[Federal Register Volume 60, Number 63 (Monday, April 3, 1995)]
[Rules and Regulations]
[Pages 16771-16780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8071]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0863]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
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SUMMARY: The Board is publishing revisions to the official staff
commentary to Regulation Z (Truth in Lending). The commentary applies
and interprets the requirements of Regulation Z. The revisions clarify
regulatory provisions and provide further guidance on issues of general
interest, such as the treatment of various fees and taxes associated
with real estate-secured loans and a creditor's
[[Page 16772]] responsibilities when investigating a claim of the
unauthorized use of a credit card.
DATES: This rule is effective April 1, 1995. Compliance is optional
until October 1, 1995.
FOR FURTHER INFORMATION CONTACT: For Subparts A and B (open-end
credit), Jane Jensen Gell or Obrea Otey Poindexter, Staff Attorneys;
for Subparts A and C (closed-end credit), Kyung Cho-Miller, Sheilah A.
Goodman, W. Kurt Schumacher, Natalie E. Taylor, 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 the hearing impaired only, Dorothea Thompson, Telecommunications
Device for the Deaf, at (202) 452-3544.
SUPPLEMENTARY INFORMATION:
I. Background
The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et
seq.) is to promote the informed use of consumer credit. 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 regulation authorizes
the issuance of official staff interpretations of the regulation. (See
Appendix C to Regulation Z.) The Board has published a staff commentary
to Regulation Z which clarifies existing law and provides guidance to
creditors in applying the regulation to specific transactions
(Supplement I of this part). The Board updates the commentary
periodically as a substitute for individual staff interpretations.
In December, the Board published proposed amendments to the
commentary to Regulation Z (59 FR 64351, December 14, 1994). The Board
received about 150 comments. Nearly 90% were from creditors or their
representatives; the remainder were from consumer advocates, government
officials, and individuals. Overall, commenters generally supported the
proposed amendments. Views were mixed on a number of comments, and some
commenters expressed concerns about issues not addressed in the
proposal. Except as discussed below, the commentary has been revised as
proposed; some technical suggestions or concerns raised by commenters
are addressed. Compliance with the amendments is mandatory on October
1, 1995.
II. Commentary Revisions
Subpart A--General
Section 226.2--Definitions and Rules of Construction
2(a) Definitions
2(a)(17) Creditor
Paragraph 2(a)(17)(i)
Comment 2(a)(17)(i)-8 clarifies the identity of the creditor for
participant loans from an employee savings plan, such as 401(k) plans.
The proposal would have clarified that the plan (and not the plan trust
or trustee) is the creditor for purposes of the TILA.
Some commenters asked for further guidance when the plan's trust or
trustee provide disclosures for the plan's participant loan program.
The comment is revised from the proposal for clarity. Creditors should
look to the plan (not the trust or trustee) to determine whether the
numerical tests for coverage have been met. The person to whom the
participant's loan is initially made payable (whether the plan, the
trust, or the trustee) is responsible for Regulation Z compliance for
participant loans.
Section 226.4--Finance Charge
4(a) Definition
Comment 4(a)-1 is revised as proposed to indicate that section 12
of the Real Estate Settlement Procedures Act (RESPA; 12 U.S.C. 2610)
prohibits creditors from charging fees for preparing TILA disclosure
statements in RESPA-covered transactions. The comments generally
supported the revisions.
The Board received a substantial number of comments relating to the
proposed revision to comment 4(a)-3 on fees charged by third parties.
While most commenters believed that the comment helped clarify the
treatment of third-party fees generally, the examples of settlement
agent charges, mortgage broker fees, and taxes raised a number of
questions.
Creditors had expressed concern about some charges imposed by loan-
closing agents being imputed to the creditor. Some had indicated that
despite the fact that they require the use of a closing agent (and in
limited ways the agent acts on behalf of the creditor), in the modern
mortgage lending environment, creditors do not have control over
certain fees that may be charged to consumers by these entities,
particularly where there is no affiliation between the creditor and the
third party, as is often the case. To address this concern, the
proposed revision to comment 4(a)-3 provided by example that if a
particular fee imposed by a settlement agent is not required or
retained by the creditor, the fee is not a finance charge, even though
the creditor requires use of a third party.
Comment 4(a)-3, which applies to all types of credit extensions
(not just home-purchase or other home-secured loans), is revised in the
final version to clarify the general third-party rule. Upon further
analysis, guidance about fees charged by settlement agents in real
estate-secured transactions is provided in a separate comment 4(a)-4.
This new comment gives the general rule for evaluating settlement agent
fees, and is followed by an example. Comments previously numbered 4(a)-
4 through -6 are now renumbered.
Many commenters also requested further clarification on the example
of mortgage broker fees as a finance charge. The proposed clarification
responded to questions about the existing mortgage broker fee example,
which had been added to address programs offering lower rates and
clearly more favorable terms to borrowers who use the creditor's
affiliated mortgage broker than to borrowers who apply to the creditor
directly. The particular example has been deleted; while the mortgage
broker fee charged in this instance is still considered a finance
charge, it is a much less common practice today, and therefore has
caused confusion. The example of mortgage broker fees is amended to
simply reflect the general rule that a fee is a finance charge if the
creditor retains the fee.
With regard to taxes, some commenters noted that the commentary
addresses in several areas the issue of whether taxes are finance
charges. These commenters requested that all comments referring to
taxes be consolidated into one comment. To ease compliance, the
reference to taxes currently contained in comment 4(a)-3 is removed.
The general rules on the treatment of taxes under the TILA are
contained in renumbered and revised comment 4(a)-7, formerly comment
4(a)-6. The current reference to taxes under 4(e)-1 has been revised
and the current reference to taxes under 4(a)-1 remains unaffected.
4(c) Charges Excluded From the Finance Charge
Paragraph 4(c)(7)
Comment 4(c)(7)-1 clarifies certain real-estate and residential
mortgage [[Page 16773]] transaction costs that are excluded from the
finance charge. In response to commenters' suggestions and upon further
analysis, the comment is revised to state that fees excludable under
this section include not only the cost of the charges excludable under
this section, but also the cost of verifying or confirming information
relating to excludable item itself. The previous language specifically
stated that a credit report fee included the cost of verifying
information in the report. This language was intended to be read only
as an example. It is now more clearly shown as such. Verification or
confirmation fees, like other excludable charges under this section,
must be bona fide and reasonable in amount.
The language addressing lump sum charges has been moved to a new
comment, 4(c)(7)-2. This provision has been adopted as proposed, with
some revisions for clarity. The comment states that a lump sum charge
for conducting or attending a closing (charged, for example, by a
lawyer or a title company) is excluded from the finance charge if the
charge is primarily for services related to items listed in
Sec. 226.4(c)(7) (such as reviewing or completing documents), even if
other incidental services, such as explaining various documents or
disbursing funds for the parties, are performed. This is an exception
to the general rule on the treatment of lump sum fees. Most commenters
supported the proposal as a clarification of the Board's existing
position. Several, however, opposed allowing creditors to exclude fees
for incidental services where the charge is primarily for services
related to items listed in Sec. 226.4(c)(7), believing that this would
result in less accurate disclosures.
Comment 4(c)(7)-3 (proposed as 4(c)(7)-2) has been adopted as
proposed, with minor changes for clarity. The comment states that
charges excludable under Sec. 226.4(c)(7) are those imposed in
connection with the initial decision to grant credit--for example, a
fee to search for tax liens on the property or to determine if flood
insurance is required. The comment also clarifies that fees for
services to be performed during the loan term, for example, to monitor
a consumer's continued compliance with contract provisions, such as
paying property taxes or purchasing flood insurance, are not excludable
under Sec. 226.4(c)(7), regardless of when they are paid. These
recurring administrative fees, paid by the consumer to protect the
creditor's security interest, are finance charges.
Commenters generally agreed with the proposed language. Many,
however, had concerns regarding the treatment of fees paid at closing
for services attributable both to the initial credit decision and to
services to be performed periodically over the term of the loan. For
example, certain flood certification providers charge a consolidated
fee, and it may not be clear to creditors what portion of the fee
relates to the services connected with the initial credit decision. The
final commentary addresses these concerns by specifying that a creditor
may treat the entire charge as a finance charge if the creditor is
uncertain of the portion properly attributable to the finance charge.
Such sum need not be labelled as an estimate.
4(e) Certain Security Interest Charges
Comment 4(e)-1 provides examples of security interest charges that
are and are not excludable as finance charges. The proposal stated that
only recording fees relating to the obligation between the creditor and
the consumer were excludable. Most commenters supported the proposal,
although some were opposed. The comment is adopted as proposed, but
indicates that fees to record documents such as an assignment between a
creditor and a third party are finance charges.
In response to comments and for clarity, the portion of comment
4(e)-1 dealing with taxes has been revised. As discussed above, comment
4(a)-7 (formerly 4(a)-6) contains the general rules on the treatment of
taxes.
Subpart B--Open-End Credit
Section 226.5--General Disclosure Requirements
5(b) Time of Disclosures
5(b)(1) Initial Disclosures
Comment 5(b)(1)-1 provides that initial disclosures must be
provided before the consumer makes the first purchase under an open-end
plan. The comment provides an example to illustrate that when a
consumer makes a purchase and opens an account with a retailer
contemporaneously, initial disclosures must be given to the consumer at
that time.
Comment 5(b)(1)-5 addresses the general rule as it relates to the
timing of initial disclosures when a creditor offers consumers an
option to transfer outstanding balances with other creditors as part of
a preapproval or general solicitation of an open-end credit plan. The
proposal required creditors to comply with initial disclosure
requirements under Sec. 226.6 before the consumer authorized the
balance transfer. The purpose of the proposal was to ensure that
consumers receive initial disclosures before the first transaction is
made under the plan.
Commenters were divided on the proposal. Several commenters
believed that the disclosures required under Sec. 226.5a at the time of
solicitation adequately protect and sufficiently inform the consumer
about the terms of the credit plan. The initial disclosures required
under Sec. 226.6, however, contain important terms that are not
included in the solicitation disclosures. For example, the initial
disclosures give the cash advance APR, information that could be an
important factor in a consumer's decision to authorize a balance
transfer. To ease compliance, card issuers that are subject to the
requirements of Sec. 226.5a may establish procedures that comply with
both sections in a single disclosure statement. Comment 5a-2 provides
guidance on the appropriate format for combined disclosures. For
example, a creditor could provide the Sec. 226.5a disclosures in a
tabular format, along with the additional disclosures required by
Sec. 226.6 outside the table.
Other commenters requested an ``opt-out'' provision that would
allow card issuers to comply by establishing a procedure under which a
consumer could cancel or reverse the balance transfer after receiving
initial disclosures. This option raises concerns about the effect such
an approach would have on a consumer whose balance with a third party
would be paid by the card issuer. It could be difficult to cancel or
reverse the balance transfer transaction.
Commenters suggested that a creditor could comply with the initial
disclosure requirements under Sec. 226.6 by delaying the requested
transfer for a period of time after the initial disclosures are sent.
The delay would ensure that the initial disclosures are received by the
consumer before the transferred balance is applied to the new plan.
Under the revised commentary, a creditor complies with this section if
initial disclosures required under Sec. 226.6 are furnished before a
balance transfer transaction occurs.
Section 226.6--Initial Disclosure Statement
6(b) Other Charges
Comment 6(b)-1 provides guidance for disclosing a termination fee
imposed in an open-end credit plan, as proposed. Commenters generally
supported the disclosure of a termination fee as an ``other charge.''
Some commenters believed disclosing the fee as a finance charge might
better assist consumers in shopping for a credit plan. But this
approach would not facilitate consumer [[Page 16774]] shopping based on
the APR, since the APR in the initial disclosures reflects on finance
charges based on periodic rates, and thus would not be affected by a
termination fee. Furthermore, the consumer would gain little from
receiving an APR (disproportionately high in some cases) on what might
be the last periodic statement for a fee imposed when the consumer
closes the plan.
Section 226.12--Special Credit Card Rules
12(b) Liability of Cardholder for Unauthorized Use
Comments 12(b)-2 and -3 address a card issuer's rights and
responsibilities in responding to a claim of unauthorized use under
Sec. 226.12. Comment 12(b)-2 clarifies that a card issuer is not
required to impose any liability. Comment 12(b)-3 clarifies that a card
issuer wishing to impose liability must investigate claims in a
reasonable manner.
Comment 12(b)-3 lists some of the procedures that may be involved
in the investigation of a claim. The procedures involved in conducting
a reasonable investigation depend on the facts of the situation;
neither a minimum nor a maximum number of steps is required to deem a
particular investigation ``reasonable.'' Some commenters expressed
concern about card issuers advising consumers that they may be required
to appear in a court action. These commenters believed such statements
would possibly be misleading and intimidating, and that in any case a
court action was independent of a card issuer's investigation. The
reference to court appearances has been deleted.
Commenters suggested a variety of other actions that a card issuer
may take, in addition to those proposed, in a reasonable investigation
of a claim of unauthorized use. The list has been expanded to clarify
that a card issuer may request documentation to verify the claim and
may request information regarding the cardholder's knowledge of the
person who allegedly used the card or of that person's authority to do
so.
Many commenters expressed concern that the proposed comment
prohibited a card issuer from denying a claim because a cardholder
refused to comply with any request for cooperation, such as the failure
to submit a signed statement. A card issuer may not automatically deny
a claim based solely on the cardholder's failure or refusal to comply
with a particular request. For example, a cardholder may return an
unsigned questionnaire about the claim but may refuse to submit a sworn
statement. The card issuer may not automatically deny the claim because
it is unaccompanied by an affidavit. However, the comment also makes
clear that the cardholder's failure to cooperate may affect the card
issuer's ability to investigate the claim of unauthorized use. For
example, if the cardholder fails to respond to requests for information
the card issuer can reasonably obtain only from the cardholder, the
comment provides that the card issuer, without further information, may
reasonably terminate its investigation.
Section 226.15--Right of Rescission
15(a) Consumer's Right To Rescind
Paragraph 15(a)(1)
Comments 15(a)(1)-5 and -6 are revised to provide further guidance
on the right to rescind a transaction secured by a consumer's principal
dwelling. (See also comments 23(a)(1)-3 and -4.)
15(d) Effects of Rescission
Comment 15(d)(2)-1 is revised to clarify that if a consumer
rescinds a credit transaction, the creditor must refund any broker fee
that is part of the credit transaction, even though the consumer paid
the fee to the broker rather than to the creditor. (See comment
23(d)(2)-1.)
Section 226.16--Advertising
16(d) Additional Requirements for Home Equity Plans
Comment 16(d)-7 clarifies disclosure requirements for balloon
payments in home equity plan advertisements. The commentary to
Sec. 226.5b(d)(5)(ii) provides that for plans in which a balloon
payment will occur if the consumer makes only the minimum payments, the
disclosure must state that fact. A comparable requirement applies to
advertisements, since the regulatory provisions on treatment of balloon
payments in home equity advertising and in disclosures are generally
parallel.
A number of commenters thought the proposed comment would require a
disclosure about balloon payments in any advertisement for a program in
which a balloon payment occurs, regardless of whether the advertisement
included a ``trigger term.'' The proposed comment was not intended to
impose such a requirement. The comment has been revised to clarify that
disclosure is required only if the advertisement contains a statement
about a minimum periodic payment. The comment also addresses questions
about the required content of the disclosure, including concerns about
the effect of the cross-reference to comment 5b(d)(5)(ii)-3.
Subpart C--Closed-End Credit
Section 226.17--General Disclosures
17(a) Form of Disclosures
Paragraph 17(a)(1)
Comment 17(a)(1)-5 is revised to clarify that a late payment fee on
a single payment loan is information directly related to the segregated
disclosures. The introductory language has been revised to clarify that
the list of directly related information is exhaustive.
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(4)
Section 226.17(c)(4) allows creditors to disregard in the payment
schedule and other calculations any small variations in the first
payment due to a long or short first period. Comment 17(c)(4)-4
clarifies that prepaid finance charges, such as ``odd-days'' or ``per-
diem'' interest paid at or prior to closing, may not be considered as
the first payment on a loan. Thus, ``odd-days'' interest paid at or
prior to closing cannot be considered a part of the payment schedule
and disregarded as a irregularity in disclosing the finance charges in
the payment schedule. The language has been adopted as proposed, with a
minor change made to state that the comment applies to ``pre-paid'' and
``odd-days'' interest, using those terms by name.
Commenters favored treating odd-days or per-diem interest collected
at closing as being the first payment for the purposes of these ``minor
irregularities'' provisions when the consummation date is subject to
change outside of the lender's control (for example, in some escrow-
closing states). If interest collected at, or prior to, consummation
meets the definition of a prepaid finance charge, it must be treated as
such.
The regulation does not require creditors to collect odd-days or
per-diem interest at, or prior to, consummation. If that interest is
collected as part of the first periodic payment, instead, the minor
irregularities provisions of Sec. 226.17(c)(4) would apply to the
extent the amount is within those parameters.
17(f) Early Disclosures
Comment 226.17(f)-1 is revised to clarify that the regulation
requires redisclosure not only if the APR, at consummation, differs
from the earlier disclosed APR by more than the allowable 1/8 or 1/4 of
1 percent [[Page 16775]] tolerance, but also if the early disclosures
were not marked as estimates, and the terms at consummation, other than
the APR, differ from the earlier disclosed terms. Language has been
added to the second example to illustrate the case when terms at
consummation differ from those previously disclosed, where they were
not marked as estimates. To facilitate comparison of the two examples,
the dates in the second example have been changed to those stated in
the first example. A third example has been added to illustrate
circumstances when the regulation does not require redisclosure even
though the consummated terms, including the APR, differ from the
disclosed terms.
Section 226.18--Content of Disclosures
18(c) Itemization of Amount Financed
Paragraph 18(c)(1)(iv)
Comment 18(c)(1)(iv)-2 clarifies disclosure requirements under the
TILA that are affected by new aggregate accounting rules under the Real
Estate Settlement Procedures Act (RESPA; 12 U.S.C. 2601). The comment
provides that creditors may use the amount on line 1002 of the HUD-1 or
HUD-1A, without adjustment, to calculate the prepaid finance charge
under the TILA.
In October 1994, the Department of Housing and Urban Development
(HUD), which implements Real Estate Settlement Procedures Act (RESPA;
12 U.S.C. 2601) through Regulation X (24 CFR Part 3500), amended its
regulation to implement new procedures for calculating the amount
consumers must pay into escrow accounts associated with RESPA-covered
home mortgage loans (59 FR 53890, October 26, 1994, and 60 FR 8812,
February 15, 1995). These procedures are being phased in over time for
existing escrow accounts; all new escrow accounts established on or
after April 24, 1995, must comply with the new procedures. Eventually,
all lenders will be required to use an aggregate accounting method
instead of a single-item method for RESPA transactions. The use of the
aggregate method will affect disclosure requirements under Regulation
Z.
Currently, in calculating the amounts required to be paid into
escrow accounts at closing, most lenders use what is referred to as the
single-item analysis. (Property taxes, insurance, and mortgage
insurance premiums are common examples of escrow items.) Under single-
item analysis, lenders account separately for each item to be collected
at closing and held in escrow.
Under the aggregate accounting method, rather than accounting for
each item separately, the amount for escrow is determined as a whole.
This will make it difficult for a creditor to determine how much of the
aggregate amount is actually allocated to each escrow item.
Regardless of how they collect the funds under RESPA, lenders will
continue to disclose escrow items on the HUD settlement statement using
the single-item analysis. If the amount actually collected at
settlement is affected by the aggregate accounting method, the
settlement statement will reflect the adjustment on a separate line in
the 1000 series (Sec. 3500.8(c)(1), 60 FR 8816, February 15, 1995).
Mortgage insurance premiums, one of the items typically paid at
settlement and included in the escrow account, are listed on line 1002
of the HUD statement. This amount is also a prepaid finance charge
under Regulation Z.
If a creditor is collecting the settlement charges using aggregate
analysis the amount actually collected may be less than the amount
listed on line 1002. Guidance had been requested on what amount lenders
should use as the prepaid finance charge, since the amount disclosed is
not precisely the amount collected. Various alternatives were
considered to ensure as accurate and uniform a disclosure as possible.
Comment 18(c)(1)(iv)-2 provides that creditors may use the amount on
line 1002, without adjustment, to calculate the prepaid finance charge
under the TILA. This approach will ease compliance and provide
consumers with an easily identifiable amount for the mortgage
insurance. While this method does slightly overstate the amount of the
prepaid finance charge for mortgage insurance, nonetheless this method
seems to provide the more accurate and equitable treatment possible
given the problems associated with identifying the amount of any single
item in an aggregate accounting analysis.
Commenters generally supported this approach. Several commenters
requested further clarification on whether the approach is mandatory,
whether the figure used is considered an estimate, and how the
tolerance is applied in this situation. A sentence has been added to
the comment to clarify that the Board is deeming the figure used on the
HUD-1 or HUD-1A as accurate, for purposes of Regulation Z, as long as
that amount is computed in accordance with RESPA. Accordingly, the
figure is not considered an estimate, and the tolerance would apply as
it does for all other figures disclosed under Regulation Z. As long as
the figure disclosed is accurate for purposes of RESPA, the figure is
accurate to determine the finance charge tolerance. The approach is
mandatory for all loans closed using the aggregate accounting method
required by RESPA.
18(d) Finance Charge
Comment 18(d)-2 has been adopted as proposed, with some minor
revisions for clarity. The comment states that although there is no
specific tolerance for the amount financed, an error in that figure--
resulting from an error in the finance charge--does not violate the act
or the regulation provided the finance charge disclosed under
Sec. 226.18(d) is within the permissible tolerance provided in footnote
41 of the regulation. This same interpretation applies to other
disclosures for which the regulation provides no specific tolerance,
such as the total of payments.
Most commenters were in favor of the proposal. Views were split
among those commenters opposing the proposal. Some suggested that a
maximum tolerance of $10 was insufficient to adequately protect
lenders. Several others opposed any tolerance for errors in the amount
financed or the other disclosures that was not currently addressed in
the regulation.
Several commenters pointed out that the language suggested the
error must result from an error in the finance charge ``that
constitutes a part of the amount financed.'' This phrase has been
deleted as unnecessary.
Section 226.19--Certain Residential Mortgage and Variable-Rate
Transactions
19(b) Certain Variable-Rate Transactions
Paragraph 19(b)(2)(vii)
Comment 19(b)(2)(vii)-2, with the exception of a few technical
changes, is adopted as proposed. It states that loans with more than
one way to trigger negative amortization are separate variable-rate
loan programs requiring separate disclosures to the extent they vary
from each other. For example, a loan which provides for monthly
interest rate changes but only annual payment changes and an option for
the borrower to cap the amount of monthly payments whenever the new
payment would exceed the old payment by more than a certain margin,
contains two separate variable-rate programs. Each program may trigger
negative amortization requiring separate disclosures. (See comments
226.19(b)(2)-2 and -3 for a discussion on the definition of a variable-
rate program and consolidation of disclosures for more than one
program.) [[Page 16776]] For the program that gives the borrower an
option to cap monthly payments, the creditor must fully disclose the
rules relating to the payment cap option, including the effects of
exercising it (such as negative amortization occurs and that the
principal balance will increase), except that the disclosure in
Sec. 226.19(b)(2)(viii) need not be given for the option.
Section 226.22--Determination of the Annual Percentage Rate
22(a) Accuracy of the Annual Percentage Rate
Paragraph 22(a)(1)
Comment 22(a)(1)-5 corrects an erroneous footnote reference.
Section 226.23--Right of Rescission
23(a) Consumer's Right To Rescind
Paragraph 23(a)(1)
Comment 23(a)(1)-4, which contains an exception to the ``one
principal dwelling'' rule in comment 23(a)(1)-3, is revised. Under the
exception, a consumer may have, in effect, two principal dwellings for
a time. Even if a consumer is acquiring or constructing a new principal
dwelling, any loan subject to Regulation Z may be rescinded when the
consumer's current principal dwelling secures the loan. A typical
example is a bridge loan.
The proposed comment provided, by example, that a loan secured by
the new home and the current home is a residential mortgage
transaction. While many commenters agreed with the proposal, some
viewed it as a change in the existing interpretation. Upon further
analysis, the proposed example would negate the exception to the
general rule. The existing language of comment 23(a)(1)-4 has been
retained with language and examples added for clarification.
Accordingly, even if a loan is a purchase-money loan secured by the new
home (that is, a residential mortgage transaction) where that loan also
is secured by the consumer's current home, the loan is rescindable.
23(d) Effects of Rescission
Paragraph 23(d)(2)
Comment 23(d)(2)-1 has been revised to clarify that if a consumer
rescinds a credit transaction, the creditor must refund to the consumer
any broker fee that is part of the credit transaction, even though the
consumer paid the fee to the broker rather than to the creditor.
Several commenters expressed concern that the literal language of the
comment could be construed to encompass a fee paid to a broker who did
not participate in the credit transaction. Some commenters wanted
broker fees covered only to the extent that the lender required the use
of a broker. Creditors must refund to the consumer any broker's fee
paid as part of the credit transaction, whether or not the creditor
required the use of a broker.
(23)(f) Exempt Transactions
Paragraph (23)(f)(4)
Comment 23(f)-4 clarifies that Sec. 226.23(f)(2) exempts from the
right of rescission refinancings by original creditors--to whom a
written agreement was originally payable. Therefore, if a consumer
refinances with any other creditor, the general rescission model form
(model form H-8) is the appropriate form to provide to the consumer.
Several commenters opposed the proposal, which they believe would
result in an anomaly. That is, if the original creditor assigns the
mortgage to a third party and the consumer returns to the original
creditor to refinance (with no new advances), the original creditor
would be excused from providing the consumer with the right of
rescission.
In certain circumstances the application of this rule may produce
an anomalous result. Nevertheless, this interpretation is required by
section 103(f) of the act and Sec. 226.2(a)(17) of the regulation,
which define ``creditor'' as ``* * * the person to whom the debt
arising from the consumer credit transaction is initially payable.* *
*''.
The comment also clarifies that in a merger, consolidation or
acquisition, the acquiring creditor would be considered the original
creditor for purposes of the exemption in Sec. 226.23(f)(2). For
example, if two lending institutions merge, the resulting institution
is considered the original creditor for refinancing mortgages
previously originated by either of the two institutions. Accordingly,
the new institution may use model form H-9 if new money is advanced.
(See comment 2(a)(25)-6.)
Appendix J--Annual Percentage Rate Computations for Closed-End Credit
Transactions
As proposed, the Board has revised the 1981 changes paragraph in
the reference section to make a technical correction to the second
sentence.
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.
For the reasons set forth in the preamble, the Board amends 12 CFR
part 226 as follows:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
2. In Supplement I to Part 226, under Section 226.2--Definitions
and Rules of Construction, under Paragraph 2(a)(17)(i)., paragraph 8.
is revised to read as follows:
Supplement I--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.2--Definitions and Rules of Construction
* * * * *
Paragraph 2(a)(17)(i).
* * * * *
8. Loans from employee savings plan. Some employee savings plans
permit participants to borrow money up to a certain percentage of
their account balances, and use a trust to administer the receipt
and disbursement of funds. Unless each participant's account is an
individual plan and trust, the creditor should apply the numerical
tests to the plan as a whole rather than to the individual account,
even if the loan amount is determined by reference to the balance in
the individual account and the repayments are credited to the
individual account. The person to whom the obligation is originally
made payable (whether the plan, the trust, or the trustee) is the
creditor for purposes of the act and regulation.
* * * * *
3. In Supplement I to Part 226, under Section 226.4--Finance
Charge, the following amendments are made:
a. Under 4(a) Definition., paragraphs 1., and 3. are revised,
paragraphs 4., 5., and 6 are redesignated as paragraphs 5., 6., and 7.,
a new paragraph 4. is added, and newly designated paragraph 7. is
revised;
b. Under Paragraph 4(c)(7)., paragraph 1. is revised and new
paragraphs 2. and 3. are added; and
c. Under (4)(e) Certain security interest charges., paragraph 1. is
revised.
The revisions and additions read as follows:
* * * * *
Section 226.4--Finance Charge
4(a) Definition.
1. Charges in comparable cash transactions. Charges imposed
uniformly in cash and credit transactions are not finance charges.
In determining whether an item is a [[Page 16777]] finance charge,
the creditor should compare the credit transaction in question with
a similar cash transaction. A creditor financing the sale of
property or services may compare charges with those payable in a
similar cash transaction by the seller of the property or service.
i. For example, the following items are not finance charges:
A. Taxes, license fees, or registration fees paid by both cash
and credit customers.
B. Discounts that are available to cash and credit customers,
such as quantity discounts.
C. Discounts available to a particular group of consumers
because they meet certain criteria, such as being members of an
organization or having accounts at a particular financial
institution. This is the case even if an individual must pay cash to
obtain the discount, provided that credit customers who are members
of the group and do not qualify for the discount pay no more than
the nonmember cash customers.
D. Charges for a service policy, auto club membership, or policy
of insurance against latent defects offered to or required of both
cash and credit customers for the same price.
ii. In contrast, the following items are finance charges:
A. Inspection and handling fees for the staged disbursement of
construction loan proceeds.
B. Fees for preparing a Truth in Lending disclosure statement,
if permitted by law (for example, the Real Estate Settlement
Procedures Act prohibits such charges in certain transactions
secured by real property).
C. Charges for a required maintenance or service contract
imposed only in a credit transaction.
iii. If the charge in a credit transaction exceeds the charge
imposed in a comparable cash transaction, only the difference is a
finance charge. For example:
A. If an escrow agent is used in both cash and credit sales of
real estate and the agent's charge is $100 in a cash transaction and
$150 in a credit transaction, only $50 is a finance charge.
2. Costs of doing business. * * *
3. Charges by third parties. Charges imposed on the consumer by
someone other than the creditor are finance charges (unless
otherwise excluded) if the creditor requires the use of a third
party as a condition of or incident to the extension of credit, even
if the consumer can choose the third party, or the creditor retains
the charge. For example:
i. The cost of required mortgage insurance, even if the consumer
is allowed to choose the insurer.
ii. A mortgage broker fee, to the extent that the broker shares
the fee with the creditor.
4. Charges by settlement agents. Charges imposed on the consumer
by a settlement agent (such as an attorney, escrow agent, or title
company) are finance charges only if the creditor requires the
particular services for which the settlement agent is charging the
borrower and the charge for those services is not otherwise excluded
from the finance charge. For example, a fee for courier service
charged by a settlement agent to send a document to the title
company or some other party is not a finance charge, provided that
the creditor has not required the use of a courier or retained the
charge.
5. Forfeitures of interest. * * *
6. Treatment of fees for use of automated teller machines. * * *
7. Taxes. i. Generally, a tax imposed by a state or other
governmental body solely on a creditor is a finance charge if the
creditor separately imposes the charge on the consumer.
ii. In contrast, a tax is not a finance charge (even if the tax
is collected by the creditor) if applicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly;
C. On the credit transaction, without indicating which party is
liable for the tax; or
D. On the creditor, if applicable law directs or authorizes the
creditor to pass the tax on to the consumer. (For purposes of this
section, if applicable law is silent as to passing on the tax, the
law is deemed not to authorize passing it on.)
iii. For example, a stamp tax, property tax, intangible tax, or
any other state or local tax imposed on the consumer, or on the
credit transaction, is not a finance charge even if the tax is
collected by the creditor.
iv. In addition, a tax is not a finance charge if it is excluded
from the finance charge by an other provision of the regulation or
commentary (for example, if the tax is imposed uniformly in cash and
credit transactions).
* * * * *
Paragraph 4(c)(7).
1. Real estate or residential mortgage transaction charges. The
list of charges in Sec. 226.4(c)(7) applies both to residential
mortgage transactions (which may include, for example, the purchase
of a mobile home) and to other transactions secured by real estate.
The fees are excluded from the finance charge even if the services
for which the fees are imposed are performed by the creditor's
employees rather than by a third party. In addition, the cost of
verifying or confirming information connected to the item is also
excluded. For example, credit report fees cover not only the cost of
the report, but also the cost of verifying information in the
report. In all cases, charges excluded under Sec. 226.4(c)(7) must
be bona fide and reasonable.
2. Lump sum charges. If a lump sum charged for several services
includes a charge that is not excludable, a portion of the total
should be allocated to that service and included in the finance
charge. However, a lump sum charged for conducting or attending a
closing (for example, by a lawyer or a title company) is excluded
from the finance charge if the charge is primarily for services
related to items listed in Sec. 226.4(c)(7) (for example, reviewing
or completing documents), even if other incidental services such as
explaining various documents or disbursing funds for the parties are
performed. The entire charge is excluded even if a fee for the
incidental services would be a finance charge if it were imposed
separately.
3. Charges assessed during the loan term. Real estate or
residential mortgage transaction charges excluded under
Sec. 226.4(c)(7) are those charges imposed solely in connection with
the initial decision to grant credit. This would include, for
example, a fee to search for tax liens on the property or to
determine if flood insurance is required. The exclusion does not
apply to fees for services to be performed periodically during the
loan term, regardless of when the fee is collected. For example, a
fee for one or more determinations during the loan term of the
current tax lien status or flood insurance requirements is a finance
charge, regardless of whether the fee is imposed at closing, or when
the service is performed. If a creditor is uncertain about what
portion of a fee to be paid at consummation or loan closing is
related to the initial decision to grant credit, the entire fee may
be treated as a finance charge.
* * * * *
(4)(e) Certain security interest charges.
1. Examples.
i. Excludable charges. Sums must be actually paid to public
officials to be excluded from the finance charge under
Sec. 226.4(e)(1). Examples are charges or other fees required for
filing or recording security agreements, mortgages, continuation
statements, termination statements, and similar documents, and
intangible property or other taxes imposed by the state solely on
the creditor and payable by the consumer (if the tax must be paid to
record a security agreement).
ii. Charges not excludable. If the obligation is between the
creditor and a third party (an assignee, for example), charges or
other fees for filing or recording security agreements, mortgages,
continuation statements, termination statements, and similar
documents relating to that obligation are not excludable from the
finance charge under this section.
* * * * *
4. In Supplement I to Part 226, under Section 226.5--General
Disclosure Requirements, under 5(b)(1) Initial disclosures., in
paragraph 1., the first and second sentences are revised, and a new
paragraph 5. is added to read as follows:
* * * * *
Subpart B--Open-End Credit
Section 226.5--General Disclosure Requirements
* * * * *
5(b)(1) Initial disclosures.
1. Disclosure before the first transaction. The rule that the
initial disclosure statement must be furnished ``before the first
transaction'' requires delivery of the initial disclosure statement
before the consumer becomes obligated on the plan. For example, the
initial disclosures must be given before the consumer makes the
first purchase (such as when a consumer opens a credit plan and
makes purchases contemporaneously at a retail store), receives the
first advance, or pays any fees or charges under the plan other than
an application fee or refundable membership fee (see below).* * *
* * * * * [[Page 16778]]
5. Balance transfers. A creditor that solicits the transfer by a
consumer of outstanding balances from an existing account to a new
open-end plan must comply with Sec. 226.6 before the balance
transfer occurs. Card issuers that are subject to the requirements
of Sec. 226.5a may establish procedures that comply with both
sections in a single disclosure statement.
* * * * *
5. In Supplement I to Part 226, under Section 226.6--Initial
Disclosure Statement, under 6(b) Other charges., paragraph 1. is
revised to read as follows:
* * * * *
Section 226.6--Initial Disclosure Statement
* * * * *
6(b) Other charges.
1. General; examples of other charges. Under Sec. 226.6(b),
significant charges related to the plan (that are not finance
charges) must also be disclosed. For example:
i. Late payment and over-the-credit-limit charges.
ii. Fees for providing documentary evidence of transactions
requested under Sec. 226.13 (billing error resolution).
iii. Charges imposed in connection with real estate transactions
such as title, appraisal, and credit report fees (see
Sec. 226.4(c)(7)).
iv. A tax imposed on the credit transaction by a state or other
governmental body, such as a documentary stamp tax on cash advances
(see the commentary to Sec. 226.4(a)).
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.
vi. Automated teller machine (ATM) charges described in comment
4(a)-5 that are not finance charges.
vii. Charges imposed for the termination of an open-end credit
plan.
* * * * *
6. In Supplement I to Part 226, under Section 226.12--Special
Credit Card Provisions, under 12(b) Liability of cardholder for
unauthorized use., new paragraphs 2. and 3. are added to read as
follows:
* * * * *
Section 226.12--Special Credit Card Provisions
* * * * *
12(b) Liability of cardholder for unauthorized use.
* * * * *
2. Imposing liability. A card issuer is not required to impose
liability on a cardholder for the unauthorized use of a credit card;
if the card issuer does not seek to impose liability, the issuer
need not conduct any investigation of the cardholder's claim.
3. Reasonable investigation. If a card issuer seeks to impose
liability when a claim of unauthorized use is made by a cardholder,
the card issuer must conduct a reasonable investigation of the
claim. In conducting its investigation, the card issuer may
reasonably request the cardholder's cooperation. The card issuer may
not automatically deny a claim based solely on the cardholder's
failure or refusal to comply with a particular request; however, if
the card issuer otherwise has no knowledge of facts confirming the
unauthorized use, the lack of information resulting from the
cardholder's failure or refusal to comply with a particular request
may lead the card issuer reasonably to terminate the investigation.
The procedures involved in investigating claims may differ, but
actions such as the following represent steps that a card issuer may
take, as appropriate, in conducting a reasonable investigation:
i. Reviewing the types or amounts of purchases made in relation
to the cardholder's previous purchasing pattern.
ii. Reviewing where the purchases were delivered in relation to
the cardholder's residence or place of business.
iii. Reviewing where the purchases were made in relation to
where the cardholder resides or has normally shopped.
iv. Comparing any signature on credit slips for the purchases to
the signature of the cardholder or an authorized user in the card
issuer's records, including other credit slips.
v. Requesting documentation to assist in the verification of the
claim.
vi. Requesting a written, signed statement from the cardholder
or authorized user.
vii. Requesting a copy of a police report, if one was filed.
viii. Requesting information regarding the cardholder's
knowledge of the person who allegedly used the card or of that
person's authority to do so.
* * * * *
7. In Supplement I to Part 226, under Section 226.15 --Right of
Rescission, the following amendments are made:
a. Under Paragraph 15(a)(1)., paragraph 5. is revised;
b. Under Paragraph 15(a)(1)., paragraph 6. is revised; and
c. Under Paragraph 15(d)(2)., in paragraph 1., the third sentence
is revised.
The additions and revisions read as follows:
* * * * *
Section 226.15--Right of Rescission
* * * * *
Paragraph 15(a)(1).
* * * * *
5. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or
other second home would not be a principal dwelling. A transaction
secured by a second home (such as a vacation home) that is not
currently being used as the consumer's principal dwelling is not
rescindable, even if the consumer intends to reside there in the
future. When a consumer buys or builds a new dwelling that will
become the consumer's principal dwelling within one year or upon
completion of construction, the new dwelling is considered the
principal dwelling if it secures the open-end credit line. In that
case, the transaction secured by the new dwelling is a residential
mortgage transaction and is not rescindable. For example, if a
consumer whose principal dwelling is currently A builds B, to be
occupied by the consumer upon completion of construction, an advance
on an open-end line to finance B and secured by B is a residential
mortgage transaction. Dwelling, as defined in Sec. 226.2, includes
structures that are classified as personalty under state law. For
example, a transaction secured by a mobile home, trailer, or
houseboat used as the consumer's principal dwelling may be
rescindable.
6. Special rule for principal dwelling. Notwithstanding the
general rule that consumers may have only one principal dwelling,
when the consumer is acquiring or constructing a new principal
dwelling, a credit plan or extension that is subject to Regulation Z
and is secured by the equity in the consumer's current principal
dwelling is subject to the right of rescission regardless of the
purpose of that loan (for example, an advance to be used as a bridge
loan). For example, if a consumer whose principal dwelling is
currently A builds B, to be occupied by the consumer upon completion
of construction, a loan to finance B and secured by A is subject to
the right of rescission. Moreover, a loan secured by both A and B
is, likewise, rescindable.
* * * * *
Paragraph 15(d)(2).
1. Refunds to consumer. * * * ``Any amount'' includes finance
charges already accrued, as well as other charges such as broker
fees, application and commitment fees, or fees for a title search or
appraisal, whether paid to the creditor, paid by the consumer
directly to a third party, or passed on from the creditor to the
third party. * * *
* * * * *
8. In Supplement I to Part 226, under Section 226.16--Advertising,
under 16(d) Additional Requirements for Home Equity Plans, a new
paragraph 7. is added to read as follows:
* * * * *
Section 226.16--Advertising
* * * * *
16(d) Additional Requirements for Home Equity Plans.
* * * * *
7. Balloon payment. In some programs, a balloon payment will
occur if only the minimum payments under the plan are made. If an
advertisement for such a program contains any statement about a
minimum periodic payment, the advertisement must also state that a
balloon payment will result (not merely that a balloon payment
``may'' result). (See comment 5b(d)(5)(ii)-3 for guidance on items
not required to be stated in the advertisement, and on situations in
which the balloon payment requirement does not apply.)
* * * * *
9. In Supplement I to Part 226, under Section 226.17--General
Disclosure [[Page 16779]] Requirements, the following amendments are
made:
a. Under Paragraph 17(a)(1)., paragraph 5. is revised;
b. Under Paragraph 17(c)(4)., a new paragraph 4. is added; and
c. Under 17(f) Early disclosures., paragraph 1. is revised.
The revisions and additions read as follows:
* * * * *
Subpart C--Closed-End Credit
Section 226.17--General Disclosure Requirements
* * * * *
Paragraph 17(a)(1).
* * * * *
5. Directly related. The segregated disclosures may, at the
creditor's option, include any information that is directly related
to those disclosures. The following is directly related information:
i. A description of a grace period after which a late payment
charge will be imposed. For example, the disclosure given under
Sec. 226.18(l) may state that a late charge will apply to ``any
payment received more than 15 days after the due date.''
ii. A statement that the transaction is not secured. For
example, the creditor may add a category labelled ``unsecured'' or
``not secured'' to the security interest disclosures given under
Sec. 226.18(m).
iii. The basis for any estimates used in making disclosures. For
example, if the maturity date of a loan depends solely on the
occurrence of a future event, the creditor may indicate that the
disclosures assume that event will occur at a certain time.
iv. The conditions under which a demand feature may be
exercised. For example, in a loan subject to demand after five
years, the disclosures may state that the loan will become payable
on demand in five years.
v. An explanation of the use of pronouns or other references to
the parties to the transaction. For example, the disclosures may
state, ```You' refers to the customer and `we' refers to the
creditor.''
vi. Instructions to the creditor or its employees on the use of
a multiple-purpose form. For example, the disclosures may state,
``Check box if applicable.''
vii. A statement that the borrower may pay a minimum finance
charge upon prepayment in a simple-interest transaction. For
example, when state law prohibits penalties, but would allow a
minimum finance charge in the event of prepayment, the creditor may
make the Sec. 226.18(k)(1) disclosure by stating, ``You may be
charged a minimum finance charge.''
viii. A brief reference to negative amortization in variable-
rate transactions. For example, in the variable-rate disclosure, the
creditor may include a short statement such as ``Unpaid interest
will be added to principal.'' (See the commentary to
Sec. 226.18(f)(1)(iii).)
ix. A brief caption identifying the disclosures. For example,
the disclosures may bear a general title such as ``Federal Truth in
Lending Disclosures'' or a descriptive title such as ``Real Estate
Loan Disclosures.''
x. A statement that a due-on-sale clause or other conditions on
assumption are contained in the loan document. For example, the
disclosure given under Sec. 226.18(q) may state, ``Someone buying
your home may, subject to conditions in the due-on-sale clause
contained in the loan document, assume the remainder of the mortgage
on the original terms.''
xi. If a state or Federal law prohibits prepayment penalties and
excludes the charging of interest after prepayment from coverage as
a penalty, a statement that the borrower may have to pay interest
for some period after prepayment in full. The disclosure given under
Sec. 226.18(k) may state, for example, ``If you prepay your loan on
other than the regular installment date, you may be assessed
interest charges until the end of the month.''
xii. More than one hypothetical example under
Sec. 226.18(f)(1)(iv) in transactions with more than one variable-
rate feature. For example, in a variable-rate transaction with an
option permitting consumers to convert to a fixed-rate transaction,
the disclosures may include an example illustrating the effects on
the payment terms of an increase resulting from conversion in
addition to the example illustrating an increase resulting from
changes in the index.
xiii. The disclosures set forth under Sec. 226.18(f)(1) for
variable-rate transactions subject to Sec. 226.18(f)(2).
xiv. A statement whether or not a subsequent purchaser of the
property securing an obligation may be permitted to assume the
remaining obligation on its original terms.
xv. A late-payment fee disclosure under Sec. 226.18(l) on a
single payment loan.
* * * * *
Paragraph 17(c)(4).
* * * * *
4. Relation to prepaid finance charges. Prepaid finance charges,
including ``odd-days'' or ``per-diem'' interest, paid prior to or at
closing may not be treated as the first payment on a loan. Thus,
creditors may not disregard an irregularity in disclosing such
finance charges.
* * * * *
17(f) Early disclosures.
1. Change in rate or other terms. Redisclosure is required for
changes that occur between the time disclosures are made and
consummation if the annual percentage rate in the consummated
transaction exceeds the limits prescribed in Sec. 226.22(a) (\1/8\
of 1 percentage point in regular transactions and \1/4\ of 1
percentage point in irregular transactions). Redisclosure is also
required, even if the annual percentage rate is within the permitted
tolerance, if the disclosures were not based on estimates in
accordance with Sec. 226.17(c)(2) and labelled as such. To
illustrate:
i. If disclosures are made in a regular transaction on July 1,
the transaction is consummated on July 15, and the actual annual
percentage rate varies by more than \1/8\ of 1 percentage point from
the disclosed annual percentage rate, the creditor must either
redisclose the changed terms or furnish a complete set of new
disclosures before consummation. Redisclosure is required even if
the disclosures made on July 1 are based on estimates and marked as
such;
ii. If disclosures are made on July 1, the transaction is
consummated on July 15, and the finance charge increased by $35 but
the disclosed annual percentage rate is within the permitted
tolerance, the creditor must at least redisclose the changed terms
that were not marked as estimates. (See Sec. 226.18(d) and footnote
41 of this part); and
iii. If early disclosures are marked as estimates and the
disclosed annual percentage rate is within tolerance at
consummation, the creditor need not redisclose the changed terms
(including the annual percentage rate).
* * * * *
10. In Supplement I to Part 226, under Section 226.18--Content of
Disclosures, the following amendments are made:
a. Under Paragraph 18(c)(1)(iv)., a new paragraph 2. is added; and
b. Under 18(d) Finance charge., paragraph 2. is revised.
The additions and revisions read as follows:
* * * * *
Section 226.18--Content of Disclosures
* * * * *
Paragraph 18(c)(1)(iv).
* * * * *
2. Prepaid mortgage insurance premiums. RESPA requires creditors
to give consumers a settlement statement disclosing the costs
associated with mortgage loan transactions. Included on the
settlement statement are mortgage insurance premiums collected at
settlement, which are prepaid finance charges. In calculating the
total amount of prepaid finance charges, creditors should use the
amount for mortgage insurance listed on the line for mortgage
insurance on the settlement statement (line 1002 on HUD-1 or HUD 1-
A), without adjustment, even if the actual amount collected at
settlement may vary because of RESPA's escrow accounting rules.
Figures for mortgage insurance disclosed in conformance with RESPA
shall be deemed to be accurate for purposes of Regulation Z.
18(d) Finance charge.
* * * * *
2. Tolerance. A tolerance for the finance charge is provided in
footnote 41 of this part. When a miscalculation of the amount
financed, or of some other numerical disclosure for which the
regulation provides no specific tolerance, results from an error in
a finance charge, the miscalculated amount financed or other
numerical disclosure does not violate the act or the regulation if
the finance charge disclosed under Sec. 226.18(d) is within the
permissible tolerance under footnote 41 of this part.
* * * * *
11. In Supplement I to Part 226, under Section 226.19--Certain
Residential Mortgage and Variable-Rate Transactions, under paragraph
[[Page 16780]] 19(b)(2)(vii)., paragraph 2. is revised to read as
follows:
Section 226.19--Certain Residential Mortgage and Variable-Rate
Transactions
* * * * *
Paragraph 19(b)(2)(vii).
* * * * *
2. Negative amortization and interest rate carryover. A creditor
must disclose, where applicable, the possibility of negative
amortization. For example, the disclosure might state, ``If any of
your payments is not sufficient to cover the interest due, the
difference will be added to your loan amount.'' Loans that provide
for more than one way to trigger negative amortization are separate
variable-rate programs requiring separate disclosures. (See the
commentary to Sec. 226.19(b)(2) for a discussion on the definition
of a variable-rate loan program and the format for disclosure.) If a
consumer is given the option to cap monthly payments that may result
in negative amortization, the creditor must fully disclose the rules
relating to the option, including the effects of exercising the
option (such as negative amortization will occur and the principal
loan balance will increase); however, the disclosure in
Sec. 226.19(b)(2)(viii) need not be provided.
* * * * *
12. In Supplement I to Part 226, under Section 226.22--
Determination of the Annual Percentage Rate, under Paragraph 22(a)(1).,
in paragraph 5., the reference ``Footnote 45a'' is revised to read
``Footnote 45d''.
13. In Supplement I to Part 226, under Section 226.23--Right of
Rescission, the following amendments are made:
a. Under Paragraph 23(a)(1)., paragraph 3.is revised;
b. Under Paragraph 23(a)(1)., paragraph 4. is revised;
c. Under Paragraph 23(d)(2)., in paragraph 1., the third sentence
is revised; and
d. Under 23(f) Exempt transactions., in paragraph 4., two new
sentences are added following the first sentence, and a new sentence is
added at the end of the paragraph.
The additions and revisions read as follows:
* * * * *
Section 226.23--Right of Rescission
* * * * *
Paragraph 23(a)(1).
* * * * *
3. Principal dwelling. A consumer can only have one principal
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or
other second home would not be a principal dwelling. A transaction
secured by a second home (such as a vacation home) that is not
currently being used as the consumer's principal dwelling is not
rescindable, even if the consumer intends to reside there in the
future. When a consumer buys or builds a new dwelling that will
become the consumer's principal dwelling within one year or upon
completion of construction, the new dwelling is considered the
principal dwelling if it secures the acquisition or construction
loan. In that case, the transaction secured by the new dwelling is a
residential mortgage transaction and is not rescindable. For
example, if a consumer whose principal dwelling is currently A
builds B, to be occupied by the consumer upon completion of
construction, a construction loan to finance B and secured by B is a
residential mortgage transaction. Dwelling, as defined in
Sec. 226.2, includes structures that are classified as personalty
under state law. For example, a transaction secured by a mobile
home, trailer, or houseboat used as the consumer's principal
dwelling may be rescindable.
4. Special rule for principal dwelling. Notwithstanding the
general rule that consumers may have only one principal dwelling,
when the consumer is acquiring or constructing a new principal
dwelling, any loan subject to Regulation Z and secured by the equity
in the consumer's current principal dwelling (for example, a bridge
loan) is subject to the right of rescission regardless of the
purpose of that loan. For example, if a consumer whose principal
dwelling is currently A builds B, to be occupied by the consumer
upon completion of construction, a construction loan to finance B
and secured by A is subject to the right of rescission. A loan
secured by both A and B is, likewise, rescindable.
* * * * *
Paragraph 23(d)(2).
1. Refunds to consumer. * * * ``Any amount'' includes finance
charges already accrued, as well as other charges, such as broker
fees, application and commitment fees, or fees for a title search or
appraisal, whether paid to the creditor, paid directly to a third
party, or passed on from the creditor to the third party. * * *
* * * * *
23(f) Exempt transactions.
* * * * *
4. New advances. * * * The original creditor is the creditor to
whom the written agreement was initially made payable. In a merger,
consolidation or acquisition, the successor institution is
considered the original creditor for purposes of the exemption in
Sec. 226.23(f)(2). * * * The general rescission notice (model form
H-8) is the appropriate form for use by creditors not considered
original creditors in refinancing transactions.
* * * * *
14. In Supplement I to Part 226, under Appendix J, under the
heading References, under 1981 changes:, the last sentence is revised
to read as follows:
* * * * *
Appendix J--Annual Percentage Rate Computations for Closed-End Credit
Transactions
* * * * *
References
* * * * *
1981 changes: * * * Paragraph (b)(5)(vi) has been revised to
permit creditors in single-advance, single-payment transactions in
which the term is less than a year and is equal to a whole number of
months, to use either the 12-month method or the 365-day method to
compute the number of unit-periods per year.
By order of the Board of Governors of the Federal Reserve
System, acting through the Secretary of the Board under delegated
authority, March 28, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-8071 Filed 3-31-95; 8:45 am]
BILLING CODE 6210-01-P
