[Federal Register Volume 62, Number 23 (Tuesday, February 4, 1997)]
[Proposed Rules]
[Pages 5183-5186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2293]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0960]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Board is publishing for comment proposed revisions to
Regulation Z. The revisions implement an amendment to the Truth in
Lending Act contained in the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 affecting the disclosure of a fifteen-year
historical example of rates and payments. The amendment applies to
variable-rate loans with a term exceeding one year and secured by the
consumer's principal dwelling. The amendment allows creditors either to
disclose a fifteen-year historical example or to give a statement that
the periodic payment may substantially increase or decrease together
with a maximum interest rate and payment based on a $10,000 loan.
DATES: Comments must be received on or before February 28, 1997.
ADDRESSES: Comments should refer to Docket No. R-0960, 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 the Board's
mail room between 8:45 a.m. and 5:15 p.m. weekdays, or to the security
control room at all other times. The mail room and the security control
room are accessible from the courtyard on 20th Street, N.W. (between
Constitution Avenue and C Street) at any time. Comments will be
available for inspection 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: Kyung H. Cho-Miller, Staff Attorney,
Division of Consumer and Community Affairs, Board of Governors of the
Federal Reserve System, at (202) 452-3667 or 452-2412; for users of
Telecommunications Device for the Deaf (TDD) only, contact Dorothea
Thompson at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The purpose of the Truth in Lending Act (TILA) (15 U.S.C. 1601 et
seq.) is to promote the informed use of consumer credit by requiring
disclosures about its terms and cost. The act requires creditors to
disclose the cost of credit as a dollar amount (the finance charge) and
as an annual percentage rate (the APR). Uniformity in creditors'
disclosures is intended to assist consumers in comparison shopping. The
TILA requires additional disclosures for loans secured by a consumer's
home and permits consumers to rescind certain transactions that involve
their principal dwelling. The act is implemented by the Board's
Regulation Z (12 CFR Part 226).
The credit transactions covered by TILA and Regulation Z fall into
two categories--open- or closed-end credit transactions. Open-end
credit is defined as a plan under which the creditor reasonably
contemplates repeated transactions, which prescribes the terms of such
transactions, and which provides for a finance charge that may be
computed from time to time on the outstanding unpaid balance, for
example, credit extended by means of a credit card (Sec. 226.2(a)(20)).
Closed-end credit is defined as any credit arrangement that does not
fall within the definition of open-end credit (Sec. 226.2(a)(10)). A
mortgage loan with a definite maturity date is an example of closed-end
credit.
II. Proposed Regulatory Provisions
Under Regulation Z, the timing and number of disclosures required
for variable-rate loans vary depending on the term and security for the
loan. For all variable-rate loans, disclosures are generally provided
once--prior to consummation. However, if the loan exceeds a term of one
year and is secured by the consumer's principal dwelling, creditors are
required to provide disclosures at three different times--when an
application is received (or when a nonrefundable fee is paid, whichever
occurs earlier), prior to consummation, and subsequent to consummation
when certain rate or payment changes occur. (See Regulation Z, 12 CFR
226.17(b), 18(f), 19, and 20(c).)
Disclosures provided at application for a variable-rate mortgage
include the Board-prescribed Consumer Handbook on Adjustable Rate
Mortgages (or a suitable substitute) and a loan program disclosure for
each variable-rate program the consumer is interested in. The loan
program disclosure consists of twelve separate items as they apply to a
variable-rate program, including information such as the identification
of the index or formula to be used for adjustments and a fifteen-year
historical example of how changes in the index values or formula used
to compute interest rates would have affected the interest rates and
payments on a $10,000 loan.
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 3009) (1996
amendment) amended the TILA by providing creditors the option to give a
statement that the periodic payments may increase or decrease
substantially together with the maximum interest rate and payment
amount for a $10,000 loan in lieu of the fifteen-year historical
example.
The Board proposes to implement the TILA amendment as discussed
below.
III. Section-by-Section Analysis
Subpart A--General
Section 226.19--Certain Residential Mortgage Transactions
19(b) Certain variable-rate transactions. Section 226.19(b)
requires the historical example disclosure for loans exceeding a term
of one year that are secured by a consumer's principal dwelling and
where the APR may increase after consummation (such as when the rate is
tied to an index). The 1996 amendment does not explicitly limit
application of the alternative disclosure to loans that exceed a term
of one year. The Board believes, however, that the amendment was
intended to apply only to loans where the fifteen-year historical
example is currently required, namely loans that exceed one year.
Accordingly, the Board proposes to apply the alternative disclosure
option to variable-rate loans with a term greater than one year and
secured by the consumer's principal dwelling.
The 1996 amendment uses the term ``residential mortgage
transactions,'' a
[[Page 5184]]
term defined in Regulation Z (Sec. 226.2(a)(24)) as credit secured by
the consumer's principal dwelling to finance the acquisition or initial
construction of that dwelling. The Board believes that the Congress did
not intend to limit the flexibility in the 1996 amendment to purchase-
money transactions, but rather intended to provide this option to all
credit transactions secured by the consumer's principal dwelling, given
that the committee report to the 1996 amendment broadly states the
alternative disclosure would be available to lenders in consumer credit
transactions under closed-end plans.
Paragraph 19(b)(2)(viii) currently sets forth the required
historical example based on a $10,000 loan amount and paragraph
19(b)(2)(x) the required disclosure of the maximum interest rate and
payment for a $10,000 loan. To make clear that creditors may elect to
provide either of the two disclosures, paragraph 19(b)(2)(viii) would
be revised. The historical example requirements are contained in
paragraph (19(b)(2)(viii)(A); the substance of paragraph 19(b)(2)(x) is
redesignated as 19(b)(2)(viii)(B). The proposal provides that if the
creditor chooses to disclose the maximum interest rate and payment in
lieu of a historical example, a statement that the periodic payment may
increase or decrease substantially must accompany the rate and payment
amount. The statement requirement may be satisfied by the disclosure in
paragraph 19(b)(2)(vi) if it states for example, ``your monthly payment
can increase or decrease substantially based on annual changes in the
interest rate.''
Regulation Z currently requires creditors to disclose a maximum
interest rate using the most recent interest rate shown in the
historical example. Because the historical example is not required
under the 1996 amendments, creditors instead must use a ``recent''
interest rate as determined by the Board. The Board proposes to require
creditors to calculate the maximum rate and payment based on an initial
rate that was in effect within one year of the disclosure. The Board
believes that a more frequent basis for updating the index or formula
would place more burden on creditors than currently exists under the
regulation and that the Congress intended to reduce burden with the
alternative. Creditors would have to calculate the maximum rate and
payment on an initial rate in effect within one year of the date the
loan program is provided and to disclose the applicable month and year.
For example, using the information in appendix H-14, the disclosure
could state ``the initial interest rate is 9.71 percent, the rate in
effect January 1987.'' The Board solicits comment on whether there are
circumstances where there is consumer benefit in updating the initial
rate more frequently than annually that would outweigh the compliance
burden of producing the disclosures more frequently.
IV. Form of Comment Letters
Comment letters should refer to Docket No. R-0960, 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 February 28, 1997. Normally, the Board
provides a 60-day comment period, in keeping with the Board's policy
statement on rulemaking (44 FR 3957, January 19, 1979). The proposed
regulatory revisions implement changes in the law that provide
regulatory compliance relief. The Board believes that 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.
V. Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 603), the Board's Office of the Secretary has reviewed the
proposed amendments to Regulation Z. Overall, the amendments are not
expected to have any significant impact on small entities. The proposed
regulatory revisions required to implement the 1996 amendment reduce
the number of disclosure required for variable-rate mortgages and ease
compliance by providing creditors with the option of either providing a
fifteen-year historical example or the maximum payment example. A final
regulatory flexibility analysis will be conducted after consideration
of comments received during the public comment period.
VI. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.), the Board has reviewed the proposed amendments under the
authority delegated to the Board by the Office of Management and
Budget. 5 CFR part 1320, Appendix A.1. Comments on the collection or
disclosure of information associated with this regulation should be
sent to the Office of Management and Budget, Paperwork Reduction
Project (7100-0199), Washington, DC 20503, with copies of such comments
to be sent to Mary M. McLaughlin, Chief, Financial Reports Section,
Division of Research and Statistics, Mail Stop 97, Board of Governors
of the Federal Reserve System, Washington, DC 20551.
The respondents are individuals or businesses that regularly offer
or extend consumer credit. The purpose of the TILA and Regulation Z is
to promote the informed use of consumer credit by requiring creditors
to disclose its terms and cost. Records must be retained by creditors
for 24 months. The revisions to the requirements in this proposed
regulation are found in 12 CFR 226.19 and appendix H.
The Board's Regulation Z applies to all types of creditors, not
just state member banks. Under the Paperwork Reduction Act, however,
the Federal Reserve accounts for the paperwork burden associated with
Regulation Z only for state member banks. Any estimates of paperwork
burden for institutions other than state member banks that would be
affected by the proposed amendments are to be provided by the federal
agency or agencies that supervise those lenders.
The proposed changes are not expected to increase the ongoing
annual burden of Regulation Z. There are 1,042 state member banks with
an estimated 5,750 disclosures, 6.5 minutes for each disclosure, for
closed-end credit per state member bank annually. The proportion of
such loans that are mortgages with an adjustable rate is estimated to
be small. If all state member banks chose to eliminate the fifteen-year
historical example from all their disclosures on such loans, the
average time required for each disclosure would decrease by 2 minutes.
The combined annual burden for all state member banks under Regulation
Z is estimated to be 1,975,600 hours; the combined annual cost is
estimated to be $39.5 million (an average of $37,920 per state member
bank). The Federal Reserve estimates that there would be associated
start-up cost of $160 per respondent to eliminate either the fifteen-
year historical example or the maximum payment example.
The disclosures made by creditors to consumers under Regulation Z
are mandatory. Since the Federal Reserve does not collect any
information, no issue of confidentiality arises. Disclosures relating
to specific transactions or accounts are not publicly available.
[[Page 5185]]
Comments are invited on: (a) whether the proposed revised
collection of information is necessary for the proper performance of
the Federal Reserve's functions; including whether the information has
practical utility; (b) the accuracy of the Federal Reserve's estimate
of the burden of the proposed disclosures, including the cost of
compliance; (c) ways to enhance the quality, utility, and clarity of
the information disclosures; and (d) ways to minimize the burden of
information disclosures on respondents, including through the use of
automated techniques or other forms of information technology.
An agency may not collect or sponsor the collection or disclosure
of information, and an organization is not required to collect or
disclose information unless a currently valid OMB control number is
displayed. The OMB control number for Regulation Z is 7100-0199.
List of Subjects in 12 CFR Part 226
Advertising, Federal Reserve System, Mortgages, Reporting and
recordkeeping requirements, Truth in lending.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions to the 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 226.19 would be amended by:
a. Republishing the introductory text of paragraph (b)(2);
b. Revising paragraph (b)(2)(viii);
c. Removing paragraph (b)(2)(x); and
d. Redesignating paragraphs (b)(2)(xi), (b)(2)(xii), and
(b)(2)(xiii) as paragraphs (b)(2)(x), (b)(2)(xi) and (b)(2)(xii)
respectively.
The revisions would read as follows:
Sec. 226.19 Certain residential mortgage and variable-rate
transactions.
* * * * *
(b) Certain variable-rate transactions. * * *
* * * * *
(2) A loan program disclosure for each variable-rate program in
which the consumer expresses an interest. The following disclosures, as
applicable, shall be provided:
* * * * *
(viii) Either of the following:
(A) An historical example, based on a $10,000 loan amount,
illustrating how payments and the loan balance would have been affected
by interest rate changes implemented according to the terms of the loan
program. The example shall be based upon index values beginning in 1977
and be updated annually until a 15-year history is shown. Thereafter,
the example shall reflect the most recent 15 years of index values. The
example shall reflect all significant loan program terms, such as
negative amortization, interest rate carryover, interest rate
discounts, and interest rate and payment limitations, that would have
been affected by the index movement during the period.
(B) The maximum interest rate and payment for a $10,000 loan
assuming the maximum periodic increases in rates and payments under the
program; the initial interest rate and payment for that loan along with
the month and year the rate was in effect (based on a rate in effect
within one year of the date the disclosures are provided); and a
statement that the periodic payment may increase or decrease
substantially depending on changes in the rate.
* * * * *
[(x) The maximum interest rate and payment for a $10,000 loan
originated at the most recent interest rate shown in the historical
example assuming the maximum periodic increases in rates and payments
under the program; and the initial interest rate and payment for that
loan.]
[(xi)] (x) The fact that the loan program contains a demand
feature.
[(xii)] (xi) The type of information that will be provided in
notices of adjustments and the timing of such notices.
[(xiii)](xii) A statement that disclosure forms are available for
the creditor's other variable-rate loan programs.
3. In part 226, Appendix H is amended by revising the three
paragraphs preceding the example in the H-14 Variable-Rate Mortgage
Sample to read as follows:
Appendix H to Part 226--Closed-end Model Forms and Clauses
* * * * *
H-14 Variable-Rate Mortgage Sample
* * * * *
How Your Monthly Payment Can Change
Your monthly payment can [change yearly] increase or
decrease substantially based on annual changes in the interest rate.
For example, on a $10,000, 30-year loan with an initial
interest rate of 9.71 percent the rate [shown in the interest rate
column below for the year 1987] in effect in January 1987, the
maximum amount that the interest rate can rise under this program is
5 percentage points, to 14.71 percent, and the monthly payment can
rise from a first-year payment of $85.62 to a maximum of $123.31 in
the fourth year.
You will be notified in writing 25 days before the
annual payment adjustment may be made. This notice will contain
information about your interest rates, payment amount and loan
balance.
* * * * *
4. In Supplement I to Part 226, under Section 226.19--Certain
Residential Mortgage and Variable-Rate Transactions, under paragraph
19(b) Certain variable-rate transactions, the following amendments
would be made:
a. The heading ``Paragraph 19(b)(2)(viii)'' would be revised to
read ``Paragraph 19(b)(2)(viii)(A);''
b. The heading ``Paragraph 19(b)(2)(x)'' would be revised to read
``Paragraph 19(b)(2)(viii)(B)'' and the paragraph heading and text are
transferred immediately preceding Paragraph 19(b)(2)(ix).
c. Paragraph 1, under the heading ``Paragraph 19(b)(2)(viii)(B)''
would be revised.
d. The heading ``Paragraph 19(b)(2)(xi)'' would be revised to read
``Paragraph 19(b)(2)(x).''
e. The heading ``Paragraph 19(b)(2)(xii)'' would be revised to read
``Paragraph 19(b)(2)(xi).''
f. The heading ``Paragraph 19(b)(2)(xiii)'' would be revised to
read ``Paragraph 19(b)(2)(xii).''
The revisions would read as follows:
Supplement I-Official Staff Interpretations
* * * * *
SUBPART C--CLOSED-END CREDIT
* * * * *
Section 226.19--Certain Residential Mortgage Transactions
* * * * *
19(b) Certain variable-rate transactions
* * * * *
Paragraph 19(b)(2)(viii)(A)
* * * * *
Paragraph 19(b)(2)[(x)](viii)(B)
1. Initial and maximum interest rate and payment. The disclosure
form must state the initial and maximum interest rates and payments
for a $10,000 loan originated at the most recent interest rate
(index value plus margin) [shown in the historical example] in
effect within one year of the date the disclosure is provided. The
month and year the rate is effective must be included in the
disclosure. In calculating the maximum payments under this
paragraph, a creditor should assume that the interest rate increases
[[Page 5186]]
as rapidly as possible under the loan program, and the maximum
payment disclosed should reflect the amortization of the loan during
this period. Thus, in a loan with 2 percentage point annual (and 5
percentage point overall) interest rate limitations or ``caps,'' the
maximum interest rate would be 5 percentage points higher than the
[most recent rate shown in the historical example] initial rate
disclosed. Moreover, the loan would not reach the maximum interest
rate until the fourth year because of the 2 percentage point annual
rate limitations, and the maximum payment disclosed would reflect
the amortization of the loan during this period. If the loan program
includes a discounted or premium initial interest rate, the [most
recent rate shown in the historical example] initial rate should be
adjusted by the amount of the discount or premium reflected
elsewhere in the disclosure for purposes of the requirements of this
paragraph. Furthermore, this disclosure should state the amount by
which the most recent rate has been adjusted. (see the commentary to
Sec. 226.19(b)(2)(viii) regarding disclosure of the amount of a
discount or premium.) The creditor may use an interest rate
applicable to the program that is more recent than the [latest rate
shown in the historical example] initial rate.
* * * * *
Paragraph 19(b)(2)[(xi)](x)
* * * * *
Paragraph 19(b)(2)[(xii)] (xi)
* * * * *
Paragraph 19(b)(2)[(xiii)] (xii)
* * * * *
5. In Supplement I to Part 226, all references to ``section
226.19(b)(2)(viii)'' are revised to read ``section
226.19(b)(2)(viii)(A)''.
6. In Supplement I to Part 226, all references to ``comment
19(b)(2)(viii)'' are revised to read ``comment 19(b)(2)(viii)(A)''.
7. In Supplement I to Part 226, all references to ``section
226.19(b)(2)(x)'' are revised to read ``section
226.19(b)(2)(viii)(B)''.
8. In Supplement I to Part 226, all references to ``comment
19(b)(2)(x)'' are revised to read ``comment 19(b)(2)(viii)(B)''.
9. In Supplement I to Part 226, Appendix H--Closed-End Model Forms
and Clauses, Paragraph 18, would be amended by removing the fourth
through the eighth sentences and adding seven new sentences in their
place to read as follows:
* * * * *
Appendix H--Closed-End Model Forms, and Clauses
* * * * *
18. Sample H-14. * * * It includes information on how the
interest rate is determined and how it can change over time[, and].
Section 226.19(b)(2)(viii) permits creditors to provide either an
historical example or an initial rate and maximum rate and payment
example; both are illustrated in the sample disclosure. The
historical example explains how the monthly payment can change based
on a $10,000 loan amount, payable in 360 monthly installments, based
on historical changes in the values for the weekly average yield on
U.S. treasury securities adjusted to a constant maturity of one
year. Index values are measured as of the first week ending in July
for the years 1977 through 1987. This reflects the requirement that
the index history be based on values for the same date or period
each year beginning with index values for 1977. The [sample
disclosure also illustrates the requirement under
Sec. 226.19(b)(2)(x) that the] initial and the maximum interest
rates and payments [be] are shown for a $10,000 loan originated at
the most recent rate [shown in the historical example] in effect
within one year of the date the loan program is provided along with
the month and year the rate was in effect. In the sample, the loan
is assumed to have an initial interest rate of 9.71 percent (which
was the interest rate in [1987 for the example shown] in effect
January 1987) and to have 2 percentage point annual (and 5
percentage point overall) interest rate limitations or caps. * * *
* * * * *
By order of the Board of Governors of the Federal Reserve
System, January 24, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-2293 Filed 2-3-97; 8:45 am]
BILLING CODE 6210-01-P
