[Federal Register Volume 59, Number 244 (Wednesday, December 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31300]


[[Page Unknown]]

[Federal Register: December 21, 1994]


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FEDERAL RESERVE SYSTEM

[Docket No. R-0864]

 

Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice; request for comments.

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SUMMARY: The Board is soliciting public comment on whether consumers 
would benefit from having greater flexibility in waiving the right of 
rescission in transactions with new creditors to refinance or 
consolidate home-secured loans (where no additional debt is incurred). 
The Riegle Community Development and Regulatory Improvement Act of 1994 
directs the Board to make recommendations to the Congress regarding 
this narrow expansion of the waiver of the right of rescission, after 
consulting with the Consumer Advisory Council to the Board, consumers, 
representatives of consumers, lenders, and other interested parties. 
Under present law, consumers may waive the right of rescission in 
refinancings or consolidations with new creditors only when a bona fide 
personal financial emergency exists (whether or not additional debt is 
incurred). When a consumer refinances a loan with the same creditor and 
no additional debt is incurred, the right of rescission does not apply; 
if additional debt is undertaken, the right of rescission applies only 
to the new money advanced.

DATES: Comments must be received on or before January 30, 1995.

ADDRESSES: Comments should refer to Docket No. R-0864, 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: Natalie E. Taylor, Staff Attorney, 
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 (TDD), at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The Truth In Lending Act (TILA), 15 U.S.C. 1601-1666j, and 
Regulation Z, 12 CFR 226.15 and 226.23, provide that in a consumer 
credit transaction in which the consumer's principal dwelling secures 
an extension of credit, the consumer has three business days in which 
to rescind the transaction after becoming obligated on the debt. This 
right of rescission was created to allow consumers time to reexamine 
their credit contracts and cost disclosures and to reconsider whether 
they want to place an important asset--the home--at risk by offering it 
as security for credit.
    Not all credit transactions secured by a consumer's principal 
dwelling are subject to the right of rescission. The TILA exempts home 
purchase-money loans from the right of rescission. For closed-end 
credit transactions, the right also does not apply when a consumer 
refinances a home-secured loan with the same creditor ( the 
``original'' creditor) and doesn't incur additional debt (no ``new 
money'' is advanced). Refinancings by a creditor other than the 
original creditor, on the other hand, are completely new transactions 
and are subject to the right of rescission.
    In a transaction subject to the right of rescission, a consumer 
must be given notice of the right to rescind at the time the consumer 
becomes legally obligated on the credit transaction. The notice must 
disclose that the creditor has a security interest in the consumer's 
home, that the consumer may rescind, how the consumer may rescind, the 
effects of rescission, and the date the rescission period expires.
    To rescind a transaction, a consumer must notify the creditor in 
writing within three business days of the last of three events: (1) 
Consummation of the loan ; (2) delivery of the TILA disclosures; or (3) 
receipt of the required notice of the right to rescind. The creditor 
may not disburse any monies or provide services or materials until the 
three-day rescission period has lapsed and the creditor is reasonably 
satisfied the consumer has not rescinded.
    A consumer who rescinds the transaction must be returned to his or 
her original position. Specifically, the creditor must refund to the 
consumer all monies paid and terminate its security interest in the 
consumer's home. Once the creditor has fulfilled its obligations, the 
consumer must return any monies or property already delivered to the 
consumer in the transaction.
    Under present law, a consumer may waive the right of rescission and 
receive immediate disbursement of the funds only when the consumer has 
a bona fide personal financial emergency. While the consumer provides 
the explanation for the bona fide personal financial emergency, in 
practice the lender determines the sufficiency of the explanation. The 
Board has not given much guidance as to what constitutes a bona fide 
personal financial emergency, as that matter is between the consumer 
and lender; however, a foreclosure is one example. Given the liability 
for failure to comply with the present rescission rules, creditors are 
generally reluctant to accept consumer waivers.

II. Riegle Community Development and Regulatory Improvement Act of 1994

    Section 344 of the Riegle Community Development and Regulatory 
Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160, enacted into 
law on September 23, 1994, directs the Board, in consultation with its 
Consumer Advisory Council, consumers, consumer representatives, 
lenders, and interested parties, to submit recommendations to the 
Congress on whether consumers would benefit from the ability to more 
freely waive the right the rescission in connection with loans with new 
creditors to refinance or consolidate debt, where no additional debt is 
incurred (no ``new money'' is advanced). The Board is publishing this 
notice to solicit the comment of interested parties on this specific 
issue.
    Waiver of the right to rescind was a topic on the Consumer Advisory 
Council agenda at its November 1994 meeting. The Council members 
expressed many divergent views, and the Council made no specific 
recommendation to the Board on the rescission issue.
    Based on the Council discussion, the comments of interested 
parties, and its own analysis, the Board will present recommendations 
to the Congress in March 1995.

    By order of the Board of Governors of the Federal Reserve 
System, December 15, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31300 Filed 12-20-94; 8:45 am]
BILLING CODE 6210-01-P