[Federal Register Volume 59, Number 239 (Wednesday, December 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30606]


[[Page Unknown]]

[Federal Register: December 14, 1994]


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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: Proposed rule; official staff interpretation.

-----------------------------------------------------------------------

SUMMARY: The Board is publishing for comment proposed revisions to the 
official staff commentary to Regulation Z (Truth in Lending). The 
commentary applies and interprets the requirements of Regulation Z. The 
proposed revisions would clarify regulatory provisions or 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 responsibilities when investigating a claim of 
unauthorized use of a credit card.

DATES: Comments must be received on or before February 1, 1995.

ADDRESSES: Comments should refer to Docket No. R-0863, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, NW. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9 a.m. and 5 
p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's rules 
regarding the availability of information.

FOR FURTHER INFORMATION CONTACT: For Subparts A and B (open-end 
credit), Jane Jensen Gell or Obrea O. Poindexter, Staff Attorneys; for 
Subparts A and C (closed-end credit), Kyung Cho-Miller, Sheilah A. 
Goodman, or Natalie E. Taylor, 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 by requiring 
disclosures about its terms and cost. The act requires creditors to 
disclose credit terms and the cost of credit as an annual percentage 
rate (APR). The act requires additional disclosures for loans secured 
by a consumer's home, and permits consumers to cancel certain 
transactions that involve their principal dwelling. It also imposes 
limitations on some credit transactions secured by a consumer's 
principal dwelling. The act is implemented by the Board's Regulation Z 
(12 CFR part 226). The regulation authorizes the issuance of official 
staff interpretations of the regulations. (See Appendix C to Regulation 
Z.)
    The Board is publishing proposed amendments to the commentary to 
Regulation Z. The commentary is designed to provide guidance to 
creditors in applying the regulation to specific transactions and is a 
substitute for individual staff interpretations. It is updated 
periodically to address significant questions that arise. It is 
expected that this update will be adopted in final form in March 1995 
with compliance optional until October 1, 1995, the effective date for 
mandatory compliance.

II. Proposed Commentary

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 would be revised to provide further guidance 
on the identity of the creditor for participant loans from an employee 
savings plan, such as 401(k) plans. Under applicable law, it is the 
plan that extends the credit, not the trust or trustee receiving and 
disbursing plan funds. Therefore, for purposes of the TILA, the plan is 
deemed to be the creditor.

Section 226.4--Finance Charge

4(a) Definition
    Comment 4(a)-1 would be revised to indicate to creditors that 
section 12 of the Real Estate Settlement Procedures Act (RESPA; 12 
U.S.C. 2610) prohibits fees from being charged for preparing TILA 
disclosure statements in RESPA-covered transactions.
    Comment 4(a)-3 would be revised to provide additional guidance on 
when fees charged by a third party are finance charges.
4(c) Charges Excluded From the Finance Charge
Paragraph 4(c)(7)
    Comment 4(c)(7)-1 would be revised to clarify the interplay of the 
fourth and fifth sentences, dealing with a lump sum charge for 
services. Proposed new language makes clear that a lawyer's attendance 
at a closing or a charge for conducting the closing is entirely 
excluded from the finance charge, even though fees for the incidental 
services might not be excluded if they were imposed separately; this is 
an exception to the general rule on the treatment of lump sum fees.
    Proposed comment 4(c)(7)-2 would clarify that real estate or 
residential mortgage transaction charges excludable under 
Sec. 226.4(c)(7) are those charges imposed in connection with the 
initial decision to grant credit and paid prior to or at consummation 
or loan closing--for example, a fee to search for tax liens on the 
property or to determine if flood insurance is required. Additional 
fees assessed during the loan term 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). 
These recurring administrative fees, paid by the consumer to protect 
the creditor's security interest, are finance charges.
4(e) Certain Security Interest Charges
    Comment 4(e)-1 would be revised to clarify that the security 
interest charges excludable as finance charges are those that relate to 
the agreement between the creditor and the consumer. When a creditor 
sells or otherwise assigns the consumer's obligation to a third party 
and the fee to record the assignment is imposed on the consumer, that 
fee is not excludable from the finance charge under Sec. 226.4(e).

Subpart B--Open-End Credit

Section 226.5--General Disclosure Requirements

(5b) 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 proposed revision provides an example to illustrate that when 
a consumer makes a purchase and opens an account contemporaneously with 
a retailer, for example, disclosures must be given to the consumer at 
that time.
    Proposed comment 5(b)(1)-5 addresses the timing of disclosures for 
open-end credit plan solicitations that offer consumers an option to 
transfer outstanding balances with other creditors.

Section 226.6--Initial Disclosure Statement

6(b) Other Charges
    Comment 6(b)-1 would be revised to state that a fee imposed for 
terminating an open-end credit plan must be disclosed as an ``other 
charge.'' Under Sec. 226.6(b) of the regulation, significant charges 
related to the plan (that are not finance charges) must be disclosed.
    While a termination fee might technically meet the definition of a 
finance charge, there is no detriment to the consumer for a creditor to 
disclose this fee as a significant charge under Sec. 226.6(b)--other 
charges--rather than a finance charge under Sec. 226.4. There seems to 
be little benefit to the consumer's receiving an APR 
(disproportionately high in some cases) on what might be the last 
periodic statement under an active plan for a fee imposed when the 
consumer closes the account.

Section 226.12--Special Credit Card Rules

12(b) Liability of Cardholder for Unauthorized Use
    Proposed 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. Proposed comment 12(b)-2 clarifies that card issuers are 
not required to impose any liability. Proposed comment   12(b)-3 
clarifies that a card issuer wishing to impose liability must 
investigate claims in a reasonable manner.
    Proposed comment 12(b)-3 lists some of the steps that card issuers 
may take in the investigation of a claim. For example, card issuers may 
request that a cardholder provide information needed to resolve the 
claim. But a card issuer cannot automatically deny a claim based on a 
cardholder's failure, for instance, to submit a signed statement or 
notarized document, or to file a police report. The steps appropriate 
for investigating particular claims may differ, and card issuers are 
not required to take certain minimum steps on all claim investigations. 
Specific comment is solicited on the proposed approach for providing 
guidance that identifies, by example, actions that card issuers may 
take in a reasonable investigation of a claim of unauthorized use.

Section 226.15--Right of Rescission

15(a) Consumer's Right To Rescind
Paragraph 15(a)(1)
    Comments 15(a)(1)-5 and -6 would be revised to provide further 
guidance on the right to rescind a transaction secured by a consumer's 
principal dwelling. The right of rescission does not apply to 
residential mortgage transactions. (See Sec. 226.15(f)(1).) Proposed 
comment 15(a)(1)-5 adds examples of transactions that are and are not 
rescindable.
    Comment 15(a)(1)-6--which contains an exception to the ``one 
principal dwelling'' rule of comment 15(a)(1)-5--would be revised to 
clarify that a credit transaction secured by the equity in the 
consumer's current principal dwelling, not by the new home, is subject 
to the rescission requirements of Sec. 226.15.
15(d) Effects of Rescission
    Consumers who rescind transactions are refunded any fees that they 
paid to obtain the loan. Comment 15(d)(2)-1 would be revised to clarify 
that broker fees, although paid by the consumer to a third party, must 
be refunded by the creditor to the consumer if the consumer rescinds 
the transaction.

Section 226.16--Advertising

16(d) Additional Requirements for Home Equity Plans
    Proposed comment 16(d)-7 would clarify disclosure requirements for 
balloon payments in home equity plan advertisements. 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. The proposed comment would apply this 
requirement to advertisements, since the regulatory provisions on 
treatment of balloon payments in home equity advertising and in 
disclosures are generally parallel.

Subpart C--Closed-end Credit

Section 226.17--General Disclosures

17(a) Form of Disclosures
Paragraph 17(a)(1)
    Comment 17(a)(1)-5 would be revised to include a late payment fee 
on a single payment loan as information directly related to the 
segregated disclosures. Section 226.18(l) requires disclosure of a late 
payment fee only if a dollar or percentage charge may be imposed before 
maturity due to a late payment, other than a deferral or extension 
charge. Creditors suggest that the only distinction between requiring 
the fee to be reflected on a loan that has not matured, as compared 
with a loan that has matured, is of a technical nature. Disclosure of a 
late payment fee is information valuable to a consumer obligated on a 
single payment loan that would not distract from or obscure the 
segregated disclosures.
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 small variations in the first payment 
due to a long or short first period. Proposed comment 17(c)(4)-4 
clarifies that prepaid finance charges, such as odd days interest paid 
at or prior to closing, may not be considered as the first payment on a 
loan. Thus, creditors cannot disregard any irregularity in disclosing 
such finance charges in the payment schedule.
17(f) Early Disclosures
    Comment 226.17(f)-1 would be revised to clarify that redisclosure 
is not only required if the annual percentage rate in the consummated 
transaction differs from the disclosed rate by more than the allowable 
1/8 or 1/4 of 1 percent tolerance, but also if the early disclosures 
were not indicated as estimates, and consummated terms other than the 
rate differ from the terms disclosed.

Section 226.18--Content of Disclosures

18(c) Itemization of Amount Financed
Paragraph 18(c)(1)(iv)
    Proposed comment 18(c)(1)(iv)-2 clarifies disclosure requirements 
under the TILA that are affected by new rules under the Real Estate 
Settlement Procedures Act (RESPA; 12 U.S.C. 2601). In October 1994, the 
Department of Housing and Urban Development (HUD), which implements 
RESPA 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). 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, 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. 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 has 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 have been 
considered to ensure as accurate and uniform a disclosure as possible. 
The proposed comment 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. Comment is solicited on the use of the 
figure in line 1002 as the amount for the prepaid finance charge for 
mortgage insurance along with any other concerns the shift to aggregate 
accounting raises for lenders under Regulation Z.
18(d) Finance Charge
    Proposed comment 18(d)-2 states that although there is no specific 
tolerance for the amount financed, an error in that figure--resulting 
from an error in a finance charge that is a component part of the 
amount financed--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. The 
same interpretation would apply to other disclosures for which the 
regulation provides no specific tolerance, such as the total of 
payments.

Section 226.19--Certain Residential Mortgage Transactions

19(b) Certain Variable-Rate Transactions
Paragraph 19(b)(2)(vii)
    Proposed comment 19(b)(2)(vii)-2 states that loans with more than 
one way to trigger negative amortization are separate variable-rate 
loan programs requiring disclosures under Sec. 226.19(b)(2) (viii) and 
(x) to the extent they vary from each other. For example, a loan that 
provides for monthly interest rate changes but only annual payment 
changes, or automatic payment caps for a set period of time, or 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, consists of three separate variable-rate programs. Each program 
may trigger negative amortization. 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 the 
principal balance will increase), except that the disclosure in 
Sec. 19(b)(2)(vii) 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 would be revised to correct an erroneous 
footnote reference.

Section 226.23--Right of Rescission

23(a) Consumer's Right To Rescind
Paragraph 23(a)(1)
    The right of rescission does not apply to residential mortgage 
transactions. (See Sec. 226.23(f)(1).) Comments 23(a)(1)-3 and -4 would 
be revised to provide further guidance on the right to rescind a 
transaction secured by a consumer's principal dwelling. Proposed 
comment 23(a)(1)-3 adds examples of transactions that are and are not 
rescindable.
    Comment 23(a)(1)-4--which contains an exception to the ``one 
principal dwelling'' rule in comment 23(a)(1)-3--would be revised to 
clarify that a credit transaction secured by the equity in the 
consumer's current principal dwelling, not by the new home, is subject 
to the rescission requirements of Sec. 226.23.
23(d) Effects of Rescission
Paragraph 23(d)(2)
    Consumers who rescind transactions are refunded any fees that they 
paid to obtain the loan. Comment 23(d)(2)-1 would be revised to clarify 
that broker fees, although paid by the consumer to a third party, must 
be refunded by the creditor to the consumer if the consumer rescinds 
the transaction.
23(f) Exempt Transactions
Paragraph 23(f)(4)
    Section 226.23(f)(2) exempts refinancings by the original creditor, 
to whom the obligation was originally payable. (See definition of a 
creditor under TILA in Sec. 226.2(a)(17).) Comment 23(f)-4 would be 
revised to clarify that 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). For example, if two lending 
institutions merge, the resulting institution is considered the 
original creditor for refinancings of any mortgage loans that were made 
by either of the two institutions. In refinancing transactions, any 
creditor that is not the original creditor for the obligation being 
refinanced must deliver the general rescission notice (model form H-8).

Appendix J--Annual Percentage Rate Computations for Closed-end 
Credit Transactions

    In the reference section, the 1981 changes paragraph would be 
revised to make a technical correction to the second sentence. 
Paragraph (b)(5)(vi) does not permit creditors to use either the 12-
month or the 365-day unit period methods ``in all cases'' where the 
transaction term equals a whole number of months, but only in a single-
advance, single-payment transaction in which the term is less than a 
year and is equal to a whole number of months.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-0863, and, when 
possible, should use a standard courier typeface with a type size of 10 
or 12 characters per inch. This will enable the Board to convert the 
text in machine-readable form through electronic scanning, and will 
facilitate automated retrieval of comments for review. Also, if 
accompanied by an original document in paper form, comments may be 
submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any IBM-
compatible DOS-based format.

List of Subjects in 12 CFR Part 226

    Advertising, Banks, banking, Consumer protection, Credit, Federal 
Reserve System, Mortgages, Reporting and recordkeeping requirements, 
Truth in lending.
    Certain conventions have been used to highlight the proposed 
revisions to the regulation. New language is shown inside bold-faced 
arrows, while language that would be deleted is set off with bold-faced 
brackets. Comments are numbered to comply with new Federal Register 
publication rules.
    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 226 as follows:

PART 226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 226 continues to read as 
follows:

    Authority: 12 U.S.C. 3806, 15 U.S.C. 1604 and 1637(c)(5).

Subpart A--General

* * * * *
    2. In supplement I to part 226, under Sec. 226.2--Definitions and 
rules of construction, under Paragraph 2(a)(17)(i)., paragraph 8. would 
be revised to read as follows:

Supplement I--Official Staff Interpretations


Sec. 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. The plan (not the trust or the 
trustee) is the creditor for purposes of this regulation. Thus, 
unless [Unless] each participant's account is an individual 
plan and trust , such as an individual 
retirement account, the numerical tests should be applied to 
the plan as a whole rather than to the individual accounts, even if the 
loan amount is determined by reference to the balance in an individual 
account and the repayments are credited to the individual account.
* * * * *
    3. In Supplement I to part 226, Sec. 226.4--Finance Charge, the 
following amendments would be made:
    a. Under 4(a) Definition., paragraphs 1. and 3. would be revised;
    b. Under Paragraph 4(c)(7)., paragraph 1. would be revised and a 
new paragraph 2. would be added; and
    c. Under (4)(e) Certain security interest charges., paragraph 1. 
would be revised.
    The revisions and additions would read as follows:
* * * * *


Sec. 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 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 credit customers who are members of the 
group and don't qualify for the discount pay no more than the non-
member 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 (RESPA) 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.
* * * * *
    3. Charges by third parties. i. Third party charges paid 
by the consumer are not finance charges if the creditor does not retain 
the charges or require the service. For example:
    A. A state or local tax on the credit transaction paid by the 
consumer, even if the tax is collected by the creditor; and
    B. A fee for a courier charged by an independent closing agent to 
send a document to the title company or some other party, provided that 
the creditor has not required the use of the courier.
    ii. In contrast, third party charges are finance charges (unless 
otherwise excluded) if the creditor requires the service as a condition 
of making the loan, even if the consumer can choose the service 
provider. Examples are:
    A. The cost of required mortgage insurance, even if the consumer is 
allowed to choose the insurer; and
    B. A mortgage broker fee when the use of a broker is required, such 
as when a consumer cannot get the same loan terms and conditions 
directly through the creditor (for example, the consumer is offered a 
loan for 8 percent only by using a broker; otherwise, the particular 
loan is offered at 9 percent). [Charges imposed on the 
consumer by someone other than the creditor for services not required 
by the creditor are not finance charges, as long as the creditor does 
not retain the charges.
    In contrast, charges imposed on the consumer by someone other than 
the creditor are finance charges (unless otherwise excluded) if the 
creditor requires the services of the third party. For example:
     A fee charged by a loan broker if the consumer cannot 
obtain the same credit terms from the creditor without using a broker.
    For example:
     A fee charged by a loan broker to a consumer, provided the 
creditor does not require the use of a broker (even if the creditor 
knows of the loan broker's involvement or compensates the broker).
     A tax imposed by a state or other governmental body on the 
credit transaction that is payable by the consumer (even if the tax is 
collected by the creditor). ]
* * * * *

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, credit report fees include 
not only the cost of the report itself, but also the cost of verifying 
information in the report. If a lump sum is charged for several 
services and 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 [A] charge for a lawyer's 
attendance at the closing or a charge for conducting the closing (for 
example, by 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 though a fee for the incidental services would 
be a finance charge if it was imposed separately. In all 
cases, charges excluded under Sec. 226.4(c)(7) must be bona fide and 
reasonable.
    2. Charges assessed during the loan term. The exclusion 
in Sec. 226.4(c)(7) for charges imposed in real estate or residential 
mortgage transactions is not available for fees to be assessed 
periodically during the loan term. For example, a fee to be assessed at 
intervals during a 30-year loan (whether collected at closing or when 
the service is rendered) for determining current tax lien status or 
flood insurance requirements is a finance charge. In contrast, where 
such fees are imposed solely in connection with the creditor's initial 
decision to grant credit, the fees are excluded from the finance charge 
under Sec. 226.4(c)(7).
* * * * *

4(e) Certain Security Interest Charges

    1. Examples. Only sums actually paid to public officials 
are excludable from the finance charge under 
Sec. 226.4(e)(1). Examples of 
excludable charges are 
[excludable from the finance charge under Sec. 226.4(e)(1) include]:
    i. Charges for filing or recording security 
agreements, mortgages, continuation statements, termination statements, 
and similar documents that evidence the obligation between 
the creditor and the consumer;
    ii. Stamps evidencing payment of taxes on 
property if the stamps are required to file a security agreement on the 
property; and
    iii. An intangible tax on the property if the payment of 
the tax is required to file a security agreement on the 
property.
    [Only sums actually paid to public officials are excludable under 
Sec. 226.4(e)(1).]
* * * * *

Subpart B--Open-End Credit

    4. In Supplement I to part 226, under Sec. 226.5--General 
Disclosure Requirements, under 5(b)(1) Initial disclosures., in 
paragraph 1., the first and second sentences would be revised, and a 
new paragraph 5. would be added to read as follows:
* * * * *


Sec. 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 consumers open credit plans and make 
purchases contemporaneously at retail stores), receives the 
first advance, or pays any fees or charges under the plan other than an 
application fee or refundable membership fee (see below).* * *
* * * * *
    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 consumer 
authorizes the balance transfer. 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 Sec. 226.6--Initial 
disclosure statement, under 6(b) Other charges., paragraph 1. would be 
revised to read as follows:
* * * * *


Sec. 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. Membership or participation fees 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 would 
not be 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 26.12--Special credit card 
provisions, under 12(b) Liability of cardholder for unauthorized use., 
new paragraphs 2. and 3. would be added to read as follows:
* * * * *


Sec. 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, but the card issuer may not automatically 
deny a claim based solely on the cardholder's failure or refusal to 
comply with a particular request. The steps necessary for 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 a written, signed statement from the cardholder or 
authorized user.
    vi. Advising the cardholder that an appearance may be required in a 
court action against the person who allegedly used the card without 
authority.
    vii. Requesting a copy of a police report, if one was 
filed.
* * * * *
    7. In Supplement I to part 226, under Sec. 226.15--Right of 
rescission, the following amendments would be made:
    a. Under Paragraph 15(a)(1)., in paragraph 5., the third sentence 
is revised, and two new sentences are added following the third 
sentence;
    b. Under Paragraph 15(a)(1)., paragraph 6. would be revised; and
    c. Under Paragraph 15(d)(2)., in paragraph 1., the third sentence 
would be revised.
    The additions and revisions would read as follows:
* * * * *


Sec. 226.15  Right of Rescission.

* * * * *

Paragraph 15(a)(1)

* * * * *
    5. Principal dwelling. * * * 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 [when] 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. * * *
    6. Special rule for principal dwelling. When the consumer is 
acquiring or constructing a new principal dwelling, 
[any]a credit plan or extension that 
is subject to Regulation Z and is secured by the equity in 
the consumer's current principal dwelling (for example, an advance to 
be used as a bridge loan) is still subject to the right of rescission. 
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. But a credit transaction secured by both A and B 
is a residential mortgage transaction and is not 
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 directly to a third party, or passed 
on from the creditor to the third party. * * *
* * * * *
    8. In Supplement I to part 226, under Sec. 226.16--Advertising, 
under 16(d) Additional Requirements for Home Equity Plans, a new 
paragraph 7. would be added to read as follows:
* * * * *


Sec. 226.16  Advertising.

* * * * *

16(d) Additional Requirements for Home Equity Plans

* * * * *
    7. Balloon payment. In programs where a balloon payment 
will occur if only the minimum payments under the plan are made, the 
advertisement must state that a balloon payment will result. (See 
comment 5b(d)(5)(ii)-3 regarding disclosure requirements for a balloon 
payment.)
* * * * *
    9. In Supplement I to part 226, under Sec. 226.17--General 
disclosure requirements, the following amendments would be made:
    a. Under Paragraph 17(a)(1)., paragraph 5. would be revised;
    b. Under Paragraph 17(c)(4)., a new paragraph 4 would be added; and
    c. Under 17(f) Early disclosures., paragraph 1. would be revised.
    The revisions and additions would read as follows:
* * * * *

Subpart C--Closed-end Credit


Sec. 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. Directly relation information includes, for example, 
the following:
    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 events 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 to 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 paid prior to or at closing may not be treated as the first 
payment period 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. [No 
redisclosure] Redisclosure is required for 
changes that occur between the time disclosures are made and 
consummation, [unless] if the annual percentage 
rate in the consummated transaction exceeds the limits prescribed in 
section 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 APR is within the 
permitted tolerance, if the disclosures were not based on estimates in 
accordance with section 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 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; 
and
    ii. If disclosures are made on January 15, the 
transaction is consummated on February 10, 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. (See Sec. 226.18(d) and footnote 41 of this part.)
* * * * *
    10. In Supplement I to part 226, under Sec. 226.18--Content of 
disclosures, the following amendments would be made:
    a. Under Paragraph 18(c)(1)(iv)., a new paragraph 2. would be 
added; and
    b. Under 18(d) Finance charge., paragraph 2 would be revised.
    The additions and revisions would read as follows:
* * * * *


Sec. 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 that is listed on the line for mortgage insurance on the 
settlement statement, without adjustment, even if the actual amount 
collected at settlement varies because of RESPA's escrow accounting 
rules.

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 that constitutes a part of that amount, 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 Sec. 226.19--Certain 
residential mortgage and variable-rate transactions, under Paragraph 
19(b)(2)(vii)., in paragraph 2., three new sentences are added 
following the second sentence to read as follows:
* * * * *


Sec. 226.19   Certain residential mortgage and variable-rate 
transactions.

* * * * *

Paragraph 19(b)(2)(vii)

* * * * *
    2. Negative amortization and interest rate carryover. * * * 
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) and 226.19(b)(3) 
for a discussion on the definition of variable-rate loan programs 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 Sec. 226.22--Determination 
of the annual percentage rate, under Paragraph 22(a)(1)., in paragraph 
5., the reference to footnote ``45a'' is revised to read ``45d''.
    13. In Supplement I to part 226, under Sec. 226.23--Right of 
Rescission, the following amendments would be made:
    a. Under Paragraph 23(a)(1)., in paragraph 3., the fourth sentence 
is revised and two new sentences are added following the fourth 
sentence;
    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 revisions and additions would read as follows:
* * * * *


Sec. 226.23  Right of rescission.

* * * * *

Paragraph 23(a)(1)

* * * * *
    3. Principal dwelling. * * * 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 [when] 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, an construction loan to 
finance B and secured by B is a residential mortgage 
transaction. * * *
    4. Special rule for principal dwelling. When the consumer is 
acquiring or constructing a new principal dwelling, [any] 
a loan (subject to Regulation 
Z) secured by the equity in the consumer's current principal 
dwelling (for example, a bridge loan) is still 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. But a credit transaction secured by both A and B is a 
residential mortgage transaction and is not 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 creditor to whom the 
obligation was initially made payable is the original creditor. 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). * * * In refinancing 
transactions, any creditor that was not the original creditor for the 
obligation being refinanced must deliver the general rescission notice 
(model form H-8).
* * * * *
    14. In Supplement I to part 226, under Appendix J, under the 
subheading References, under 1981 changes:, the second sentence would 
be 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 [in all cases where the transaction term equals 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, December 8, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-30606 Filed 12-13-94; 8:45 am]
BILLING CODE 6210-01-P