[Federal Register Volume 61, Number 102 (Friday, May 24, 1996)]
[Proposed Rules]
[Pages 26126-26135]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12685]
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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. 61, No. 102 / Friday, May 24, 1996 / Proposed
Rules
[[Page 26126]]
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0927]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board is publishing for comment proposed revisions to
Regulation Z (Truth in Lending). The revisions would implement the
Truth in Lending Act Amendments of 1995 (1995 Amendments), which
establish new creditor-liability rules for closed-end loans secured by
real property or dwellings consummated on or after September 30, 1995.
The 1995 Amendments create several tolerances for accuracy in
disclosing the amount of the finance charge, and creditors have no
civil or administrative liability if the finance charge or affected
disclosures are within the applicable tolerances. The amendments also
clarify how lenders must disclose certain fees connected with mortgage
loans. In addition, the Board is proposing a new rule regarding the
treatment of fees charged in connection with debt cancellation
agreements, which would be similar to the existing rule regarding
credit insurance premiums, and provide for more uniform treatment of
these fees.
DATES: Comments must be received on or before June 24, 1996.
ADDRESSES: Comments should refer to Docket No. R-0927, 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: James A. Michaels, Senior Attorney, or
Natalie E. Taylor or Michael L. Hentrel, 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
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 credit terms and the cost of credit as a dollar amount (the
finance charge) and as an annual percentage rate (the APR). 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).
II. Proposed Regulatory Provisions
On September 30, 1995, the Congress enacted the Truth in Lending
Act Amendments of 1995 (1995 Amendments), Public Law 104-29, 109 Stat.
271. The 1995 Amendments address the concerns of mortgage lenders
stemming from a 1994 court decision, Rodash v. AIB Mortgage Co., 16
F.3d 1142 (11th Cir. 1994). In that case, the U.S. Court of Appeals
affirmed a district court opinion that allowed a consumer to rescind a
mortgage loan and recover all fees and finance charges that had been
paid, based in part on errors in the creditor's TILA disclosures.
Subsequently, a number of class action lawsuits were filed, involving
thousands of mortgage loans, alleging similar violations and seeking
the remedy of rescission.
In May 1995, in response to mortgage lenders' concerns about their
potential liability for finance charge violations that they viewed as
minor, the Congress enacted a temporary moratorium on such litigation.
The moratorium expired on October 1, 1995, and has been replaced by the
1995 Amendments, which establish new liability rules for loans
consummated both before and after September 30. The Board is proposing
regulations only regarding loans made after September 30, 1995.
Remarks by the Congressional sponsors, made after enactment of the
amendments, reflect their intent to apply the new rules only to closed-
end loans secured by real property or dwellings (including manufactured
or mobile homes). 141 Cong. Rec. E1918 (daily ed. Oct. 11, 1995)
(Statement of Rep. McCollum and Rep. Gonzalez). The 1995 Amendments
contain several provisions, however, stating that they apply to any
consumer credit transaction.
Sections 2 and 3 of the 1995 Amendments amend section 106 of the
TILA, concerning the determination of the finance charge to clarify how
creditors must disclose certain fees connected with mortgage loans. The
proposed regulation would incorporate the statutory amendments without
substantive change. For the most part, the treatment of these fees
under the revised regulation is consistent with existing Board
interpretations. The only significant departure from current law
concerns mortgage broker fees. Under the revised regulation--as
mandated by the statutory amendments--all fees charged by a mortgage
broker would be included in the finance charge unless it is the type of
fee that would be excluded when it is charged by the creditor.
Presently, fees charged by a mortgage broker are only included if the
creditor requires the use of the broker or retains any part of the fee.
Section 3 of the 1995 Amendments provides that disclosures
regarding per diem interest charges will be considered accurate so long
as they are based on information known to the creditor when the
disclosures are prepared, even if the actual charges differ by the time
disclosures are provided to the consumer. This provision would be
incorporated in the regulation without change.
The 1995 Amendments also establish several tolerances for accuracy
in disclosing the finance charge in connection with closed-end loans
secured by real property or dwellings. Previously, the TILA contained
no tolerance for finance charge errors, although Regulation Z contains
a de
[[Page 26127]]
minimis $10 tolerance that will continue to apply to non-mortgage
loans. For mortgage loans, the proposed regulation contains a general
$100 tolerance for finance charge disclosures. Three separate finance
charge tolerances would apply in determining whether a consumer may
rescind a mortgage loan on the grounds that the creditor failed to
provide accurate disclosures; the tolerance varies depending on the
type of loan, amount of credit extended and whether foreclosure
proceedings have been initiated.
Sections 5 and 8 of the 1995 Amendments revise section 125 of the
TILA, which allows consumers to rescind certain mortgage loans and
requires that they receive notice of their rescission rights. Section 5
clarifies that a creditor will not be liable for the form of notice
given to the consumer if the creditor has used the appropriate form
published by the Board or a comparable notice. Section 8 establishes
special rules that apply when the consumer seeks to rescind the loan
after foreclosure proceedings have been initiated. The proposed
regulation would incorporate these provisions.
While the 1995 Amendments do not explicitly amend the existing
tolerance for the annual percentage rate (APR) disclosures, the
proposed regulation would establish additional APR tolerances in
mortgage transactions where the disclosed APR results from a finance
charge that is understated or overstated but within the tolerance
established under the amendments. Accordingly, the APR would be
considered accurate if it results from a finance charge that would also
be considered accurate, even if the disclosed APR falls outside of the
existing TILA tolerance of one-fourth or one-eighth of one percent.
The proposed regulation would also provide an additional tolerance
for mortgage transactions, to avoid creditor liability for a disclosed
APR that is incorrect but is closer to the actual APR than the APR that
would be considered accurate under the new statutory tolerance. The
purpose of this tolerance is to reduce or eliminate litigation over
disclosure errors that are less serious than the errors allowed under
the new finance charge tolerance.
The Board is also proposing amendments to Regulation Z regarding
the treatment of fees charged in connection with debt cancellation
agreements, which provide similar benefits to credit insurance. Public
comment was solicited last fall regarding the treatment of these fees
under the existing rules, in connection with proposed changes to the
Official Staff Commentary (60 FR 62764, December 7, 1995). The
comments, mostly from creditors or their trade associations, expressed
concern about the need under the current rule to determine, on a state-
by-state basis, whether debt cancellation fees should be treated as
insurance premiums. In response to the commenters' concerns, the
proposed interpretation was withdrawn based on the belief that the
issues raised by the commenters would be better addressed in the
context of a regulatory amendment (61 FR 14952, April 4, 1996). The
proposed revisions to Regulation Z would provide uniform treatment for
the disclosure of debt cancellation fees under the TILA, consistent
with the existing rule for credit life, health, and accident insurance.
Finally, the Board is proposing a technical amendment to the
definition of ``business day.'' The revision clarifies that for
purposes of the Board's rules implementing the Home Ownership and
Equity Protection Act of 1994 in Subpart E of Regulation Z, the term
``business day'' has the same meaning as in the rules regarding
rescission.
The Board expects to adopt a final rule in September 1996. Under
the 1995 Amendments, the new rule regarding the treatment of mortgage
broker fees will become effective on September 30, 1996, or 60 days
after the Board issues a final regulation, whichever is earlier. The
other provisions of the 1995 Amendments became effective upon their
enactment on September 30, 1995, and the Board believes that its
proposed changes to Regulation Z do not impose any additional
disclosure requirements beyond those already required under the
statute. Accordingly, the Board expects the proposed revisions to
Regulation Z (other than the provision regarding the treatment of
mortgage broker fees) to become effective 30 days after the final
regulation is issued.
III. Section-by-Section Analysis
Subpart A--General
Section 226.2--Definitions and Rules of Construction
2(a) Definitions
2(a)(6)
The definition of the term ``business day'' in paragraph 2(a)(6)
would be revised to clarify that for purposes of the rules implementing
the Home Ownership and Equity Protection Act of 1994 in Subpart E of
Regulation Z, the term ``business day'' has the same meaning as in the
rescission rules in sections 226.15 and 226.23. The proposed revision
also updates the list of legal public holidays to include the Birthday
of Martin Luther King, Jr.
Section 226.4--Finance Charge
4(a)(1) Charges by Third Parties
Proposed paragraph 4(a)(1) reflects the general rule for third
party charges currently contained in comment 4(a)-3 of the Official
Staff Commentary.
4(a)(2) Special Rule; Closing Agent Charges
Proposed paragraph 4(a)(2) incorporates the substance of section
2(a) of the 1995 Amendments, which excludes from the finance charge,
any fees charged by third-party closing agents provided that the
creditor does not require the imposition of the charge or provision of
the services, and does not retain any portion of the charge. The
amendment is consistent with the existing interpretation in comment
4(a)-4 of the Official Staff Commentary.
4(a)(3) Special Rule; Mortgage Broker Fees
Proposed paragraph 4(a)(3) contains a new rule regarding the
treatment of mortgage broker fees, to implement section 106(a)(6) of
the TILA (15 U.S.C. Sec. 1605(a)(6)). The rule requires that all fees
charged by a mortgage broker and paid by the consumer be included in
the finance charge, without regard to whether the fee is paid to the
broker or to the lender for delivery to the broker. A fee charged by a
mortgage broker will be excluded from the finance charge only if it is
the type of fee that would also be excluded when it is charged by the
creditor. Fees paid by the funding party to a broker as a ``yield
spread premium,'' that are already included in the finance charge,
either as interest or as points, should not be double counted.
4(b) Example of Finance Charge
4(b)(10) Debt Cancellation Fees
Proposed paragraph 4(b)(10) clarifies that fees charged by
creditors in connection with debt cancellation agreements are
considered finance charges. The conditions under which voluntary debt
cancellation fees may be excluded from the finance charge are set forth
in proposed paragraph 4(d)(3).
4(c) Charges Excluded From the Finance Charge
4(c)(7) Real-Estate Related Fees
4(c)(7)(ii)
Paragraph 4(c)(7)(ii) would be revised to implement the amendment
to section 106(e)(2) of the TILA (15 U.S.C. 1605(e)(2)). Formerly, the
TILA excluded fees for preparation of a ``deed, settlement statement,
or other
[[Page 26128]]
documents'' from the finance charge, and the existing regulation
clarified that the exclusion applied only to the preparation of
``similar documents.'' The regulation would be revised to reflect the
new statutory language, which further clarifies that the documents must
be ``loan-related.'' The Board believes that the amendment does not
represent a substantive change from the current rule.
4(c)(7)(iii)
Paragraph 4(c)(7)(iii) would be revised by deleting the reference
to appraisal fees, which would be addressed separately in revised
paragraph 4(c)(7)(iv).
4(c)(7)(iv)
Paragraph 4(c)(7)(iv) would be redesignated as 4(c)(7)(v).
Paragraph 4(c)(7)(iv) would be revised consistent with section
106(e)(5) of the TILA (15 U.S.C. 1605(e)(5)), which clarifies that fees
related to property inspections conducted prior to closing, in order to
check for pest infestation or flood hazards, may be excluded from the
finance charge. The proposed revision is consistent with comment
4(c)(7)-3 of the Official Staff Commentary, which states that excluded
fees are those charged solely in connection with the initial decision
to extend credit. The exclusion does not apply to fees for services to
be performed periodically during the term of the loan.
4(d) Insurance and Debt Cancellation Agreements
The Board proposes to amend Regulation Z by adding a provision
regarding the requirements for disclosing the cost of debt cancellation
agreements, which provide consumers with benefits similar to credit
insurance. Under these agreements, generally in return for a fee, the
creditor agrees to cancel all or part of any remaining debt in the
event of a certain occurrence, such as the death, disability or
unemployment of the consumer or the destruction or theft of goods
securing the loan. The creditor may or may not purchase insurance to
cover this risk.
During the past year, the Board received a significant number of
inquiries concerning the proper treatment of fees paid for a form of
debt cancellation agreement known as guaranteed automobile protection
or ``GAP,'' which is sold in connection with motor vehicle loans. GAP
agreements cancel the remaining debt when the vehicle securing the loan
is stolen or destroyed and the settlement payment made by the
consumer's primary automobile insurance is insufficient to pay the loan
balance.
Debt cancellation fees are not specifically addressed in the
existing regulation; however, under the current rules they would not
receive uniform treatment in Truth in Lending disclosures. For example,
in some states, charges for debt cancellation agreements may be
considered credit insurance premiums. Regulation Z currently allows
such fees to be excluded from the finance charge only if the agreement
insures against the death, disability or loss of income of the borrower
and certain disclosures are provided. On the other hand, fees for GAP
coverage offered by a creditor, which does not protect against the
types of risk covered in sections 226.4(d) (1) and (2), are always
included in the finance charge, as are other types of debt cancellation
fees in states where the agreements are not considered to be insurance.
Pursuant to its authority under section 105 of the TILA, the Board
is proposing a rule that would specifically address debt cancellation
fees and provide uniform treatment for their disclosure. The proposed
rule would exclude debt cancellation fees from the finance charge if
the consumer's purchase of the product is voluntary, the extension of
credit is not conditioned on the purchase, and specified disclosures
are provided to the consumer. This is consistent with the existing rule
for credit life, health, and accident insurance.
4(d)(1) Voluntary Credit Insurance Premiums
Paragraph 4(d)(1)(i) would be modified consistent with existing
comment 4(d)-1 of the Official Staff Commentary, to clarify that a
disclosure that insurance coverage is not required by the creditor must
be in writing.
4(d)(3) Debt cancellation fees
Proposed paragraph 4(d)(3) addresses the treatment of fees paid for
GAP coverage and other debt cancellation agreements. The new provision
closely follows the existing rule pertaining to credit insurance in
section 226.4(d)(1), and would exclude fees for debt cancellation from
the finance charge if the specified conditions are met. The provision
would apply without regard to whether the debt cancellation agreement
is considered to be insurance under state law.
Fees for GAP coverage must be disclosed according to this rule
rather than the provisions in paragraph 4(d)(2). Even though GAP
coverage is triggered by the loss of or damage to property, GAP
agreements do not insure against such loss or damage. Instead they
insure against the credit risk that remains if there is a balance due
on the obligation after traditional property insurance benefits are
exhausted.
4(e) Certain Security-interest Charges
4(e)(3) Taxes on Security Instruments
Proposed paragraph 4(e)(3) would be added consistent with section
106(d)(3) of the TILA (15 U.S.C. Sec. 1605(d)(3)). The new provision
would provide that taxes levied on security instruments or on documents
evidencing indebtedness (``intangible property taxes''), that must be
paid in order to record the security instrument, are excluded from the
finance charge. The 1995 Amendments and proposed rule are consistent
with existing comment 4(e)-1(i) of the Official Staff Commentary.
Subpart C--Closed-End Credit
Section 226.17--General Disclosure Requirements
17(a) Form of Disclosures
17(a)(1)
Footnote 38 in paragraph 17(a)(1) would be revised to include the
disclosures relating to debt cancellation agreements among those that
may be made together with or separately from the other required
disclosures.
17(c) Basis of Disclosures and Use of Estimates
17(c)(2)
Paragraph 17(c)(2) would be redesignated as 17(c)(2)(i) and
modified slightly to reflect the general rule that disclosures must be
based on the best information reasonably available to the creditor at
the time the disclosures are provided to the consumer. This is
consistent with existing comment 17(c)(2)-1 of the Official Staff
Commentary, which would be redesignated as comment 17(c)(2)(i)-1.
17(c)(2)(ii)
Proposed paragraph 17(c)(2)(ii) reflects the 1995 amendment to
section 121(c) of the TILA (15 U.S.C. 1631(c)), which deals with the
disclosure of per diem interest charges collected upon loan
consummation.
Per diem interest, also known as ``odd-days interest,'' is the
interest that will accrue between consummation and the first regularly-
scheduled payment. Previously, the general requirement that TILA
disclosures must be accurate at the time the disclosures are provided
to consumers applied to the disclosure of per diem interest. Under the
1995 Amendments, a disclosure with respect
[[Page 26129]]
to the amount of per diem interest to be collected at consummation will
be considered accurate if the disclosure is based on the information
actually known to the creditor at the time the disclosure is prepared,
even if the actual charges differ by the time disclosures are provided
to the borrower. Creditors should exercise reasonable diligence in
ascertaining the necessary information when preparing disclosures. This
change is intended to eliminate the need to revise the TILA disclosures
if a change in the closing date also changes the amount of the per diem
interest that is paid at closing.
The 1995 Amendments state that this provision applies to ``any
consumer credit transaction,'' although remarks by the Congressional
sponsors suggest that it may have been intended to apply only to
closed-end mortgage loans. The Board proposes to limit the provision to
closed-end loans; the provision does not appear relevant to open-end
lines of credit. Accordingly, the amended regulation would apply the
new rule to any closed-end loan involving per diem interest charges.
Comment is solicited on whether the statutory provision would have any
applicability in open-end credit transactions.
17(f) Early Disclosures
Paragraph 17(f) would be revised for clarification and divided into
paragraphs 17(f) (1) and (2). As revised, the rule more clearly
reflects the interpretation presently contained in comment 17(f)-1 of
the Official Staff Commentary. The revisions also clarify that the
creditor's duty to provide new disclosures is determined by comparing
the APR disclosed under section 226.18(e) with the APR disclosed in the
consummated transaction, even though the actual APR determined in
accordance with Regulation Z may differ.
Also, a new footnote 41 has been added to cross reference and
distinguish this rule from the rule on redisclosures contained in
section 226.19(a)(2). Section 226.19(a)(2), which only applies to
certain residential mortgage transactions, provides additional leeway
by allowing a creditor to make the new disclosures prior to
consummation or settlement, whichever occurs later.
Section 226.18--Content of Disclosures
18(d) Finance Charge
Section 106(f) of the TILA (15 U.S.C. Sec. 1605(f)) establishes a
new tolerance for accuracy in disclosing the finance charge for closed-
end loans secured by real property or dwellings. Section 226.18(d) has
been revised and reorganized to incorporate this change.
18(d)(1) Mortgage Loans
Proposed paragraph 18(d)(1) provides a new finance charge tolerance
applicable to mortgage loans consummated on or after September 30,
1995. For covered transactions, the disclosed finance charge will be
considered accurate if it is understated by $100 or less or if the
finance charge is overstated. The new tolerance applies to the
disclosed finance charge as well as any disclosure affected by the
finance charge, including the annual percentage rate (APR). The effect
of the new finance charge tolerance on the disclosed APR is explained
in more detail in connection with the proposed revisions to section
226.22(a).
18(d)(2) Other Credit
The existing tolerance for finance charge disclosures, currently in
footnote 41, continues to apply to all other closed-end loans
consummated on or after September 30, 1995, and has been moved into
proposed paragraph 18(d)(2).
18(n) Insurance and Debt Cancellation Agreements
Paragraph 18(n) would be revised to include disclosures made in
connection with debt cancellation agreements.
Section 226.19--Certain Residential Mortgage and Variable Rate
Transactions
19(a)(2) Redisclosure Required
Paragraph 19(a)(2) would be revised to make it consistent with the
revision made to section 226.17(f)(2). The change clarifies that a
creditor's duty to provide new disclosures is determined by comparing
the APR that was disclosed under section 226.18(e) with the APR
disclosed in the consummated transaction.
Section 226.22--Determination of Annual Percentage Rate
22(a) Accuracy of Annual Percentage Rate
Paragraph 22(a) would be revised to add new paragraphs (a)(4) and
(a)(5). The TILA contains tolerances for the APR, which are either one-
quarter or one-eighth of one percent, depending on the type of
transaction. These existing statutory APR tolerances are not altered by
the 1995 Amendments, although the amendments create a tolerance for the
finance charge disclosed for mortgage loans as well as ``any disclosure
affected by the finance charge.'' Although this language could be
viewed as applying only to numerical amounts for which there is no
statutory tolerance (such as the amount financed) the Board is of the
view that the 1995 Amendments should be interpreted broadly to include
the APR as one of the ``affected disclosures.'' Otherwise, transactions
in which the disclosed finance charge is misstated but considered
accurate under the new tolerance might be subject to legal challenge
based on the disclosed APR, which seems inconsistent with the
legislative intent. For closed-end loans secured by real property or
dwellings, the proposed revisions would establish two additional
tolerances for accuracy in disclosing the APR when the disclosed
finance charge is within the tolerances established by the 1995
Amendments.
22(a)(4) Mortgage Loans
Proposed paragraph 22(a)(4) provides an additional tolerance for
APR disclosures in transactions where the finance charge is understated
or overstated but is considered accurate under the 1995 Amendments. For
example, in a secured home-improvement loan, if a creditor improperly
omits a $100 fee from the finance charge, the understated finance
charge would now be considered accurate under section 226.18(d)(1).
Under paragraph 22(a)(4), the APR resulting from the understated
finance charge would also be considered accurate, even if the disclosed
APR falls outside of the existing tolerance of one-eighth of one
percent provided under section 107(c) of the TILA. For purposes of
determining a borrower's right to rescind a mortgage loan, an APR
resulting from a finance charge that is considered accurate in
accordance with the applicable rule in section 226.23(g) or (h)(2),
would also be considered accurate.
22(a)(5) Additional Tolerance for Mortgage Loans
In light of the new APR tolerance established under the 1995
Amendments, the Board proposes to adopt an additional APR tolerance
(not required by the statute), in section 226.22(a)(5). The purpose
would be to avoid the anomalous result of imposing liability on a
creditor for a disclosed APR that is incorrect but is closer to the
actual APR than the APR that would be considered accurate under the
statutory tolerance in paragraph 22(a)(4).
For instance, if the omission of a $100 fee from the finance charge
would result in understatement of the finance charge and a disclosed
APR that is understated by one-half of one percent, that APR would be
considered accurate under
[[Page 26130]]
paragraph 22(a)(4), even though it is outside of the existing APR
tolerance of one-eighth of one percent. Under proposed paragraph
22(a)(5), the disclosed APR would also be considered accurate if it is
understated by less than one-half of one percent. Thus, if the actual
APR in this example was 9.00 percent and the $100 omission would result
in an APR of 8.50 that would be considered accurate under paragraph
22(a)(4), a disclosed APR of 8.75 percent would be within the tolerance
in paragraph 22(a)(5). Similarly, if an overstated finance charge
results in an overstated APR, the creditor would not be liable for an
overstatement that is closer to the actual APR.
Under section 105 of the TILA, the Board is authorized to adopt
exceptions to the TILA that will facilitate compliance. Proposed
paragraph 22(a)(5) would treat as accurate, a disclosed APR that is
more accurate than the one resulting from a misstated finance charge
that is considered accurate under the 1995 Amendments. The Board
believes that this rule will facilitate compliance with the TILA, and
prevent disputes over errors that have no greater effect on consumers
beyond the effects already contemplated by the statutory tolerances.
The Board recognizes that this rule might allow a creditor to disclose
an inaccurate APR that is not derived from either the actual or the
disclosed finance charge. Presumably, this situation would not be
common. On balance, however, the Board believes the proposed rule is
consistent with the intent of the 1995 Amendments.
Section 226.23--Right of Rescission
23(b) Notice of Right To Rescind
Proposed paragraph 23(b)(2) implements amendments to TILA section
125 (15 U.S.C. 1635). Under the 1995 amendments, creditors will not be
liable for the form of rescission notice they give to the consumer if
the creditor uses the appropriate form published by the Board or a
comparable notice. Proposed paragraph 23(b)(2) requires proper use of
the model form approved by the Board or a comparable form. Creditors
properly completing the appropriate form in Appendix H would be deemed
in compliance with the regulation for those disclosures. The model form
in Appendix H-9 has been revised slightly to ease compliance and
clarify that it may be used in loan refinancings with the original
creditor, without regard to whether the creditor is the holder of the
note at the time of refinancing.
23(g) Tolerances for Accuracy
Proposed paragraph 23(g) would implement section 106(f)(2) of the
TILA (15 U.S.C. Sec. 1605(f)(2)), which creates separate finance charge
tolerances that apply in determining whether a consumer may rescind a
loan based on inaccurate TILA disclosures. These tolerances are
intended to limit rescission as a remedy available to consumers for
TILA disclosure violations. Under the rescission tolerances, the
finance charge and other disclosures affected by the finance charge are
deemed accurate if they do not vary from the actual finance charge by
more than a certain amount; either one-half of one percent of the total
amount of credit extended, or one percent of the total amount of credit
extended, depending on the type of transaction.
The Board proposes to apply the rescission in section 106(f)(2) in
addition to, rather than in lieu of, the general tolerances in section
106(f)(1). The Board believes that it is unlikely that the Congress
intended to allow the rescission remedy to be invoked when the
disclosures would otherwise be considered accurate under the general
tolerance rules. As a result, when the rescission tolerance based on a
percentage of the amount of credit extended is less than $100, the
general $100 tolerance in section 106(f)(1) would apply. For example,
in the case of a small home improvement loan, the one-half of one
percent rescission tolerance would be less than $100 for loans under
$20,000. In such cases, the $100 tolerance would apply in determining
the borrower's right to rescind the transaction. The Board also
proposes to apply the general rule in section 106(f)(1)(B), that
overstated finance charges of any amount shall be treated as accurate,
as the applicable rule in determining whether a consumer may rescind a
loan.
The Board also proposes in paragraph (g), to interpret the
statutory phrase ``total amount of credit extended'' to be the ``face
amount of the note'' for purposes of calculating the rescission
tolerances. For purposes of paragraph (g)(2), the Board interprets the
statutory language ``no new consolidation'' to mean that this tolerance
applies where the transaction does not involve the consolidation of an
existing loan. The Board believes that this promotes ease of compliance
and consistency.
23(h) Special Rules for Foreclosures
Proposed paragraph 23(h) implements section 125(i)(2) of the TILA
(15 U.S.C. Sec. 1635(i)(2)), which provides special rescission rules
after a foreclosure action has been initiated. The Board interprets
this provision in its context to apply only to closed-end credit; there
does not appear to be any basis for applying it to open-end lines of
credit. For example, the 1995 Amendments allow a consumer to rescind a
loan in foreclosure if a mortgage broker fee was not properly
disclosed; broker fees, however, are not generally associated with
open-end lines of credit.
The special tolerances applicable to foreclosures are intended to
provide additional consumer protection in light of the new finance
charge tolerance that generally limits the consumer's right to rescind
a closed-end mortgage loan. Once foreclosure is initiated, the consumer
may rescind the loan if the finance charge is understated by more than
$35, even though a larger tolerance would apply before foreclosure.
Because open-end home equity loans currently have no tolerance for
finance charge errors, applying the $35 foreclosure tolerance to open-
end loans would result in less protection for consumers. The Board
believes this result would be inconsistent with the intent of the
special foreclosure rules.
Subpart E--Special Rules for Certain Mortgage Transactions
Section 226.31--General Rules
31(d) Basis of Disclosures and Use of Estimates
Paragraph 31(d) would be revised and reorganized, consistent with
the revisions made to section 226.17(c).
31(d)(3)
Proposed paragraph 31(d)(3) would incorporate the new rule
regarding the disclosure of per diem interest charges, consistent with
the proposed amendment in section 226.17(c)(2)(ii). Under the 1995
Amendments, a disclosure with respect to per diem interest charges
collected upon loan consummation will be considered accurate if the
disclosure is based on the information actually known to the creditor
at the time the disclosure is prepared. In preparing disclosures,
creditors are expected to exercise reasonable diligence in ascertaining
the necessary information. Proposed paragraph 31(d)(3) would clarify
that the same rule applies to a disclosure made pursuant to Subpart E
(such as the APR) that would be affected by the per diem interest
charge.
31(g) Accuracy of Annual Percentage Rate
Paragraph 31(g) would be revised to clarify that a creditor may
rely on the
[[Page 26131]]
APR tolerances provided in section 226.22 for purposes of determining
whether a transaction is covered under section 226.32(a) and making the
disclosures required by section 226.32(c).
Appendix H to Part 226--Closed-end Model Forms and Clauses
H-9 Rescission Model Form
The 1995 Amendments clarify that creditors will not be liable for
the form of rescission notice they give to the consumer if the creditor
uses the appropriate form published by the Board or a comparable
notice. In order to ease compliance, model form H-9 has been revised
slightly to clarify that it may be used in loan refinancings with the
original creditor, without regard to whether the original creditor is
the holder of the note at the time of refinancing. Creditors may,
however, continue to use the original forms H-8 and H-9 as appropriate.
Supplement I--Official Staff Interpretations
The proposed revisions would conform the Official Staff Commentary
consistent with the proposed amendments to Regulation Z.
IV. Form of Comment Letters
Comment letters should refer to Docket No. R-0927 and, when
possible, should use a standard Courier typeface with a type size of 10
or 12 characters per inch. This will enable the Board to convert the
text to machine-readable form through electronic scanning, and will
facilitate automated retrieval of comments for review. Also, if
accompanied by an original document in paper form, comments may be
submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any IBM-
compatible DOS-based format.
The comment period ends on June 24, 1996. 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 made by the 1995
Amendments and with the exception of one provision related to mortgage
broker fees, the statutory amendments are already in effect. The
amendments regarding the disclosure of mortgage broker fees will become
effective on or before September 30, 1996. 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
by the new rules.
V. Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. Sec. 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 1995 Amendments
clarify the existing disclosure requirements and ease compliance by
providing new tolerances. Under the existing rules, fees charged in
connection with debt cancellation agreements are generally treated as
finance charges; the proposed rule allows creditors to exclude these
fees from the finance charge if additional disclosures are provided to
the consumer. 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.
Sec. 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 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, Federal Reserve Board Clearance
Officer, 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 226.2, 226.4, 226.17, 226.18, 226.19,
226.22, 226.23, and 226.31.
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 would 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 average frequency of 136,294 responses per bank each year. The
current estimated burden for Regulation Z ranges from 5 seconds per
response (for disclosures prior to opening a credit card account) to 30
minutes per response (for inclusion of information in an
advertisement). The combined annual burden for all state member banks
under Regulation Z is estimated to be 1,975,600 hours; based on an
hourly cost of $20, the combined annual cost is estimated to be $39.5
million (an average of $37,920 per state member bank). Using the same
hourly cost, the Federal Reserve estimates that there would be
associated start up cost in the amount of $160 per respondent for
changing disclosures (or disclosure-producing software) to include
disclosures relating to voluntary debt cancellation agreements.
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.
Comments are invited on: (a) whether the proposed revision to
Regulation Z is necessary for the proper performance of the Federal
Reserve's functions; including whether the disclosed 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, Banks, banking, Consumer protection, Credit, Federal
Reserve System, Mortgages, Reporting and recordkeeping requirements,
Truth in lending.
[[Page 26132]]
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 226.2 would be amended by revising paragraph (a)(6) to
read as follows:
Sec. 226.2 Definitions and rules of construction.
(a) Definitions. * * *
* * * * *
(6) 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. However, for purposes of rescission under Secs. 226.15 and
226.23, and for purposes of Sec. 226.31, the term
means all calendar days except Sundays and the legal public holidays
specified in 5 USC 6103(a), such as New Year's Day, the
Birthday of Martin Luther King, Jr., Washington's Birthday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day.
* * * * *
3. Section 226.4 would be amended as follows:
a. Paragraph (a) would be revised;
b. New paragraph (b)(10) would be added;
c. A heading would be added to paragraph (c)(7), paragraph (c)(7)
introductory text would be republished, paragraphs (c)(7)(ii) and
(c)(7)(iii) would be revised, paragraph (c)(7)(iv) would be
redesignated as paragraph (c)(7)(v) and republished, and a new
paragraph (c)(7)(iv) would be added;
d. Paragraph (d) heading would be revised, paragraph (d)(1) heading
and introductory text and paragraph (d)(1)(i) would be revised, and a
new paragraph (d)(3) would be added.
e. A new paragraph (e)(3) would be added.
The revisions and additions would read as follows:
Sec. 226.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit
as a dollar amount. It includes any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit.
It does not include any charge of a type payable in a comparable cash
transaction.
(1) Charges by third parties. The finance charge
includes fees and amounts charged by someone other than the creditor
(unless otherwise excluded under this section) if the creditor requires
the use of the third party as a condition of or incident to the
extension of credit (even if the consumer can choose the third party)
or retains the charge.
(2) Special rule; closing agent charges. Fees charged by a third-
party closing agent are finance charges only if the creditor requires
the particular services for which the consumer is charged or requires
the imposition of the charge, or retains any portion of the charge.
(3) Special rule; mortgage broker fees. Fees charged by a mortgage
broker (including fees paid directly to the broker or paid to the
creditor for delivery to the broker) are finance charges even if the
creditor does not require the consumer to use a mortgage broker and the
creditor does not retain any portion of the charge.
(b) Example of finance charge * * *
* * * * *
(10) Debt cancellation fees. Premiums or other charges
paid in connection with a debt cancellation agreement, without regard
to whether the agreement is insurance under applicable law.
(c) Charges excluded from the finance charge. * * *
* * * * *
(7) Real-estate related fees. The following
fees in a transaction secured by real property or in a residential
mortgage transaction, if the fees are bona fide and reasonable in
amount:
* * * * *
(ii) Fees for preparing loan-related documents, such
as deeds, mortgages, and reconveyance[,]
or settlement [, and similar] documents.
(iii) Notary [, appraisal,] and credit report fees.
(iv) Property appraisal fees, including fees related to
any pest infestation or flood hazard inspections conducted prior to
closing.
(v) Amounts required to be paid into escrow
or trustee accounts if the amounts would not otherwise be included in
the finance charge.
* * * * *
(d) Insurance and debt cancellation
agreements. (1) Voluntary credit insurance
premiums. Premiums for credit life, accident, health or loss
of income insurance may be excluded from the finance charge if the
following conditions are met:
(i) The insurance coverage is not required by the creditor, and
this fact is disclosed in writing.
* * * * *
(3) Debt cancellation fees. Charges or premiums paid in
connection with an agreement that provides for cancellation of all or
part of the debtor's liability for amounts exceeding the value of the
collateral securing the debtor's obligation, or in connection with any
other debt cancellation agreement, may be excluded from the finance
charge, without regard to whether the agreement is insurance, if the
following conditions are met:
(i) The agreement or coverage is not required by the creditor, and
this fact is disclosed in writing.
(ii) The fee or premium for the initial term of coverage is
disclosed. If the term of coverage is less than the term of the credit
transaction, the term of coverage also shall be disclosed. The fee or
premium may be disclosed on a unit-cost basis only in open-end credit
transactions, closed-end credit transactions by mail or telephone under
226.17(g), and certain closed-end credit transactions involving an
insurance plan that limits the total amount of indebtedness subject to
coverage.
(iii) The consumer signs or initials an affirmative written request
for the coverage after receiving the disclosures specified in this
paragraph. Any consumer in the transaction may sign or initial the
request.
(e) Certain security interest charges. * * *
* * * * *
(3) Taxes on security instruments. Any tax levied on
security instruments or on documents evidencing indebtedness if the
payment of such taxes is a precondition for recording the instrument
securing the evidence of indebtedness.
* * * * *
4. Section 226.17 would be amended as follows:
a. In paragraph (a)(1), footnote 38 would be revised;
b. Paragraph (c)(2) would be redesignated as paragraph (c)(2)(i)
and revised, and paragraph (c)(2)(ii) would be added;
c. Paragraph (f) would be revised.
The revisions and additions would read as follows:
[[Page 26133]]
Sec. 226.17 General disclosure requirements.
(a) Form of disclosures. (1) * * * \38\ * * *
---------------------------------------------------------------------------
\38\ The following disclosures may be made together
with or separately from other required
disclosures: the creditor's identity under Sec. 226.18(a), the
variable rate example under Sec. 226.18(f)(4), insurance
or debt cancellation agreements under
Sec. 226.18(n), and certain security interest charges under
Sec. 226.18(o).
---------------------------------------------------------------------------
* * * * *
(c) Basis of disclosures and use of estimates. * * *
(2)(i) If any information necessary for an
accurate disclosure is unknown to the creditor, it shall make the
disclosure based on the best information reasonably available
at the time the disclosure is provided to the
consumer, and shall state that the disclosure is an
estimate.
(ii) For a transaction in which a portion of the
interest is determined on a per diem basis and collected upon
consummation, any disclosure with respect to the per diem interest
shall be deemed to be accurate if the disclosure is based on
information actually known to the creditor at the time that the
disclosure documents are prepared for consummation of the
transaction.
* * * * *
(f) Early disclosures. If disclosures are given before the date of
consummation of a transaction and a subsequent event makes them
inaccurate, before consummation \39\ the creditor
shall disclose [the changed terms before consummation]
---------------------------------------------------------------------------
\39\ For certain residential mortgage transactions,
Sec. 226.19(a)(2) permits redisclosure no later than consummation or
settlement, whichever is later.
---------------------------------------------------------------------------
(1) any changed term that was not based on an estimate
in accordance with Sec. 226.17(c)(2) and labelled as such;
(2) all changed terms, if the annual percentage rate
disclosed in the consummated transaction varies
from the annual percentage rate disclosed under Sec. 226.18(e) by more
than \1/8\ of 1 percentage point in a regular transaction, or more than
\1/4\ of 1 percentage point in an irregular transaction, as defined in
Sec. 226.22(a).
* * * * *
5. Section 226.18 would be amended as follows:
a. Footnote 41 in paragraph (d) would be removed and paragraph (d)
introductory text would be republished;
b. New paragraphs (d)(1) and (d)(2) would be added;
c. Footnotes 39 and 40 in paragraph (c) would be redesignated as
footnotes 40 and 41 respectively; and
d. Paragraph (n) would be revised.
The revisions and additions would read as follows:
Sec. 226.18 Content of disclosures.
* * * * *
(d) Finance charge. The finance charge, using that term, and a
brief description such as ``the dollar amount the credit will cost
you.'' [\41\]
---------------------------------------------------------------------------
[\41\ The finance charge shall be considered accurate if it is
not more than $5 above or below the exact finance charge in a
transaction involving an amount financed of $1,000 or less, or not
more than $10 above or below the exact finance charge in a
transaction involving an amount financed of more than $1,000.]
---------------------------------------------------------------------------
(1) Mortgage loans. In a transaction secured by real
property or a dwelling, the disclosed finance charge and other
disclosures affected by the disclosed finance charge (such as the
amount financed and the annual percentage rate) shall be treated as
accurate if the amount disclosed as the finance charge:
(i) is greater than the amount required to be disclosed; or
(ii) is understated by no more than $100.
(2) Other credit. In any other transaction, the amount disclosed as
the finance charge shall be treated as accurate if it is not more than
$5 above or below the amount required to be disclosed in a transaction
involving an amount financed of $1,000 or less, or not more than $10
above or below the amount required to be disclosed in a transaction
involving an amount financed of more than $1,000.
* * * * *
(n) Insurance and debt cancellation
agreements. The items required by Sec. 226.4(d) in order to
exclude certain insurance premiums and debt cancellation
fees from the finance charge.
* * * * *
6. Section 226.19 would be amended by revising paragraph (a)(2) to
read as follows:
Sec. 226.19 Certain residential mortgage and variable-rate
transactions.
(a) * * *
(2) Redisclosure required. If the annual percentage rate
disclosed in the consummated transaction varies
from the annual percentage rate disclosed under Sec. 226.18(e) by more
than \1/8\ of 1 percentage point in a regular transaction or more than
\1/4\ of 1 percentage point in an irregular transaction, as defined in
Sec. 226.22, the creditor shall disclose the changed terms no later
than consummation or settlement.
* * * * *
7. Section 226.22 would be amended by adding new paragraphs (a)(4)
and (a)(5) to read as follows:
Sec. 226.22 Determination of annual percentage rate.
(a) Accuracy of annual percentage rate. * * *
* * * * *
(4) Mortgage loans. If the annual percentage rate
disclosed in a transaction secured by real property or a dwelling
varies from the actual rate determined in accordance with paragraph
(a)(1) of this section, the disclosed annual percentage rate shall be
considered accurate if:
(i) It is the rate resulting from the disclosed finance charge; and
(ii) The disclosed finance charge would be considered accurate
under Sec. 226.18(d)(1) or Sec. 226.23 (g) or (h).
(5) Additional tolerance for mortgage loans. In a transaction
secured by real property or a dwelling, if the disclosed finance charge
is calculated incorrectly but considered accurate under
Sec. 226.18(d)(1) or Sec. 226.23 (g) or (h), the disclosed annual
percentage rate shall be considered accurate:
(i) If the disclosed finance charge is understated, and the
disclosed annual percentage rate is also understated but is closer to
the actual annual percentage rate than the rate that would be
considered accurate under paragraph (a)(4) of this section;
(ii) If the disclosed finance charge is overstated, and the
disclosed annual percentage rate is also overstated but is closer to
the actual annual percentage rate than the rate that would be
considered accurate under paragraph (a)(4) of this section.
* * * * *
8. Section 226.23 would be amended as follows:
a. Paragraphs (b)(1) through (b)(5) would be redesignated as
paragraphs (b)(1)(i) through (b)(1)(v);
b. Paragraph (b) would be redesignated as paragraph (b)(1) and
republished;
c. A new paragraph (b)(2) would be added; and
d. New paragraphs (g) and (h) would be added.
The revisions and additions would read as follows:
Sec. 226.23 Right of rescission.
* * * * *
(b) (1) Notice of right to rescind. In a
transaction subject to rescission, a creditor shall deliver two copies
of the notice of the right to rescind to each consumer entitled to
rescind. The notice shall be on a separate document that identifies the
transaction and shall clearly and conspicuously disclose the following:
[[Page 26134]]
[(1)](i) The retention or acquisition of a
security interest in the consumer's principal dwelling.
[(2)](ii) The consumer's right to rescind the
transaction.
[(3)](iii) How to exercise the right to
rescind, with a form for that purpose, designating the address of the
creditor's place of business.
[(4)](iv) The effects of rescission, as
described in paragraph (d) of this section.
[(5)](v) The date the rescission period
expires.
(2) Proper form of notice. To satisfy the disclosure
requirements of paragraph (b)(1) of this section, the creditor shall
provide a notice that conforms with the model forms in Appendix H of
this part, as appropriate, or a notice that is substantially
similar.
* * * * *
(g) Tolerances for accuracy. (1) Except as provided in
paragraphs (g)(2) and (h)(2) of this section, the finance charge and
other disclosures affected by the finance charge (such as the amount
financed and the annual percentage rate) shall be considered accurate
for purposes of this section if the disclosed finance charge is:
(i) Greater than the amount required to be disclosed; or
(ii) Understated by no more than \1/2\ of one percent of the face
amount of the note or $100, whichever is greater.
(2) In a refinancing of a residential mortgage transaction (other
than a transaction covered by Sec. 226.32) with a creditor where no new
money is advanced and there is no consolidation of an existing loan,
the finance charge and other disclosures affected by the finance charge
(such as the amount financed and the annual percentage rate) shall be
considered accurate for purposes of this section if the disclosed
finance charge is:
(i) Greater than the amount required to be disclosed; or
(ii) Understated by no more than one percent of the face amount of
the note or $100, whichever is greater.
(h) Special rules for foreclosures--(1) Right to rescind. After the
initiation of a foreclosure on the consumer's principal dwelling which
secures the credit obligation, the consumer shall have the right to
rescind the transaction if:
(i) A mortgage broker fee was not included in the finance charge,
if required by the laws and regulations in effect at the time of
consummation; or
(ii) The creditor did not provide the appropriate form of notice,
in accordance with Appendix H of this part, or a substantially similar
notice.
(2) Tolerance for disclosures. After the initiation of foreclosure,
the finance charge and other disclosures affected by the finance charge
(such as the amount financed and the annual percentage rate) shall be
considered accurate for purposes of this section if the disclosed
finance charge is:
(i) Greater than the amount required to be disclosed; or
(ii) Understated by no more than $35.
9. Section 226.31 would be amended by revising paragraphs (d) and
(g) as follows:
Sec. 226.31 General rules.
* * * * *
(d) Basis of disclosures and use of estimates.
(1) Disclosures shall reflect the terms of the
legal obligation between the parties.
(2) If any information necessary for accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at
the time the disclosures are provided and shall
state clearly that the disclosure is an estimate.
(3) For a transaction in which a portion of the interest
is determined on a per diem basis and collected upon consummation, any
disclosure with respect to the per diem interest shall be deemed to be
accurate if the disclosure is based on the information actually known
to the creditor at the time that the disclosure documents are prepared
for consummation of the transaction.
* * * * *
(g) Accuracy of annual percentage rate. For purposes of
Sec. 226.32, the annual percentage rate shall be considered
accurate, and may be used in determining whether a
transaction is covered by Sec. 226.32, if it is accurate
according to the requirements and within the tolerances set forth in
Sec. 226.22.
10. In Part 226, Appendix H is amended by revising the entry for H-
9 Rescission Model Form in the contents listing at the beginning of the
appendix and the H-9 Rescission Model Form to read as follows:
Appendix H to Part 226--Closed-end Model Forms and Clauses
* * * * *
H-9--Rescission Model Form (Refinancing[)] with Original
Creditor) (Sec. 226.23)
* * * * *
H-9--Rescission Model Form (Refinancing[)] with Original
Creditor)
Notice of Right To Cancel
Your Right To Cancel
You are entering into a new transaction to increase the amount
of credit provided to you. [We acquired a [mortgage/lien/security
interest] [on/in] your home under the original transaction and will
retain that [mortgage/lien/security interest] in the new
transaction.] Your home is the security for this new
transaction. You have a legal right under federal law to
cancel the new transaction, without cost, within three business days
from whichever of the following events occurs last:
(1) The date of the new transaction, which is
____________________; or
(2) The date you received your new Truth in Lending disclosures;
or
(3) The date you received this notice of your right to cancel.
If you cancel the new transaction, your cancellation will apply
only to the increase in the amount of credit. It will not affect the
amount that you presently owe or the [mortgage/lien/security
interest] we already have [on/in] your home. If you cancel, the
[mortgage/lien/security interest] as it applies to the increased
amount is also cancelled. Within 20 calendar days after we receive
your notice of cancellation of the new transaction, we must take the
steps necessary to reflect the fact that our [mortgage/lien/security
interest] [on/in] your home no longer applies to the increase of
credit. We must also return any money you have given to us or anyone
else in connection with the new transaction.
You may keep any money we have given you in the new transaction
until we have done the things mentioned above, but you must then
offer to return the money at the address below. If we do not take
possession of the money within 20 calendar days of your offer, you
may keep it without further obligation.
How To Cancel
If you decide to cancel the new transaction, you may do so by
notifying us in writing, at (creditor's name and business address).
You may use any written statement that is signed and dated by
you and states your intention to cancel, or you may use this notice
by dating and signing below. Keep one copy of this notice because it
contains important information about your rights.
If you cancel by mail or telegram, you must send the notice no
later than midnight of ____________________ (date) (or midnight of
the third business day following the latest of the three events
listed above).
If you send or deliver your written notice to cancel some other
way, it must be
[[Page 26135]]
delivered to the above address no later than that time.
I Wish to Cancel
----------------------------------------------------------------------
Consumer's Signature
----------------------------------------------------------------------
Date
Supplement I--[Amended]
11. In Supplement I to Part 226, under Section 226.4--Finance
Charge, under 4(a) Definition, paragraph 3. ii. would be removed.
12. In Supplement I to Part 226, under Section 226.17--General
Disclosure Requirements, under 17(c) Basis of disclosures and use of
estimates, Paragraph 17(c)(2) would be redesignated as Paragraph
17(c)(2)(i):
Supplement I--Official Staff Interpretations
* * * * *
Section 226.17--General Disclosure Requirements
* * * * *
17(c) Basis of Disclosures and Use of Estimates
* * * * *
Paragraph 17(c)(2)(i).
* * * * *
13. In Supplement I to Part 226, under Section 226.18--Content of
Disclosures, under 18(d) Finance charge, paragraph 2 would be removed.
14. In Supplement I to Part 226, under Section 226.23--Right of
Rescission, under 23(b) Notice of right to rescind, the first sentence
of paragraph 3 would be revised to read as follows:
* * * * *
Section 226.23--right of rescission
* * * * *
23(b) Notice of right to rescind.
* * * * *
3. Content. The notice must include all of the information outlined
in Section 226.23(b)(1)(i) through (v) [through
5]. * * *
* * * * *
By order of the Board of Governors of the Federal Reserve
System, May 15, 1996.
William W. Wiles,
Secretary of the Board
[FR Doc. 96-12685 Filed 5-23-96; 8:45 am]
BILLING CODE 6210-01-P
