[Federal Register Volume 59, Number 231 (Friday, December 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29624]
[[Page Unknown]]
[Federal Register: December 2, 1994]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0858]
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 amendments to
Regulation Z (Truth in Lending). The amendments implement recent
changes made to the Truth in Lending Act by the Riegle Community
Development and Regulatory Improvement Act of 1994. The law imposes new
disclosure requirements and substantive limitations on mortgages
bearing high rates or fees. The amendments would provide greater
protections to consumers entering into high-rate, high-fee mortgages.
The law also imposes new disclosure requirements to assist consumers in
comparing the cost of reverse mortgage transactions, which provide
periodic payments to primarily elderly homeowners and rely principally
on the home's value for repayment.
DATES: Comments must be received on or before January 18, 1995.
ADDRESSES: Comments should refer to Docket No. R-0858, 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 the availability of information.
FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, or Kyung
Cho-Miller or Sheilah Goodman, Staff Attorneys, Division of Consumer
and Community Affairs, Board of Governors of the Federal Reserve
System, at (202) 452-3667 or 452-2412; for the hearing impaired only,
Dorothea Thompson, Telecommunications Device for the Deaf, at (202)
452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The purpose of the Truth in Lending Act (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 credit
terms and the cost of credit as an annual percentage rate (APR). The
act requires additional disclosures for loans secured by a consumer's
home, and permits consumers to cancel certain transactions that involve
their principal dwelling. Limitations are imposed on some credit line
plans secured by a consumer's principal dwelling. The act is
implemented by the Board's Regulation Z (12 CFR part 226).
II. Proposed Regulatory Provisions
The Home Ownership and Equity Protection Act of 1994 (Equity
Protection Act), contained in the Riegle Community Development and
Regulatory Improvement Act of 1994 (Community Development Act), Pub. L.
103-325, 108 Stat. 2160, amends the Truth in Lending Act (TILA).
Section 152 of the Equity Protection Act adds a new section 129 dealing
with high-rate, high-fee mortgages. Section 154 adds a new section 138
dealing with reverse mortgage transactions. The Equity Protection Act
was enacted in September 1994, and directs the Board to issue final
regulations within 180 days. It provides that the statutory provisions
and rules adopted by the Board shall apply on the October 1 following
six months after the final regulation is issued.
The Board is proposing regulations for comment, and expects to
adopt final implementing regulations in March 1995. Compliance with the
law would be mandatory by October 1, 1995. Section 156 of the Equity
Protection Act states that the final rule governs all high-rate, high-
fee mortgage transactions consummated after the mandatory effective
date. The Board believes that the same compliance rule would apply to
reverse mortgage transactions consummated after the mandatory effective
date.
III. Section-By-Section Analysis
Section 226.2--Definitions and Rules of Construction
2(a) Definitions
2(a)(17) Creditor
Section 152(c) of the Equity Protection Act states the number of
high-rate, high-fee mortgage transactions a lender may make before
becoming a creditor for purposes of the TILA. The proposed regulation
parallels the statute. The regulation provides that persons making
occasional home-secured loans--less than five during a calendar year--
are not subject to the act. The proposed regulation provides that a
creditor includes a person originating two or more high-rate, high-fee
mortgage loans, or one or more such mortgage loans through a mortgage
broker during any 12-month period. Thus, for example, a person
originating one high-rate, high-fee mortgage that soon thereafter
enters into two home-secured loans, one of which was a high-rate, high-
fee loan, would be required to comply with TILA for both transactions.
Subpart B--Open-End Credit
Section 226.5b--Requirements for Home Equity Plans
5b(f) Limitations on Home Equity Plans
The TILA allows creditors to terminate open-end plans and demand
repayment in narrowly drawn circumstances such as when the consumer
fails to make payments or takes actions that affect the creditor's
security. Section 154(c) of the Equity Protection Act excludes reverse
mortgage transactions from these substantive limitations. The
legislative history states that the amendment is intended to codify the
Board's interpretation regarding a creditor's ability to accelerate an
open-end reverse mortgage loan in accordance with the credit contract.
The proposed amendment reflects that intent.
Subpart C--Closed-end Credit
Section 226.23--Right of Rescission
23(a) Consumer's Right to Rescind
Section 152(b) of the Equity Protection Act provides that high-
rate, high-fee mortgage disclosures are ``material'' for purposes of
the TILA. Proposed amendments to footnote 48 implement the change. The
effect is to give consumers the right to rescind a high-rate, high-fee
mortgage if a creditor fails to furnish the disclosures set forth in
proposed Sec. 226.32(c) or provides for a prohibited credit term set
forth in proposed Sec. 226.32(d).
Subpart D--Miscellaneous
Section 226.28--Effect on State Laws
28(b) Equivalent Disclosure Requirements
Section 152(e) of the Equity Protection Act provides that the
procedure for substituting substantially similar state law disclosures
for federal TILA requirements does not apply to state disclosure
requirements for high-rate, high-fee mortgages. The proposed amendments
reflect this limitation.
Subpart E--Certain Mortgage Transactions
The amendments to the TILA (section 129 dealing with high-rate,
high-fee mortgages and section 138 dealing with reverse mortgage
transactions) layer disclosure and timing requirements onto the
requirements already imposed for these consumer credit transactions.
The Board proposes to implement these provisions by adding a new
subpart E to the regulation: proposed Sec. 226.31 addresses general
requirements such as timing and format rules; Sec. 226.32 contains
rules relating to high-rate, high-fee mortgages; and Sec. 226.32
addresses reverse mortgages.
Section 226.31--General Disclosure Requirements
31(a) Relation to Other Subparts
The proposed regulation explicitly states that the requirements and
limitations of Subpart E are in addition to--not in lieu of--those
otherwise provided in other subparts of the regulation. For example,
creditors offering closed-end, variable-rate loans that are secured by
the consumer's principal dwelling and have a term greater that one year
must generally provide disclosures at the time of application and prior
to consummation, according to the requirements of Subpart C. If these
transactions are also high-rate, high-fee mortgage loans, this subpart
requires creditors to provide additional disclosures at least three
business days prior to the loan's consummation.
31(c) Timing of Disclosures
31(c)(1) High-rate, High-fee Mortgage Disclosures
Section 129 of the TILA and the proposed regulation require a
three-day ``cooling off'' period between the time consumers are
furnished with special disclosures about a high-rate, high-fee mortgage
and the time the consumer becomes obligated under the loan.
The law also authorizes the Board to identify in the regulation
circumstances under which a homeowner may modify or waive the right to
the three-day waiting period to meet bona fide personal financial
emergencies. The legislative history states that the provision is
intended to protect consumers from high-pressure sales tactics and to
ensure that consumers understand the terms of loans with high interest
rates or up-front fees. The Board is not proposing regulations
regarding waivers of the cooling-off period at this time. Sections
226.15(e) and 226.23(e) of the regulation discuss waivers of the right
to rescind, and the Board solicits comments on whether similar
provisions should be incorporated for high-rate, high-fee mortgage
loans.
31(c)(2) Reverse Mortgage Disclosures
Besides the other disclosures required by the regulation, section
138 of the TILA requires creditors to furnish additional disclosures to
consumers at least three business days prior to consummation of a
reverse mortgage transaction. Timing requirements for closed-end credit
are often tied to the consummation of the transaction, and the
regulation parallels the statute for closed-end reverse mortgage loans.
However, reverse mortgage loans may also be structured as open-end
credit plans. In that case, the proposed regulation provides that the
disclosures must be given at least three business days prior to the
first transaction under the open-end credit plan.
Conforming Paragraphs
Proposed paragraphs (d), (e), and (f) mirror provisions in subparts
B and C, and provide consistency among the subparts of the regulation.
(See Sec. 226.5 and Sec. 226.17.)
Section 226.32--High-Rate, High-Fee Mortgages
32(a) Coverage
Section 152 of the Equity Protection Act provides that the high-
rate, high-fee mortgage rules do not apply to a residential mortgage
transaction, a reverse mortgage transaction, and an open-end credit
plan. The proposed regulation tracks those exceptions, with two
additions for clarification. The Board believes the Congress intended
to exempt from coverage only those reverse mortgage transactions which
are part of the new disclosure scheme in proposed Sec. 226.33, and the
proposed amendment reflects that limitation. Also, the proposed
amendment clarifies that the exception for open-end credit plans
extends to all plans subject to subpart B of the regulation (Open-end
Credit).
32(b) Definitions
32(b)(1) High-Rate, High-Fee Mortgage
Section 103(aa) of the TILA defines the mortgages covered by new
section 129 based on the rates charged and fees paid. For ease of
compliance, the proposed amendments refer to those mortgages as high-
rate, high-fee mortgages.
32(b)(1)(i)
The statute covers mortgages that charge rates above a specified
standard. The rate-based test is tied to Treasury securities having
comparable terms of the loan's maturity. Rate information for Treasury
securities is widely available. For example, the Board's Selected
Interest Rates (statistical release H-15) identifies Treasury
securities with maturities of 1, 2, 3, 5, 7, 10, 20 and 30 years. The
Board anticipates that for loan maturities that do not match those of
Treasury securities, creditors will use rounding to determine a
comparable maturity. For example, the APR for an eight-year loan would
be compared to securities with a seven-year maturity; a nine-year loan
would be compared to a ten-year maturity.
The Board is required by section 157 of the Equity Protection Act
to conduct a study and make recommendations to the Congress about
whether a high-rate mortgage could be defined with a more appropriate
interest rate index than Treasury securities of comparable maturities.
The study will begin when the proposed regulation is adopted in final
form and will end 18 months later. As an adjunct to the study, the
Board solicits comments on other interest rate indices that might be
more appropriate.
32(b)(1)(ii)
The statute also covers mortgages 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 $400 dollar amount will
be adjusted annually on January 1 by the annual percentage change in
the Consumer Price Index, as reported on June 1 of the previous year.
The Board contemplates that any adjustment will be published at the
same time as proposed periodic updates of Regulation Z's official staff
commentary, which are regularly published for public comment in the
autumn of each year.
The Board believes the statute requires creditors to use the
principal balance--and not additional costs that may be incurred at
closing--when determining whether the ratio of fees to the total loan
amount exceeds 8 percentage points.
The TILA's timing rules for providing disclosures--including those
disclosures proposed below--are generally triggered by the consummation
of a closed-end credit transaction. State law determines when
consummation occurs, and it often, but not always, coincides with the
loan closing. The statute defines a high-fee mortgage by measuring the
amount of fees paid at or before closing; the proposed amendment
reflects that timing rule.
32(b)(2) Points and Fees
Section 103(aa) of the TILA defines points and fees as all finance
charges (except interest or the time-price differential), all
compensation paid to mortgage brokers, and all items identified in
section 106(e) (other than amounts held for future payment of taxes)
unless the charge is reasonable, the creditor receives no direct or
indirect compensation from the charge, and the charge is not paid to an
affiliate of the creditor. The proposed amendments replicate the
statute, except that the proposed definition refers to the regulatory
provisions implementing section 106(a) (finance charges) and section
106(e) (closing costs for real estate-related transactions) of the
TILA.
The Board believes the Congress intended a very broad application
of the term ``compensation,'' including, for example, amounts paid to
brokers by creditors (in addition to amounts paid by consumers).
Section 103(aa) also authorizes the Board to identify other charges
that would be appropriate to include in the total fee calculation. The
proposed regulation does not identify any such additional charges. The
legislative history includes credit insurance premiums as an example of
fees that could be included, if evidence showed that the premiums were
being used to circumvent the statute. The Board solicits comment on
charges not captured by the statute that would be appropriate to
include in the test to determine whether a transaction is a high-fee
mortgage, and if so, why.
32(b)(3) Affiliate
Section 129(k) of the TILA defines ``affiliate'' for purposes of
the high-rate, high-fee mortgage rules by a statutory reference to the
Bank Holding Company Act of 1956. (12 U.S.C. 1841(k)) That act defines
affiliate as any company that controls, is controlled by, or is under
the common control with another company. It also defines ``company''
and when one company is considered to ``control'' another. See 12
U.S.C. 1841(a) and (b). The proposed amendment simply defines the term
by statutory reference.
32(c) Disclosures
The proposed regulation mirrors the disclosure requirements of
section 129(a). The law requires creditors to disclose a monthly
payment based on an interest rate cap required for consumer contracts
by a provision in the Competitive Equality Banking Act of 1987 (CEBA),
which is implemented in Sec. 226.30. The legislative history provides
that in calculating the maximum payment based on the interest rate cap,
creditors should assume the maximum possible increases in rates in the
shortest possible timeframe. To ease compliance, proposed paragraph
(c)(4) refers to Sec. 226.30 rather than CEBA.
32(d) Limitations
Section 129 of the TILA prohibits high-rate, high-fee mortgage
creditors from including several terms in their credit contracts.
32(d)(5) Rebates
Section 129(d) of the TILA restricts how creditors may calculate
refunds of interest when a high-rate, high-fee mortgage loan is
accelerated due to a consumer's default. The statute provides that
creditors must calculate the refund by a method no less favorable than
the actuarial method, as defined under section 933(d) of the Housing
and Community Development Act of 1992 (HCDA). That section describes a
method of allocating payments so that a payment is first applied to
accumulated finance charges. Any remaining amount is applied to the
unpaid balance of the amount financed. The effect of the actuarial
method is to prohibit calculating refunds by the ``rule of 78s.'' The
proposed amendment defines the actuarial method by statutory reference.
32(d)(6) Prepayment Penalties
Section 129(c) of the TILA generally bars creditors from including
a prepayment penalty in a high-rate, high-fee mortgage contract. The
statute includes as a prepayment penalty, refunds of unearned interest
calculated less favorably than the actuarial method in HCDA's section
933(d). The proposed regulation likewise limits rebate calculations by
a statutory reference to the HCDA.
The legislative history notes that the ``actuarial method'' has
been defined by some states, and that in some jurisdictions the
actuarial method provides a refund that is greater than the refund
received under the HCDA definition. The legislative history states that
in those circumstances, creditors should continue to apply state law to
determine if a refund is a prepayment penalty for a high-rate, high-fee
mortgage. The legislative history also states that the reference to the
HCDA is not intended to be exclusive, and that penalties based on a
percentage of the outstanding balance or on the number of months of
interest are also prohibited.
32(d)(7) Exception
Section 129(c)(2) of the TILA allows creditors to provide for a
penalty when a consumer prepays a high-rate, high-fee mortgage under
narrowly drawn circumstances. The proposed amendment follows the
statute, except that in discussing permissible refund calculation
methods, the proposed amendment incorporates the heading of HCDA's
section 933(b)--prohibiting the rule of 78s--rather than referring to
the actuarial method.
32(e) Prohibited Acts and Practices
Section 129(l)(2) of the TILA authorizes the Board to prohibit acts
or practices in connection with mortgage loans that the Board finds to
be unfair, deceptive or designed to evade the high-rate, high-fee
mortgage rules. The Board also may prohibit acts or practices related
to refinancing mortgage loans that the Board finds are associated with
abusive lending practices or that are not in the borrower's interest.
The Board believes a study and hearing required by the Equity
Protection Act will assist the Board in its determination of whether
certain acts or practices should be prohibited. Section 157 of the
Equity Protection Act requires the Board to conduct a study and make
recommendations to the Congress regarding, in part, the adequacy of
federal laws protecting consumers with open-end credit plans secured by
the consumer's principal dwelling. The statutory timeframe for the
study is eighteen months, beginning after the amendments are adopted.
Section 158 of the Equity Protection Act requires the Board (in
consultation with its Consumer Advisory Council) to conduct public
hearings that examine home equity loans in the marketplace and the
adequacy of federal laws (including the new rules affecting high-rate,
high-fee mortgages and reverse mortgage transactions) in protecting
consumers--particularly low-income consumers. The statute provides that
the first hearing must be held prior to September 1997, and the Board
contemplates the initial hearing will occur sometime in 1996, so that
the impact of the new rules can be evaluated. Thus, the Board is not
proposing to prohibit a particular act or practice at this time.
32(e)(1) Repayment Ability
Section 129(h) of the TILA prohibits creditors extending high-rate,
high-fee mortgage loans from engaging in a pattern or practice of
extending such credit to consumers based on the consumer's collateral
without regard to the consumer's repayment ability, including the
consumer's current and expected income, current obligations, and
employment. The Board believes that the information provided by the
consumer in connection with paragraph (d)(7) can be relied on when
considering a consumer's ability to repay the debt.
32(e)(2) Home Improvement Contracts
Section 129(i) of the TILA restricts how creditors may disburse
proceeds to contractors under a home improvement contract secured by a
high-rate, high-fee mortgage. The proposed regulation reflects the
statutory requirement that the creditor must disburse the proceeds by
an instrument payable to the consumer or jointly to the consumer and
the contractor.
Alternatively, at the election of the consumer, the creditor could
disburse the proceeds through an escrow agent in accordance with terms
established in a written agreement signed by the consumer, the
creditor, and the contractor prior to the disbursement. The Board
solicits comment on whether further guidance is needed regarding the
use of a third party escrow agent. For example, comment is solicited on
whether an affiliate of the creditor could act as a disbursing agent.
The Board believes the Congress contemplated that both the consumer and
the creditor would make a good-faith effort to agree to a mutually
acceptable third party.
The statutory provision on check disbursements is technical and
narrowly drawn. Its limitations are imposed only on ``creditors''--the
person to whom a note is intially made payable. The consumer
protections of this provision would not apply to the disbursement of
funds by a lender such as a bank or finance company that purchases a
high-rate, high-fee mortgage note made payable to a home improvement
contractor, because the lender is not the ``creditor.''
Exemptions
Section 129(l)(1) of the TILA authorizes the Board to create
exemptions to the limitations set forth in proposed paragraph (d) and
paragraph (e) of this section, upon a finding that the exemption is in
the interest of the borrowing public and will apply only to mortgage
products or categories of products that maintain and strengthen home
ownership and equity protection. The legislative history expresses the
Congress' concern that the legislation might inappropriately apply to
some government loans or short-term ``bridge'' construction loans. It
also states that in granting the exemption authority to the Board, the
Congress intended that the Board consider exemptions on a product-by-
product basis.
The Board has not proposed any exemptions at this time. Comment is
solicited on whether the Board should exercise its exemption authority
for a product. And if a product is identified, the Board requests
comment on the potential for abusive lending practices to be used for
the products, and how the product is used to facilitate homeownership
and strengthen the homeowner's equity interest.
Section 226.33--Reverse Mortgages 33(a) Definition
Section 154 of the Equity Protection Act defines a ``reverse
mortgage'' as a nonrecourse transaction that is secured by the
consumer's principal dwelling and that ties repayment (other than upon
default) to the homeowner's death or the permanent move from or
transfer of the home. The proposed regulation tracks the statute.
A nonrecourse transaction limits the homeowner's liability to no
more than the proceeds of the sale of the home (unless a lesser amount
is provided for in the credit obligation such as by an equity
reservation or an equity conservation agreement between the consumer
and creditor). Neither the statute nor the proposed regulation defines
``nonrecourse transactions.'' Similarly, specific acts of default for
purposes of the reverse mortgage rules are not defined. Neither the act
nor the legislative history identifies such acts, and the Board
believes that the determination of ``default'' is most appropriately
left to the legal obligation between the parties and state or other
law. However, the Board notes that further guidance could be given if
such an approach results in creditors defining default in a way that
circumvents the protections for consumers entering into reverse
mortgage transactions.
33(b) Content of Disclosures
Section 138 of the TILA establishes a new standard to measure the
cost of reverse mortgage credit. The statute requires reverse mortgage
creditors to disclose a good faith estimate of the projected total cost
of the credit to the consumer, expressed as a table of annual interest
rates. The legislative history states that the Congress contemplated a
disclosure scheme modeled after the matrix disclosure currently
required by section 255 of the National Housing Act and implemented by
the Department of Housing and Urban Development's (HUD's) Home Equity
Conversion Mortgage (HECM) program. The proposed regulation reflects
that approach, except as noted below.
The regulation requires creditors to use the term ``total annual
loan cost rate'' rather than ``annual interest rate'' in complying with
this section. The statute does not mandate the use of the term ``annual
interest rate,'' and the Board believes that using a different term
will avoid possible confusion between the disclosure of an ``annual
interest rate'' and the ``annual percentage rate,'' which is required
by other parts of the regulation. The term ``total annual loan cost
rate'' is unlikely to be confused with the more frequently used APR.
Furthermore, the Board believes ``total annual loan cost rate'' is a
more accurate description of the percentage cost of reverse mortgages
than ``annual interest rate.'' For example, the rate may reflect costs
other than interest, such as annuity premiums, appraisal fees and a
percentage of any appreciation in the consumer's home.
Section 138(a)(1) of the TILA requires creditors to disclose total
annual loan cost rates for not less than three projected appreciation
rates and not less than three credit transaction periods, as determined
by the Board. HUD's HECM matrix similarly discloses nine ``average
annual percentage rates'' based on three assumed annual home
appreciation rates and three assumed loan terms. The proposed
regulation would require the tabular disclosure of nine total annual
loan cost rates.
The HECM matrix is accompanied by a listing of the basic factors
used in calculating the projected total cost of credit, such as the age
of the borrower, the value of the consumer's home, etc., and a brief
discussion of some assumptions used in calculating the rates in the
matrix. The proposed regulation would require that the matrix be
accompanied by a listing of key factors used in calculating the total
annual loan cost rates, along with a brief narrative that helps
consumers to interpret the rates disclosed in the matrix. (See the
supplementary material accompanying proposed Appendix K for further
discussion of the model disclosure.)
33(c) Projected Total Cost of Credit
Section 138(a) and 138(b) of the TILA identify factors creditors
must consider when calculating the projected total cost of credit and
the corresponding total annual loan cost rates. The proposed regulation
lists those requirements in paragraph (c) of this section. (The
mathematical formulas for determining the total annual loan cost rate
is contained in Appendix K.)
33(c)(1) Costs to Consumer
Section 138(b)(2) of the TILA includes in the projected total cost
of credit all costs and charges to the consumer, including the costs of
any associated annuity that the consumer elects or is required to
purchase as part of the reverse mortgage transaction. The proposed
regulation parallels the statute, except that the term ``associated''
has been deleted.
The Board believes the Congress intended a very broad application
of the terms ``costs and charges.'' For example, the Board believes all
costs and charges connected with the reverse mortgage transaction must
be included in the projected total cost of credit, whether or not the
charge is deemed to be a finance charge under Subpart A of the
regulation.
Some creditors require or permit consumers to purchase an annuity
as part of the transaction that at some future time supplements or
replaces the creditor's payments. The law and regulation require the
amount paid by the consumer for the annuity to be included as a cost to
the consumer. This is the case whether the purchase is made through the
creditor or a third party, or whether the purchase is mandatory or
voluntary.
The HECM program does not include disposition costs as a part of
the total annual loan cost rate, and the proposed regulation follows
that approach. The Board solicits comment on the treatment of
disposition costs that may be incurred when the loan is repaid.
33(c)(2) Payments to Consumer
Section 138(b)(3) of the TILA requires creditors to consider in the
projected total cost of credit all payments to and for the benefit of
the consumer, including annuity payments received by the consumer from
an annuity purchased as part of the reverse mortgage transaction. The
regulation would generally track the statute, with slight modifications
for clarity.
33(c)(3) Additional Creditor Compensation
Section 138(b)(1) of the TILA includes in the total cost of a
reverse mortgage loan any shared appreciation or equity that the
creditor is entitled to receive pursuant to the credit contract. For
example, creditors sometimes offer a reduced interest rate in exchange
for a portion of the appreciation or equity that may be realized when
the dwelling is sold.
33(c)(4) Limitations on Consumer Liability
Section 138(b)(4) of the TILA requires creditors to consider in the
projected total cost of credit any limitation on the consumer's
liability under the reverse mortgage loan. This would include, for
example, equity conservation agreements. These agreements protect a
portion of the equity in the dwelling for the consumer or the
consumer's estate.
This paragraph would also apply to the nonrecourse provision that
is a part of any credit contract meeting the definition of a reverse
mortgage transaction. (See paragraph (a) of this section.) Some reverse
mortgage transactions provide that a consumer's liability will not
exceed a specific percentage of the projected home value, say 75
percent. Other reverse mortgages set the consumer's maximum liability
at the ``net proceeds'' available from the sale of the home. That is,
if a consumer sells the home for $100,000 and brokerage commissions and
other incidental selling costs were $7,000, the creditor would receive
no more than $93,000--the net proceeds of the sale.
The Board believes that the purposes of the reverse mortgage
disclosures would be enhanced if the calculations of projected total
costs for ``net proceeds'' recourse limitations were based on uniform
assumptions about the costs associated with the sale of the home. Thus,
if a contract does not otherwise specify a percentage for net proceeds,
creditors must assume closing costs of 7 percent, which approximates
the amounts paid for typical brokerage fees and other incidental costs.
The Board solicits comment on this approach. If another amount is more
appropriate, commenters should provide the rationale for the
alternative approach.
33(c)(5) Assumed Annual Appreciation Rates
Section 138(a)(1) of the TILA requires each total annual loan cost
rate to be based on one of (at least) three projected appreciation
rates for the consumer's dwelling. The proposed regulation tracks the
appreciation rates used in HUD's HECM program. That is, the total
annual loan cost rates are based on assumed annual home appreciation
rates of 0 percent, 4 percent and 8 percent. The Board believes these
appreciation rates are appropriate estimates for reverse mortgage
transactions. For example, HUD's program based the 4 percent annual
appreciation rate on its assessment of long-term averages of historical
housing appreciation rates. The 0 percent and 8 percent rates help
consumers understand the potential costs and benefits of the loan if
their dwelling does not appreciate in value at all, or if its value
appreciated at a rate double the 4 percent rate. The Board solicits
comment on other appreciation rates that might be used in lieu of the
proposed rates; and if alternative rates are suggested, commenters
should provide the rationale for why those rates would be a more
appropriate measure for calculating the total annual loan cost rate.
33(c)(6) Assumed Loan Period
Section 138(a)(1) of the TILA also requires each total annual loan
cost rate to be based on one of (at least) three credit transaction
periods, as determined by the Board, including a short-term reverse
mortgage, a term equaling the actuarial life expectancy of the
consumer, and ``such longer term as the Board deems appropriate.'' The
proposed regulation tracks the assumed loan periods required under the
HECM program: a period of two years, a period equal to the consumer's
life expectancy, and a period equal to approximately 1.4 times the
consumer's life expectancy (the creditor would use the life expectancy
of the youngest consumer in transactions involving multiple borrowers).
The Board believes these proposed loan periods produce total annual
loan cost rates that will assist consumers in understanding the costs
of the reverse mortgage transaction in the event that, for example,
they move permanently from the dwelling either sooner or later than
anticipated. (See the supplementary material accompanying proposed
Appendix L for further discussion of the life expectancy data used to
derive two of the assumed loan periods.)
The statute authorizes the Board to require total annual loan cost
rates for more than three assumed loan periods. The Board notes that,
depending on the age of the borrower, a significant time interval could
exist between the shortest loan period (two years) and the consumer's
life expectancy. Accordingly, the Board solicits comment on whether
other assumed loan periods, such as an assumed loan period of one-half
of the life expectancy figure, should be added to the regulation; and
if so, whether calculations based on the additional assumed loan
periods should be required (which promotes uniformity), or optional.
Appendix K--Total Annual Loan Cost Rate Computations for Reverse
Mortgage Transactions
The proposed regulation bases the calculation of total annual loan
cost rates on a commonly used computation tool, an internal rate of
return formula. The formula uses the estimation or ``iteration''
procedure required to compute APRs under Appendix J of this part.
However, Appendix J is written in the context of forward (not reverse)
mortgages. The proposed formulas are similar to those in Appendix J;
however, to ease compliance and avoid confusion about terminology,
definitions and instructions appropriate for reverse mortgages are
placed in Appendix K.
(b) Instructions and Equations for the Total Annual Loan Cost Rate
(b)(5) Number of Unit-Periods Between Two Given Dates
The proposed total annual loan cost rates are based on a proposed
assumption that the reverse mortgage transaction begins on the first
day of the month in which consummation is estimated to occur. The total
annual loan cost rates are good faith estimates based on a number of
assumptions. The Board believes that using fractional unit-periods
required under Appendix J for calculating APRs is unnecessary for these
disclosures, and has not incorporated many definitions relating to time
intervals.
(b)(8) Solution of General Equation by Iteration Process
Rather than restate the iteration process required to be used in
determining total annual loan cost rates under the appendix, the Board
has referred lenders to Appendix J of this regulation for the
procedures to be followed. The Board solicits comment on whether this
is sufficient guidance to reverse mortgage lenders.
(b)(9) Assumption for Discretionary Cash Advances
Some reverse mortgage transactions permit consumers to control when
advances are received. The proposed regulation requires creditors to
use a special assumption for calculating the total annual loan cost
rate in this case. Creditors must assume that 50 percent of the amount
of the credit line is advanced when the consumer becomes obligated
under the transaction (at the interest rate then in effect) and that no
further advances are made during the remaining term. The Board believes
this assumption is appropriate for reverse mortgage credit lines, given
that the amount and timing of advances (thus, the estimated interest
owed) are within the consumer's control. The proposal also is
consistent with Appendix D's requirements for an estimated interest
figure when the amount and timing of construction loan advances are
unknown, as well as with HUD's HECM program.
Creditors would follow this approach for estimating interest on
open-end reverse mortgage credit lines. Once the interest figure is
determined, creditors would use the general equation in section (b)(8)
of this appendix to calculate the total annual loan cost rate.
(b)(10) Assumption for Variable-Rate Reverse Mortgage Transactions
Regulation Z provides that to calculate the APR, creditors offering
variable-rate transactions must base disclosures on the initial
interest rate and not assume the rate will increase. The Board proposes
to adopt the same convention for calculating total annual loan cost
rates. The Board notes, however, that HUD's HECM program requires
creditors to assume an ``expected average mortgage interest rate'' or
``expected interest rate'' instead of the initial rate. The convention
required by HUD reflects an average of long-term U.S. Treasury
securities and results in a rate that is generally higher than the
initial rate. The Board solicits comments on the benefits to consumers
and burdens to creditors if creditors offering variable-rate reverse
mortgage transactions were required to use both HUD's and the proposed
assumptions to compute total annual loan cost rates.
(b)(11) Assumption for Closing Costs
The proposed regulation requires creditors to assume all closing
and other consumer costs are financed by the creditor. These costs are
generally financed as a part of the transaction, and the Board believes
the proposed assumption provides uniformity.
(c) Examples of Total Annual Loan Cost Rate Computations
Three examples are provided to assist creditors in calculating the
total annual loan cost rate. The Board solicits comment on whether
other examples should be provided, and if so, what should be
illustrated.
(d) Reverse Mortgage Model Form and Sample Form
The proposed regulation requires that the matrix be accompanied by
a disclosure substantially similar to the model form in this paragraph.
Reverse mortgages are complicated transactions, and the Board believes
a uniform disclosure would enhance consumer understanding of the
proposed transaction and promote informed comparison shopping.
The proposed model form and sample form are placed in this
appendix, because they apply to both open-end and closed-end reverse
mortgage transactions. This avoids publishing the forms twice, in
Appendix G (Open-end model forms and clauses) and Appendix H (Closed-
end model forms and clauses).
Appendix L--Assumed Loan Periods for Calculation of Total Annual Loan
Cost Rates
As stated previously, the law requires the total annual loan cost
rate disclosures for reverse mortgage transactions to be based on three
assumed loan periods, as determined by the Board. The proposed
regulation tracks the assumed loan period requirements of HUD's HECM
program (two years, a period equal to the youngest consumer's life
expectancy, and a period 1.4 times that consumer's life expectancy).
The Board proposes to use the U.S. Decennial Life Tables for the
life expectancy figures. These tables are published by the Department
of Health and Human Services and are widely available to the public.
The figures in the proposed appendix are based on data currently
available, that is, on tables for 1979-1981, as rounded to the nearest
whole year. The Board contemplates updating the figures as data are
published periodically. The Board solicits comment on other sources of
life expectancy data that are also widely available and would be
appropriate for determining the total annual loan cost rate for reverse
mortgage transactions.
The proposed regulation also tracks the HECM program's use of
female life expectancy figures for calculating total annual loan cost
rates for all borrowers, as women are estimated to comprise the
majority of borrowers under existing reverse mortgage programs.
IV. Form of Comment Letters
Comment letters should refer to Docket No. R-0858, 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.
The comment period ends on January 18, 1995, a period slightly less
than the 60 days normally called for in the Board's policy statement on
rulemaking (44 FR 3957, January 19, 1979). The law provides for a short
timeframe to issue implementing amendments in final form, and the Board
believes an abbreviated comment period is desirable to ensure that a
final rule is in place as soon as possible to provide guidance to
creditors affected by the new rules.
V. Regulatory Flexibility Analysis
The Board's Office of the Secretary has prepared an economic impact
statement on the proposed amendments to Regulation Z. A copy of the
analysis may be obtained from Publications Services, Board of Governors
of the Federal Reserve System, Washington, D.C. 20551, at (202) 452-
3245.
VI. Paperwork Reduction Act
In accordance with section 3507 of the Paperwork Reduction Act of
1980 (44 U.S.C. 35; 5 CFR 1320.13), the proposed revisions will be
reviewed by the Board under the authority delegated to the Board by the
Office of Management and Budget after consideration of comments
received during the public comment period.
The proposal requires creditors offering high-rate, high-fee
mortgages and creditors offering reverse mortgage transactions to
furnish to consumers at least three days prior to consummation a one-
time notice disclosing costs of the loan and reminding consumers that
signing an application or receiving disclosures does not require the
consumer to complete the transaction. A model form in Appendix K is
proposed to ease compliance for creditors furnishing reverse mortgage
disclosures.
The Board believes that the types of mortgage products that would
trigger these additional disclosures are not typically offered by state
member banks; thus, the proposed requirements would have only a
negligible impact on the paperwork burden for state member banks. Any
estimates of paperwork burden for institutions other than state member
banks that would be affected by the proposed amendments would be
provided by the federal agency or agencies that supervise these
lenders.
VII. Indexing Terms
The Code of Federal Regulations publishes a list of subjects
identifying common research terms that are intended to assist
laypersons with the use of the Code of Federal Regulations. The list of
subjects under which 12 CFR part 226 is listed would be expanded as
listed below.
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.
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.
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. Section 226.1 would be amended as follows:
a. Paragraph (b) would be revised;
b. Paragraph (d)(5) would be redesignated as paragraph (d)(6);
c. A new paragraph (d)(5) would be added; and
d. Redesignated paragraph (d)(6) would be revised.
The revisions and addition would read as follows:
Sec. 226.1 Authority, purpose, coverage, organization, enforcement
and liability.
* * * * *
(b) The purpose of this regulation is to promote the informed use
of consumer credit be requiring disclosures about its terms and cost.
In addition, the regulation requires a maximum interest rate to be
stated in variable-rate contracts secured by the consumer's dwelling
[,]. It also [and] imposes limitations on home equity plans that are
subject to the requirements of Sec. 226.5b and high-rate, high-fee
mortgages that are subject to the requirements of Sec. 226.32. The
regulation does not govern charges for consumer credit.
* * * * *
(d) * * *
(5) [There are several appendices containing information such as
the procedures for determinations about state laws, state exemptions
and issuance of staff interpretations, special rules for certain kinds
of credit plans, a list of enforcement agencies, and the rules for
computing annual percentage rates in closed-end credit transactions.]
Subpart E relates to high-rate, high-fee mortgage transactions and
reverse mortgage transactions. It contains rules on disclosures, fees,
and total annual loan cost rates.
(6) There are several appendices containing information such as the
procedures for determinations about state laws, state exemptions and
issuance of staff interpretations, special rules for certain kinds of
credit plans, a list of enforcement agencies, and the rules for
computing annual percentage rates in closed-end credit transactions and
annual interest rates for reverse mortgage transactions.
* * * * *
3. In Sec. 226.2, footnote 3 in paragraph (a)(17)(i) would be
revised to read as follows:
Sec. 226.2 Definitions and rules of construction.
(a) * * *
(17) * * *
(i) * * *3 * * *
---------------------------------------------------------------------------
\3\A person regularly extends consumer credit only if it
extended credit (other than credit subject to the requirements of
Sec. 226.32) more than 25 times (or more than 5 times for
transactions secured by a dwelling) in the preceding calendar year.
If a person did not meet these numerical standards in the preceding
calendar year, the numerical standards shall be applied to the
current calendar year. A person regularly extends consumer credit
if, in any 12-month period, it originated two or more credit
extensions that are subject to the requirements of Sec. 226.32
(covering high-rate, high-fee mortgages) or one or more such credit
extensions through a mortgage broker.
---------------------------------------------------------------------------
* * * * *
4. In Sec. 226.5b paragraph (f)(2) introductory text would be
revised and a new paragraph (f)(4) would be added to read as follows:
Sec. 226.5b Requirements for home equity plans.
* * * * *
(f) * * *
(2) Terminate a plan and demand repayment of the entire outstanding
balance in advance of the original term (except for reverse mortgage
transactions that are subject to paragraph (f)(4) of this section)
unless
* * * * *
* * * * *
(4) For reverse mortgage transactions that are subject to
Sec. 226.33, terminate a plan and demand repayment of the entire
outstanding balance in advance of the original term except:
(i) In the case of default;
(ii) If the consumer transfers title to the property securing the
note;
(iii) If the consumer ceases using the property securing the note
as the primary dwelling; or
(iv) Upon the consumer's death.
* * * * *
5. In Sec. 226.23, footnote 48 in paragraph (a)(3) would be revised
to read as follows:
Sec. 226.23 Right of rescission.
(a) * * *
(3) * * * \48\ * * *
---------------------------------------------------------------------------
\4\8The term ``material disclosures'' means the required
disclosures of the annual percentage rate, the finance charge, the
amount financed, the total payments, [and] the payment
schedule[.], and the disclosures and limitations referred
to in Sec. 226.32(c) and (d).
---------------------------------------------------------------------------
* * * * *
6. In Sec. 226.28, the first sentence of paragraph (b) would be
revised to read as follows:
Sec. 226.28 Effect on State laws.
* * * * *
(b) Equivalent disclosure requirements. If the Board determines
that a disclosure required by state law (other than a requirement
relating to the finance charge [or] , annual
percentage rate, or the disclosures required under
Sec. 226.32) is substantially the same in meaning as a
disclosure required under the act or this regulation, creditors in that
state may make the state disclosure in lieu of the federal disclosure.
* * *
* * * * *
7. Part 226 would be amended by adding a new Subpart E to read as
follows:
Subpart E--Certain Mortgage Transactions
Sec.
226.31 General disclosure requirements.
226.32 High-rate, high-fee mortgages.
226.33 Reverse mortgages.
Subpart E--Certain Mortgage Transactions
Sec. 226.31 General disclosure requirements.
(a) Relation to other subparts. The requirements and limitations of
this subpart are in addition to and not in lieu of those contained in
other subparts of this part.
(b) Form of disclosures. The creditor shall make the disclosures
required by this subpart clearly and conspicuously in writing, in a
form that the consumer may keep.
(c) Timing of disclosures.--(1) High-rate, high-fee mortgage
disclosures. The creditor shall furnish the disclosures required by
Sec. 226.32 at least three business days prior to consummation of a
high-rate, high-fee mortgage transaction.
(i) New disclosures. After complying with paragraph (c)(1) of this
section and prior to consummation, if the creditor changes any term
that makes the disclosures inaccurate, new disclosures shall be
provided in accordance with the requirements of this subpart.
(ii) Telephone disclosures. A creditor may provide new disclosures
by telephone if the consumer initiates the change, and if, at
consummation--
(A) The creditor provides new written disclosures; and
(B) The consumer and creditor sign a statement that the new
disclosures were provided by telephone at least three days prior to
consummation.
(2) Reverse mortgage disclosures. The creditor shall furnish the
disclosures required by Sec. 226.33 at least three business days prior
to:
(i) Consummation of a closed-end credit transaction; or
(ii) The first transaction under an open-end credit plan.
(d) Basis of disclosures and use of estimates. Disclosures shall
reflect the terms of the legal obligation between the parties. If any
information necessary for accurate disclosure is unknown to the
creditor, the creditor shall make the disclosure based on the best
information reasonably available and shall state clearly that the
disclosure is an estimate.
(e) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor
must comply with the requirements that this regulation imposes on any
or all of them. If there is more than one consumer, the disclosures may
be made to any consumer who is primarily liable on the obligation. If
the transaction is rescindable under Sec. 226.15 or Sec. 226.23,
however, the disclosures shall be made to each consumer who has the
right to rescind.
(f) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor delivers the
required disclosures, the inaccuracy is not a violation of this
regulation, although new disclosures may be required under paragraph
(c) of this section, Sec. 226.9(c), Sec. 226.19, or Sec. 226.20.
Sec. 226.32 High-rate, high-fee mortgages.
(a) Coverage. This section does not apply to the following:
(1) A residential mortgage transaction.
(2) A reverse mortgage transaction subject to Sec. 226.33.
(3) An open-end credit plan subject to subpart B of this part.
(b) Definitions. For purposes of this subpart, the following
definitions apply:
(1) High-rate, high fee mortgage means a consumer credit
transaction that is secured by the consumer's principal dwelling, and
in which either:
(i) The annual percentage rate at consummation will exceed by more
than 10 percentage points the yield on Treasury securities having
comparable periods of maturity on the fifteenth day of the month
immediately preceding the month in which the application for the
extension of credit is received by the creditor; or
(ii) The total points and fees payable by the consumer at or before
loan closing will exceed the greater of 8 percent of the total loan
amount, or $400; the $400 figure shall be adjusted annually on January
1 by the annual percentage change in the Consumer Price Index that was
reported on the preceding June 1.
(2) For purposes of paragraph (b)(1)(ii) of this section, points
and fees mean:
(i) All items required to be disclosed under Sec. 226.4(a) and
226.4(b), except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers; and
(iii) All items required to be disclosed under Sec. 226.4(c)(7)
(other than amounts held for future payment of taxes) unless the charge
is reasonable, the creditor receives no direct or indirect
compensation, and the charge is not paid to an affiliate of the
creditor.
(3) Affiliate means an entity defined in section 2(k) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841).
(c) Disclosures. In addition to other disclosures required by this
part, for each high-rate, high-fee mortgage transaction, the creditor
shall disclose the following:
(1) Notices. The following statement: ``You are not required to
complete this agreement merely because you have received these
disclosures or have signed a loan application. If you obtain this loan,
the lender will have a mortgage on your home. You could lose your home,
and any money you have put into it, if you do not meet your obligations
under the loan.''
(2) Annual percentage rate. The annual percentage rate.
(3) Monthly payment. The amount of the regular monthly payment.
(4) Variable-rate. For variable-rate transactions, a statement that
the interest rate and monthly payment may increase, and the amount of
the maximum monthly payment, based on the maximum interest rate
required to be disclosed under Sec. 226.30.
(d) Limitations. A high-rate, high-fee mortgage transaction may not
provide for the following terms:
(1) Balloon payment. A payment schedule with regular periodic
payments that do not repay the full amount of interest.
(2) Negative amortization. A payment schedule with regular periodic
payments that when aggregated, do not fully amortize the outstanding
principal balance.
(3) Advance payments. A payment schedule that consolidates more
than two periodic payments and pays them in advance from the proceeds.
(4) Increased interest rate. An increase in the interest rate after
default.
(5) Rebates. A refund calculation by a method less favorable than
the actuarial method (as defined under section 933(d) of the Housing
and Community Development Act of 1992), for rebates arising from a loan
acceleration due to default.
(6) Prepayment penalties. Except as provided in paragraph (d)(7) of
this section, a penalty for paying all or part of the principal before
the date on which the principal is due. A prepayment penalty includes
computing a refund of unearned interest less favorable to the consumer
than the actuarial method, as defined under section 933(d) of the
Housing and Community Development Act of 1992.
(7) Exception. A high-rate, high-fee mortgage transaction may
contain a prepayment penalty otherwise permitted by law (including a
refund calculated according to the rule of 78s) if:
(i) The penalty can be exercised only for the first five years
following consummation;
(ii) The source of the prepayment funds is not a refinancing by the
creditor or an affiliate of the creditor; and
(iii) At consummation, the consumer's total monthly debts
(including amounts owed under the high-rate, high-fee mortgage) do not
exceed 50 percent of the consumer's monthly gross income, as verified
by the consumer's signed financial statement, a credit report, and
payment records for employment income.
(e) Prohibited acts and practices. A creditor extending high-rate,
high-fee mortgage credit may not:
(1) Repayment ability. Engage in a pattern or practice of extending
such credit to a consumer based on the consumer's collateral if,
considering the consumer's current and expected income, current
obligations, and employment, the consumer is unable to make the
scheduled payments.
(2) Home improvement contracts. Pay a contractor under a home
improvement contract from the proceeds of a high-rate, high-fee
mortgage, other than:
(i) By an instrument payable to the consumer or jointly to the
consumer and the contractor; or
(ii) At the election of the consumer, through a third-party escrow
agent in accordance with terms established in a written agreement
signed by the consumer, the creditor, and the contractor prior to the
disbursement.
(3) Notice to assignee. Sell or otherwise assign a high-rate, high-
fee mortgage without furnishing the following statement to the
purchaser or assignee: ``Notice: Purchasers or assignees of this
mortgage could be liable for all claims and defenses with respect to
the mortgage that the borrower could assert against the creditor.''
Sec. 226.33 Reverse mortgages.
(a) Definition. For purposes of this subpart, reverse mortgage
transaction means a nonrecourse consumer credit obligation in which:
(1) A mortgage, deed of trust, or equivalent consensual security
interest securing one or more advances is created in the consumer's
principal dwelling; and
(2) Any principal, interest, or shared appreciation or equity is
due and payable (other than in the case of default) only after:
(i) The consumer dies;
(ii) The dwelling is transferred; or
(iii) The consumer ceases to occupy the dwelling as a principal
dwelling.
(b) Content of disclosures. In addition to other disclosures
required by this part, for each reverse mortgage transaction, the
creditor shall provide the following disclosures in a form
substantially similar to the model form found in paragraph (d) of
Appendix K of this part:
(1) Notice. A statement that the consumer is not obligated to
complete the reverse mortgage transaction merely because the consumer
has received the disclosures required by this section or has signed an
application for a reverse mortgage loan.
(2) Total annual loan cost rates. A good faith estimate of the
projected total cost of the credit, determined in accordance with
paragraph (c) of this section, and expressed as a table of ``total
annual loan cost rates,'' using that term, determined in accordance
with Appendix K of this part.
(3) Itemization of pertinent information. An itemization of loan
terms, charges, the age of borrower and the appraised property value.
(4) Explanation of table. An explanation of the table of total
annual loan cost rates provided in the model form found in paragraph
(d) of Appendix K of this part.
(c) Projected total cost of credit. The projected total cost of
credit shall reflect the following factors, as applicable:
(1) Costs to consumer. All costs and charges to the consumer,
including the costs of any annuity that the consumer elects or is
required to purchase as part of the reverse mortgage transaction.
(2) Payments to consumer. All payments to and for the benefit of
the consumer, including annuity payments that the consumer will receive
from an annuity that the consumer elects or is required to purchase as
part of the reverse mortgage transaction.
(3) Additional creditor compensation. Any shared appreciation or
equity in the dwelling that the creditor is entitled by contract to
receive.
(4) Limitations on consumer liability. Any limitation on the
consumer's liability (such as nonrecourse limits and equity
conservation agreements).
(5) Assumed annual appreciation rates. Each of the following
assumed annual appreciation rates for the dwelling:
(i) 0 percent.
(ii) 4 percent.
(iii) 8 percent.
(6) Assumed loan period. Each of the following assumed loan
periods, as provided in Appendix L of this part:
(i) 2 years.
(ii) The actuarial life expectancy of the youngest consumer to
become obligated on the reverse mortgage transaction (as of that
consumer's most recent birthday).
(iii) The actuarial life expectancy specified by paragraph
(c)(5)(ii) of this section, multiplied by a factor of 1.4 and rounded
to the nearest full year.
9. A new Appendix K would be added to read as follows:
Appendix K to Part 226--Total Annual Loan Cost Rate Computations
for Reverse Mortgage Transactions
(a) Introduction. Creditors are required to disclose a series of
total annual loan cost rates for each reverse mortgage transaction.
This appendix contains the equations creditors must use in computing
the total annual loan cost rate for various transactions, as well as
instructions, explanations, and examples for various transactions.
This appendix is modeled after Appendix J of this part (Annual
Percentage Rates Computations for Closed-end Credit Transactions);
creditors should consult Appendix J of this part for additional
guidance in using the formulas for reverse mortgages.
(b) Instructions and equations for the total annual loan cost
rate.
(1) General rule. The total annual loan cost rate shall be the
nominal total annual loan cost rate determined by multiplying the
unit-period rate by the number of unit-periods in a year.
(2) Term of the transaction. For purposes of total loan cost
disclosures, the term of a reverse mortgage transaction is assumed
to begin on the first of the month in which consummation is expected
to occur. If a loan cost or any portion of a loan cost is initially
incurred beginning on a date later than consummation, the term of
the transaction is assumed to begin on the first of the month in
which that loan cost is incurred. For purposes of total loan cost
disclosures, the term ends on each of the assumed loan periods
specified in Sec. 226.33(c)(6).
(3) Definitions of time intervals.
(i) A period is the interval of time between advances.
(ii) A common period is any period that occurs more than once in
a transaction.
(iii) A standard interval of time is a day, week, semimonth,
month, or a multiple of a week or a month up to, but not exceeding,
1 year.
(iv) All months shall be considered equal.
(4) Unit-period.
(i) In all transactions other than a single-advance, single-
payment transaction, the unit-period shall be that common period,
not to exceed one year, that occurs most frequently in the
transaction, except that:
(A) If two or more common periods occur with equal frequency,
the smaller of such common periods shall be the unit-period; or
(B) If there is no common period in the transaction, the unit-
period shall be that period which is the average of all periods
rounded to the nearest whole standard interval of time. If the
average is equally near two standard intervals of time, the lower
shall be the unit-period.
(ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed
one year.
(5) Number of unit-periods between two given dates.
(i) The number of days between two dates shall be the number of
24-hour intervals between any point in time on the first date to the
same point in time on the second date.
(ii) If the unit-period is a month, the number of full unit-
periods between two dates shall be the number of months. If the
unit-period is a month, the number of unit-periods per year shall be
12.
(iii) If the unit-period is a semimonth or a multiple of a month
not exceeding 11 months, the number of days between two dates shall
be 30 times the number of full months. The number of full unit-
periods shall be determined by dividing the number of days by 15 in
the case of a semimonthly unit-period or by the appropriate multiple
of 30 in the case of a multimonthly unit-period. If the unit-period
is a semimonth, the number of unit-periods per year shall be 24. If
the number of unit-periods is a multiple of a month, the number of
unit-periods per year shall be 12 divided by the number of months
per unit-period.
(iv) If the unit-period is a day, a week, or a multiple of a
week, the number of full unit-periods shall be determined by
dividing the number of days between the two given dates by the
number of days per unit-period. If the unit-period is a day, the
number of unit-periods per year shall be 365. If the unit-period is
a week or a multiple of a week, the number of unit-periods per year
shall be 52 divided by the number of weeks per unit-period.
(v) If the unit-period is a year, the number of full unit-
periods between two dates shall be the number of full years (each
equal to 12 months).
(6) Symbols. The symbols used to express the terms of a
transaction in the equation set forth in paragraph (b)(8) of this
appendix are defined as follows:
Aj = The amount of each periodic or lump-sum advance to the
consumer under the reverse mortgage transaction.
i = Percentage rate of the total loan cost per unit-period,
expressed as a decimal equivalent.
j = The number of unit-periods until the jth advance.
n = The number of unit-periods between consummation and repayment of
the debt.
Pn = Min (Baln, Valn). This is the maximum amount
that the creditor can be repaid at the specified loan term.
Baln = Loan balance at time of repayment, including all costs
and fees incurred by the consumer (including any shared appreciation
or shared equity amount) compounded to time n at the creditor's
contract rate of interest.
Valn = Val0 (1 + )y, where Val0 is the
property value at consummation, is the assumed annual rate of
appreciation for the dwelling, and y is the number of years in the
assumed term. Valn must be reduced by the amount of any equity
reserved for the consumer by agreement between the parties, or by 7
percent (or the amount or percentage specified in the credit
agreement), if the amount required to be repaid is limited to the
net proceeds of sale.
= The summation operator.
Symbols used in the examples shown in this appendix are defined
as follows:
FVx i = The future value of 1 per unit-period for x unit
periods, first advance due immediately (at time = 0, which is
consummation).
TP02DE94.013
I = wi x 100 = the nominal total annual loan cost rate.
(7) General equation. The total annual loan cost rate for a
reverse mortgage transaction must be determined by first solving the
following formula, which sets forth the relationship between the
advances to the consumer and the amount owed to the creditor under
the terms of the reverse mortgage agreement for the loan cost rate
per unit-period (the loan cost rate per unit-period is then
multiplied by the number of unit-periods per year to obtain the
total annual loan cost rate I; that is I = wi):
TP02DE94.014
(8) Solution of general equation by iteration process. (i) The
general equation in paragraph (b)(7) of this appendix, when applied
to a simple transaction for a reverse mortgage loan of equal monthly
advances of $350 each, and with a total amount owed of $14,313.08 at
an assumed repayment period of two years, takes the special form:
TP02DE94.015
Using the iteration procedures found in steps 1 through 4 of
(b)(9)(i) of Appendix J of this part, the total annual loan cost
rate, correct to two decimals, is 48.53%.
(ii) In using these iteration procedures, it is expected that
calculators or computers will be programmed to carry all available
decimals throughout the calculation and that enough iterations will
be performed to make virtually certain that the total annual loan
cost rate obtained, when rounded to two decimals, is correct. Total
annual loan cost rates in the examples below were obtained by using
a 10-digit programmable calculator and the iteration procedure
described in Appendix J to this part.
(9) Assumption for discretionary cash advances. If the consumer
controls the timing of advances made after consummation (such as in
a credit line arrangement), creditors must use the general formula
in paragraph (b)(7) of this appendix. The total annual loan cost
rate shall be based on the assumption that 50 percent of the
principal loan amount is advanced at closing, or in the case of an
open-end transaction, at the time the consumer becomes obligated
under the plan. Creditors shall assume the advances are made at the
interest rate then in effect and that no further advances are made
to, or repayments made by, the consumer during the term of the
transaction or plan.
(10) Assumption for variable-rate reverse mortgage transactions.
If the interest rate for a reverse mortgage transaction may increase
during the loan term and the amount or timing is not known at
consummation, creditors shall base the disclosures on the initial
interest rate in effect at the time the disclosures are provided.
(11) Assumption for closing costs. In calculating the total
annual loan cost rate, creditors shall assume all closing and other
consumer costs are financed by the creditor.
(c) Examples of total annual loan cost rate computations.
(1) Lump-sum advance at consummation.
Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Estimated time of repayment (based on life expectancy of a consumer
of age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
P120 = Min (109,441.32, 148,024.43)
TP02DE94.016
i = .010843293
Total annual loan cost rate (100(.010843293 x 12)) = 13.01%
(2) Monthly advance beginning at consummation.
Monthly advance to consumer, beginning at consummation: $481.43
Total of consumer's loan costs financed at consummation: $4,500
Estimated time of repayment (based on life expectancy of a consumer
of age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
P120 = Min (107,054.49, 215,892.50)
TP02DE94.017
i = .009383333
Total annual loan cost rate (100(.009383333 x 12) = 11.26%
(3) Lump sum advance at consummation and monthly advances
thereafter.
Lump sum advance to consumer at consummation: $10,725
Monthly advance to consumer, beginning one month after consummation:
$725.00
Total of consumer's loan costs financed at consummation: $4,500
Estimated time of repayment (based on life expectancy of a consumer
of age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
P144 = Min (229,382.85, 251,817.01)
TP02DE94.018
i = .00806917958
Total annual loan cost rate (100(.00806917958 x 12) = 9.68%
(d) Reverse mortgage model form and sample form.
(1) Model form.
Total Annual Loan Cost Rate
Loan Terms
Age of borrower:
Appraised property value:
Interest rate:
Monthly payment:
Initial draw:
Line of credit:
Initial Loan Charges
Closing costs:
Mortgage insurance premium:
Annuity cost:
Monthly Loan Charges
Mortgage insurance:
Servicing fee:
Other Charges
Shared Appreciation:
Repayment Limits
------------------------------------------------------------------------
2-year []-year []-year
Appreciation rate (percent) loan term loan term loan term
------------------------------------------------------------------------
0
4
8
------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you
keep the loan and how much your house appreciates in value.
Generally, the longer you keep a reverse mortgage, the lower the
cost of the loan is for you.
This table shows the estimated cost of your reverse mortgage
loan, expressed as an annual rate. It illustrates the cost for three
loan terms: 2 years, life expectancy for someone your age, and 1.4
times that life expectancy. The table also shows the cost of the
loan, assuming the value of your home appreciates at three different
rates: 0%, 4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically
include principal, interest, closing costs, mortgage insurance
premiums, annuity costs, and servicing costs (but not disposition
costs--costs when you sell the home).
The rates in this table are estimates. Your actual cost may
differ if, for example, the amount of your loan advances varies or
the interest rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not Require
You to Complete This Loan
(2) Sample Form.
Total Annual Loan Cost Rate
Loan Terms
Age of borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly payment: $301.80
Initial draw: $1,000
Line of credit: $4,000
Initial Loan Charges
Closing costs: $2,500
Mortgage insurance premium: $2,000
Annuity cost: N/A
Monthly Loan Charges
Mortgage insurance: .05%
Servicng fee: $25.00
Other Charges
Shared Appreciation: N/A
Repayment Limits
Net proceeds estimated at 93% of projected home sale
------------------------------------------------------------------------
2 year 12 year 17 year
Appreciation rate (percent) loan term loan term loan term
(percent) (percent) (percent)
------------------------------------------------------------------------
0...................................... 39.8 10.8 4.6
4...................................... 39.8 12.2 10.6
8...................................... 39.8 12.2 11.2
------------------------------------------------------------------------
The cost of any reverse mortgage loan depends on how long you
keep the loan and how much your house appreciates in value.
Generally, the longer you keep a reverse mortgage, the lower the
cost of the loan is for you.
This table shows the estimated cost of your reverse mortgage
loan, expressed as an annual rate. It illustrates the cost for three
loan terms: 2 years, life expectancy for someone your age, and 1.4
times that life expectancy. The table also shows the cost of the
loan, assuming the value of your home appreciates at three different
rates: 0%,4% and 8%.
The total annual loan cost rates in this table are based on the
total charges associated with this loan. These charges typically
include principal, interest, closing costs, mortgage insurance
premiums, annuity costs, and servicing costs (but not disposition
costs--costs when you sell the home).
The rates in this table are estimates. Your actual cost may
differ if, for example, the amount of your loan advances varies or
the interest rate on your mortgage changes.
Signing an Application or Receiving These Disclosures Does Not Require
You to Complete This Loan
10. A new Appendix L would be added to read as follows:
Appendix L to Part 226--Assumed Loan Periods for Computations of
Total Annual Loan Cost Rates
(a) Required tables. In calculating the total annual loan cost
rates in accordance with Appendix K of this part, creditors shall
assume three loan periods, as determined by the following table.
(b) Loan periods.
(1) Loan Period 1 is a two-year loan period.
(2) Loan Period 2 is the life expectancy in years of the
youngest borrower to become obligated on the reverse mortgage loan,
as shown in the U.S. Decennial Life Tables for 1979-1981 for
females, rounded to the nearest whole year.
(3) Loan Period 3 is the life expectancy figure in Loan Period
2, multiplied by 1.4 and rounded to the nearest full year. (.5 has
been rounded up to 1).
------------------------------------------------------------------------
Loan Loan period Loan
period 1 2 (life period 3
Age of youngest borrower (in expectancy) (in
years) (in years) years)
------------------------------------------------------------------------
62................................... 2 21 30
63................................... 2 20 28
64................................... 2 19 27
65................................... 2 18 25
66................................... 2 18 25
67................................... 2 17 24
68................................... 2 16 22
69................................... 2 16 22
70................................... 2 15 21
71................................... 2 14 20
72................................... 2 13 18
73................................... 2 13 18
74................................... 2 12 17
75................................... 2 12 17
76................................... 2 11 15
77................................... 2 10 15
78................................... 2 10 14
79................................... 2 9 13
80................................... 2 9 13
81................................... 2 8 11
82................................... 2 8 11
83................................... 2 7 10
84................................... 2 7 10
85................................... 2 6 8
86................................... 2 6 8
87................................... 2 6 8
88................................... 2 5 7
89................................... 2 5 7
90................................... 2 5 7
91................................... 2 4 6
92................................... 2 4 6
93................................... 2 4 6
94................................... 2 4 6
95 and over.......................... 2 3 4'
------------------------------------------------------------------------
By order of the Board of Governors of the Federal
Reserve System, November 28, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-29624 Filed 12-1-94; 8:45 am]
BILLING CODE 6210-01-P
