[Federal Register Volume 64, Number 214 (Friday, November 5, 1999)]
[Proposed Rules]
[Pages 60368-60370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29004]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1050]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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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 addresses short-term cash advances commonly called
``payday loans'' and includes technical revisions.
DATES: Comments must be received on or before January 10, 2000.
ADDRESSES: Comments, which should refer to Docket No. R-1050, may be
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551. Comments addressed to Ms. Johnson may also be
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m.
weekdays, and to the security control room at all other times. The mail
room and the security control room, both in the Board's Eccles
Building, are accessible from the courtyard entrance on 20th Street
between Constitution Avenue and C Street, N.W. Comments may be
inspected in room MP-500 in the Board's Martin Building between 9:00
a.m. and 5:00 p.m., pursuant to the Board's Rules Regarding the
Availability of Information, 12 CFR part 261.
FOR FURTHER INFORMATION CONTACT: Natalie E. Taylor, Michael E. Hentrel,
or David A. Stein, 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 Diane Jenkins 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 providing
for 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. Uniformity in creditors' disclosures is
intended to assist consumers in comparison shopping for credit. TILA
requires additional disclosures for loans secured by consumers' homes
and permits consumers to rescind certain transactions that involve
their principal dwelling. In addition, the act regulates certain
practices of creditors. 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
2000; to the extent the revisions impose new requirements on creditors,
compliance would be optional until October 1, 2000, the effective date
for mandatory compliance.
II. Proposed Revisions
Subpart A--General
Section 226.2--Definitions and Rules of Construction
2(a) Definitions
2(a)(14) Credit
The Board has been asked to clarify whether ``payday loans''--also
known as ``cash advance loans,'' ``check advance loans,'' and ``post-
dated check loans''--constitute credit for purposes of TILA. Typically
in such transactions, a short-term cash advance is made to a consumer
in exchange for the consumer's personal check in the
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amount of the advance, plus a fee; sometimes the advance is made in
exchange for the consumer's authorization to debit electronically the
consumer's checking account in the amount of the advance, plus a fee.
The transaction occurs with knowledge by both parties that the amount
advanced is not, or may not be, available from the consumer's checking
account at the time of the transaction. Thus, the parties agree that
the consumer's check will not be cashed or the account electronically
debited until a designated future date. On that date, the consumer
usually has the option to repay the obligation by allowing the party
advancing the funds to cash the check or electronically debit the
consumer's checking account, or by providing cash or some other means
of payment. The consumer may also have the option to defer repayment
beyond the initial period by paying an additional fee.
Section 226.2(a)(14) defines credit as the right to defer the
payment of debt or the right to incur debt and defer its payment. In
the case of payday loans, this includes the agreement to defer cashing
the check or debiting the consumer's account. Comment 2(a)(14)-2 would
be added to clarify that payday loan transactions constitute credit for
purposes of TILA. Persons that regularly extend payday loans and impose
a finance charge are required to provide TILA disclosures to consumers.
Subpart C--Closed-End Credit
Section 226.19--Certain Residential Mortgage and Variable-rate
Transactions
19(b) Certain variable-rate transactions
In December 1997, the Board revised the requirements in
Sec. 226.19(b)(2) concerning the disclosure of a fifteen-year
historical example of interest rates and payments. (62 FR 63441,
December 1, 1997.) The amendments to Sec. 226.19(b)(2) provide
creditors with the option of giving a statement that the periodic
payments may increase or decrease substantially together with the
maximum interest rate and payment amount for a $10,000 loan amount in
lieu of having to give the fifteen-year historical example.
The Board proposes technical amendments to comment 19(b)-5 to
conform the citations in the comment to Sec. 226.19(b)(2), as amended.
No substantive change is intended.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.32--Requirements for Certain Closed-end Home Mortgages
32(a) Coverage
32(a)(1)(ii)
TILA imposes additional disclosure requirements and substantive
limitations on certain closed-end mortgage loans bearing rates or fees
above a certain percentage or amount. See Sec. 226.32. Creditors must
follow the rules in Sec. 226.32 if the total points and fees payable by
the consumer at or before loan closing exceed the greater of $400 or 8
percent of the total loan amount. The Board is required to adjust the
$400 amount each year. The adjusted amount for 2000 ($451) is published
elsewhere in today's Federal Register and would be added to comment
32(a)(1)(ii)-2.
III. Form of Comment Letters
Comment letters should refer to Docket No. R-1050, and, when
possible, should use a standard typeface with a font size of 10 or 12.
This will enable the Board to convert the text to 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 computer diskettes
in any IBM-compatible DOS-or Windows-based format.
List of Subjects in 12 CFR Part 226
Advertising, 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 text of the staff commentary. 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
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 Section 226.2--Definitions
and Rules of Construction, under 2(a)(14) Credit., a new paragraph 2.
would be added to read as follows:
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.2--Definitions and Rules of Construction
2(a) Definitions.
* * * * *
2(a)(14) Credit.
* * * * *
2. Payday loans. Credit includes a payday loan
transaction in which a short-term cash advance is made to a consumer
in exchange for the consumer's personal check, in the amount of the
advance plus a fee, or in exchange for the consumer's authorization
to debit the consumer's checking account, for the amount of the
advance plus a fee. In both instances the parties agree that the
check will not be cashed, or that the consumer's checking account
will not be debited, until a designated future date.
3. In Supplement I to Part 226, under Section 226.19--Certain
Residential Mortgage and Variable-Rate Transactions, under 19(b)
Certain variable-rate transactions, paragraph 5. would be revised to
read as follows:
* * * * *
Subpart C--Closed-End Credit
* * * * *
Section 226.19--Certain Residential Mortgage and Variable-Rate
Transactions
* * * * *
19(b) Certain variable-rate transactions.
* * * * *
5. Examples of variable-rate transactions. The following
transactions, if they have a term greater than one year and are
secured by the consumer's principal dwelling, constitute variable-
rate transactions subject to the disclosure requirements of
Sec. 226.19(b).
i. Renewable balloon-payment instruments where the creditor is
both unconditionally obligated to renew the balloon-payment loan at
the consumer's option (or is obligated to renew subject to
conditions within the consumer's control) and has the option of
increasing the interest rate at the time of renewal. (See comment
17(c)(1)-11 for a discussion of conditions within a consumer's
control in connection with renewable balloon-payment loans.)
ii. Preferred-rate loans where the terms of the legal obligation
provide that the initial underlying rate is fixed but will increase
upon the occurrence of some event, such as an employee leaving the
employ of the creditor, and the note reflects the preferred rate.
The disclosures under Sec. 226.19(b)(1) and 226.19(b)(2)(v), (viii),
(ix), [(x) and (xiii)] and (xii) are not
applicable to such loans.
iii. ``Price level adjusted mortgages'' or other indexed
mortgages that have a fixed rate of interest but provide for
periodic adjustments to payments and the loan balance to reflect
changes in an index measuring prices or inflation. The disclosures
under Sec. 226.19(b)(1) are not applicable to such loans, nor are
the following provisions to the extent they relate to the
determination of the interest rate by
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the addition of a margin, changes in the interest-rate, or interest-
rate discounts: Section 226.19(b)(2)(i), (iii), (iv), (v), (vi),
(vii), (viii), and (ix)[, and (x)]. (See comments
20(c)-2 and 30-1 regarding the inapplicability of variable-rate
adjustment notices and interest-rate limitations to price-level-
adjusted or similar mortgages.)
iv. Graduated-payment mortgages and step-rate transactions
without a variable-rate feature are not considered variable-rate
transactions.
* * * * *
4. In Supplement I to Part 226, under Section 226.32--Requirements
for Certain Closed-End Home Mortgages, under 32(a)(1)(ii), paragraph
2.v. would be added to read as follows:
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
Section 226.32--Requirements for Certain Closed-End Home Mortgages
32(a) Coverage.
* * * * *
Paragraph 32(a)(1)(ii). * * *
* * * * *
2. Annual adjustment of $400 amount.
* * *
* * * * *
v. For 2000, $451, reflecting a 2.3 percent increase in
the CPI-U from June 1998 to June 1999, rounded to the nearest whole
dollar.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, acting through the Secretary of the Board under delegated
authority, November 1, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-29004 Filed 11-4-99; 8:45 am]
BILLING CODE 6210-01-P
