period is paid or not; visions; and, perhaps most importantly, ( c ) 1) the scheduled amortization of the obligation (the date from which the Bnance charge begins to accrue to the date of the Bnal scheduled pay ment) is at least 10 years, and 2) the obligation is otherwise payable in monthly instalments. (b ) such a requirement does not apply to transactions falling within the original minor irregularities An initial payment period of 62 days or less may be treated as though it were regular and an irregular initial payment or any portion thereof resulting from the application of a rate to the balance for such an irregular period may be disregarded if: pro By the order of the Board of Governors, August 23, 1978. it seems PRINTED IN NEW YORK Board of Governors of the Federal Reserve System TRUTH IN LENDING AMENDMENT TO REGULATION Z Disclosure of Varying Payments Scheduled to Repay the Indebtedness AGENCY; Board of Governors of the Federal Reserve SU FP E E A f E N T A R Y Z N F O R A fA T lO N . System. (1 ) In response to a num ber of inquiries regard ing the proper m ethod A C T IO N . § 2 2 6 .8 ( b ) ( 3 ) Final rule. of disclosure (pursuant to of Regulation Z ) of paym ents sched uled to repay the indebtedness in consumer credit SUA7A7ARY: On April 24, 1978, the Board of G over nors published a proposed revision of Interpretation $ 2 2 6 ,8 0 8 of Regulation Z (4 3 FR 1 7 3 6 3 ). It w ould have permitted disclosure of the com plete paym ent schedule (as required by $ 2 2 6 .8 ( b )( 3 ) ) on the reverse of the disclosure docum ent or on a separate page or pages in any transaction in which the paym ent amounts vary, or, in certain enumerated transactions, disclosure of an abbreviated schedule that indicated the progression of the paym ent amounts. has determined that the Th e Board proposed revision of the interpretation should be withdrawn and the first alter native, disclosure of a com plete paym ent schedule on the reverse of the disclosure docum ent or on a sepa rate page, should be incorporated into $ 2 2 6 .8 ( a ) of Regulation Z by am endm ent of that subsection, effec tive immediately. remain unchanged, The present interpretation will and official staff interpretations and public information letters permitting its use in types o f transactions other than that described in the present interpretation will remain in effect. T h e pro posed abbreviated paym ent schedules will not be per mitted. E F F E C T IV E D A T E ; transactions in which the amounts of such payments vary, the Board of Governors proposed a revision of Interpretation interpreation 1) $ 226.808 w ould for have public comm ent. permitted the The creditor in any transaction which the amounts scheduled to repay the indebtedness vary, to provide the customer with a com plete paym ent schedule on the reverse of the disclosure statement or on a separate page or pages (conspicuously referenced in the disclosure state m e n t), notwithstanding the requirem ent of $ 2 2 6 .8 (a ) that all disclosures be m ade on one side of a single page, or 2 ) in certain enumerated transactions, to give the customer an abbreviated schedule of payments that would disclose the num ber of payments, the amount of certain paym ents, and a description of the variation in the paym ent amounts. interpretation In addition, the w ould have provided that non-credit items (such as certain credit life and disability insur ance prem ium s) that are not included in the amount financed or in the finance charge must be excluded from the total of payments scheduled to repay the indebtedness. Finally, a num ber of public informa tion letters and official staff interpretations w ould have been rescinded. U pon publication in the Fad- era/ RegMfer. E igh ty-tw o comments on the proposal were received by the Board. A majority of the comments favored adoption of the proposal with modifications, although a F O R F U R T H E R IN F O R A IA T Z O N C O N T A C T . D o lores S. Smith, Section C hief, Division of Consum er significant number of the comments expressed opposition to the proposal for policy reasons. Based on the comments received and its own analysis, the Affairs, Board of Governors of the Federal Reserve Board has decided to withdraw the proposed revision System, W ashington, D .C . 20551 (2 0 2 -4 5 2 -2 4 1 2 ). of the interpretation (including the position For Regulation Z to be complete, retain: 1) Regulation Z pamphlet, amended to March 23, 1977. 2 ) Amendments effective April 11, 1977, July 20, 1977, October 10, 1977, March 28, 1978, April 21, 1978, and August 3, 1978. 3 ) This slip sheet. [Enc. Cir. No. 84141 stated therein concerning inclusion of non-credit items in the miums for which disclosure in accordance with the Instead, the Board is amending present interpretation had been approved in an official Regulation Z to permit the first alternative ( disclosure staff interpretation. Third, Exam ple II, Transaction B of a com plete paym ent schedule on as m any pages as permitted the use of an abbreviated schedule in trans total of p a ym en ts). necessary) in any transaction in which the paym ent actions with irregular first or last payments. amounts and menters felt that similar deviations should be per olRcial staff interpretations that the Board had pro mitted for the other examples. Finally, a number of vary. The public information letters C om posed to rescind will remain in effect. These changes commenters suggested other, more irregular transac and the reasons therefor are discussed in greater detail tions (e .g ., simple interest loans with m onthly finance below . charge payments and quarterly principal paym ents) as proper subjects for abbreviated schedules. (2 ) The disclosure of a com plete paym ent schedule on the reverse of the disclosure document or on a separate page or pages was favored b y the majority of commenters. T h e Board finds that provision of such a schedule w ould not detract from, and in some cases m ay even enhance, the value of the disclosures to consumers. not C om m ents were divided on whether or there w ould be operational difficulties in pro viding a com plete schedule of payments to customers. It should be pointed out that the provision of The Board has determined that even if additional examples were provided only for G P M transactions, for other m ortgage insurance irregular first or last transactions payments in the and for enumerated transactions, the number of examples w ould be at least doubled. Such a result appears unwarranted, particularly in light of present efforts to simplify the Truth in Lending Act and Regulation Z. a Furthermore, while examples could be adopted to separate schedule o f paym ents is an alternative method accom m odate the present programs of creditors, devel of disclosure; creditors that would encounter opera opments in lending practices would invariably result tional difficulties m ay continue to give the schedule in their inadequacy for disclosure under new of paym ents with the other required disclosures. grams. The Board also wishes to point out that the brack eted words in the am endm ent to $ 2 2 6 .8 ( a ) are to be used alternatively, i.e., the inappropriate bracketed words should be deleted when making the disclosure. pro The Board would be faced with the alterna tives of constant amendment of the interpretation or repetition of the present situation, whereby staff inter pretations have expanded the scope of the current $ 226.808 to permit its use in transactions other than those specifically set forth. (3 ) The Board finds that use of additional examples in the interpretation w ould not serve to facilitate com Com menters noted that verification of the accuracy of the annual percentage rate (A P R ) disclosure pliance with the regulation's requirements nor provide (either by the enforcement authorities or consumers) consumers with sufficient understandable information for creditors disclosing in accordance with the pro about their credit transactions. Therefore, the pro posed revision of the interpretation is withdrawn. posed examples w ould be impossible because there would be no disclosure of actual paym ent amounts. A num ber of significant problems with respect to This verification problem exists now, but the proposal the examples in the interpretation were brought to w ould the Board's attention b y commenters. transactions in which abbreviated disclosures would comments First, addressed need A number of for more examples. increased significantly the number of be permitted. The solutions to this enforcement prob the lem (requiring complete paym ent schedules at con program recently authorized by Section summation or the ability to reproduce the estimated graduated H U D -F H A the have paym ent mortgages 245 of the National H ousing A c t) (such as have increasing payments for the first years of the note and, in the case of the F H A program, decreasing payments after the first 6 or 11 years (as a result of decreases in required mortgage insurance prem iu m s). ters expressed their desire for examples C om m en to fit such programs. burdensom e to creditors. Based on the concerns raised by commenters and its own opinion that the examples provide insufficient flexibility for the developm ent of new lending pro grams, the Board has determined that withdrawal of the proposed Second, the examples did not incorporate one type of credit transaction paym ent amounts at a later date) would be extremely with m ortgage insurance pre interpretation, with provision of the com plete paym ent schedule as an alternative, will provide creditors with a simple method of compliance this Public Information Letters 1021 and 1186 will not alternative will provide the greatest amount of infor be rescinded, as they are consistent with the Board's mation to consumers in a readily understandable for position concerning the treatment of m ortgage insur mat. ance premiums. in varying paym ent transactions. In addition, Public Information Letters 1158 and 1164 and Official Staff Interpretations F C -0 0 0 3 , 0025, (4 ) The proposed interpretation stated the posi 0030, 0031, and 0104 will not be rescinded because the tion that the "total of payments scheduled to repay Board is reluctant to the indebtedness" included only the amount financed the disclosure of insurance premiums. disrupt creditor practices in It should be and the finance charge. This position was contrary to pointed out, however, that the Board believes that a number o f public information letters issued b y the further expansion of the scope of the present inter staff that permit the inclusion in the total of payments pretation through staff letters has been obviated by of premiums for optional, cancellable credit life and the am endm ent to § 2 2 6 .8 ( a ) permitting the schedule disability insurance that are not financed and that are to be placed on a separate page, and the staff does not excluded from the finance charge by compliance with intend to respond favorably to future requests § 2 2 6 .4 (a ) ( 5 ) . such expansion. Th e comments on this portion of the proposal were (6 ) for In accordance with 5 U .S .C . § 5 5 3 ( d ) ( i ) , the on the effective date of the am endm ent need not be delayed staff's position in developing their loan programs and because it is a substantive rule that relieves a restric criticized the disruption of these programs should the tion. negative. Com menters cited interpretation be adopted. their reliance Creditors that now offer ( 7 ) Therefore, pursuant to the authority granted in these types of credit life and disability insurance pro 15 U .S .C . § 1604 (1 9 7 0 ) , the Board hereby amends grams stated that they w ould either begin requiring 12 C .F .R . Part 226, effective upon publication in the insurance coverage of the customer or finance the Fadera/ Register, by adding the follow ing to the end premiums, which would result in increased finance of § 2 2 6 .8 ( a ) : charges to customers. Creditors also stated that calcu lation of the amounts of the varying payments at con S E C T IO N summation w ould be extremely difficult with existing E N D — S P E C IF IC D IS C L O S U R E S rate and paym ent charts. 226.8 — C R E D I T O T H E R T H A N OPEN (a) General Rule. The Board has decided that the permissibility of the inclusion of non-credit items in the total of pay ments will be given further consideration by the staff and will be addressed in an official staff interpretation. (5 ) The Board had also proposed rescinding a number of public information letters and official staff interpretations that would have conflicted with the proposed interpretation. interpretations will N one of these letters and now be rescinded. The letters dealing with the inclusion of credit life and disability insurance premiums in the total of paym ents (1 6 9 , 632, 684, 735, 799, 833, the final paragraph of 834, and 8 5 0 ) will remain in effect pending issuance of an official staff interpretation on the subject. Notwithstanding the provisions of paragraphs (1) and (2) of this subsection, a creditor may, in any transaction in which the payments scheduled to repay the indebtedness vary, satisfy the requirements of § 226.8(b) (3) with respect to the number, amount, and due dates or periods of payments by disclosing the required information on the reverse of the dis closure statement or on a separate page(s), provided that the following notice appears with the other re quired disclosures: "NOTICE: See [reverse side] [accompanying statement] for the schedule of pay ments." By order of the Board of Governors, August 23, 1978. PRINTED IN NEW YORK
@FedFRASER