[Federal Register Volume 60, Number 235 (Thursday, December 7, 1995)]
[Proposed Rules]
[Pages 62764-62772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29711]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 /
Proposed Rules
[[Page 62764]]
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0903]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; official staff interpretation.
-----------------------------------------------------------------------
SUMMARY: The Board is publishing for comment proposed revisions to the
official staff commentary to Regulation Z (Truth in Lending). The
commentary applies and interprets the requirements of Regulation Z. The
proposed update provides guidance mainly on issues relating to reverse
mortgages and mortgages bearing rates above a certain percentage or
fees above a certain amount. It also addresses issues of general
interest, such as the treatment of debt cancellation contracts and a
card issuer's responsibilities when a cardholder asserts a claim or
defense relating to a merchant dispute.
DATES: Comments must be received on or before February 2, 1996.
ADDRESSES: Comments should refer to Docket No. R-0903, 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: For Subparts A and B (open-end
credit), Jane Jensen Gell or Obrea O. Poindexter, Staff Attorneys; for
Subparts A, C and E (closed-end credit, reverse mortgages, and
mortgages bearing rates or fees above a certain percentage or amount),
Jane Ahrens, Senior Attorney, or Kyung Cho-Miller, Kurt Schumacher, or
Manley Williams, Staff Attorneys, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, at (202)
452-3667 or 452-2412. For users of Telecommunications Device for the
Deaf (TDD) only, please contact Dorthea Thompson, at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et
seq.) is to promote the informed use of consumer credit by requiring
disclosures about its terms and cost. The act requires creditors to
disclose 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. It also imposes
limitations on some credit transactions secured by a consumer's
principal dwelling. The act is implemented by the Board's Regulation Z
(12 CFR part 226). The Board also has an official staff commentary (12
CFR part 226 (Supp. I)) that interprets the regulation, and provides
guidance to creditors in applying the regulation to specific
transactions. It is updated periodically to address significant
questions that arise, and is a substitute for individual staff
interpretations. The Board expects to adopt amendments in final form in
March 1996 with compliance optional until October 1, 1996, the
effective date for mandatory compliance.
On March 24, 1995, the Board published amendments to Regulation Z
implementing the Home Ownership and Equity Protection Act of 1994,
contained in the Riegle Community Development and Regulatory
Improvement Act of 1994, Public Law 103-325, 108 Stat. 2160 (60 FR
15463). These amendments, which became effective on October 1, impose
new disclosure requirements and substantive limitations on certain
closed-end mortgage loans bearing rates or fees above a certain
percentage or amount. The amendments also impose new disclosure
requirements for reverse mortgage transactions, which provide advances
primarily to elderly homeowners and rely principally on the home's
value for repayment. In large measure, the proposed commentary
incorporates the supplementary information accompanying that
rulemaking, and addresses other issues that have arisen since the
publication of the final rule.
The Congress recently amended TILA provisions concerning finance
charge disclosures for home mortgage loans. The Truth in Lending Act
Amendments of 1995 (``1995 Act,'' Public Law 104-29, 109 Stat. 271)
clarify the treatment of several fees typically associated with real
estate-related lending, and revise tolerances for finance charge
calculations for loans secured by real estate or dwellings. The
statutory amendments, which were enacted in response to a number of
lawsuits, also address consumer remedies for creditors' past and future
disclosure violations. The 1995 Act became effective immediately for
provisions relating to tolerances, past and future liability, and the
exclusion of certain closing costs from the finance charge calculation.
The statutory amendments that exclude certain real estate related
closing costs from the finance charge generally codify interpretations
previously issued by the Board, and no further revisions to the
commentary are contemplated at this time.
Another 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; this provision will become effective 60
days after the Board issues a final rule or no later than 12 months
after enactment of the amendments to the act. It is anticipated that
the Board will issue a proposed amendment to Regulation Z addressing
brokers fees during the first quarter of 1996, and will make any
changes to the commentary relating to the treatment of brokers fees as
part of that rulemaking.
II. Proposed Commentary
Subpart A--General
Section 226.4--Finance Charge
4(a) Definition
Proposed comment 4(a)-8 addresses the treatment of fees charged in
connection with debt cancellation agreements. In the case of motor
vehicle loans, debt cancellation agreements (sometimes referred to as
``gap''
[[Page 62765]]
agreements) offer protection to consumers in the event the vehicle is
stolen or destroyed and the motor vehicle insurance proceeds are
insufficient to extinguish the debt. Under these agreements, in return
for a fee paid, the consumer is not held liable for the remaining
balance due on the loan. Other types of agreements may provide for debt
cancellation if the borrower dies or becomes disabled. In some states,
debt cancellation agreements may be regulated as or otherwise
considered insurance contracts.
The Board has received questions from creditors about the proper
treatment of fees for debt cancellation agreements. Section 226.4(d)
allows a creditor to exclude optional credit life and certain property
insurance premiums from the finance charge if the creditor meets
certain conditions, including disclosure of the premium. Some creditors
believe that debt cancellation fees should uniformly be treated as
Sec. 226.4(d) insurance premiums under the regulation. These creditors
generally believe that the fees for optional debt cancellation
contracts should be excluded from the finance charge. An alternative
view is that the fees may be treated as insurance premiums only if the
contract is considered insurance under state law.
Proposed comment 4(a)-8 follows the state law analysis. The
proposed comment provides that if a debt cancellation agreement is
regulated as or considered insurance under state law, the fee may be
excludable from the finance charge in accordance with the rules in
Sec. 226.4(d). That is, under the proposed comment the fee may be
excludable if the insurance is properly characterized as credit life,
accident, health or loss-of-income insurance as specified in
Sec. 226.4(d)(1), or as insurance against loss of or damage to
property, or against liability arising out of the ownership or use of
property as specified in Sec. 226.4(d)(2). Insurance protecting the
creditor against credit loss is a finance charge. (See Sec. 226.4(b)(5)
and accompanying commentary.)
If state law does not regulate or consider the agreement to be
insurance, then the general rules in Sec. 226.4(a) apply. Under
Sec. 226.4(a), debt cancellation fees paid to a creditor are treated as
finance charges because they are charged by the creditor as an incident
to the extension of credit and, although optional, the fees are not of
a type payable in a comparable cash transaction.
4(d) Insurance
Comment 4(d)-5 would be revised to clarify that insurance is deemed
to be required--and the premiums treated and disclosed as finance
charges--when a consumer has several alternatives to fulfill a
condition to a credit extension, one of which is to purchase insurance
from the creditor and the consumer elects that option. For example,
where, as a condition to obtaining a credit card, a consumer must
purchase a life insurance policy from the creditor, assign an existing
policy, or pledge another form of security, such as a certificate of
deposit, if the consumer purchases the insurance from the creditor, the
premiums are finance charges.
Subpart B--Open-end Credit
Section 226.6--Initial Disclosure Statement
6(b) Other Charges
Comment 6(b)-1 would be revised to state that a membership fee to
join an organization is an ``other charge'' if the primary benefit of
membership is the opportunity to apply for a credit card and other
benefits are incidental. For example, if an organization offers, in
addition to the opportunity for a credit card account, only minor
benefits such as a newsletter and a member information hotline, a fee
to join the organization should be disclosed as an ``other charge.''
Section 226.12--Special Credit Card Rules
12(c) Right of Cardholder to Assert Claims or Defenses Against Card
Issuer
12(c)(2) Adverse Credit Reports Prohibited
Proposed comment 12(c)(2)-2 provides guidance on when a card issuer
may consider a dispute settled for purposes of reporting an amount in
dispute as delinquent. Until the card issuer conducts a reasonable
investigation, the disputed amount may not be collected or reported as
delinquent.
Section 226.14--Determination of Annual Percentage Rate
14(c) Annual Percentage Rate for Periodic Statements
Comment 14(c)-10 would provide guidance on calculating the APR on
periodic statements when a transaction occurs at the end of one cycle,
but is posted to the account in a subsequent cycle, such as when a
cardholder obtains a cash advance (for which there is a transaction
fee) on the last day of a billing cycle and the transaction is posted
to the cardholder's account on the second day of the following cycle.
The transaction (and fee, if applicable) are included on the statement
reflecting the cycle in which the transaction posted, and the proposed
comment clarifies how creditors calculate the APR to reflect the delay
in posting.
Subpart C--Closed-end Credit
Section 17--General Disclosure Requirements
17(c) Basis of Disclosure and Use of Estimates
Paragraph 17(c)(1)
Comment 17(c)(1)-10 would be revised to clarify that if a contract
for a variable rate transaction provides for a delay in the
implementation of changes to an index value, the creditor may use any
index value in effect during the delay period. For example, if a
contract specifies that rate changes are based on the index value in
effect 45 days before the change date, the creditor may use any index
value in effect within that 45-day delay period.
Proposed comment 17(c)(1)-18 addresses pawn transactions. There has
been some confusion about the coverage and compliance of pawn
transactions under the TILA. The comment clarifies how some of the
items required to be disclosed under Sec. 226.18 such as the amount
financed, the finance charge, and the percentage should be disclosed.
Disclosure of these transactions under the open-end credit provisions
is not addressed based on the belief that typically pawn transactions
are not open-end credit transactions.
Section 18--Content of Disclosures
18(c) Itemization of Amount Financed
Paragraph 18(c)(1)(iii)
Proposed comment 18(c)(1)(iii)-2 concerns the treatment of certain
charges known as ``upcharges'' that creditors may sometimes add to a
fee charged by a third party for services such as maintenance and
service contracts on automobiles. The comment, which only applies in
cases where a creditor charges the same amount of an upcharge in both
cash and credit transactions, offers flexibility in how creditors can
choose to itemize and disclose the amount charged for the service
(including the amount of the upcharge). The treatment of these fees for
purposes of disclosures under the TILA does not govern the imposition
or amount of such upcharges.
[[Page 62766]]
Section 226.20--Subsequent Disclosure Requirements
20(a) Refinancings
The Board has been asked whether certain actions constitute adding
a variable-rate feature for purposes of this section. Comment 20(a)-3
would be revised to clarify that changing the index on a variable-rate
transaction is not adding a variable-rate feature, nor is substituting
an index for one that no longer exists.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.31--General Rules
31(c) Timing of Disclosures
31(c)(1) Disclosures for Certain Closed-end Home Mortgages
Numerous creditors have suggested that the rule for furnishing
disclosures should be deemed to be satisfied as long as the creditor
places the disclosures in the mail three days prior to consummation.
The word ``furnish'' for purposes of Sec. 226.32 disclosures has the
same meaning as ``deliver'' for the other disclosure requirements of
Regulation Z. Accordingly, proposed comment 31(c)(1)-1 clarifies that
disclosures are furnished, or delivered, when received by the consumer,
not when mailed by the creditor.
Proposed comment 31(c)(1)-2 clarifies that creditors may rely on
the definition of ``business days'' in comment 2(a)(6)-2 for purposes
of complying with the timing requirements for furnishing disclosures
under this section.
31(c)(1)(i) Change in Terms
Proposed comment 31(c)(1)(i)-1 clarifies that a creditor must
provide new Sec. 226.32(c) disclosures if a change in terms (whether in
the formal written agreement or otherwise, such as an oral agreement
affecting the amount of a fee required to be paid at closing) makes the
previously provided disclosures inaccurate.
31(c)(1)(iii) Consumer's Waiver of Waiting Period Before Consummation
Proposed comment 31(c)(1)(iii)-1 provides guidance on circumstances
in which the consumer may modify or waive the right to the three-day
waiting period to meet bona fide personal financial emergencies.
Generally, whether a bona fide personal financial emergency exists is a
matter to be decided between the parties. The provisions in comments
23(e)-1 and 34(e)-2 apply to this section. For example, a consumer's
waiver does not automatically insulate the creditor from liability for
failing to provide the three-day waiting period.
31(c)(2) Disclosures for Reverse Mortgages
Proposed comment 31(c)(2)-1 clarifies the definition of ``business
day'' for purposes of providing reverse mortgage disclosures to
consumers.
31(d) Basis of Disclosures and Use of Estimates
Section 226.31(d) mirrors the provisions in Sec. 226.5(c) and
Sec. 226.17(c), and allows the use of estimates when information
necessary for an accurate disclosure is unknown to the creditor,
provided that the disclosure is clearly identified as an estimate.
Proposed comment 31(d)-1 clarifies that when a disclosure required by
Sec. 226.32 is marked as an estimate and becomes inaccurate due to a
change in terms that occurs before consummation, new disclosures must
be provided.
Section 226.32--Requirements for Certain Closed-end Home Mortgages
32(a) Coverage
Paragraph 32(a)(1)(i)
Proposed comment 32(a)(1)(i)-1 clarifies when an application is
received, for purposes of determining which Treasury securities yield
should be used to compare the APR. Proposed comment 32(a)(1)(i)-2
provides guidance on comparing loan maturities to yields on Treasury
securities, for purposes of determining whether a mortgage loan is
covered by Sec. 226.32. Proposed comment 32(a)(1)(i)-3 clarifies rules
for calculating the APR for variable-rate, discount, premium, or
stepped-rate loans.
Proposed comment 32(a)(1)(i)-4 clarifies which Treasury security to
use for the APR test, and where the yields on these securities can be
found. Creditors may request the Board statistical release H-15 by
calling (202) 452-3245. Treasury security yields are also available
from the Federal Reserve Bank of New York by calling (212) 720-6619.
Paragraph 32(a)(1)(ii)
Creditors must follow the rules in Sec. 226.32 if, in part, 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, based on the annual
percentage change in the Consumer Price Index as reported on June 1,
effective January 1 of the following year. The Board anticipates that
adjustments to the $400 dollar figure will be published each yearend
and incorporated into the commentary the following spring.
Paragraph 32(b)(1)
Paragraph 32(b)(1)(i)
Comment 32(b)(1)(i)-1 clarifies the scope of items defined as
finance charges under Sec. 226.4 that are considered ``points and
fees.''
Paragraph 32(b)(1)(ii)
Proposed comment 32(b)(1)(ii)-1 addresses the treatment of mortgage
brokers fees. Section 226.32(b)(1) defines ``points and fees'' to
include all finance charges (except interest or the time-price
differential), as well as all compensation paid to mortgage brokers.
Accordingly, compensation paid to a mortgage broker must be included as
``points and fees'' even if the amount is not disclosed as a finance
charge.
Section 32(b)(1)(ii) at the time it was issued was interpreted to
include all mortgage broker fees that are required to be disclosed
under the Real Estate Settlement Procedures Act. Under that
interpretation, amounts paid by creditors to mortgage brokers would be
included, as are amounts paid by consumers. Upon further analysis, a
narrower interpretation is being proposed. Proposed comment
32(b)(1)(ii)-1 states that for purposes of the ``points and fees''
test, only mortgage broker fees paid by the consumer are included in
the calculation. The comment further clarifies that mortgage broker
fees should not be double counted; that is, where such fees are
included in the finance charge, they are already included as ``points
and fees'' under Sec. 226.32(b)(1)(i) and should not be counted again
under Sec. 226.32(b)(1)(ii).
32(c)(3) Regular payment
Proposed comment 32(c)(3)-1 clarifies that the regulation
contemplates the disclosure of monthly or other regularly scheduled
periodic payments, such as bimonthy or quarterly. The comment also
clarifies that there must be at least two payments, and they must be in
an amount and occur at such intervals that the payments fully amortize
the loan. For the amount of the payment, proposed comment 32(c)(3)-2
clarifies that creditors may rely on Sec. 226.18(g) for guidance.
32(c)(4) Variable-rate
Proposed comment 32(c)(4)-1 provides additional guidance on
calculating ``worst-case'' payment examples when the transaction has
more than one payment stream.
[[Page 62767]]
32(d) Limitations
32(d)(1)(i) Balloon Payment
The statute and regulation prohibit the use of balloon payments for
mortgages covered by Sec. 226.32 that have a term of less than five
years. For such loans, the repayment schedule must fully amortize the
outstanding principal balance through ``regular periodic payments.''
The proposed comment provides guidance on the definition of ``regular
periodic payments.''
32(d)(2) Negative Amortization
Proposed comment 32(d)(2)-1 clarifies that the prohibition against
including negative amortization in a mortgage covered by Sec. 226.32
does not extend to increases in the principal balance unrelated to the
payment schedule, such as an increase related to the purchase of force-
placed insurance.
32(d)(4) Increased Interest Rate
Proposed comment 32(d)(4)-1 clarifies that a rate increase in a
variable-rate transaction is not prohibited by the act or regulation,
even if the rate increases after the consumer has defaulted on the
obligation.
32(d)(5) Rebates
Section 226.32(d)(5) restricts how creditors may calculate refunds
of interest when a mortgage loan subject to this section is accelerated
due to a consumer's default. The proposed comment clarifies that this
restriction applies to refunds of interest only, and not to refunds of
other items such as origination fees or points. In addition, the
proposed comment clarifies that the refund calculation includes odd-
days interest, regardless of when it is paid.
32(d)(7) Prepayment Penalty Exception
Proposed comment 32(d)(7)-1 provides guidance on calculating a
consumer's debt-to-income ratio. Proposed comment 32(d)(7)-2 clarifies
that verification of employment satisfies the regulation's requirement
that the creditor obtain ``payment records for employment income.''
32(e) Prohibited Acts and Practices
32(e)(1) Repayment Ability
For mortgage loans subject to Sec. 226.32, the regulation prohibits
creditors from engaging in a pattern or practice of extending such
credit 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. Proposed comment
32(e)(1)-1 provides guidance on determining the consumer's repayment
ability. The comment clarifies that creditors may rely on the same
information provided by the consumer in connection with
Sec. 226.32(d)(7), or other information, including information about
unverified income.
Section 226.33--Requirements for Reverse Mortgages
The U.S. Department of Housing and Urban Development (HUD) has
modified its software regarding reverse mortgages originated under the
Home Equity Conversion Mortgage (HECM) program to conform with the
requirements and the terminology used for reverse mortgages under
Regulation Z and the appendices to the regulation. (The HECM program
has been temporarily suspended, pending the reauthorization of funding
by the Congress.) For example, HUD's software now allows creditors to
use the initial interest rate, rather than the ``expected interest
rate,'' in calculating the total annual loan cost rate for a variable-
rate transaction. Although creditors may find HUD's software helpful in
meeting the disclosure requirements under Regulation Z, they should
first take steps to verify the accuracy of the software, including any
instructions, before using it. Neither HUD nor the Board provides a
``safe harbor'' to creditors regarding use of this software.
33(a) Definition
Proposed comment 33(a)-1 addresses an implication relative to the
definition of a reverse mortgage transaction under the regulation. If a
transaction structured as a reverse mortgage loan is a recourse
transaction (that is, one that imposes personal liability on the
consumer for the difference between the loan balance at maturity and
the value of the property), it is not a reverse mortgage under
Sec. 226.33. Thus, if the transaction is also closed-end, and the
annual percentage rate or the points and fees assessed in the
transaction exceed those specified in Sec. 226.32(a)(1), the
transaction is covered by Sec. 226.32. Such transactions may not
generally contain a balloon payment or negative amortization (both of
which are found in reverse mortgages by definition). Open-end credit
plans are exempt from the provisions of Sec. 226.32(a).
33(c)(2) Payments to Consumer
Proposed comment 33(c)(2)-1 provides guidance where the legal
obligation of a reverse mortgage transaction includes a benefit, such
as a ``death benefit,'' in which a payment to the consumer's estate (or
a credit to the outstanding loan balance) will be made upon the
occurrence of an event (for example, the consumer's death within a
certain period of time).
III. Form of Comment Letters
Comment letters should refer to Docket No. R-0903, 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, along with
an original document in paper form, commenters are encouraged to submit
their comments on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any
IBM-compatible DOS-based format.
List of Subjects in 12 CFR Part 226
Advertising, Banks, Banking, Consumer protection, Credit, Federal
Reserve System, Mortgages, Reporting and recordkeeping requirements,
Truth in lending.
Certain conventions have been used to highlight the proposed
revisions to the regulation. New language is shown inside bold-faced
arrows, while language that would be deleted is set off with bold-faced
brackets. Comments are numbered to comply with new Federal Register
publication rules.
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR part 226 as follows:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806, 15 U.S.C. 1604 and 1637(c)(5).
2. In supplement I to Part 226, under section 226.4--Finance
Charge, the following amendments would be made:
1. Under 4(a) Definition., a new paragraph 8. would be added; and
2. Under 4(d) Insurance., paragraph 5. would be revised.
The additions and revisions read as follows:
Supplement I--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.4--Finance Charge
4(a) Definition.
* * * * *
8. Treatment of Debt Cancellation Agreements. Some
creditors may require debt cancellation agreements while others may
offer them as an option. In the case of motor
[[Page 62768]]
vehicle loans, these agreements, sometimes referred to as ``gap''
agreements, offer protection to consumers if the vehicle is stolen
or destroyed and the motor vehicle insurance proceeds are
insufficient to extinguish the debt. In return for a fee, the
consumer will not be held liable for the remaining balance due on
the loan. Other types of agreements provide for debt cancellation if
the borrower dies or becomes disabled. In some states these
agreements are regulated as or otherwise considered insurance under
state law.
i. Insurance. If the agreement is regulated as or considered
insurance under state law, the fee paid by the consumer may be
excludable from the finance charge if it meets the requirements in
Sec. 226.4(d). Insurance protecting the creditor against credit
loss, however, is a finance charge under Sec. 226.4(b)(5).
ii. Other. If the agreement is not considered insurance under
state law, debt cancellation fees paid to the creditor, whether
required or optional, are incident to the extension of credit and
must be disclosed as a finance charge. An optional debt cancellation
fee paid to a third-party is a finance charge only to the extent
that the third-party shares the fee with the creditor. If a creditor
cannot determine whether state law considers the agreement
insurance, the fees must be treated as if the agreement is not
insurance.
* * * * *
Paragraph 4(d).
* * * * *
5. Required credit life insurance. Credit life, accident,
health, or loss-of-income insurance must be voluntary in order for
the premium or charges to be excluded from the finance charge.
Whether the insurance is in fact required or optional is a factual
question. If the insurance is required, the premiums must be
included in the finance charge, whether the insurance is purchased
from the creditor or from a third party. If the consumer
is required to elect one of several options--such as
[only option the creditor gives the consumer is] to purchase credit
life insurance from the creditor, [or to]
assign an existing life insurance policy, or pledge
security such as a certificate of deposit, and the
consumer purchases the credit life insurance, the premium must be
included in the finance charge. (If the consumer assigns a
preexisting policy instead, no premium is included in the finance
charge. The security interest would be disclosed under
Sec. 226.6(c) or Sec. 226.18(m). See the commentary to
Sec. 226.(4)(b) (7) and (8).)
* * * * *
3. In supplement I to part 226, under section 226.6--Initial
Disclosure Statement, under 6(b) Other charges., paragraph 1.v. would
be revised to read as follows:
* * * * *
Subpart B--Open-End Credit
* * * * *
Section 226.6--Initial Disclosure Statement
* * * * *
6(b) Other charges.
1. * * *
v. A membership or participation fee for a package of services
that includes an open-end credit feature, unless the fee is required
whether or not the open-end credit feature is included. For example,
a membership fee to join a credit union is not an ``other charge,''
even if membership is required to apply for credit. For
the fee to be excluded from disclosure as an ``other charge,''
however, the package of services must have some substantive purpose
other than access to the credit feature. For example, if the primary
benefit of membership in an organization is the opportunity to apply
for a credit card, and the other benefits offered are incidental to
the credit feature, the membership fee is an ``other
charge.''
* * * * *
4. In supplement I to part 226, under Section 226.12--Special
Credit Card Provisions, under 12(c)(2) Adverse credit reports
prohibited., new paragraph 2. would be added to read as follows:
* * * * *
Section 226.12--Special Credit Card Provisions
* * * * *
12(c)(2) Adverse credit reports prohibited.
* * * * *
2. Settlement of dispute. A card issuer may not
consider a dispute settled and report an amount disputed as
delinquent or begin collection of the disputed amount until it has
completed a reasonable investigation of the cardholder's claim. In
conducting an investigation, the card issuer may reasonably request
the cardholder's cooperation. The card issuer may not automatically
consider a dispute settled due to the cardholder's failure or
refusal to comply with a particular request.
* * * * *
5. In supplement I to Part 226, under Section 226.14--Determination
of Annual Percentage Rate, under 14(c) Annual percentage rate for
periodic statements., a new paragraph 10. would be added to read as
follows:
* * * * *
Section 226.14--Determination of Annual Percentage Rate
* * * * *
14(c) Annual percentage rate for periodic statements.
* * * * *
10. Transactions at end of billing cycle. The annual
percentage rate reflects transactions and charges imposed during the
billing cycle. However, a transaction that occurs at the end of a
billing cycle may be impracticable to post until the following
cycle, such as a cash advance that occurs on the last day of a
billing cycle. The transaction is posted to the account in the
following cycle. In this case, the annual percentage rate shall be
calculate as follows for the billing cycle in which the transaction
and charges are posted:
i. The denominator shall be calculated as if the transaction
occurred on the first day of the billing cycle, and
ii. The numerator shall include the amount of the transaction
charge plus all finance charges derived from the application of the
periodic rate to the amount of the transaction (including all
charges from a prior cycle).
* * * * *
6. In Supplement I to Part 226, under Section 226.17--General
Disclosure Requirements, under Paragraph 17(c)(1)., paragraph 10. would
be revised and a new paragraph 18. would be added to read as follows:
* * * * *
Subpart C--Closed-End Credit
Section 226.17--General Disclosure Requirements
* * * * *
17(c) Basis of disclosures and use of estimates.
Paragraph 17(c)(1).
* * * * *
10. Discounted and premium variable-rate transactions. In some
variable-rate transactions, creditors may set an initial interest
rate that is not determined by the index or formula used to make
later interest rate adjustments. Typically, this initial rate
charged to consumers is lower than the rate would be if it were
calculated using the index or formula. However, in some cases the
initial rate may be higher. In a discounted transaction, for
example, a creditor may calculate interest rates according to a
formula using the six-month Treasury bill rate plus a 2 percent
margin. If the Treasury bill rate at consummation is 10 percent, the
creditor may forgo the 2 percent spread and charge only 10 percent
for a limited time, instead of setting an initial rate of 12
percent.
i. When creditors use an initial interest
rate that is not calculated using the index or formula for later
rate adjustments, the disclosures should reflect a composite annual
percentage rate based on the initial rate for as long as it is
charged and, for the remainder of the term, the rate that would have
been applied using the index or formula at the time of consummation.
The rate at consummation need not be used if a contract provides for
a delay in the implementation of changes in an index value. For
example, if the contract specifies that rate changes are based on
the index value in effect 45 days before the change date, creditors
may use any [the] index value in effect
during the 45 day period [not more than 45
days] before consummation in calculating a composite annual
percentage rate.
ii. The effect of the multiple rates must
also be reflected in the calculation and disclosure of the finance
charge, total of payments, and payment schedule.
iii. If a loan contains a rate or payment
cap that would prevent the initial rate or payment, at the time of
the first adjustment, from changing to the rate determined by the
index or formula at consummation, the effect of that rate or payment
cap should be reflected in the disclosures.
iv. Because these transactions involve
irregular payment amounts, an annual
[[Page 62769]]
percentage rate tolerance of \1/4\ of 1 percent applies, in accordance
with Sec. 226.22(a)(3) of the regulation.
v. Examples of discounted variable-rate
transactions include:
A. A 30-year loan for $100,000 with no
prepaid finance charges and rates determined by the Treasury bill
rate plus 2 percent. Rate and payment adjustments are made annually.
Although the Treasury bill rate at the time of consummation is 10
percent, the creditor sets the interest rate for one year at 9
percent, instead of 12 percent according to the formula. The
disclosures should reflect a composite annual percentage rate of
11.63 percent based on 9 percent for one year and 12 percent for 29
years. Reflecting those two rate levels, the payment schedule should
show 12 payments of $804.62 and 348 payments of $1,025.31. The
finance charge should be $266,463.32 and the total of payments
$366,463.32.
B. Same loan as above, except with a 2
percent rate cap on periodic adjustments. The disclosures should
reflect a composite annual percentage rate of 11.53 percent based on
9 percent for the first year, 11 percent for the second year, and 12
percent for the remaining 28 years. Reflecting those three rate
levels, the payment schedule should show 12 payments of $804.62, 12
payments of $950.09, and 336 payments of $1,024.34. The finance
charge should be $265,234.76 and the total of payments $365,234.76.
C. Same loan as above, except with a 7\1/
2\ percent cap on payment adjustments. The disclosures should
reflect a composite annual percentage rate of 11.64 percent, based
on 9 percent for one year and 12 percent for 29 years. Because of
the payment cap, five levels of payments should be reflected. The
payment schedule should show 12 payments of $804.62, 12 payments of
$864.97, 12 payments of $929.84, 12 payments of $999.58, and 312
payments of $1,070.04. The finance charge should be $277,040.60, and
the total of payments $377,040.60.
D. This paragraph does not apply to
variable-rate loans in which the initial interest rate is set
according to the index or formula used for later adjustments but is
not set at the value of the index or formula at consummation. For
example, if a creditor commits to an initial rate based on the
formula on a date prior to consummation, but the index has moved
during the period between that time and consummation, a creditor
should base its disclosures on the initial rate.
* * * * *
18. Pawn Transactions. For a transaction in which a
consumer pledges or sells an item to a creditor in return for a sum
of money, and retains the right to redeem the item for a greater sum
(the redemption price) within a specified period of time:
i. The amount financed is the initial sum paid to the consumer.
ii. The finance charge is the difference between the initial sum
paid to the consumer and the redemption price.
iii. The term of the transaction, for calculating the annual
percentage rate, is the specified period of time agreed to by the
creditor and the consumer.
* * * * *
7. In Supplement I to Part 226, under Section 226.18--Content of
Disclosures, under Paragraph 18(c)(1)(iii)., a new paragraph 2. would
be added to read as follows:
* * * * *
Section 226.18--Content of Disclosures
* * * * *
Paragraph 18(c)(1)(iii).
* * * * *
2. Creditor-imposed charges added to amounts paid to
others. A creditor that offers an item for sale in both cash and
credit transactions sometimes adds an amount (often referred to as
an ``upcharge'') to a fee charged to a consumer by a third party for
a service (such as for a maintenance or service contract) that is
payable in an equal amount in both types of transactions, and
retains that amount. At its option, the creditor may list the total
charge (including the portion retained by it) as an amount paid to
others, or it may choose to reflect the amounts in the manner in
which they were actually paid to or retained by the appropriate
parties.
* * * * *
8. In Supplement I to Part 226, under Section 226.20 Subsequent
Disclosure Requirements, under Paragraph 20(a) Refinancings., paragraph
3. would be revised to read as follows:
* * * * *
Section 226.20--Subsequent Disclosure Requirements
Paragraph 20(a) Refinancings.
* * * * *
3. Variable-rate.
i. If a variable-rate feature was properly
disclosed under the regulation, a rate change in accord with those
disclosures is not a refinancing. For example, no new
disclosures are required when the variable-rate feature is invoked
on a renewable balloon-payment mortgage that was previously
disclosed as a variable-rate transaction. [For example, a
renewable balloon-payment mortgage that was disclosed as a variable-
rate transaction is not subject to new disclosure requirements when
the variable-rate feature is invoked. However, even]
ii. Even if it is not accomplished by the
cancellation of the old obligation and substitution of a new one, a
new transaction subject to new disclosures results if the creditor
either:
A. Increases the rate based on a variable-
rate feature that was not previously disclosed, or
B. Adds a variable-rate feature to the
obligation. A creditor does not add a variable-rate
feature by changing the index of a variable-rate transaction or
substituting a new index for one that no longer exists.
iii. If either of the above
[these] two events occur in a transaction secured by a principal
dwelling with a term longer than one year, the disclosures required
under Sec. 226.19(b) also must be given at that time.
* * * * *
9. In Supplement I to Part 226, a new Subpart E--Special Rules for
Certain Home Mortgage Transactions would be added as follows:
* * * * *
Subpart E--Special Rules for Certain Home Mortgage
Transactions
Section 226.31--General Rules
31(c) Timing of disclosure.
Paragraph 31(c)(1) Disclosures for certain closed-end home
mortgages.
1. Furnishing disclosures. Disclosures are considered furnished
when received by the consumer.
2. Pre-consummation waiting period. A creditor must furnish the
special disclosures at least three business days prior to
consummation. For purposes of Sec. 226.32, ``business day'' means
every calendar day except Sundays and federal legal holidays. For
example, if disclosures are provided on Friday, consummation could
occur any time on Tuesday, the third business day following receipt
of disclosures.
Paragraph 31(c)(1)(i) Change in terms.
1. Redisclosure required. Creditors must provide new disclosures
if the regular payment or any other disclosure required by
Sec. 226.32(c) becomes inaccurate.
Paragraph 31(c)(1)(ii) Telephone disclosures.
1. Telephone disclosures. Disclosures by telephone must be
furnished at least three calendar days prior to consummation.
Paragraph 31(c)(1)(iii) Consumer's waiver of waiting period
before consummation.
1. Modification or waiver. A consumer may modify or waive the
right to the three-day waiting period only after receiving the
disclosures required by Sec. 226.32 and only if the circumstances
meet the criteria for establishing a bona fide personal financial
emergency in Sec. 226.23(e). Whether these criteria are met are
determined by the facts surrounding individual situations. The
impending sale of the consumer's home at foreclosure is one example
of a bona fide personal financial emergency. Each consumer entitled
to the three-day waiting period must sign a written statement for
the waiver to be effective.
Paragraph 31(c)(2) Disclosures for reverse mortgages.
1. Business days. For purposes of providing reverse mortgage
disclosures, ``business day'' means a day on which the creditor's
offices are open to the public for carrying on substantially all of
its business functions.
2. Open-end plans. Disclosures for open-end reverse mortgages
must be provided three business days before the first transaction
under the plan (see Sec. 226.5(b)(1)).
31(d) Basis of disclosures and use of estimates.
1. Redisclosure. When a disclosure required by Sec. 226.32 is
based on and labeled as an estimate and becomes inaccurate due to a
change in terms that occurs before consummation, new disclosures
must be provided.
[[Page 62770]]
Section 226.32--Requirements for Certain Closed-End Home Mortgages
32(a) Coverage.
Paragraph 32(a)(1)(i).
1. Application date. An application is deemed received when it
reaches the creditor in any of the ways applications are normally
transmitted. (See Sec. 226.19(a).) For example, if a borrower
applies for a 10-year loan on September 30 and the creditor
counteroffers with a 7-year loan on October 10, the creditor must
measure the annual percentage rate against the appropriate Treasury
security yield as of August 15. An application transmitted through
an intermediary agent or broker is received when it reaches the
creditor, rather than when it reaches the agent or broker.
2. When fifteenth not a business day. If the 15th day of the
month immediately preceding the application date is not a business
day, the creditor must use the yield as of the business day
immediately preceding the 15th.
3. Calculating annual percentage rates for variable-rate loans
and discount loans. Creditors must use the rules set out in the
commentary to Sec. 226.17(c)(1) in calculating the annual percentage
rate for variable-rate loans (assume the rate in effect at the time
of disclosure remains unchanged) and for discount, premium, and
stepped-rate transactions (which must reflect composite annual
percentage rates).
4. Treasury securities. To determine the yield on a Treasury
security for the annual percentage rate test, creditors may use the
Board's Selected Interest Rates (statistical release H-15) or the
actual auction results. Treasury auctions are held at regular
intervals for the different types of securities. These figures are
published by major financial and metropolitan newspapers, and are
also available from Federal Reserve Banks. Creditors must use the
yield on the security that has the nearest maturity at issuance to
the loan's maturity. For example, if a creditor must compare the
annual percentage rate to Treasury securities with either seven-year
or ten-year maturities, the annual percentage rate for an eight-year
loan is compared with securities that have a seven-year maturity;
the annual percentage rate for a nine-year loan is compared with
securities that have a ten-year maturity. If the loan maturity is
exactly halfway between, the annual percentage rate is compared with
the Treasury security that has the lower yield. For example, if the
loan has a maturity of 20 years and comparable securities have
maturities of 10 years with a yield of 6.501 percent and 30 years
with a yield of 6.906 percent, the annual percentage rate is
compared with 10 percentage points over the yield of 6.501 percent,
the lower of the two yields.
Paragraph 32(a)(1)(ii).
1. Total loan amount. For purposes of the ``points and fees''
test, the total loan amount is calculated by taking the amount
financed, as determined according to Sec. 226.18(b), and deducting
any cost listed in Sec. 226.32(b)(1)(iii) that is both included as
points and fees under Sec. 226.32(b)(1) and financed by the
creditor. For example, if a consumer borrows $10,000, finances a
$300 fee for a creditor-conducted appraisal, and pays $400 in points
at closing, the amount financed according to Sec. 226.18(b) is
$9,900 ($10,000 plus the $300 appraisal fee that is financed by the
creditor, less $400 in prepaid finance charges). The $300 appraisal
fee paid to the creditor is added to other points and fees under
Sec. 226.32(b)(1)(iii). It is deducted from the amount financed
under Sec. 226.18(b) ($9,900) to derive a total loan amount of
$9,600. If the $300 appraisal fee is paid in cash at closing, the
$300 is included in the points and fees calculation. However,
because it is not financed by the creditor, the $300 fee is not part
of the amount financed under Sec. 226.18(b) ($10,000, in this case).
The total loan amount is $9,600 ($10,000, less $400 in prepaid
finance charges).
32(b) Definitions.
Paragraph 32(b)(1)(i).
1. General. Items defined as finance charges under Sec. 226.4(a)
and 226.(4)(b) are included under this paragraph as a component of
the total ``points and fees.'' Items excluded from the finance
charge under other provisions of Sec. 226.4 are not included in the
calculation under this paragraph 32(b)(1)(i), although the fee may
be included in ``points and fees'' under paragraphs 32(b)(1)(ii) and
32(b)(1)(iii).
Paragraph 32(b)(1)(ii).
1. Mortgage broker fees. In determining ``points and fees'' for
purposes of this section, compensation paid by a consumer to a
mortgage broker (directly or through the creditor for delivery to
the broker) is included in the calculation whether or not the amount
is disclosed as a finance charge. Mortgage broker fees that are not
paid by the consumer are not included. Broker fees already included
in the calculation as finance charges under Sec. 226.32(b)(1)(i)
need not be counted again under Sec. 226.32(b)(1)(ii).
2. Example. Section 226.32(b)(1)(iii) defines ``points and
fees'' to include all items listed in Sec. 226.4(c)(7), other than
amounts held for future payment of taxes. An item listed in
Sec. 226.4(c)(7) may be excluded from the ``points and fees''
calculation, however, if 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. For example, a
reasonable fee paid by the consumer to an independent, third-party
appraiser may be excluded from the points and fees calculation
(assuming no compensation is paid to the creditor). A fee paid by
the consumer for an appraisal performed by the creditor must be
included in the calculation, even though the fee may be excluded
from the finance charge if it is bona fide and reasonable in amount.
32(c) Disclosures.
1. Format. The disclosures must be clear and conspicuous but
need not be in any particular type size or typeface, nor presented
in any particular manner. For example, the disclosures need not be a
part of the mortgage.
Paragraph 32(c)(3) Regular payment.
1. General. The regular payment is the amount due from the
borrower at regular intervals, such as monthly, bimonthly,
quarterly, or annually. There must be at least two payments, and the
payments must be in an amount and at such intervals that they fully
amortize the amount owed. If the loan has two payment streams, the
regular payment for each must be disclosed.
2. Discount and premium rates. In disclosing the regular
payment, creditors may rely on the rules set forth in
Sec. 226.18(g). In discounted or premium variable rate transactions
where the creditor sets the initial interest rate and later rate
adjustments are determined by an index or formula, the creditor must
disclose both the payment based on the discount or premium and the
payment that will be in effect thereafter. Additional explanatory
material which does not detract from the required disclosures may
accompany the disclosed amounts. For example, if a monthly payment
is $250 for the first six months and then increases based on an
index and margin, the creditor could use language such as the
following: ``Your regular monthly payment will be $250 for six
months. After six months your regular monthly payment will be based
on an index and margin, which currently would make your payment
$350. Your actual payment at that time may be higher or lower.''
Paragraph 32(c)(4) Variable-rate.
1. Calculating ``worst-case'' payment example. Creditors may
rely on instructions in Sec. 226.19(b)(2)(x) for calculating the
maximum possible increases in rates in the shortest possible
timeframe, based on the face amount of the note (not the
hypothetical loan amount of $10,000 required by
Sec. 226.19(b)(2)(x)). The creditor must provide a maximum payment
for each payment stream, where a payment schedule provides for more
than one payment stream and more than one maximum payment amount is
possible.
32(d) Limitations.
Paragraph 32(d)(1)(i) Balloon payment.
1. Regular periodic payments. The repayment schedule for a
Sec. 226.32 mortgage loan with a term of less than five years must
fully amortize the outstanding principal balance through ``regular
periodic payments.'' A payment is a ``regular periodic payment'' if
it is not more than twice the amount of other payments.
Paragraph 32(d)(2) Negative amortization.
1. Negative amortization. The prohibition against negative
amortization in a mortgage covered by Sec. 226.32 does not preclude
increases in the principal balance that result from events unrelated
to the payment schedule, such as when a consumer fails to obtain
property insurance and the creditor purchases and adds the premium
to the consumer's principal balance.
Paragraph 32(d)(4) Increased interest rate.
1. Variable-rate transactions. The limitation on interest rate
increases does not apply to rate increases resulting from index
changes in a variable-rate transaction, even if the increase occurs
after default by the consumer.
Paragraph 32(d)(5) Rebates.
1. Calculation of refunds. The limitation applies only to
refunds of interest and not to any other charges that are considered
finance charges under Sec. 226.4 (for example, points and fees paid
at closing). The calculation of the refund of interest includes odd-
days interest, whether paid at or after consummation.
[[Page 62771]]
Paragraph 32(d)(6) Prepayment penalties.
1. State law. If using the actuarial method defined by
applicable state law results in a refund that is greater than the
refund calculated by using the method described in section 933(d) of
the Housing and Community Development Act of 1992, creditors must
use the state law definition in determining if a refund is a
prepayment penalty under Sec. 226.32(d)(6).
32(d)(7) Prepayment penalty exception.
Paragraph 32(d)(7)(iii).
1. Calculating debt-to-income ratio. ``Debt'' does not include
amounts paid by the borrower in cash at closing or amounts from the
loan proceeds that directly repay an existing debt. Creditors may
consider combined debt-to-income ratios for transactions involving
joint applicants.
2. Verification. Verification of employment satisfies the
requirement for payment records for employment income.
32(e) Prohibited acts and practices.
Paragraph 32(e)(1) Repayment ability.
1. Determining repayment ability. The information provided to
the creditor in connection with Sec. 226.32(d)(7) may be used to
show that the creditor considered the consumer's income and
obligations before extending the credit. Any expected income can be
considered by the creditor, except equity income that the consumer
would obtain through the foreclosure of a mortgage covered by
Sec. 226.32. For example, a creditor may use information about
income other than regular salary or wages such as gifts, expected
retirement payments, or income from housecleaning or childcare. The
creditor also may use unverified income, so long as the creditor has
a reasonable basis for believing that the income exists.
Paragraph 32(e)(2) Home-Improvement Contracts.
Paragraph 32(e)(2)(i).
1. Joint payees. If a creditor pays a contractor with an
instrument jointly payable to the contractor and the consumer, the
instrument must name as payee each consumer who is primarily
obligated on the note.
Paragraph 32(e)(3) Notice to Assignee.
1. Subsequent sellers or assignors. Any person, whether or not
the original creditor, that sells or assigns a mortgage subject to
this section must furnish the notice of potential liability to the
purchaser or assignee.
2. Format. While the notice of potential liability need not be in
any particular format, the notice must be prominent. Placing it on the
face of the note, such as with a stamp, is one means of satisfying the
prominence requirement.
Section 226.33--Requirements for Reverse Mortgages
33(a) Definition.
1. Nonrecourse transaction. A nonrecourse reverse mortgage
transaction limits the homeowner's liability to the proceeds of the
sale of the home (or any lesser amount specified in the credit
obligation). If a transaction structured as a closed-end reverse
mortgage transaction allows recourse against the consumer, and the
annual percentage rate or the points and fees exceed those specified
under Sec. 226.32(a)(1), the transaction is subject to all the
requirements of Sec. 226.32, including the limitations concerning
balloon payments and negative amortization.
Paragraph 33(a)(2).
1. Default. Default is not defined by the regulation, but rather
by the legal obligation between the parties and state or other law.
2. Definite term or maturity date. To meet the definition of a
reverse mortgage transaction, a creditor cannot require any
principal, interest, or shared appreciation or equity to be due and
payable (other than in the case of default) until after the
consumer's death, transfer of the dwelling, or the consumer ceases
to occupy the dwelling as a principal dwelling. Some state laws
require legal obligations secured by a mortgage to specify a
definite maturity date or term of repayment in the instrument. Such
a provision in an obligation does not violate the definition of a
reverse mortgage transaction if the maturity date or term or
repayment required by state law would in no case operate to cause
maturity prior to the occurrence of any of the events recognized in
the regulation. For example, a provision that allows a reverse
mortgage loan to become due and payable only after the consumer's
death, transfer, or cessation of occupancy, or after a specified
term, but which automatically extends the term for consecutive
periods as long as none of the other events has occurred would meet
the definition of a reverse mortgage transaction.
33(c) Projected total cost of credit.
Paragraph 33(c)(1) Costs to consumer.
1. Costs and charges to consumer--relation to finance charge.
All costs and charges to the consumer that are incurred in a reverse
mortgage transaction are included in the projected total cost of
credit, and thus in the total annual loan cost rates, whether or not
the cost or charge is a finance charge under Sec. 226.4 of the
regulation.
2. Annuity costs. As part of the credit transaction, some
creditors require or permit a consumer to purchase an annuity that
immediately--or at some future time--supplements or replaces the
creditor's payments. The amount paid by the consumer for the annuity
is a cost to the consumer under this section, regardless of whether
the annuity is purchased through the creditor or a third party, or
whether the purchase is mandatory or voluntary.
3. Disposition costs excluded. Disposition costs incurred in
connection with the sale or transfer of the property subject to the
reverse mortgage are not included in the costs to the consumer under
this paragraph. (However, see the definition of Valn in
appendix K to the regulation to determine the effect certain
disposition costs may have on the total annual loan cost rates.)
Paragraph 33(c)(2) Payments to consumer.
1. Payments upon a specified event. The projected total cost of
credit should not reflect contingent payments in which a credit to
the outstanding loan balance or a payment to the consumer's estate
is made upon the occurrence of an event (for example, a ``death
benefit'' payable if the consumer's death occurs within a certain
period of time). Thus, the table of total annual loan cost rates
required under Sec. 226.33(b)(2) would not reflect such payments. At
its option, however, a creditor may put an asterisk, footnote, or
similar type of notation in the table next to the applicable total
annual loan cost rate, and state in the body of the note, apart from
the table, the assumption upon which the total annual loan cost is
made and any different rate that would apply if the contingent
benefit were paid.
Paragraph 33(c)(3) Additional creditor compensation.
1. Shared appreciation or equity. Any shared appreciation or
equity that the creditor is entitled to receive pursuant to the
legal obligation must be included in the total cost of a reverse
mortgage loan. For example, if a creditor agrees to a reduced
interest rate on the transaction in exchange for a portion of the
appreciation or equity that may be realized when the dwelling is
sold, that portion is included in the projected total cost of
credit.
Paragraph 33(c)(4) Limitations on consumer liability.
1. In general. Creditors must include any limitation on the
consumer's liability (such as a nonrecourse limit or an equity
conservation agreement) in the projected total cost of credit. These
limits and agreements protect a portion of the equity in the
dwelling for the consumer or the consumer's estate. For example, the
following contractual provisions are limitations on the consumer's
liability that must be included in the projected total cost of
credit:
i. A limit on the consumer's liability to a certain percentage
of the projected value of the home.
ii. A limit on the consumer's liability to the net proceeds from
the sale of the property subject to the reverse mortgage.
2. Uniform assumption for ``net proceeds'' recourse limitations.
If the legal obligation between the parties does not specify a
percentage for the ``net proceeds'' liability of the consumer, for
purposes of the disclosures required by Sec. 226.33, a creditor must
assume that the costs associated with selling the property will
equal 7 percent of the projected sale price (see the definition of
the Valn symbol under appendix K(b)(6)).
* * * * *
10. In Supplement I to Part 226, a new Appendix K--Total Annual
Loan Cost Rate Computations for Reverse Mortgage Transactions and a new
Appendix L--Assumed Loan Periods for Computations of Total Annual Loan
Cost Rates would be added to read as follows:
* * * * *
Appendix K--Total Annual Loan Cost Rate Computations for
Reverse Mortgage Transactions
1. General. The calculation of total annual loan cost rates
under appendix K is based on the principles set and the estimation
or ``iteration'' procedure used to compute annual percentage rates
under appendix J. Rather than restate this iteration process in
full, the regulation cross-references the procedures found in
appendix J. In other aspects the appendix reflects the special
[[Page 62772]]
nature of reverse mortgage transactions. Special definitions and
instructions are included where appropriate.
(b) Instructions and equations for the total annual loan cost
rate.
(b)(5) Number of unit-periods between two given dates.
1. Assumption as to when transaction begins. The computation of
the total annual loan cost rate is based on the assumption that the
reverse mortgage transaction begins on the first day of the month in
which consummation is estimated to occur. Therefore, fractional
unit-periods (as used under appendix J for calculating annual
percentage rates) are not used.
(b)(9) Assumption for discretionary cash advances.
1. Amount of credit. Creditors should compute the total annual
loan cost rates for transactions involving discretionary cash
advances by assuming that 50 percent of the initial amount of the
credit available under the transaction is advanced at closing or, in
an open-end transaction, when the consumer becomes obligated under
the plan. (For the purposes of this assumption, the initial amount
of the credit is the principle loan amount less any costs to the
consumer under section 226.33(c)(1).)
(b)(10) Assumption for variable-rate reverse mortgage
transactions.
1. Initial discount or premium rate. Where a variable-rate
reverse mortgage transaction includes an initial discount or premium
rate, the creditor should apply the same rules for calculating the
total annual loan cost rate as are applied when calculating the
annual percentage rate for a loan with an initial discount or
premium rate (see the commentary to Sec. 226.17(c)).
(d) Reverse mortgage model form and sample form.
(d)(2) Sample form.
1. General. The ``clear and conspicuous'' standard for reverse
mortgage disclosures does not require disclosures to be printed in
any particular type size. Disclosures may be made on more than one
page, and use both the front and the reverse sides, so long as the
pages constitute an integrated document.
Appendix L--Assumed Loan Periods for Computations of Total Annual Loan
Cost Rates
1. General. The life expectancy figures used in this appendix
are those found in the U.S. Decennial Life Tables for women, as
rounded to the nearest whole year and as published by the U. S.
Department of Health and Human Services. The figures contained in
this appendix must be used by creditors for all consumers (men and
women). This appendix will be revised periodically by the Board to
incorporate revisions to the figures made in the Decennial
Tables.
By order of the Board of Governors of the Federal Reserve
System, acting through the Secretary of the Board under delegated
authority, December 1, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-29711 Filed 12-6-95; 8:45 am]
BILLING CODE 6210-01-P
