[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Proposed Rules]
[Pages 66179-66181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30994]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Reg. Z; Docket No. R-0908]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Request for comments.
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SUMMARY: The Board is soliciting comment on how the finance charge
could more accurately reflect the cost of consumer credit. In
particular, the Board is asking for the public's views on the
feasibility of treating as finance charges all costs imposed by the
creditor or payable by the consumer as an incident to the extension of
credit. The Truth in Lending Act Amendments of 1995 direct the Board to
submit a report to the Congress regarding these issues. Under present
law, costs such as interest are part of the finance charge; other
costs, including many associated with real estate-secured lending, are
excluded from the finance charge. The Board is also required to address
in its report abusive refinancing practices engaged in by creditors for
the purpose of avoiding a consumer's rescission rights.
DATES: Comments must be received on or before February 9, 1996.
ADDRESSES: Comments should refer to Docket No. R-0908, and may be
mailed to William W. Wiles, Secretary of the Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
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, NW.,
(between Constitution Avenue and C Street) at any time. Comments may be
inspected in Room MP-500 of the Martin Building between 9 a.m. and 5
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 E. Ahrens, Senior Attorney, or
Sheilah Goodman, or Kurt Schumacher, 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 Devices for the Deaf, contact Dorothea Thompson, at
(202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The Truth in Lending Act Amendments of 1995 (1995 Amendments Act),
Pub. L. 104-29, 109 Stat. 271, enacted into law on September 30, 1995,
direct the Board to submit a report to the Congress concerning the use
of finance charges to accurately reflect the cost of consumer credit.
The Board must consider the feasibility of including in the finance
charge all charges payable directly or indirectly by the consumer and
imposed directly or indirectly by the creditor as an incident to the
credit transaction--especially costs associated with real estate- or
home-secured lending that are currently excluded from the finance
charge under section 106 of the Truth in Lending Act. As contemplated
by the Congress, perhaps only charges payable in a comparable cash
transaction would continue to be excluded from the finance charge. The
report must also address abusive refinancing practices engaged in by a
creditor for the purpose of avoiding a consumer's rescission rights.
The Board will submit its report to the Congress in early spring 1996,
based on the comments of interested parties and on its own analysis.
[[Page 66180]]
II. Finance Charges
Definition
The Truth in Lending Act (15 U.S.C. 1601 et seq.) contains rules
governing the disclosure of finance charges (Section 106). The act is
implemented by the Board's Regulation Z (12 CFR part 226). Rules on
finance charges are contained in Regulation Z Sec. 226.4 and
accompanying official staff interpretations. The finance charge is
defined as the cost of consumer credit expressed as a dollar amount. It
includes any charge payable directly or indirectly by the consumer and
imposed directly or indirectly by the creditor as an incident to or a
condition of the extension of credit. The term ``imposed'' is
interpreted broadly, to include any cost charged by the creditor
(unless otherwise excluded), including charges for optional services
paid by the consumer. Examples of a finance charge include interest,
points, and service or transaction fees.
The act excludes certain costs from the finance charge, such as
charges payable in a comparable cash transaction and fees paid to
third-party closing agents (unless the creditor requires the services
provided or retains the fee). Many costs associated with loans secured
by real estate or a principal dwelling are specifically excluded;
examples are fees for appraisals, document preparation, title
insurance, and pest inspections prior to loan closing. The regulation
also excludes charges such as application fees (charged to all
applicants), late payment fees, and most taxes.
Still other costs that are generally included in the finance charge
may nevertheless be excluded. For example, the act provides that credit
report fees are finance charges, but provides an exception for credit
report fees associated with real estate- or home-secured loans. The act
also excludes optional credit life insurance premiums and fees to
record a security interest if the cost is disclosed to the consumer and
meets other conditions.
Annual percentage rate
In addition to requiring disclosure of finance charges as a dollar
amount, the act and regulation require creditors to disclose the cost
of consumer credit as an annual percentage rate (APR). Creditors must
disclose an APR for all types of consumer credit--installment loans
(closed-end credit) and credit card accounts or home equity lines of
credit (open-end plans). The APR for closed-end credit and open-end
plans reflect finance charges, but the distinct nature of these
products calls for differences in how the APR is calculated.
The APR for closed-end credit is based on the amounts borrowed by
the consumer in relation to the amount and timing of payments to the
creditor. It factors in interest and all other finance charges. Costs
such as recording fees or title insurance fees may be disclosed, but
are not a part of the finance charge and thus, are excluded from the
APR calculation.
Under open-end plans such as a home equity line of credit, the
creditor typically sets the maximum amount that can be borrowed at any
time. The amount that will actually be borrowed by the consumer,
however, is typically unknown when the credit plan is established. The
APR stated in advertisements and account-opening disclosures reflects
only the rate of interest that will be applied to any outstanding
balance the consumer may have in the future. Additional costs--whether
finance or other charges--are separately identified.
Consumers with outstanding balances receive an APR on periodic
statements. That APR is based on the outstanding balance and certain
finance charges imposed during the cycle. Some finance charges, such as
points charged in connection with establishing a home equity plan or
other fees to open or renew plans, would skew the APR for the billing
cycle in which they are imposed. These types of finance charges are
disclosed on periodic statements but are not figured in the APR.
Request for Comment
The Board requests comments on how the definition of the finance
charge could be modified, if at all, to reflect the cost of consumer
credit more accurately. The Congress directs the Board to make
recommendations on any necessary statutory and regulatory changes.
(1995 Amendments, Section 2(f).) The Board believes the scope of the
study is limited to possible modifications to the definition of the
finance charge.
The 1995 Amendments contain, for the most part, provisions
affecting closed-end credit that is real estate- or home-secured. The
Board believes that the scope of the report is intended to cover the
treatment of costs as finance charges for all types of consumer credit,
although a focus of the study will be on those fees associated with
real estate lending that are currently excluded from the finance
charge. For example, many costs associated with entering into home-
secured loans are the same whether the credit is an installment loan or
a line of credit. Similarly, certain application fees are excluded from
the finance charge for all types of credit transactions, not just those
affecting installment loans.
Comment is requested on the feasibility of including in the finance
charge all charges payable directly or indirectly by the consumer and
imposed directly or indirectly by the creditor as an incident to the
credit transaction (other than costs imposed in comparable cash
transactions), particularly costs associated with real estate- or home-
secured credit that are currently excluded from the finance charge. For
example, mortgage brokers fees are sometimes, but not always, a finance
charge under present law: A new statutory provision categorizes all
brokers fees paid by the consumer to the broker (or to the creditor for
delivery to the broker) as finance charges, and will go into effect
when the Board issues a final rule in 1996.
In assessing the feasibility of this approach, the Board must
consider the implications of including charges imposed by third
parties--settlement agents and others--that may not be within the
creditor's knowledge or control. Comment is requested on compliance
issues that would arise if the definition of the finance charge were
expanded to include charges by third parties.
Treating all costs as a finance charge would, of course, simplify
creditor compliance with the TILA and Regulation Z; it would reduce the
potential for disclosure errors. The Board believes the study is, in
part, a reaction to the spate of class action lawsuits that followed
the court decision of Rodash v. AIB Mortgage Company. (16 F.3d 1142
(11th Cir. 1994)). In Rodash, the court found, among other TILA
violations, that the creditor improperly excluded several fees from the
finance charge calculation--totalling about $225. The court awarded
civil money damages and allowed the consumer to rescind a $100,000
loan.
Including all costs in the finance charge, however, would also
increase the APR disclosed for closed-end credit transactions--
dramatically, in some cases. For example, the APR for home-secured
loans would reflect closing costs such as appraisal fees, title
insurance and the like. Including premiums for optional credit life
insurance or for property insurance in the finance charge could also
have a significant impact on the APR. The resulting APR for installment
loans may seem distorted, particularly in relation to the APR disclosed
for a comparable open-end product. For example, disclosures for a home-
secured open-
[[Page 66181]]
end plan would include closing costs and insurance premiums as finance
charges, but those fees would not be included in the APR stated in
advertisements or account-opening disclosures, unless the current rules
on calculating the APR are changed.
III. Abusive Refinancing Practices
The act and regulation allow consumers to cancel (or rescind)
certain credit transactions secured by the consumer's principal
dwelling. For example, the right of rescission applies if a consumer's
principal dwelling is used to secure a loan financing home improvements
or a child's education. Other loans secured by a consumer's principal
dwelling are not rescindable, such as a loan for a business purpose.
A consumer's right to rescind a refinanced loan depends on both the
creditor and amount of money involved. If the creditor refinancing the
loan is the same creditor that initially extended the credit, consumers
may rescind the refinancing only to the extent new monies are advanced.
For example, if a consumer's principal dwelling secures a loan with a
creditor and the consumer seeks to refinance an outstanding balance of
$100,000 with the same creditor, the transaction is not rescindable. If
the consumer obtains $25,000 in an additional advance, the refinancing
could be rescinded up to the new advance of $25,000. If the consumer
refinances the loan with a new creditor instead, the entire transaction
is rescindable, whether or not new monies are advanced.
The Board's report must include recommendations, if any, for
statutory or regulatory changes necessary to address abusive
refinancing practices engaged in by a creditor for the purpose of
avoiding a consumer's rescission rights. Comment is requested on the
issue.
IV. Form of Comment Letters
Comment letters should refer to Docket No. R-0908, 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 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 or 5\1/4\ inch computer diskettes in any IBM-
compatible DOS-based format.
By order of the Board of Governors of the Federal Reserve
System, December 15, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-30994 Filed 12-20-95; 8:45 am]
BILLING CODE 6210-01-P
