[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Rules and Regulations]
[Pages 49237-49248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23951]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0927]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is publishing revisions to Regulation Z (Truth in
Lending). The revisions implement the Truth in Lending Act Amendments
of 1995, which establish new creditor-liability rules for closed-end
loans secured by real property or dwellings and consummated on or after
September 30, 1995. The 1995 Amendments create several tolerances for
accuracy in disclosing the amount of the finance charge, and creditors
have no civil or administrative liability if the finance charge and
affected disclosures are within the applicable tolerances. The
amendments also clarify how lenders must disclose certain fees
connected with mortgage loans. In addition, the Board is publishing a
new rule regarding the treatment of fees charged in connection with
debt cancellation agreements, which is similar to the existing rule for
credit insurance premiums and provides for more uniform treatment of
these fees.
DATES: This rule is effective October 21, 1996.
FOR FURTHER INFORMATION CONTACT: James A. Michaels, Senior Attorney, or
Natalie E. Taylor or Michael L. Hentrel, Staff Attorneys, Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, at (202) 452-3667 or 452-2412; users of
Telecommunications Device for the Deaf (TDD) only, contact Dorothea
Thompson at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The purpose of the Truth in Lending Act (TILA) (15 U.S.C. 1601 et
seq.) is to promote the informed use of consumer credit by requiring
disclosures about its terms and cost. The act requires creditors to
disclose the cost of credit as a dollar amount (the ``finance charge'')
and as an annual percentage rate (the ``APR''). Uniformity in
creditors' disclosures is intended to assist consumers in comparison
shopping.
[[Page 49238]]
The TILA requires additional disclosures for loans secured by a
consumer's home and permits consumers to rescind certain transactions
that involve their principal dwelling. The act is implemented by the
Board's Regulation Z (12 CFR part 226).
II. Regulatory Provisions
On September 30, 1995, the Congress enacted the Truth in Lending
Act Amendments of 1995 (1995 Amendments), Pub. L. 104-29, 109 Stat.
271. The 1995 Amendments address the concerns of mortgage lenders
stemming from a 1994 court decision, Rodash v. AIB Mortgage Co., 16
F.3d 1142 (11th Cir. 1994). In that case, the U.S. Court of Appeals
affirmed a district court opinion that allowed a consumer to rescind a
home mortgage loan and recover all fees and finance charges that had
been paid, based in part on errors in the creditor's TILA disclosures.
Subsequently, a number of class action lawsuits were filed, involving
thousands of mortgage loans, alleging similar violations and seeking
the remedy of rescission.
In response to mortgage lenders' concerns about their potential
liability for finance charge violations that they viewed as minor, the
Congress enacted a temporary moratorium on such litigation, which has
now been replaced by the 1995 Amendments. The Amendments establish new
liability rules for loans consummated before and after September 30,
1995, establish a new rule that includes mortgage broker fees in the
finance charge disclosure, and clarify the proper treatment of other
fees. In May 1996, the Board published proposed regulations to
implement the amendments with respect to loans made after September 30
(61 FR 26126).
The Board is also amending Regulation Z to provide a rule
addressing the treatment of fees charged in connection with debt
cancellation agreements, which serve purposes similar to credit
insurance. A specialized form of debt cancellation agreement, known as
guaranteed automobile protection or ``GAP,'' is also covered by the new
rule. In response to public comments, the final rule has been modified
slightly from the May 1996 proposal.
Finally, the Board is making a technical amendment to the
definitions of ``business day'' in Regulation Z, 12 CFR 226.2(a)(6).
For clarity, the Board has amended the definitions of ``business day''
to include a specific reference to subpart E.
Under the 1995 Amendments, the statutory provision treating
mortgage broker fees as finance charges becomes effective on September
30, 1996. The other provisions of the 1995 Amendments became effective
upon the law's enactment on September 30, 1995. The Board believes that
revisions to Regulation Z do not impose any additional disclosure
requirements beyond those already required under the statute, as
amended. Accordingly, the revisions to Regulation Z will become
effective on October 21, 1996.
The new rule on debt cancellation fees will also become effective
on October 21. The rule imposes no additional disclosure requirements.
Creditors must continue to treat debt cancellation fees as finance
charges; when the new rule becomes effective creditors will have the
option of excluding voluntary debt cancellation fees from the finance
charge if they meet the specified requirements.
III. Section-by-Section Analysis
Subpart A--General
Section 226.2--Definitions and Rules of Construction
2(a) Definitions
2(a)(6)
Paragraph (2)(a)(6) is adopted as proposed. For purposes of the
Board's rules implementing the Home Ownership and Equity Protection Act
of 1994 in Subpart E of Regulation Z, the ``business day'' definition
for rescission applies. The Board has also updated the list of legal
public holidays to include the Birthday of Martin Luther King, Jr.
Section 226.4--Finance Charge
4(a)(1) Charges by Third Parties
Paragraph 4(a)(1) reflects the general rule for third party charges
currently contained in comment 4(a)-3 of the Official Staff Commentary.
A slight modification has been made for clarity. In general, amounts
charged by third parties are included in the finance charge if the
creditor requires the use of the third party or retains any portion of
the charge (in which case the portion retained is included as a finance
charge).
4(a)(2) Special Rule; Closing Agent Charges
Paragraph 4(a)(2) incorporates the substance of section 2(a) of the
1995 Amendments, and is consistent with the existing interpretation in
comment 4(a)-4 of the Official Staff Commentary. Under the rule, a fee
charged by a third-party closing agent is included in the finance
charge only if the creditor requires the imposition of the charge or
the provision of the service, or retains any portion of the charge.
Accordingly, a courier fee charged by a third-party closing agent is
only a finance charge if the creditor requires the use of the courier
(or to the extent the creditor retains a portion of the charge). The
rule only applies to the third-party serving as the closing agent with
respect to that loan. The final rule has also been modified slightly to
clarify the term ``closing agent.''
4(a)(3) Special Rule; Mortgage Broker Fees
Paragraph 4(a)(3) contains a new rule regarding the treatment of
mortgage broker fees, to implement section 106(a)(6) of the TILA (15
U.S.C. 1605(a)(6)), which becomes effective on September 30, 1996. The
rule requires that all fees charged by a mortgage broker and paid
directly by the consumer be included in the finance charge, whether the
fee is paid to the broker or to the lender for delivery to the broker.
A fee charged by a mortgage broker will be excluded from the finance
charge only if it is the type of fee that would also be excluded when
it is charged by the creditor. In the case of application fees charged
by a mortgage broker, such fees may be excluded from the finance charge
if the mortgage broker charges the fee to all applicants for credit,
whether or not credit is actually extended.
Several commenters questioned the basis for requiring creditors to
disclose, as finance charges, fees that the creditor neither imposes
nor requires. They also expressed concern about creditors' duty for
including brokers' fees in Truth in Lending disclosures when the
existence or amount of such fees may not be known to the creditor.
The new rule is mandated by the 1995 Amendments. Under the Real
Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2601 et seq.),
amounts paid by a consumer directly to a mortgage broker or through the
lender for delivery to the mortgage broker are already required to be
disclosed to the borrower at the loan closing on the HUD-1 or HUD-1A.
See 24 CFR part 3500 appendix A, appendix B para.12. The Board believes
that the new TILA disclosure requirement should not pose a significant
additional burden, and that it is reasonable to require creditors to
use the information from the HUD forms in calculating the finance
charge. Accordingly, the Board expects that creditors will adopt
practices and procedures consistent with their affirmative obligation
to obtain the relevant information from the parties involved.
In the May proposal, the Board noted that fees paid by the funding
party to a broker as a ``yield spread premium,''
[[Page 49239]]
and already included in the finance charge as interest or as points
should not be double counted. Several commenters sought further
clarification, noting that brokers may be compensated by the lender
under various arrangements. The proposal's reference to ``yield spread
premiums'' was only intended to be one example of lender-paid
compensation that must be separately disclosed on the HUD-1 under the
current RESPA rules, but should not be double counted because it is
already included as part of the finance charge.
4(b) Example of Finance Charge
4(b)(10) Debt Cancellation Fees
Debt cancellation agreements serve a purpose similar to credit
insurance, even though the products are not identical in all respects.
Paragraph 4(b)(10) clarifies that fees charged by creditors for debt
cancellation coverage that is written in connection with a credit
transaction are considered finance charges. Conditions under which
voluntary debt cancellation fees may be excluded from the finance
charge are set forth in paragraph 4(d)(3).
Comments by some insurance providers noted that the term ``debt
cancellation agreement'' is not commonly used in reference to GAP
agreements. For purposes of Regulation Z, however, the term ``debt
cancellation agreement'' is used generically to refer to a contract
between a debtor and creditor providing for satisfaction of all or part
of the debt when a specified event occurs. This definition includes GAP
agreements, even though GAP agreements only cancel the portion of the
debt remaining after the application of property insurance benefits.
Some commenters disagreed with the notion that voluntary debt
cancellation fees may be considered finance charges, although they
generally supported the Board's approach in paragraph 4(d)(3),
excluding such fees when appropriate disclosures are provided. Other
commenters believed that debt cancellation agreements are an integral
part of the loan agreement and argue that such fees are necessarily
charged as an incident to the extension of credit, making them finance
charges.
The Board believes that a debt cancellation fee charged by the
creditor satisfies the definition of a finance charge because it is
part of the cost of the credit. The TILA defines a finance charge to
include any charge imposed as an incident to the extension of credit.
The Board has interpreted this definition to include any fee charged by
the creditor in connection with the loan, if it is not charged in
comparable cash transactions and is not subject to an express
exemption. The Board has generally taken a case-by-case approach in
determining whether particular fees are ``finance charges,'' and does
not interpret Regulation Z to automatically exclude all ``voluntary''
charges from the finance charge. As a practical matter, most voluntary
fees are excluded from the finance charge under the separate exclusion
for charges that are payable in a comparable cash transaction, such as
fees for optional maintenance agreements or fees paid to process motor
vehicle registrations. In the case of debt cancellation agreements,
however, the voluntary nature of the arrangement does not alter the
fact that debt cancellation coverage is a feature of the loan affecting
the total price paid for the credit.
Thus, even though a lender may not require a particular loan
feature, the feature may become a term of the credit if it is included.
For example, borrowers obtaining variable-rate loans may have an option
to convert the loan to a fixed interest rate at a subsequent date. Even
though the lender does not require that particular feature, when it is
included for an additional charge (either paid separately at closing or
paid in the form of a higher interest rate or points), that amount
properly represents part of the finance charge for that particular
loan, even though less costly loans may be available without that
feature. This is also the case with debt cancellation coverage, which
alters the fundamental nature of the borrower's repayment obligation.
Although the same loan may be available without that feature, with
respect to a loan that has been structured in this manner, the debt
cancellation fee is one that has been imposed as an incident to that
particular extension of credit. The same rationale applies to premiums
for voluntary credit insurance, which generally are finance charges
under the TILA but may be excluded if specified disclosures are given.
Creditors have reported significant difficulty in determining the
proper treatment of debt cancellation fees under Regulation Z,
particularly GAP fees. Because the status of these agreements under
state insurance laws and regulations is often unclear, creditors have
been unsure whether they may apply the TILA rules excluding certain
credit insurance premiums from the finance charge. Those rules permit
the cost of credit insurance to be excluded if the purchase is
voluntary and certain disclosures are made regarding the terms of the
coverage. For the reasons discussed below, the Board has determined
that similar treatment for debt cancellation fees is appropriate.
Accordingly, paragraph 4(d)(3) provides that debt cancellation fees may
be excluded from the finance charge if the disclosures and requirements
in that paragraph are satisfied.
4(c) Charges Excluded From the Finance Charge
4(c)(7) Real-Estate Related Fees
4(c)(7)(ii)
Paragraph 4(c)(7)(ii) is revised to implement the amendment to
section 106(e)(2) of the TILA (15 U.S.C. 1605(e)(2)). The Board
believes that the amendment does not represent a substantive change
from the current rule.
4(c)(7)(iii)
Paragraph 4(c)(7)(iii) is revised by deleting the reference to
appraisal fees, which is addressed separately in revised paragraph
4(c)(7)(iv).
4(c)(7)(iv)
Former paragraph 4(c)(7)(iv) is redesignated as 4(c)(7)(v). A new
paragraph 4(c)(7)(iv) implements section 106(e)(5) of the TILA (15
U.S.C. 1605(e)(5)), which clarifies that fees related to property
inspections conducted prior to closing for pest infestation or flood
hazard determinations, may be excluded from the finance charge. In
response to commenters' suggestions, the language has been modified to
reflect that the same rule applies to other types of property
inspections conducted as part of the lender's credit decision to assess
the value or condition of the property. The revision is consistent with
comment 4(c)(7)-3 of the Official Staff Commentary, which states that
excluded fees are those charged solely in connection with the initial
decision to extend credit. The exclusion does not apply to fees for
inspections or services to be performed periodically during the term of
the loan.
4(d) Insurance and Debt Cancellation Coverage
4(d)(1) Voluntary Credit Insurance Premiums
Paragraph 4(d)(1)(i) is modified consistent with existing comment
4(d)-1 of the Official Staff Commentary, to clarify that a disclosure
that insurance coverage is not required by the creditor must be in
writing.
[[Page 49240]]
4(d)(3) Voluntary Debt Cancellation Fees
The Board is amending Regulation Z by adding a provision on fees
charged for debt cancellation agreements, which serve a purpose similar
to credit insurance. The new rule allows creditors to exclude fees for
voluntary debt cancellation coverage from the finance charge when
specified disclosures are made. In disclosing debt cancellation fees,
creditors may not use the model forms for insurance premiums unless
debt cancellation coverage constitutes insurance under state law.
Under a debt cancellation agreement, the creditor agrees to cancel
all or part of any remaining debt in the event of an occurrence, such
as the death, disability or unemployment of the borrower. The creditor
may or may not purchase insurance to cover this risk. A specific form
of debt cancellation known as guaranteed automobile protection, or
``GAP,'' is sold in connection with motor vehicle loans. GAP agreements
cancel the remaining debt when the vehicle securing the loan is stolen
or destroyed and the settlement payment made by the consumer's primary
automobile insurance is insufficient to pay the loan balance.
Previously, debt cancellation fees have not been specifically
addressed in Regulation Z. In December 1995, the Board proposed to
issue its first written interpretation on the proper treatment of debt
cancellation fees under then existing rules. The December
interpretation recognized that debt cancellation fees are finance
charges paid as an incident to the extension of credit. In some states,
debt cancellation coverage may be considered insurance, thus the
proposed interpretation noted that in some cases the fees might be
excluded from the finance charge in accordance with the existing rules
in Sec. 226.4(d) for certain types of insurance premiums. For example,
the Board noted that in a state where debt cancellation agreements are
considered or regulated as insurance, Sec. 226.4(d)(1) would allow such
fees to be excluded from the finance charge if the agreement insures
against the death, disability, or loss of income of the borrower and
certain disclosures are given. On the other hand, fees for GAP coverage
not protecting against the types of risk covered in Secs. 226.4(d) (1)
and (2) were to be included in the finance charge, as were other types
of debt cancellation fees in states where the agreements are not
considered to be insurance. The proposed interpretation also noted that
charges for insurance protecting the creditor against credit loss are
finance charges under section 226.4(b)(5) and may not be excluded under
Sec. 226.4(d).
The comments received in response to the proposed December
interpretation were mostly negative. Commenters expressed particular
concern about the need to make a state-by-state determination of
whether such agreements are considered insurance contracts. They noted
that reliance on state law would not create a uniform rule for
measuring the cost of credit, contrary to the purpose of the TILA.
Creditors in some states could quote a lower APR for the same product,
which would not assist consumers in comparison shopping. Even within a
state that treats debt cancellation agreements as insurance, debt
cancellation fees would not be treated uniformly under Regulation Z,
which excludes such fees from the finance charge only if the agreement
covers loss of life, disability, or unemployment, but not if the
agreement covered other contingencies, as in the case of GAP
agreements. Moreover, debt cancellation fees and credit insurance
premiums would be treated differently for purposes of cost disclosures
even though they served a similar purpose to the consumer.
Commenters also expressed concern about the potential compliance
risks associated with making a determination about the status of debt
cancellation agreements, including GAP, in states where the insurance
laws are unclear. Commenters stated that some creditors have refused to
make or purchase loans with GAP coverage due to the uncertainty about
how fees must be disclosed under the TILA. Several lawsuits have
challenged creditors' practices of excluding voluntary GAP fees from
the finance charge, although some courts have held that these fees are
not finance charges in the absence of a contrary ruling by the Board.
In April 1996, the proposed interpretation was withdrawn to allow
the Board to consider amending Regulation Z to provide a separate rule
that would explicitly address GAP and other debt cancellation fees. In
May 1996, the Board proposed such a rule. The proposed rule did not
mirror the withdrawn interpretation which had largely addressed the
fees based on the application of the rules for insurance premiums.
Instead, the Board proposed to treat debt cancellation agreements in a
uniform manner, without regard to their status under state insurance
law.
The Board believes that it is important for Regulation Z to promote
uniformity in the disclosure of similar credit cost features to assist
consumers and to facilitate creditor compliance. Accordingly, the Board
is adopting a new rule to specifically address debt cancellation
agreements, including GAP agreements. Pursuant to its authority under
section 105 of the TILA, the Board is authorized to issue regulations
containing such differentiations or exceptions for any class of
transactions as in the Board's judgment are proper to effectuate the
purposes of the TILA or facilitate compliance with the act. The Board
has determined that the rule being adopted, which allows voluntary debt
cancellation fees to be excluded from the finance charge when certain
disclosures are given, will effectuate the TILA's purpose of providing
uniform disclosures to promote comparison shopping and the informed use
of credit. The new rule also addresses creditors' difficulties with the
existing rules and facilitates compliance with the act.
Comments from credit insurance providers questioned the Board's
authority to issue the rule based on a section 106(d)(4) of the
original TILA, which was deleted in the Truth in Lending Simplification
and Reform Act of 1980 (``Simplification Act''). Section 106 defines
the term ``finance charge'' for purposes of the TILA and former section
106(d)(4) authorized the Board to issue regulations excluding from the
finance charge any ``type of charge which is not for credit'' (emphasis
added). Insurance providers asserted that the deletion of section
106(d)(4) curtailed the Board's general authority to exclude items from
the finance charge by regulation. The Board disagrees with the
insurance providers' interpretation.
The Board has express authority to issue the rule on debt
cancellation fees under section 105 of the TILA. To the extent that the
former section 106(d)(4) may also have provided more specific
authority, its deletion merely eliminated an alternate source of
authority. The Board believes, however, that these commenters have
misinterpreted the purpose of section 106(d)(4) and the reason for the
changes made by the Simplification Act. The Simplification Act sought
to clarify the statutory definition of a ``finance charge'' and did so
by adding language to expressly exclude from the finance charge, all
charges ``payable in a comparable cash transaction.'' This new
statutory exclusion made it unnecessary for the Board to exclude
noncredit charges on an individual basis by regulation. Thus, the
authority originally granted in section 106(d)(4) became obsolete.
There is nothing to suggest that the Simplification Act's revision
to section 106 was intended to limit the Board's
[[Page 49241]]
general regulatory authority under section 105. Section 106(d)(4)
established the Board's authority to exclude charges that were not for
credit. The Board's broader authority under section 105 to make
exceptions also applies to credit-related charges, and was not affected
by the Simplification Act. Debt cancellation fees are credit-related
charges that are not payable in comparable cash transactions, and would
not have been the type of fees governed by section 106(d)(4).
New paragraph 4(d)(3) closely parallels the existing rule
pertaining to credit insurance in Sec. 226.4(d)(1), and excludes fees
paid for similar types of debt cancellation agreements, as well as GAP
agreements, from the finance charge if the specified conditions are
met. Paragraph 4(d)(3) applies whether or not the debt cancellation
agreement is considered to be insurance under state law. The language
of paragraph 4(d)(3) has been modified in the final rule to clarify
that it applies only to specific types of debt cancellation agreements.
Under the final rule, fees for GAP coverage must be disclosed
according to paragraph 4(d)(3) rather than the provisions in paragraph
4(d)(2) for property insurance. Even though GAP coverage is triggered
by the loss of or damage to property, GAP agreements do not insure
against such loss or damage. Instead, GAP agreements typically cover
the remaining balance due on the obligation after traditional property
insurance benefits are exhausted.
Comments from credit insurance providers expressed concern that
consumers will be unaware that debt cancellation agreements differ from
credit insurance. According to these commenters, the differences are
significant and stem largely from the fact that insurance is heavily
regulated while, to date, debt cancellation agreements are largely
unregulated. They also noted that debt cancellation coverage may
require consumers to pay taxes that would not apply to credit insurance
policies. The insurance providers believed that, in the past, the
different treatment afforded to debt cancellation fees and credit
insurance premiums under Regulation Z has protected consumers from the
creditors' utilization of unregulated debt cancellation agreements, but
that the new rule would promote their use. These commenters asserted
that if the TILA cost disclosures are identical for insurance and non-
insurance products, consumers will be misled or misinformed; they
believe that even though greater consumer protection is afforded by the
regulated insurance products, this difference will not be apparent to
consumers.
The Board is mindful that debt cancellation agreements and
traditional insurance products are not identical in all respects. From
the consumer's standpoint, however, both products are available to
satisfy the consumer's liability for the debt in full measure if the
specified contingency occurs. The fact that debt cancellation
agreements may be subject to less oversight by state regulators or
different tax rules is not sufficient in the Board's judgment to
suggest that the fees paid must necessarily be included in the finance
charge and APR for purposes of the TILA's cost disclosures. Whatever
degree of regulation may be appropriate for debt cancellation coverage,
Regulation Z does not affect the ability of appropriate governmental
authorities to implement such protections. The TILA cost disclosures
are not intended to deter creditors from offering unregulated products.
While the TILA seeks to provide uniform disclosures about the cost
and terms of credit to promote comparison shopping, the ultimate task
of assessing the relative value of two different products that are
similarly priced rests with the consumer. Where voluntary credit
insurance and debt cancellation agreements cover the identical
contingency for the same price, requiring the fee to be included in the
finance charge and APR in one loan but not in the other does not fairly
inform the borrower about the relative cost of the two loans. Consumers
are unlikely to become better informed about the distinctions between
these products simply by having the TILA disclosures make one loan
appear costlier than the other. The new rule allows the cost to be
excluded from the finance charge and APR in both cases, so long as the
cost for the initial term of coverage is disclosed along with other
specified items. Consumers are likely to find comparison shopping
easier under this rule to the extent they will have similar cost
disclosures for both products and will not have to account for
different treatment in the finance charge or APR disclosures.
Likewise, consumers comparing loans offered by lenders in two
different states will be able to comparison shop based on these cost
disclosures without considering the impact state insurance laws might
have on the disclosed finance charge or APR. Some commenters suggested
that uniformity could be achieved just as easily if all voluntary debt
cancellation fees were simply included in the finance charge rather
than excluded. Uniformity would not be achieved by the adoption of such
a rule, however, given that in states where debt cancellation coverage
is considered insurance the statutory exclusion for credit insurance
premiums would still allow creditors to exclude some debt cancellation
fees from the finance charge.
The Board believes that treating debt cancellation fees and credit
insurance premiums similarly for purposes of cost disclosure should not
in itself create confusion about the nature of the parties' contractual
relationship or the degree to which that relationship is regulated by
state insurance agencies. The Board agrees that some confusion could
result if creditors use the Board's existing model forms for disclosing
insurance premiums to also disclose debt cancellation fees. Although
the new rule allows both types of charges to be excluded from the
finance charge under similar conditions, it does not authorize
creditors to characterize debt cancellation fees as insurance premiums
for TILA purposes. Creditors can comply with Sec. 226.4(d)(3) by
providing a disclosure that refers to debt cancellation coverage
whether or not the agreement is considered insurance. Creditors may use
the Board's existing credit insurance disclosure forms only if the debt
cancellation coverage constitutes insurance under state law.
4(e) Certain Security-Interest Charges
4(e)(3) Taxes on Security Instruments
Paragraph 4(e)(3), which implements section 106(d)(3) of the TILA
(15 U.S.C. 1605(d)(3)) is consistent with comment 4(e)-1(i) of the
Official Staff Commentary. The new provision provides that taxes levied
on security instruments or on documents evidencing indebtedness
(``intangible property taxes''), that must be paid to record the
security instrument, are excluded from the finance charge. The language
has been modified slightly from the proposal, to clarify that the
exclusion applies when payment of the tax is a requirement for
recording the instrument, regardless of when the fee is paid.
Subpart C--Closed-end Credit
Section 226.17--General Disclosure Requirements
17(a) Form of Disclosures
17(a)(1)
Footnote 38 in paragraph 17(a)(1) is revised to include the
disclosures relating to debt cancellation agreements among those that
may be made together with or separately from the other required
disclosures.
[[Page 49242]]
17(c) Basis of Disclosures and Use of Estimates
17(c)(2)
Paragraph 17(c)(2) is redesignated as 17(c)(2)(i) and modified
slightly to reflect the general rule that disclosures must be based on
the best information reasonably available to the creditor at the time
the disclosures are provided to the consumer.
17(c)(2)(ii)
Paragraph 17(c)(2)(ii) reflects the 1995 amendment to section
121(c) of the TILA (15 U.S.C. 1631(c)), which deals with the disclosure
of per-diem interest charges collected at loan consummation.
Per-diem interest, also known as ``odd-days interest,'' is the
interest that will accrue between consummation and the first regularly-
scheduled payment. A disclosure affected by the amount of per-diem
interest collected at consummation will be considered accurate if the
disclosure is based on the information known to the creditor at the
time the disclosure is prepared, even if the actual charge differs by
the time disclosures are provided to the borrower. Creditors should
exercise reasonable diligence in ascertaining the correct information
when preparing disclosures.
Several commenters requested clarification on how the new $100
finance charge tolerance for mortgage loans applies when the per-diem
interest charges disclosed prior to consummation are inaccurate. Under
the new rule, if finance charge disclosures are affected by per-diem
interest, creditors may rely on the charges known at the time the
disclosures are prepared, and the disclosures will be deemed to be
accurate without regard to the amount of per-diem charges actually paid
at closing. In that case, the $100 finance charge tolerance would not
be needed. If in the same transaction, other components of the finance
charge were understated, the creditor would still have the benefit of
the full $100 tolerance.
As commenters noted, this provision does not have any applicability
in open-end credit transactions.
17(f) Early Disclosures
Paragraph 17(f) is revised to clarify the creditor's duty to
provide new disclosures, which is determined by comparing the APR at
the time of consummation to the APR disclosed earlier.
Section 226.18--Content of Disclosures
18(d) Finance Charge
Section 106(f) of the TILA (15 U.S.C. 1605(f)) establishes a new
tolerance for accuracy in disclosing the finance charge for closed-end
loans secured by real property or dwellings. Section 226.18(d) has been
revised and reorganized to incorporate this change. Commenters
generally supported the regulatory provisions implementing the new
tolerances.
18(d)(1) Mortgage Loans
Paragraph 18(d)(1) provides a new finance charge tolerance
applicable to mortgage loans consummated on or after September 30,
1995. For covered transactions, the disclosed finance charge will be
considered accurate if it is understated by $100 or less or if the
finance charge is overstated. The new tolerance applies to the
disclosed finance charge as well as any disclosure affected by the
finance charge, including the APR. The effect of the new finance charge
tolerance on the disclosed APR is explained in more detail under
paragraph 22(a).
Consumer groups expressed concern that the new statutory tolerance
might be viewed as an opportunity for creditors to intentionally charge
consumers up to $100 more than the finance charge stated in the TILA
disclosures and they refer to the legislative history, which suggests
that the new law was not intended to give lenders the right to pad
fees. They argued that the new tolerances should apply, therefore, only
to creditor errors made in good faith. Although this principle might
appear sound, the Board notes that the existing tolerances in
Regulation Z are not limited to good-faith errors and that application
of a ``good faith'' rule would necessitate a case-by-case determination
of how a particular error occurred, complicating the broad relief
intended by the Congress. The Board believes that imposing a good-faith
standard would be inconsistent with the purpose of the 1995 Amendments,
which is to reduce potential litigation over disclosure errors.
Moreover, with the new $100 tolerance, a creditor making intentional
misstatements would leave little or no margin for making bona fide
errors, risking the type of potential liability that led to enactment
of the 1995 Amendments.
18(d)(2) Other Credit
The existing tolerance for finance charge disclosures, currently in
footnote 41, continues to apply to all closed-end loans other than
mortgage loans, and has been moved into paragraph 18(d)(2).
18(n) Insurance and Debt Cancellation Agreements
Paragraph 18(n) has been revised to include disclosures made in
connection with debt cancellation agreements.
Section 226.19--Certain Residential Mortgage and Variable Rate
Transactions
19(a)(2) Redisclosure Required
Paragraph 19(a)(2) has been further revised for clarity and
consistency with paragraph 17(f).
Section 226.22--Determination of Annual Percentage Rate
22(a) Accuracy of Annual Percentage Rate
Paragraph 22(a) is revised to add new paragraphs (a)(4) and (a)(5).
For closed-end loans secured by real property or dwellings, the new
provisions establish two additional tolerances for accuracy in
disclosing the APR when the disclosed finance charge is within the
tolerances established by the 1995 Amendments.
The TILA contains tolerances for the APR, of either one-quarter or
one-eighth of 1 percent, depending on the type of transaction. These
existing statutory APR tolerances were not altered by the 1995
Amendments, although the amendments create a tolerance for the finance
charge disclosed for mortgage loans as well as ``any disclosure
affected by the finance charge.'' Consumer groups argued that the
Congress intended the new tolerances to apply only to numerical
disclosures other than the APR (such as the ``amount financed'' and the
``total of payments''), for which there is currently no regulatory or
statutory tolerance. The Board believes, however, that the APR is one
of the ``affected disclosures.'' Otherwise, transactions in which the
disclosed finance charge is misstated but considered accurate under the
new tolerance would remain subject to legal challenge based on the
disclosed APR, which seems inconsistent with the legislative intent.
There was broad support for this approach among creditors who commented
on the rule.
22(a)(4) Mortgage Loans
Paragraph 22(a)(4) provides an additional tolerance for APR
disclosures in transactions where the finance charge is understated or
overstated but is considered accurate under the 1995 Amendments. For
example, in a secured home-improvement loan, if a creditor improperly
omits a $100 fee from the
[[Page 49243]]
finance charge, the understated finance charge will now be considered
accurate under Sec. 226.18(d)(1). Under paragraph 22(a)(4), the APR
resulting from the understated finance charge will also be considered
accurate, even if the disclosed APR falls outside of the existing
tolerance of one-eighth of 1 percent provided under section 107(c) of
the TILA. For purposes of determining a borrower's right to rescind a
mortgage loan, an APR resulting from a finance charge that is
considered accurate in accordance with the applicable rule in
Sec. 226.23(g) or (h)(2) will also be considered accurate. The language
has been modified slightly to clarify that new tolerances apply in
addition to the existing tolerances in paragraphs 22(a)(2) and (3).
22(a)(5) Additional Tolerance for Mortgage Loans
In light of the new APR tolerance established under the 1995
Amendments, the Board has adopted an additional APR tolerance (not
provided in the statute) in Sec. 226.22(a)(5). The purpose is to avoid
the anomalous result of imposing liability on a creditor for a
disclosed APR that is incorrect but is closer to the actual APR than
the APR that would be considered accurate under the statutory tolerance
in paragraph 22(a)(4).
For instance, if the omission of a $100 fee from the finance charge
results in an understatement of the finance charge and a disclosed APR
that is understated by one-half of 1 percent, that APR will be
considered accurate under paragraph 22(a)(4), even though it is outside
of the existing APR tolerance of one-eighth of 1 percent. Under
paragraph 22(a)(5), the disclosed APR is considered accurate if it is
understated by less than one-half of 1 percent. Thus, if the actual APR
in this example is 9.00 percent and the $100 omission results in an APR
of 8.50 percent that is considered accurate under paragraph 22(a)(4), a
disclosed APR of 8.75 percent will be within the tolerance in paragraph
22(a)(5). Similarly, if an overstated finance charge results in an
overstated APR, the creditor will not be liable for an overstatement
that is closer to the actual APR.
Under section 105 of the TILA, the Board is authorized to adopt
exceptions to the TILA that will facilitate compliance. Paragraph
22(a)(5) treats as accurate, a disclosed APR that is more accurate than
the one resulting from a misstated finance charge that is considered
accurate under the 1995 Amendments. The Board believes that this rule
will facilitate compliance with the TILA, and prevent disputes over
errors that have no greater effect on consumers beyond the effects
already contemplated by the statutory tolerances. The Board recognizes
that this rule might allow a creditor to disclose an inaccurate APR
that is not derived from either the actual or the disclosed finance
charge. Presumably, this situation will not be common. On balance,
however, the Board believes the rule is consistent with the intent of
the 1995 Amendments.
The language in the proposed rule has been modified slightly to
clarify that the new tolerance is in addition to and not in lieu of the
existing tolerance.
Section 226.23--Right of Rescission
23(b) Notice of Right To Rescind
Paragraph 23(b)(2) clarifies that use of the appropriate model form
approved by the Board, or a comparable form, is required for compliance
with the regulation for those disclosures.
Model form H-9 was revised to ease compliance and to clarify that
it may be used in loan refinancings with the original creditor, whether
or not the creditor is the holder of the note at the time of
refinancing. Some commenters requested further clarification on the
proper use of the form, noting that it does not address the situation
where the original note and mortgage are extinguished and new documents
are executed to cover both the outstanding debt and the amount borrowed
in the new transaction. The form has been revised in order to address
these concerns.
23(g) Tolerances for Accuracy
Paragraph 23(g) implements section 106(f)(2) of the TILA (15 U.S.C.
1605(f)(2)). The Board is applying the rescission tolerances in section
106(f)(2) in addition to, rather than in lieu of, the general
tolerances in section 106(f)(1). The Board believes this is consistent
with the statutory language; it is unlikely that the Congress intended
to allow the rescission remedy to be invoked when the disclosures would
otherwise be considered accurate under the rules for civil and
administrative liability. Most commenters supported these
interpretations. Consumer groups expressed the view that the new
rescission tolerances should only be applied to creditor errors made in
good faith. For the reasons already discussed, the Board believes such
an interpretation would be inconsistent with the legislative intent of
the amendments.
Several commenters sought clarification of what constitutes a loan
where ``no new money is advanced'' for purposes of Sec. 226.23(g)(2).
The rule has been modified for consistency and now refers to a
refinancing in which there has been ``no new advance.'' This phrase
applies to loans for which the new amount financed does not exceed the
unpaid principal balance plus any earned unpaid finance charge on the
existing debt, and amounts attributed solely to the costs of the
refinancing. This is consistent with section 226.23(f)(2) and the
language used in comment 23(f)-4 of the Official Staff Commentary.
23(h) Special Rules for Foreclosures
Paragraph 23(h) implements section 125(i)(2) of the TILA (15 U.S.C.
1635(i)(2)), which provides special rescission rules after a
foreclosure action has been initiated. Most commenters supported the
proposal, although consumer groups believed that the foreclosure rules
should apply to both open- and closed-end mortgage transactions.
The Board proposed to apply the new foreclosure rules only to
closed-end mortgages since there appeared to be no basis for applying
them to open-end lines of credit. The Board believes the Congress
clearly intended to provide additional consumer protections once
foreclosure has been initiated. For example, the statute allows a
consumer to rescind a closed-end loan in foreclosure if the finance
charge is understated by more than $35, even though a larger tolerance
would otherwise apply. Because open-end home equity loans have no
general tolerance for finance charge errors, applying the $35 tolerance
to open-end loans in foreclosure would actually result in less
protection for consumers. The Board believes this would be inconsistent
with the intent of the special foreclosure rules. Accordingly, the
Board interprets the foreclosure tolerances to apply only to closed-end
loans.
The 1995 Amendments also allow a consumer to rescind a loan in
foreclosure if a mortgage broker fee was not properly disclosed,
without regard to the dollar amount involved. Consumer groups commented
that this aspect of the new foreclosure rules should be applied to
open-end transactions. Because broker fees are not generally associated
with open-end lines of credit, it seems unlikely that this was the
legislative intent. There is also no basis for reading this portion of
the foreclosure rules more broadly than the foreclosure tolerances
which apply only to closed-end transactions.
The new rules covering consumers' right to rescind a loan in
foreclosure
[[Page 49244]]
only apply to transactions that were originally subject to the right of
rescission. Consequently, the new rules do not apply to purchase money
loans.
Subpart E--Special Rules for Certain Mortgage Transactions
Section 226.31--General Rules
31(d) Basis of Disclosures and Use of Estimates
Paragraph 31(d) is revised and reorganized, consistent with the
revisions made to Sec. 226.17(c).
31(d)(3)
Paragraph 31(d)(3) incorporates the new rule regarding the
disclosure of per-diem interest charges, consistent with the amendment
in section 226.17(c)(2)(ii). In preparing disclosures, creditors are
expected to exercise reasonable diligence in ascertaining the necessary
information. Paragraph 31(d)(3) has been modified slightly to clarify
that the rule applies to a disclosure made pursuant to Subpart E (such
as the APR) that would be affected by the per-diem interest charge.
31(g) Accuracy of Annual Percentage Rate
Paragraph 31(g) is intended to clarify that for purposes of
determining whether a transaction is covered under Sec. 226.32(a) and
in making the disclosures required by Sec. 226.32(c), a creditor may
rely on its APR calculations if they are considered accurate according
to the APR tolerances provided in Sec. 226.22. For this purpose, the
APR tolerances in paragraph 22(a) (4) and (5) apply only if the finance
charge is considered accurate under Sec. 226.18(d)(1); the rescission
tolerances in Sec. 226.23 (g) or (h) do not apply.
Consumer groups expressed the view that the new tolerances should
not apply in determining whether a loan is covered under
Sec. 226.32(a). The language of the 1995 Amendments suggests that the
new tolerances apply to all closed-end mortgage loans. The Board does
not believe such an interpretation would be consistent with the
legislative intent of the statute.
Appendix H to Part 226--Closed-End Model Forms and Clauses
H-9 Rescission Model Form
The 1995 Amendments clarify that creditors will not be liable for
the form of rescission notice they give to the consumer if the creditor
uses the appropriate form published by the Board or a comparable
notice. In order to ease compliance, model form H-9 has been revised
slightly to clarify that it may be used in loan refinancings with the
original creditor, without regard to whether the original creditor is
the holder of the note at the time of refinancing. Creditors may,
however, continue to use the original forms H-8 and H-9 as appropriate.
Supplement I--Official Staff Interpretations
The revisions would conform the Official Staff Commentary
consistent with the amendments to Regulation Z.
IV. Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 603), the Board's Office of the Secretary has reviewed the
amendments to Regulation Z. Overall, the amendments are not expected to
have any significant impact on small entities. The regulatory revisions
required to implement the 1995 Amendments clarify the existing
disclosure requirements and ease compliance by providing new
tolerances. Under the existing rules, fees charged in connection with
debt cancellation agreements are generally treated as finance charges;
the final rule allows creditors to exclude these fees from the finance
charge if additional disclosures are provided to the consumer.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.), the Board has reviewed the amendments to Regulation Z
under the authority delegated to the Board by the Office of Management
and Budget. 5 CFR part 1320 appendix A.1.
The respondents are individuals or businesses that regularly offer
or extend consumer credit. The purpose of the TILA and Regulation Z is
to promote the informed use of consumer credit by requiring creditors
to disclose its terms and cost. Creditors must retain records of
compliance for 24 months. The revisions to the requirements in this
regulation are found in 12 CFR 226.4, 226.17, 226.18, 226.19, 226.23,
and 226.31.
The disclosures made by creditors to consumers under Regulation Z
are mandatory pursuant to the Truth in Lending Act (15 U.S.C. 1601 et
seq.). Since the Federal Reserve does not collect any information, no
issue of confidentiality under the Freedom of Information Act arises.
Disclosures relating to specific transactions or accounts are not
publicly available.
The Board's Regulation Z applies to all types of creditors, not
just state member banks. Under the Paperwork Reduction Act, however,
the Federal Reserve accounts for the paperwork burden associated with
Regulation Z only for state member banks. Any estimates of paperwork
burden for institutions other than state member banks that would be
affected by the amendments would be provided by the federal agency or
agencies that supervise those lenders.
There are 1,042 state member banks with an average frequency of
136,294 responses per bank each year. The current estimated burden for
Regulation Z ranges from 5 seconds per response (for disclosures prior
to opening a credit card account) to 30 minutes per response (for
inclusion of information in an advertisement). The combined annual
burden for all state member banks under Regulation Z is estimated to be
1,975,605 hours (an average of 1,896 hours per state member bank).
As stated in the notice of proposed rulemaking, the changes to the
regulation are not expected to increase the ongoing annual burden of
Regulation Z. The Federal Reserve also estimated the associated startup
cost to be $160 per respondent for changing disclosures (or disclosure-
producing software) to include disclosures relating to voluntary debt
cancellation agreements.
The Federal Reserve received comments on the burden estimates from
a multi-bank holding company and from a bank and its affiliated
mortgage company. Both believed that the Federal Reserve's estimate of
the cost of revising the disclosures was too low. However, some
activities cited by the commenters, such as recordkeeping, filing,
auditing, and monitoring, should be ongoing under the current rule. The
burden for these activities is included in the figures above, estimated
to be 1,896 hours per state member bank per year. Also, under the
Paperwork Reduction Act, some activities, while associated with
complying with the regulation, are not considered paperwork burden.
Nonetheless, the Federal Reserve is revising its estimate of the
typical startup cost at a state member bank to $3,000 to include the
cost of additional legal services.
An agency may not collect or sponsor the collection or disclosure
of information, and an organization is not required to collect or
disclose information unless a currently valid OMB control number is
displayed. The OMB control number for the Recordkeeping and Disclosure
Requirements in Connection with Regulation Z is 7100-0199.
Send comments regarding the burden estimate, or any other aspect of
this collection of information, including
[[Page 49245]]
suggestions for reducing the burden, to: Secretary, Board of Governors
of the Federal Reserve System, 20th and C Streets, NW., Washington, DC
20551; and to the Office of Management and Budget, Paperwork Reduction
Project (7100-0199), Washington, DC 20503.
List of Subjects in 12 CFR Part 226
Advertising, Banks, banking, Consumer protection, Credit, Federal
Reserve System, Mortgages, Reporting and recordkeeping requirements,
Truth in lending.
For the reasons set forth in the preamble, the Board amends 12 CFR
Part 226 as follows:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
2. Section 226.2 is amended by revising paragraph (a)(6) to read as
follows:
Sec. 226.2 Definitions and rules of construction.
(a) Definitions. * * *
* * * * *
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Secs. 226.15 and
226.23, and for purposes of Sec. 226.31, the term means all calendar
days except Sundays and the legal public holidays specified in 5 U.S.C.
6103(a), such as New Year's Day, the Birthday of Martin Luther King,
Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
* * * * *
3. Section 226.4 is amended as follows:
a. Paragraph (a) is revised;
b. New paragraph (b)(10) is added;
c. A heading is added to paragraph (c)(7), the introductory text to
paragraph (c)(7) is republished, paragraphs (c)(7)(ii) and (c)(7)(iii)
are revised, paragraph (c)(7)(iv) is redesignated as paragraph
(c)(7)(v) and republished, and a new paragraph (c)(7)(iv) is added;
d. The paragraph (d) heading is revised, the paragraph (d)(1)
heading and introductory text are revised, paragraph (d)(1)(i) is
revised, and a new paragraph (d)(3) is added.
e. A new paragraph (e)(3) is added.
The revisions and additions are to read as follows:
Sec. 226.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit
as a dollar amount. It includes any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit.
It does not include any charge of a type payable in a comparable cash
transaction.
(1) Charges by third parties. The finance charge includes fees and
amounts charged by someone other than the creditor, unless otherwise
excluded under this section, if the creditor:
(i) requires the use of a third party as a condition of or an
incident to the extension of credit, even if the consumer can choose
the third party; or
(ii) retains a portion of the third-party charge, to the extent of
the portion retained.
(2) Special rule; closing agent charges. Fees charged by a third
party that conducts the loan closing (such as a settlement agent,
attorney, or escrow or title company) are finance charges only if the
creditor:
(i) Requires the particular services for which the consumer is
charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(3) Special rule; mortgage broker fees. Fees charged by a mortgage
broker (including fees paid by the consumer directly to the broker or
to the creditor for delivery to the broker) are finance charges even if
the creditor does not require the consumer to use a mortgage broker and
even if the creditor does not retain any portion of the charge.
(b) Example of finance charge * * *
* * * * *
(10) Debt cancellation fees. Charges or premiums paid for debt
cancellation coverage written in connection with a credit transaction,
whether or not the debt cancellation coverage is insurance under
applicable law.
(c) Charges excluded from the finance charge. * * *
* * * * *
(7) Real-estate related fees. The following fees in a transaction
secured by real property or in a residential mortgage transaction, if
the fees are bona fide and reasonable in amount:
* * * * *
(ii) Fees for preparing loan-related documents, such as deeds,
mortgages, and reconveyance or settlement documents.
(iii) Notary and credit report fees.
(iv) Property appraisal fees or fees for inspections to assess the
value or condition of the property if the service is performed prior to
closing, including fees related to pest infestation or flood hazard
determinations.
(v) Amounts required to be paid into escrow or trustee accounts if
the amounts would not otherwise be included in the finance charge.
* * * * *
(d) Insurance and debt cancellation coverage.--(1) Voluntary credit
insurance premiums. Premiums for credit life, accident, health or loss-
of-income insurance may be excluded from the finance charge if the
following conditions are met:
(i) The insurance coverage is not required by the creditor, and
this fact is disclosed in writing.
* * * * *
(3) Voluntary debt cancellation fees. (i) Charges or premiums paid
for debt cancellation coverage of the type specified in paragraph
(d)(3)(ii) of this section may be excluded from the finance charge,
whether or not the coverage is insurance, if the following conditions
are met:
(A) The debt cancellation agreement or coverage is not required by
the creditor, and this fact is disclosed in writing;
(B) The fee or premium for the initial term of coverage is
disclosed. If the term of coverage is less than the term of the credit
transaction, the term of coverage also shall be disclosed. The fee or
premium may be disclosed on a unit-cost basis only in open-end credit
transactions, closed-end credit transactions by mail or telephone under
Sec. 226.17(g), and certain closed-end credit transactions involving a
debt cancellation agreement that limits the total amount of
indebtedness subject to coverage;
(C) The consumer signs or initials an affirmative written request
for coverage after receiving the disclosures specified in this
paragraph. Any consumer in the transaction may sign or initial the
request.
(ii) Paragraph (d)(3)(i) of this section applies to fees paid for
debt cancellation coverage that provides for cancellation of all or
part of the debtor's liability for amounts exceeding the value of the
collateral securing the obligation, or in the event of the loss of
life, health, or income or in case of accident.
(e) Certain security interest charges. * * *
* * * * *
(3) Taxes on security instruments. Any tax levied on security
instruments or on documents evidencing indebtedness if the payment of
such taxes is a requirement for recording the
[[Page 49246]]
instrument securing the evidence of indebtedness.
* * * * *
4. Section 226.17 is amended as follows:
a. In paragraph (a)(1), footnote 38 is revised;
b. Paragraph (c)(2) is redesignated as paragraph (c)(2)(i) and
revised, and paragraph (c)(2)(ii) is added;
c. Paragraph (f) is revised.
The revisions and additions are to read as follows:
Sec. 226.17 General disclosure requirements.
(a) Form of disclosures. (1) * * * 38 * * *
---------------------------------------------------------------------------
\38\ The following disclosures may be made together with or
separately from other required disclosures: the creditor's identity
under Sec. 226.18(a), the variable rate example under
Sec. 226.18(f)(4), insurance or debt cancellation under
Sec. 226.18(n), and certain security interest charges under
Sec. 226.18(o).
---------------------------------------------------------------------------
* * * * *
(c) Basis of disclosures and use of estimates. * * *
(2)(i) If any information necessary for an accurate disclosure is
unknown to the creditor, the creditor shall make the disclosure based
on the best information reasonably available at the time the disclosure
is provided to the consumer, and shall state clearly that the
disclosure is an estimate.
(ii) For a transaction in which a portion of the interest is
determined on a per-diem basis and collected at consummation, any
disclosure affected by the per-diem interest shall be considered
accurate if the disclosure is based on the information known to the
creditor at the time that the disclosure documents are prepared for
consummation of the transaction.
* * * * *
(f) Early disclosures. If disclosures required by this subpart are
given before the date of consummation of a transaction and a subsequent
event makes them inaccurate, the creditor shall disclose before
consummation: 39
---------------------------------------------------------------------------
\39\ For certain residential mortgage transactions,
Sec. 226.19(a)(2) permits redisclosure no later than consummation or
settlement, whichever is later.
---------------------------------------------------------------------------
(1) any changed term unless the term was based on an estimate in
accordance with Sec. 226.17(c)(2) and was labelled an estimate;
(2) all changed terms, if the annual percentage rate at the time of
consummation varies from the annual percentage rate disclosed earlier
by more than \1/8\ of 1 percentage point in a regular transaction, or
more than \1/4\ of 1 percentage point in an irregular transaction, as
defined in Sec. 226.22(a).
* * * * *
5. Section 226.18 is amended as follows:
a. Footnote 41 in paragraph (d) is removed and paragraph (d)
introductory text is republished;
b. New paragraphs (d)(1) and (d)(2) are added;
c. Footnotes 39 and 40 in paragraph (c) are redesignated as
footnotes 40 and 41 respectively; and
d. Paragraph (n) is revised.
The revisions and additions are to read as follows:
Sec. 226.18 Content of disclosures.
* * * * *
(d) Finance charge. The finance charge, using that term, and a
brief description such as ``the dollar amount the credit will cost
you.''
(1) Mortgage loans. In a transaction secured by real property or a
dwelling, the disclosed finance charge and other disclosures affected
by the disclosed finance charge (including the amount financed and the
annual percentage rate) shall be treated as accurate if the amount
disclosed as the finance charge:
(i) is understated by no more than $100; or
(ii) is greater than the amount required to be disclosed.
(2) Other credit. In any other transaction, the amount disclosed as
the finance charge shall be treated as accurate if, in a transaction
involving an amount financed of $1,000 or less, it is not more than $5
above or below the amount required to be disclosed; or, in a
transaction involving an amount financed of more than $1,000, it is not
more than $10 above or below the amount required to be disclosed.
* * * * *
(n) Insurance and debt cancellation. The items required by
Sec. 226.4(d) in order to exclude certain insurance premiums and debt
cancellation fees from the finance charge.
* * * * *
6. Section 226.19 is amended by revising paragraph (a)(2) to read
as follows:
Sec. 226.19 Certain residential mortgage and variable-rate
transactions.
(a) * * *
(2) Redisclosure required. If the annual percentage rate at the
time of consummation varies from the annual percentage rate disclosed
earlier by more than \1/8\ of 1 percentage point in a regular
transaction or more than \1/4\ of 1 percentage point in an irregular
transaction, as defined in Sec. 226.22, the creditor shall disclose all
the changed terms no later than consummation or settlement.
* * * * *
7. Section 226.22 is amended by adding new paragraphs (a)(4) and
(a)(5) to read as follows:
Sec. 226.22 Determination of annual percentage rate.
(a) Accuracy of annual percentage rate. * * *
* * * * *
(4) Mortgage loans. If the annual percentage rate disclosed in a
transaction secured by real property or a dwelling varies from the
actual rate determined in accordance with paragraph (a)(1) of this
section, in addition to the tolerances applicable under paragraphs
(a)(2) and (3) of this section, the disclosed annual percentage rate
shall also be considered accurate if:
(i) The rate results from the disclosed finance charge; and
(ii)(A) The disclosed finance charge would be considered accurate
under Sec. 226.18(d)(1); or
(B) For purposes of rescission, if the disclosed finance charge
would be considered accurate under Sec. 226.23(g) or (h), whichever
applies.
(5) Additional tolerance for mortgage loans. In a transaction
secured by real property or a dwelling, in addition to the tolerances
applicable under paragraphs (a)(2) and (3) of this section, if the
disclosed finance charge is calculated incorrectly but is considered
accurate under Sec. 226.18(d)(1) or Sec. 226.23(g) or (h), the
disclosed annual percentage rate shall be considered accurate:
(i) If the disclosed finance charge is understated, and the
disclosed annual percentage rate is also understated but it is closer
to the actual annual percentage rate than the rate that would be
considered accurate under paragraph (a)(4) of this section;
(ii) If the disclosed finance charge is overstated, and the
disclosed annual percentage rate is also overstated but it is closer to
the actual annual percentage rate than the rate that would be
considered accurate under paragraph (a)(4) of this section.
* * * * *
8. Section 226.23 is amended as follows:
a. Paragraphs (b)(1) through (b)(5) are redesignated as paragraphs
(b)(1)(i) through (b)(1)(v);
b. The introductory text of paragraph (b) is redesignated as (b)(1)
and republished;
c. A new paragraph (b)(2) is added; and
d. New paragraphs (g) and (h) are added.
The revisions and additions are to read as follows:
[[Page 49247]]
Sec. 226.23 Right of rescission.
* * * * *
(b)(1) Notice of right to rescind. In a transaction subject to
rescission, a creditor shall deliver two copies of the notice of the
right to rescind to each consumer entitled to rescind. The notice shall
be on a separate document that identifies the transaction and shall
clearly and conspicuously disclose the following:
(i) The retention or acquisition of a security interest in the
consumer's principal dwelling.
(ii) The consumer's right to rescind the transaction.
(iii) How to exercise the right to rescind, with a form for that
purpose, designating the address of the creditor's place of business.
(iv) The effects of rescission, as described in paragraph (d) of
this section.
(v) The date the rescission period expires.
(2) Proper form of notice. To satisfy the disclosure requirements
of paragraph (b)(1) of this section, the creditor shall provide the
appropriate model form in Appendix H of this part or a substantially
similar notice.
* * * * *
(g) Tolerances for accuracy.--(1) One-half of 1 percent tolerance.
Except as provided in paragraphs (g)(2) and (h)(2) of this section, the
finance charge and other disclosures affected by the finance charge
(such as the amount financed and the annual percentage rate) shall be
considered accurate for purposes of this section if the disclosed
finance charge:
(i) is understated by no more than \1/2\ of 1 percent of the face
amount of the note or $100, whichever is greater; or
(ii) is greater than the amount required to be disclosed.
(2) One percent tolerance. In a refinancing of a residential
mortgage transaction with a new creditor (other than a transaction
covered by Sec. 226.32), if there is no new advance and no
consolidation of existing loans, the finance charge and other
disclosures affected by the finance charge (such as the amount financed
and the annual percentage rate) shall be considered accurate for
purposes of this section if the disclosed finance charge:
(i) is understated by no more than 1 percent of the face amount of
the note or $100, whichever is greater; or
(ii) is greater than the amount required to be disclosed.
(h) Special rules for foreclosures.--(1) Right to rescind. After
the initiation of foreclosure on the consumer's principal dwelling that
secures the credit obligation, the consumer shall have the right to
rescind the transaction if:
(i) A mortgage broker fee that should have been included in the
finance charge was not included; or
(ii) The creditor did not provide the properly completed
appropriate model form in Appendix H of this part, or a substantially
similar notice of rescission.
(2) Tolerance for disclosures. After the initiation of foreclosure
on the consumer's principal dwelling that secures the credit
obligation, the finance charge and other disclosures affected by the
finance charge (such as the amount financed and the annual percentage
rate) shall be considered accurate for purposes of this section if the
disclosed finance charge:
(i) is understated by no more than $35; or
(ii) is greater than the amount required to be disclosed.
9. Section 226.31 is amended by revising paragraphs (d) and (g) to
read as follows:
Sec. 226.31 General rules.
* * * * *
(d) Basis of disclosures and use of estimates--(1) Legal
Obligation. Disclosures shall reflect the terms of the legal obligation
between the parties.
(2) Estimates. If any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at the
time the disclosure is provided, and shall state clearly that the
disclosure is an estimate.
(3) Per-diem interest. For a transaction in which a portion of the
interest is determined on a per-diem basis and collected at
consummation, any disclosure affected by the per-diem interest shall be
considered accurate if the disclosure is based on the information known
to the creditor at the time that the disclosure documents are prepared.
* * * * *
(g) Accuracy of annual percentage rate. For purposes of
Sec. 226.32, the annual percentage rate shall be considered accurate,
and may be used in determining whether a transaction is covered by
Sec. 226.32, if it is accurate according to the requirements and within
the tolerances under Sec. 226.22. The finance charge tolerances for
rescission under Sec. 226.23(g) or (h) shall not apply for this
purpose.
10. In Part 226, Appendix H is amended by revising the H-9
Rescission Model Form and the contents listing at the beginning of
Appendix H to read as follows:
Appendix H to Part 226--Closed End Model Forms and Clauses
H-1--Credit Sale Model Form (Sec. 226.18)
H-2--Loan Model Form (Sec. 226.18)
H-3--Amount Financed Itemization Model Form (Sec. 226.18(c))
H-4(A)--Variable-Rate Model Clauses (Sec. 226.18(f)(1))
H-4(B)--Variable-Rate Model Clauses (Sec. 226.18(f)(2))
H-4(C)--Variable-Rate Model Clauses (Sec. 226.19(b))
H-4(D)--Variable-Rate Model Clauses (Sec. 226.20(c))
H-5--Demand Feature Model Clauses (Sec. 226.18(I))
H-6--Assumption Policy Model Clause (Sec. 226.18(q))
H-7--Required Deposit Model Clause (Sec. 226.18(r))
H-8--Rescission Model Form (General) (Sec. 226.23)
H-9--Rescission Model Form (Refinancing With Original Creditor)
(Sec. 226.23)
H-10--Credit Sale Sample
H-11--Installment Loan Sample
H-12--Refinancing Sample
H-13--Mortgage with Demand Feature Sample
H-14--Variable-Rate Mortgage Sample (Sec. 226.19(b))
H-15--Graduated Payment Mortgage Sample
H-16--Mortgage Sample (Sec. 226.32)
* * * * *
H-9--Rescission Model Form (Refinancing with Original Creditor)
NOTICE OF RIGHT TO CANCEL
Your Right to Cancel
You are entering into a new transaction to increase the amount
of credit previously provided to you. Your home is the security for
this new transaction. You have a legal right under federal law to
cancel this new transaction, without cost, within three business
days from whichever of the following events occurs last:
(1) the date of this new transaction, which is ________________;
or
(2) the date you received your new Truth in Lending disclosures;
or
(3) the date you received this notice of your right to cancel.
If you cancel this new transaction, it will not affect any
amount that you presently owe. Your home is the security for that
amount. Within 20 calendar days after we receive your notice of
cancellation of this new transaction, we must take the steps
necessary to reflect the fact that your home does not secure the
increase of credit. We must also return any money you have given to
us or anyone else in connection with this new transaction.
You may keep any money we have given you in this new transaction
until we have done the things mentioned above, but you must then
offer to return the money at the address below.
[[Page 49248]]
If we do not take possession of the money within 20 calendar
days of your offer, you may keep it without further obligation.
How To Cancel
If you decide to cancel this new transaction, you may do so by
notifying us in writing, at
----------------------------------------------------------------------
(Creditor's name and business address).
You may use any written statement that is signed and dated by
you and states your intention to cancel, or you may use this notice
by dating and signing below. Keep one copy of this notice because it
contains important information about your rights.
If you cancel by mail or telegram, you must send the notice no
later than midnight of
----------------------------------------------------------------------
(Date)-----------------------------------------------------------------
(or midnight of the third business day following the latest of the
three events listed above).
If you send or deliver your written notice to cancel some other
way, it must be delivered to the above address no later than that
time.
I WISH TO CANCEL
----------------------------------------------------------------------
Consumer's Signature
----------------------------------------------------------------------
Date
11. In Supplement I to Part 226, under Section 226.4--Finance
Charge, under 4(a) Definition, paragraph 3.ii. is removed.
12. In Supplement I to Part 226, under Section 226.17--General
Disclosure Requirements, under 17(c) Basis of disclosures and use of
estimates, paragraph 17(c)(2) is redesignated as paragraph 17(c)(2)(i):
Supplement I--Official Staff Interpretations
* * * * *
Section 226.17--General Disclosure Requirements
* * * * *
17(c) Basis of Disclosures and Use of Estimates
* * * * *
Paragraph 17(c)(2)(i).
* * * * *
13. In Supplement I to Part 226, under Section 226.18--Content of
Disclosures, under 18(d) Finance charge, paragraph 2 is removed.
14. In Supplement I to Part 226, under Section 226.23--Right of
Rescission, under 23(b) Notice of right to rescind, the first sentence
of paragraph 3 is revised to read as follows:
Section 226.23--Right of Rescission.
* * * * *
23(b) Notice of right to rescind
* * * * *
3. Content. The notice must include all of the information
outlined in Section 226.23(b)(1)(i) through (v). * * *
* * * * *
By order of the Board of Governors of the Federal Reserve
System, September 13, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-23951 Filed 9-18-96; 8:45 am]
BILLING CODE 6210-01-P
