[Federal Register Volume 61, Number 230 (Wednesday, November 27, 1996)]
[Proposed Rules]
[Pages 60223-60229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29639]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 230 / Wednesday, November 27, 1996 /
Proposed Rules
[[Page 60223]]
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0942]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; official staff interpretation.
-----------------------------------------------------------------------
SUMMARY: The Board is publishing for comment proposed revisions to the
official staff commentary to Regulation Z (Truth in Lending). The
commentary applies and interprets the requirements of Regulation Z. The
proposed update provides guidance on issues relating to the treatment
of certain fees paid in connection with mortgage loans. It addresses
new tolerances for accuracy in disclosing the amount of the finance
charge and other affected cost disclosures. In addition, the proposed
update discusses issues such as the treatment of debt cancellation
agreements and a creditor's duties if providing periodic statements via
electronic means.
DATES: Comments must be received on or before January 6, 1997.
ADDRESSES: Comments should refer to Docket No. R-0942, and may be
mailed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, DC 20551. Comments also may be delivered to Room B-2222 of
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the
guard station in the Eccles Building courtyard on 20th Street, N.W.
(between Constitution Avenue and C Street) at any time. Comments may be
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's
Rules Regarding Availability of Information.
FOR FURTHER INFORMATION CONTACT: Jane E. Ahrens or James A. Michaels,
Senior Attorneys, or Sheilah A. Goodman or Manley Williams, Staff
Attorneys, Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412;
for 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. 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). The Board's official staff commentary
(12 CFR Part 226 (Supp. I)) interprets the regulation, and provides
guidance to creditors in applying the regulation to specific
transactions. The commentary is a substitute for individual staff
interpretations; it is updated periodically to address significant
questions that arise. The Board expects to adopt revisions to the
commentary in final form in March 1997; to the extent the revisions
impose new requirements on creditors, compliance would be optional
until October 1, 1997, the effective date for mandatory compliance.
On September 19, 1996, the Board published amendments to Regulation
Z (61 FR 49237) implementing the Truth in Lending Act Amendments of
1995 (``1995 Amendments,'' Pub. L. 104-29, 109 Stat. 271). The
amendments clarify the treatment of fees typically associated with real
estate-related lending, and revise tolerances for finance charge
calculations for loans secured by real estate or dwellings. In the same
rulemaking, the Board also addressed the treatment of fees charged in
connection with debt cancellation agreements. In large measure, the
proposed commentary incorporates the supplementary information
accompanying that rulemaking.
II. Proposed Revisions
Supplement I--Official Staff Interpretations
Introduction
Comment I-5 updates the reference to the regulation's appendices.
Subpart A--General
Section 226.2--Definitions
2(a)(25) Security Interest
Comment 2(a)(25)-6 refers to model form H-9, which was revised in
the September 1996 rulemaking. The comment reflects changes to the
form's text.
Section 226.4--Finance Charge
4(a) Definition
Comments 4(a)-3 and -4 are deleted, and subsequent comments
redesignated, in accord with the revision and reorganization of
Sec. 226.4(a) in the September 1996 rulemaking.
Paragraph 4(a)(1) Charges by Third Parties
Comment 4(a)(1)-1 retains the example of third-party charges
currently in comment 4(a)-3.i. The example illustrates that amounts
charged by a third party are included in the finance charge if the
creditor requires the use of the third party, even if the consumer may
choose the service provider.
Comment 4(a)(1)-2 addresses the treatment of annuity premiums
associated with some reverse mortgages. The Board proposes to treat the
cost of the premiums as a finance charge when the purchase of an
annuity is effectively required incident to the credit.
4(a)(2) Special rule; closing agent charges
Proposed comment 4(a)(2)-1 retains the substance of the guidance
currently in comment 4(a)-4; that is, charges by a third-party closing
agent are finance charges only if the creditor requires the particular
charge or service, or to the extent the creditor retains any portion of
the fee (unless the charge is otherwise excluded). Technical amendments
conform the text to new Sec. 226.4(a)(2)--such as replacing
``settlement agent'' with ``closing agent''--without any substantive
change. The comment also clarifies that the special rule applies only
to the third party serving as a closing agent for the particular loan.
Charges by a third party who is not the
[[Page 60224]]
closing agent for the loan but who provides services typically
performed by closing agents (recording the mortgage, for example) are
covered by the general rule for third-party charges in paragraph
4(a)(1).
Paragraph 4(a)(3) Special Rule; Mortgage Broker Fees
Comments 4(a)(3)-1 and -2 address the treatment of mortgage broker
fees. Under the 1995 Amendments, mortgage broker fees paid by the
borrower are finance charges (unless otherwise excluded). Comment
4(a)(3)-1 clarifies that mortgage broker fees may be excluded from the
finance charge if the fee would be excluded when charged by the
creditor. The comment also provides that if the mortgage broker charges
an application fee, the fee may be excluded from the finance charge if
the broker charges the fee to all applicants, whether or not credit is
extended.
Proposed comment 4(a)(3)-2 discusses the scope of the special rule
for mortgage broker fees. It addresses the treatment of compensation
paid by the creditor to a mortgage broker in addition to--or
substitution for--compensation paid by the consumer to the broker.
4(b) Examples of Finance Charges
Paragraph 4(b)(10) Debt Cancellation Fees
Proposed comment 4(b)(10)-1 clarifies that for purposes of
Regulation Z, the term ``debt cancellation agreement'' includes a
specialized type of agreement known as guaranteed automobile protection
or ``GAP'' agreements.
4(c) Charges Excluded From the Finance Charge
Paragraph 4(c)(5)
Numerous creditors have asked for additional guidance on certain
finance charges paid by a noncreditor seller on a consumer's behalf
before loan closing. Comment 4(c)(5)-2 currently states that these
payments, such as for mortgage insurance premiums, should be excluded
from the finance charge as seller's points. The proposal clarifies the
standards for determining when to exclude such amounts from the finance
charge.
Section 226.17(c)(1) states that disclosures must be based on the
consumer's legal obligation. Comment 17(c)(1)-3 provides guidance for
disclosing the effect of payments by a seller or another third party
that reduce, for example, a consumer's interest rate. Disclosures
should reflect the payment only if the consumer is no longer legally
bound to the creditor for the amount paid. Comment 4(c)(5)-2 would be
revised to clarify that the same standard applies for amounts paid by
noncreditor sellers.
4(d) Insurance and Debt Cancellation Coverage
Paragraph 4(d)(3) Voluntary Debt Cancellation Fees
Proposed comment 4(d)(3)-1 clarifies that fees for GAP agreements
must be disclosed in accord with paragraph 4(d)(3) rather than the
property insurance provisions of paragraph 4(d)(2). Proposed comment
4(d)(3)-2 clarifies that creditors may characterize debt cancellation
fees as insurance premiums in their TILA disclosures only if the debt
cancellation coverage constitutes insurance under state law.
4(e) Certain Security Interest Charges
Section 226.4(e) excludes certain security interest charges paid to
public officials from the finance charge if the amounts are itemized
and disclosed. As an example, comment 4(e)-1 lists a tax imposed solely
on the creditor that is charged to the consumer. To ease compliance,
the proposed revision also provides a cross reference to comment 4(a)-7
(to be redesignated as 4(a)-5), which also addresses the treatment of
taxes.
Subpart B--Open-End Credit
Section 226.5--General Disclosure Requirements
5(b) Time of Disclosures
5(b)(2) Periodic Statements
Paragraph 5(b)(2)(ii)
Comment 5(b)(2)(ii)-3 responds to technological developments in the
way credit transactions are conducted via electronic means; it provides
guidance on when periodic statements may be provided electronically,
for example, via home banking systems. The proposal is part of a
general review that will seek to adapt current rules to the way
electronic disclosures may be provided and retained. For example, the
Board has addressed similar issues in recent proposed amendments to
Regulation E (Electronic Fund Transfers, 12 CFR Part 205, 61 FR 19696,
May 2, 1996) and Regulation CC (Expedited Funds Availability, 12 CFR
Part 229, 61 FR 27802).
Subpart C--Closed-End Credit
Section 226.17--General Disclosure Requirements
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(2)(ii)
Proposed comment 17(c)(2)(ii)-1 addresses the new rule applicable
to the disclosure of per-diem interest charges. Under the rule, any
numerical disclosure affected by the per-diem interest charge is
considered accurate if it is based on the information known to the
creditor at the time the disclosure is prepared, whether or not the
disclosure of per-diem interest is accurate when it is received by the
consumer. The proposed comment clarifies that in such cases, the
resulting finance charge is considered accurate without regard to the
tolerance for errors under Sec. 226.18(d)(1). The Board requests
comment on whether a conforming comment to paragraph 31(d)(3) is
necessary.
17(f) Early Disclosures
Paragraph 17(f)(2)
The Board proposes to reorganize comment 17(f)-1 and to add
proposed comment 17(f)(2)-1 to conform to the new regulation. Comment
17(f)-1 includes an additional example relating to mortgage loans. The
revision also clarifies that for purposes of determining if
redisclosure is required, the changed terms must be redisclosed
according to the rules for accuracy in paragraph 17(f) rather than the
tolerances in Sec. 226.18(d) or 226.22(a).
Section 226.18--Content of Disclosures
18(c) Itemization of Amount Financed
Comment 18(c)-4 provides that in transactions subject to the Real
Estate Settlement Procedures Act (RESPA), no itemization of the amount
financed is required with the early TILA disclosures if the creditor
complies with the good faith estimate requirements of RESPA. The
comment would be amended to clarify that in such transactions, if
redisclosure is required under Sec. 226.19(a)(2), no itemization need
be provided if, at or prior to consummation, the consumer receives a
settlement statement that conforms with the substantive requirements of
RESPA.
The Department of Housing and Urban Development (HUD) recently
solicited comment on whether creditors, in transactions subject to
RESPA, should be allowed to show only the total amount collected for
escrow on the settlement statement, rather than itemizing these
amounts. Comment
[[Page 60225]]
18(c)(1)(iv) would be revised and expanded to address how creditors can
determine the portion of the total amount collected for an escrow
account that is a prepaid finance charge, if any.
18(d) Finance Charge
Paragraph 18(d)(2)
Proposed comment 18(d)(2)-1 incorporates the guidance formerly
found in comment 18(d)-2 that was removed as part of the recent
reorganization of Sec. 226.18(d).
Paragraph 18(n) Insurance and debt Cancellation
Proposed comment 18(n)-2 provides guidance for disclosing debt
cancellation fees under Sec. 226.4(d)(3). The proposed comment
clarifies that creditors may disclose debt cancellation fees as
insurance premiums only if the coverage is insurance under state law,
consistent with proposed comment 4(d)(3)-2.
Section 226.19--Certain Residential Mortgage and Variable-Rate
Transactions
Paragraph 19(a)(2) Redisclosure Required
Comment 19(a)(2) is revised for consistency with proposed comment
17(f)(2)-1.
Section 226.22--Determination of the Annual Percentage Rate
22(a) Accuracy of the Annual Percentage Rate
Paragraphs 22(a)(4) and (a)(5)
Sections 226.22(a)(4) and (a)(5) provide two additional APR
tolerances for mortgage loans when the finance charge has been
misstated but is considered accurate. The proposed comments provide
specific examples of these tolerances.
Section 226.23--Right of Rescission
23(g) Tolerances for Accuracy
Paragraph 23(g)(2) One Percent Tolerance
Proposed comment 23(g)(2)-1 clarifies that the phrase ``new
advance'' has the same meaning in paragraph 23(g)(2) as it has in
comment 23(f)-4. Both rules address rescission rights when home-secured
loans are refinanced.
Paragraph 23(h) Special Rules for Foreclosures
Proposed comment 23(h)-1 clarifies that the special rules for
foreclosures under paragraph 23(h) only apply to transactions that were
originally subject to rescission under paragraph 226.23(a)(1).
Paragraph 23(h)(1)(i)
Proposed comment 23(h)(1)(i)-1 clarifies that a consumer may
rescind a loan in foreclosure if a mortgage broker fee is omitted or
understated, without regard to the dollar amount involved. An example
illustrates the rule.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.31--General Rules
31(c) Timing of disclosures
Section 226.31(c) discusses the timing rules for providing
disclosures to consumers for transactions covered by Sec. 226.32
(Sec. 226.3(c)(1)) and reverse mortgages (Sec. 226.31(c)(2)). Comment
31(c)(1)-1, which states that disclosures are furnished when received
by the consumer, is redesignated as comment 31(c)-1 to reflect that the
rule applies to all transactions covered by Sec. 226.31(c).
Section 226.32--Requirements for Certain Closed-end Home Mortgages
32(b) Definitions
Paragraph 32(b)(1)(i)
Comment 32(b)(1)(i)-1 is revised to clarify that per diem interest,
typically paid in a lump sum at closing, is nonetheless interest, and
is not a component of ``points and fees'' under paragraph 32(b)(1).
32(c) Disclosures
32(c)(3) Regular payment
Balloon payments are prohibited in loans that are covered by
Sec. 226.32 and have a term of less than five years. Proposed comment
32(c)(3)-2 clarifies that if a loan with a term of five years or more
provides for a balloon payment, the balloon payment must be disclosed
under this paragraph.
Section 226.33--Requirements for Reverse Mortgages
33(a) Definition
Paragraph 33(a)(2)
Under Sec. 226.33, a reverse mortgages can become due and payable
only after the consumer dies, the dwelling is transferred, or the
consumer ceases to occupy the dwelling as a principal dwelling. Some
states require mortgages to have a definite maturity date. The proposed
comment clarifies how a transaction can comply with those laws and have
a definite maturity date while remaining a reverse mortgage under
Sec. 226.33.
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
Comment app. G and H-2 would be revised, consistent with comments
4(d)(3)-1 and 18(n)-2, to reflect that creditors should not
characterize debt cancellation fees as insurance premiums unless such
coverage is insurance under state law.
Appendix H--Closed-End Model Forms and Clauses
The Board modified the current model form H-9 in the September 1996
rulemaking. Proposed comment app. H-11 would clarify that the revised
H-9 is substantially similar to the current H-9, and creditors may
continue to use the prior version. Creditors are encouraged to use the
revised version when reordering or reprinting forms.
III. Form of Comment Letters
Comment letters should refer to Docket No. R-0942, and, when
possible, should use a standard courier typeface with a type size of 10
or 12 characters per inch. This will enable the Board to convert the
text in machine-readable form through electronic scanning, and will
facilitate automated retrieval of comments for review. Also, if
accompanied by an original document in paper form, comments may be
submitted on 3\1/2\-inch or 5\1/4\-inch computer diskettes in any IBM-
compatible DOS-based format.
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.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions to the regulation. New language is shown inside bold-faced
arrows, while language that would be deleted is set off with bold-faced
brackets. Comments are numbered to comply with new Federal Register
publication rules.
For the reasons set forth in the preamble, the Board proposes to
amend 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. In Supplement I to Part 226, under Introduction, the last
sentence in paragraph 5. would be revised to read as follows:
[[Page 60226]]
Supplement I--Official Staff Interpretations
Introduction
* * * * *
5. Comment designations. * * * Comments to
the [The] appendices may be cited, for
example, as Comments app. A-1.
[through J-2.]
* * * * *
3. Supplement I to Part 226, under Section 226.2--Definitions,
under paragraph 2(a)(25), is amended by removing the last two sentences
of the second undesignated paragraph of paragraph 6.
4. In Supplement I to Part 226, under Section 226.4--Finance
Charge, the following amendments would be made:
a. Under 4(a) Definition., paragraphs 3. and 4. would be removed
and paragraphs 5. through 7. would be redesignated as paragraphs 3.
through 5., respectively, and new paragraphs 4(a)(1), 4(a)(2), and
4(a)(3) would be added preceding 4(b);
b. Under 4(b) Examples of finance charges., a new paragraph
4(b)(10) would be added;
c. Under 4(c) Charges excluded from the finance charge., under
4(c)(5) paragraph 2. would be revised;
d. Under 4(d), the paragraph heading would be revised, and a new
paragraph 4(d)(3) would be added; and
e. Under 4(e) Certain security interest charges., paragraph 1.i.
would be revised. The additions and revisions would read as follows:
* * * * *
Subpart A--General
* * * * *
Section 226.4--Finance Charge
4(a) Definition.
* * * * *
Paragraph 4(a)(1) Charges by third parties.
1. Choosing the provider of a required service. An example of a
third-party charge included in the finance charge is the cost of
required mortgage insurance, even if the consumer is allowed to
choose the insurer.
2. Annuities associated with reverse mortgages. Some creditors
may offer annuities in connection with a reverse mortgage
transaction. The amount of the premium is a finance charge if the
creditor in effect requires the purchase of the annuity incident to
the credit. Examples include the following:
i. The credit documents reflect the purchase of an annuity from
a specific provider or providers.
ii. The creditor assesses an additional charges on consumers who
do not purchase an annuity from a specific provider.
iii. The annuity is intended to supplement or replace the
creditor's payments to the consumer either immediately or at some
future date.
Paragraph 4(a)(2) Special rule; closing agent charges .
1. General. This rule applies to charges by a third party
serving as the closing agent for the particular loan. Unless a
charge is otherwise excluded (for example, a real estate-related
closing cost under Sec. 226.4(c)(7) or a fee paid in a comparable
cash transaction), a fee charged by a third-party closing agent is
included in the finance charge if the creditor requires the
imposition of the charge or the provision of the service, or to the
extent the creditor retains any portion of the charge. For example,
a courier fee charged by a third-party closing agent is a finance
charge if the creditor requires the use of a courier.
Paragraph 4(a)(3) Special rule; mortgage broker fees.
1. Special rule--mortgage broker fees. A fee charged by a
mortgage broker is excluded from the finance charge if it is the
type of fee that is also excluded when charged by the creditor. To
exclude an application fee from the finance charge, a mortgage
broker must charge the fee to all applicants for credit, whether or
not credit is extended.
2. Compensation by lender. Compensation paid by a creditor to a
mortgage broker under an arrangement between those parties is not
included in the finance charge. For example, where a consumer is
obligated to pay points to the creditor and a fee to a mortgage
broker, those charges must be disclosed as finance charges. Under a
separate arrangement between the creditor and the broker, the
creditor may also agree to compensate the broker, such as in ``yield
spread premiums'' or ``back points.'' This compensation paid by the
creditor to the broker is not a finance charge.
* * * * *
4(b) Examples of finance charges.
* * * * *
Paragraph 4(b)(10) Debt cancellation fees.
1. Definition. The term ``debt cancellation agreement'' refers
to a contract between a borrower and a creditor providing for
satisfaction of all or part of the debt when a specified event
occurs. The term includes guaranteed automobile protection or
``GAP'' agreements, which cancel the remaining debt after property
insurance benefits are exhausted.
* * * * *
Paragraph 4(c)(5).
* * * * *
2. Other seller-paid amounts. Mortgage insurance premiums and other
finance charges are sometimes paid at or before
consummation or settlement on the borrower's behalf by a noncreditor
seller. [In such cases the] The creditor should treat the
payment made by the seller as seller's points and exclude it from the
finance charge if the consumer is not legally bound to the
creditor for the charge. A creditor who gives disclosures
before the payment has been made should base them on the best
information reasonably available[, as called for by the estimate
provisions of the regulation].
* * * * *
4(d) Insuranceand debt cancellation
coverage.
* * * * *
Paragraph 4(d)(3).
1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection or
``GAP'' agreements must be disclosed according to Sec. 226. 4(d)(3)
rather than according to Sec. 226. 4(d)(2) for property insurance.
2. Disclosures. 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 model credit insurance disclosures only if the debt
cancellation coverage constitutes insurance under state
law.
* * * * *
4(e) Certain security interest charges.
1. Examples.
i. Excludable charges. Sums must be actually paid to public
officials to be excluded from the finance charge under
Sec. 226.4(e)(1). Examples are charges or other fees required for
filing or recording security agreements, mortgages, continuation
statements, and similar documents, as well as intangible property or
other taxes imposed by the state solely on the creditor [and payable
by] and charged to the consumer (if the tax
must be paid to record a security interest). (See comment
4(a)-5 (formerly 4(a)-7) regarding the treatment of taxes,
generally.).
* * * * *
5. In Supplement I to Part 226, under Section 226.5--General
Disclosure Requirements, under Paragraph 5(b)(2)(ii)., paragraph 3.
would be revised to read as follows:
* * * * *
Subpart B--Open-End Credit
Section 226.5--General Disclosure Requirements
* * * * *
5(b) Timing of disclosures.
* * * * *
5(b)(2) Periodic statements.
* * * * *
Paragraph 5(b)(2)(ii).
* * * * *
3. Calling for periodic statements. The creditor may permit
consumers to call for their periodic statements, but may not require
them to do so. If the consumer wishes to pick up the statement and
the plan has a free-ride period, the statement (including
a statement provided by electronic means) must be made
available in accordance with the 14-day rule.
* * * * *
6. In Supplement I to Part 226, under Section 226.17--General
Disclosure Requirements, the following amendments would be made:
[[Page 60227]]
a. Under 17(c) Basis of disclosures and use of estimates, a new
paragraph 17(c)(2)(ii) would be added; and
b. Under 17(f) Early disclosures, paragraphs 1. introductory text,
1. i., the last sentence of 1. ii., and 1. iii. would be revised and a
heading would be added to paragraph 1. ii; and a new paragraph 17(f)(2)
preceding 17(g) would be added. The additions and revisions would read
as follows:
* * * * *
Subpart C--Closed-End Credit
Section 226.17--General Disclosure Requirements
* * * * *
17(c) Basis of disclosures and use of estimates.
* * * * *
Paragraph 17(c)(2)(ii).
1. Per-diem interest. This paragraph applies to any numerical
disclosure (such as the finance charge or annual percentage rate)
that is affected by the amount of the per-diem interest charge that
will be collected at consummation. If the amount of per-diem
interest used in preparing the disclosures for consummation is based
on the information known to the creditor at the time the disclosure
document is prepared, the disclosures are considered accurate under
this rule, and the affected disclosures are also considered
accurate. For example, if the amount of per-diem interest used to
prepare disclosures is less than the amount of per-diem interest
charged at consummation, and as a result the finance charge is
understated by $200, the disclosed finance charge is considered
accurate even though the understatement is not within the $100
tolerance of Sec. 226.18(d)(1). In this example, if in addition to
the understatement related to the per-diem interest, a $90 fee is
incorrectly omitted from the finance charge, causing it to be
understated by a total of $290, the finance charge is considered
accurate because the $90 fee is within the tolerance in
Sec. 226.18(d)(1).
* * * * *
17(f) Early disclosures.
1. Change in rate or other terms. Redisclosure is required for
changes that occur between the time disclosures are made and
consummation if the annual percentage rate in the consummated
transaction exceeds the limits prescribed in this
section, even if the initial disclosures would be considered
accurate under the tolerances in Secs. 226.18(d) or
226.22(a). [Sec. 226.22(a) (1/8 of 1 percentage point in
regular transactions and 1/4 of one percentage point in irregular
transactions. Redisclosure is also required, even if the annual
percentage rate is within the permitted tolerance, if the
disclosures were not based on estimates in accordance with
Sec. 226.17(c)(2) and labeled as such.] To illustrate:
i. General. A. If disclosures are made in
a regular transaction on July 1, the transaction is consummated on
July 15, and the actual annual percentage rate varies by more than
1/8 of 1 percentage point from the disclosed annual percentage rate,
the creditor must either redisclose the changed terms or furnish a
complete set of new disclosures before consummation. Redisclosure is
required even if the disclosures made on July 1 are based on
estimates and marked as such.
B. In a regular transaction, if early disclosures are
marked as estimates and the disclosed annual percentage rate is
within \1/8\ of 1 percentage point of the rate at consummation, the
creditor need not redisclose the changed terms (including the annual
percentage rate).
ii. Nonmortgage loan. * * * (See
Sec. 226.18(d)(2) [and footnote 41] of this
part.)
iii. Mortgage loan. At the time TILA disclosures are
prepared in July, the loan closing is scheduled for July 31 and the
creditor does not plan to collect per-diem interest at consummation.
Consummation actually occurs on August 5, and per-diem interest for
the remainder of August is collected as a prepaid finance charge.
Assuming there were no other changes requiring redisclosure, the
creditor may rely on the disclosures prepared in July that were
accurate when they were prepared. However, if the creditor prepares
new disclosures in August that will be provided at consummation, the
new disclosures must take into account the amount of the per-diem
interest known to the creditor at that time. [If early
disclosures are marked as estimates and the disclosed annual
percentage rate is within tolerance at consummation, the creditor
need not redisclose the changed terms (including the annual
percentage rate).]
Paragraph 17(f)(2).
1. Irregular transactions. For purposes of this paragraph, a
transaction is deemed to be ``irregular'' according to the
definition in footnote 46 of Sec. 226.22(a)(3).
* * * * *
7. In Supplement I to Part 226, under Section 226.18--Content of
Disclosures, the following amendments would be made:
a. Under 18(c) Itemization of Amount Financed., paragraph 4. would
be revised;
b. Under 18(c)(1)(iv)., paragraph 2. would be revised;
c. Under 18(d) Finance charge., a new paragraph 18(d)(2) Other
credit. would be added after paragraph 1; and
d. Under 18(n) Insurance., the heading would be revised and
paragraph 2. would be added.
The revisions and additions would read as follows:
* * * * *
Section 226.18--Content of Disclosures
* * * * *
18(c) Itemization of amount financed.
* * * * *
4. RESPA transactions. The Real Estate Settlement Procedures Act
(RESPA) requires creditors to provide a good
faith estimate[s] of closing costs and a settlement
statement listing the amounts paid by the consumer.
Transactions subject to RESPA are exempt from the requirements of
Sec. 226.18(c) if the creditor complies with RESPA's
requirements for a [the] good faith estimate[s]
and settlement statement. [requirement.]
The itemization of the amount financed need not be given, even
though the content and timing of the good faith estimate[s]
and settlement statement under RESPA differ
from the requirements of
Sec. Sec. 226.18(c)and
19(a)(2) [requirement]. If the settlement
statement is substituted for the itemization when redisclosure is
required under Sec. 226.19(a)(2), it must be delivered to the
consumer at or prior to consummation.
* * * * *
Paragraph 18(c)(1)(iv).
* * * * *
[2. Prepaid mortgage insurance premiums. RESPA requires
creditors to give consumers a settlement statement disclosing the
costs associated with mortgage loan transactions. Included on the
settlement statement are mortgage insurance premiums collected at
settlement that are prepaid finance charges. In calculating the
total amount of prepaid finance charges, creditors should use the
amount for mortgage insurance listed on the line for mortgage
insurance on the settlement statement (line 1002 on HUD-1 or HUD 1-
A), without adjustment, even if the actual amount collected at
settlement may vary because of RESPA's escrow accounting rules.
Figures for mortgage insurance disclosed in conformance with RESPA
shall be deemed to be accurate for purposes of Regulation Z.]
2. Escrow items. RESPA requires creditors to give
consumers a good faith estimate and settlement statement disclosing
the costs associated with mortgage loan transactions. Included in
these disclosures are amounts which are paid at or before
consummation and placed in an escrow or impound account. Typically
some, but not all, of the escrow items are prepaid finance charges,
such as mortgage insurance premiums.
Regardless of how the escrow amounts are shown on the good faith
estimate or settlement statement for RESPA purposes, creditors must
be able to identify the amount attributable to finance charges in
order to calculate the total prepaid finance charge under
Sec. 226.18(c)(1)(iv).
i. Itemized amounts. If the amounts paid into escrow are
individually itemized on the good faith estimate and the settlement
statement, the creditor may use the itemized amount even if the
actual amount collected at settlement varies because of RESPA's
escrow accounting rules. For example, if the itemized amount on the
settlement statement includes mortgage insurance, creditors may rely
on the amount listed on line 1002 of the HUD-1 or HUD 1-A, even
though an adjustment to the aggregate amount of the escrow items may
be shown on another line in the 1000 series. If an itemized escrow
amount that is a finance charge is disclosed in conformance with
RESPA, it shall be deemed to be accurate for purposes of Regulation
Z.
ii. Lump-sum amounts. If an amount paid into escrow is listed as
a lump sum on the good faith estimate and the settlement statement,
and if that amount includes some costs that are finance charges, the
creditor
[[Page 60228]]
must identify the amount attributable to finance charges to
calculate the total prepaid finance charge under
Sec. 226.18(c)(1)(iv). To determine the amount attributable to the
finance charge, creditors must use single-item accounting, as
defined under RESPA (24 CFR Secs. 3500.17(b) and (d)(2)).
Alternatively, creditors may treat the entire amount paid into
escrow as a prepaid finance charge.
* * * * *
18(d) Finance charge.
* * * * *
Paragraph 18(d)(2) Other credit.
1. Tolerance. When a finance charge error results in a
miscalculation of the amount financed, or of some other numerical
disclosure for which the regulation provides no specific tolerance,
the miscalculation does not violate the act or the regulation if the
finance charge error is within the permissible tolerance under this
paragraph.
* * * * *
Paragraph 18(n) Insurance and debt
cancellation.
* * * * *
2. Debt cancellation. Creditors may use the model
credit insurance disclosures only if the debt cancellation coverage
constitutes insurance under state law. Otherwise, they may provide a
parallel disclosure that refers to debt cancellation
coverage.
* * * * *
8. In Supplement I to Part 226, under Section 226.19--Certain
Residential Mortgage and Variable-Rate Transactions, under 19(a)(2)
Redisclosure required., the first sentence of paragraph 1. would be
revised to read as follows:
* * * * *
Section 226.19--Certain Residential Mortgage and Variable-Rate
Transactions
* * * * *
Paragraph 19(a)(2) Redisclosure required.
1. Conditions for redisclosure. Creditors must make new
disclosures if the annual percentage rate at consummation differs
from the estimate originally disclosed by more than \1/8\ of 1
percentage point in regular transactions or \1/4\ of 1 percentage
point in irregular transactions, as defined in footnote
46 of Sec. 226.22(a)(3)* *
*
* * * * *
9. In Supplement I to Part 226, Section 226.22--Determination of
the Annual Percentage Rate, would be amended by adding new
paragraphs 22(a)(4) and 22(a)(5) to read as follows:
* * * * *
Section 226.22--Determination of the Annual Percentage Rate
22(a) Accuracy of the annual percentage rate.
* * * * *
Paragraph 22(a)(4) Mortgage loans.
1. Example. If a creditor improperly omits a $75 fee from the
finance charge on a regular transaction, the understated finance
charge is considered accurate under Sec. 226.18(d)(1), and the
annual percentage rate corresponding to that understated finance
charge also is considered accurate even if it falls outside the
tolerance of \1/8\ of 1 percent provided under Sec. 226.22(a)(2). In
that case, an annual percentage rate corresponding to a $100
understatement of the finance charge would not be considered
accurate.
Paragraph 22(a)(5) Additional tolerance for mortgage loans.
1. Example. This paragraph contains an additional tolerance for
a disclosed annual percentage rate that is incorrect but is closer
to the actual annual percentage rate than the rate that would be
considered accurate under the tolerance in Sec. 226.22(a)(4). To
illustrate: in an irregular transaction subject to a \1/4\ of 1
percent tolerance, if the actual annual percentage rate is 9.00
percent and a $75 omission from the finance charge corresponds to a
rate of 8.50 percent that is considered accurate under
Sec. 226.22(a)(4), a disclosed APR of 8.65 percent is within the
tolerance in Sec. 226.22(a)(5). In this example of an understated
finance charge, a disclosed annual percentage rate below 8.50 or
above 9.25 percent will not be considered accurate.
* * * * *
10. In Supplement I to Part 226, Section 226.23--Right of
Rescission would be amended by adding new 23(g) and (23)(h) to read
as follows:
* * * * *
Section 226.23--Right of Rescission
* * * * *
23(g) Tolerances for accuracy.
Paragraph 23(g)(2) One percent tolerance.
1. New advance. The phrase ``new advance'' has the same meaning
as in comment 23(f)-4.
23(h) Special Rules for Foreclosures.
1. Rescission. Section 226.23(h) applies only to transactions
that are subject to rescission under Sec. 226.23(a)(1).
Paragraph 23(h)(1)(i).
1. Mortgage broker fees. A consumer may rescind a loan in
foreclosure if a mortgage broker fee was omitted or understated,
without regard to the dollar amount involved. For example, a
consumers right to rescind a loan in foreclosure is triggered by a
$10 understatement of a mortgage broker fee; an understatement of
more than $35 in other finance charges also triggers
rescission.
* * * * *
11. In Supplement I to Part 226, under Section 226.31--General
Rules, under Paragraph 31(c)(1) paragraph 1. would be redesignated
as paragraph 1. under 31(c), and paragraph 2., under Paragraph 31
(c)(1) would be redesignated as paragraph 1.
12. In Supplement I to Part 226, under Section 226.32--
Requirements for Certain Closed-End Home Mortgages, the following
amendments would be made:
a. Under Paragraph 32(b)(1)(i)., paragraph 1. would be revised;
and
b. Under 32(c)(3)., a new paragraph 2. would be added.
The revisions and additions would read as follows:
* * * * *
Section 226.32--Requirements for Certain Closed-End Home Mortgages
* * * * *
32(b) Definitions.
Paragraph 32(b)(1)(i).
1. General. Section 226.32(b)(1)(i) includes in the
total ``points and fees'' items defined as finance charges under
Secs. 226.4(a) and 226.(4)(b). Items excluded from the finance
charge under other provisions of Sec. 226.4 are not included in the
total ``points and fees'' under paragraph 32(b)(1)(i), but may be
included in ``points and fees'' under paragraphs 32(b)(1)(ii) and
32(b)(1)(iii). Interest, including per diem interest, is excluded
from ``points and fees'' under Sec. 226.32(b)(1).
* * * * *
32(c) Disclosures.
* * * * *
32(c)(3) Regular payment.
* * * * *
2. Balloon payments. If a loan with a term of five
years or more provides for a balloon payment, the balloon payment
must be disclosed. For a loan with a term of less than five years, a
balloon payment is prohibited.
* * * * *
13. In Supplement I to Part 226, under Section 226.33--
Requirements for Reverse Mortgages, under Paragraph 33(a)(2), in
paragraph 2., the third and fourth sentences would be revised and a
new sentence would be added at the end of the paragraph to read as
follows.
* * * * *
Section 226.33--Requirements for Reverse Mortgages
33(a) Definition.
* * * * *
Paragraph 33(a)(2).
* * * * *
2. Definite term or maturity date. * * * Stating a definite
maturity date or term of repayment in an obligation does not violate
the definition of a reverse-mortgage transaction if the maturity
date or term of repayment used would not [in
no case] operate to cause maturity prior to the occurrence of any of
the maturity events recognized in the regulation.
For example, some reverse mortgage programs specify
that the final maturity date is the borrower's 150th birthday; other
programs include a shorter term but provide that the term is
automatically extended for consecutive periods if none of the other
maturity events has yet occurred. These programs would be
permissible. [For example, a provision that allows a
reverse-mortgage loan to become due and payable only after the
consumer's death, transfer, or cessation of occupancy, or after a
specified term, but which automatically extends the term for
consecutive periods as long as none of the events specified in this
section had yet occurred would be permissible.]
* * * * *
14. In Supplement I to Part 226, under APPENDICES G AND H--OPEN-END
AND CLOSED-END MODEL FORMS AND CLAUSES, a new paragraph 2. would be
added to read as follows:
* * * * *
[[Page 60229]]
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
* * * * *
2. Debt cancellation coverage. The regulation does
not authorize creditors to characterize debt cancellation fees as
insurance premiums for purposes of this regulation. Creditors may
provide a disclosure that refers to debt cancellation coverage
whether or not the agreement is considered insurance. Creditors may
use the model credit insurance disclosures only if the debt
cancellation coverage constitutes insurance under state
law.
* * * * *
15. In Supplement I to Part 226, under Appendix H--Closed-End
Model Forms and Clauses, a new sentence would be added to the end of
paragraph 11. to read as follows:
* * * * *
Appendix H--Closed-End Model Forms and Clauses
* * * * *
11. Models H-8 and H-9. * * * The prior version of
model form H-9 is substantially similar to the current version and
creditors may continue to use it, as appropriate. Creditors are
encouraged, however, to use the current version when reordering or
reprinting forms.
By order of the Board of Governors of the Federal Reserve
System, acting through the Secretary of the Board under delegated
authority, November 14, 1996.
William W. Wiles,
Secretary of the Board
[FR Doc. 96-29639 Filed 11-26-96; 8:45 am]
BILLING CODE 6210-01-P
