[Federal Register Volume 60, Number 57 (Friday, March 24, 1995)]
[Rules and Regulations]
[Pages 15463-15477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7231]



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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0858]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is publishing amendments to Regulation Z (Truth in 
Lending). The amendments implement changes made to the Truth in Lending 
Act by the Riegle Community Development and Regulatory Improvement Act 
of 1994. The law imposes new disclosure requirements and substantive 
limitations on closed-end home equity mortgage loans bearing rates or 
fees above a certain percentage or amount. The amendments provide 
protection to consumers entering into these mortgages. The law also 
imposes new disclosure requirements to assist consumers in comparing 
the cost of reverse mortgage transactions, which provide periodic 
advances primarily to elderly homeowners and rely principally on the 
home's value for repayment.

DATES: This rule is effective March 22, 1995. Compliance is optional 
until October 1, 1995.

FOR FURTHER INFORMATION CONTACT: Jane Ahrens, Senior Attorney, or Kyung 
Cho-Miller, Sheilah Goodman, or Kurt Schumacher, 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 (15 U.S.C. 1601-1666j) is 
to promote the informed use of consumer credit. The act requires 
creditors to disclose credit terms and the cost of credit as an annual 
percentage rate (APR). The act requires additional disclosures for 
loans secured by a consumer's home, and permits consumers to cancel 
certain transactions that involve their principal dwelling. The act is 
implemented by the Board's Regulation Z (12 CFR part 226).
    The Home Ownership and Equity Protection Act of 1994 (HOEPA), 
contained in the Riegle Community Development and Regulatory 
Improvement Act of 1994 (Community Development Act), Pub. L. 103-325, 
108 Stat. 2160, amends the Truth in Lending Act (TILA). Section 152 of 
the HOEPA adds a new section 129 dealing with certain mortgages bearing 
rates or fees above a certain percentage or amount. Section 154 adds a 
new section 138 dealing with reverse mortgage transactions.
    The HOEPA was enacted in September 1994, and directs the Board to 
issue final regulations within 180 days. Section 155 provides that the 
statutory provisions and the Board's rules shall apply on the October 1 
following six months after the final regulation is issued. It also 
states that the final rule governs all mortgage transactions having 
rates or fees above a certain percentage or amount (``Section 32 
mortgages,'' as found in Sec. 226.32 of the regulation) consummated 
after the mandatory effective date. The Board has determined that the 
same compliance rule applies to reverse mortgage transactions 
consummated after October 1, 1995.

[[Page 15464]]

II. Regulatory Provisions

    In December 1994, the Board published a proposed rule amending 
Regulation Z, to implement the new law (59 FR 61832, December 2, 1994). 
The Board received about 100 comments on the proposal. About 85 percent 
were from creditors or other businesses potentially affected by the 
proposal (and their trade associations); the remainder were mainly from 
consumer groups and individuals. Commenters generally supported the 
Board's proposal, although some believe the act's provisions are 
detrimental to consumers seeking credit. In large measure, the 
regulatory amendments that the Board has adopted in the final rule 
follow the proposal; technical suggestions or concerns raised by 
commenters are addressed in the final rule. The section-by-section 
descriptions given below provide interpretive guidance to creditors 
until autumn 1995, when an update to the Official Staff Commentary to 
the regulation will be proposed.

III. Section-by-Section Analysis

Section 226.2--Definitions and Rules of Construction

2(a) Definitions

2(a)(17) Creditor

    Section 226.2(a)(17) n.3 implements section 152(c) of the HOEPA and 
defines coverage in terms of the number of Section 32 mortgage 
transactions that will subject a lender to the TILA. The regulation 
parallels the statute. A creditor includes a person originating--during 
any 12-month period--two or more Section 32 mortgage loans, or one or 
more such mortgage loans through a mortgage broker. Thus, for example, 
a person that originates one Section 32 mortgage during a 12-month 
period is not covered. A person that originates three home-secured 
loans, two of which are secured by Section 32 mortgages, will be 
required to comply with the TILA for the latter two transactions. 
Persons making fewer than five home-secured loans during a calendar 
year--that do not meet the definition of a Section 32 mortgage--are not 
subject to the act.

Subpart B--Open-End Credit

Section 226.5b--Requirements for Home Equity Plans

5b(f) Limitations on Home Equity Plans

    The TILA generally restricts creditors' ability to terminate open-
end plans and demand repayment to narrowly drawn circumstances, such as 
when the consumer fails to make payments or takes actions that 
adversely affect the creditor's security. Section 154(c) of the HOEPA 
excludes reverse mortgage transactions from these restrictions. The 
legislative history states that the statutory amendment codifies the 
Board's existing interpretation regarding a creditor's ability to 
accelerate an open-end reverse mortgage loan in accordance with the 
credit contract, specifically, upon the consumer's death. The 
regulatory amendment reflects that legislative intent.

Subpart C--Closed-End Credit

Section 226.23--Right of Rescission

23(a) Consumer's Right to Rescind

    Section 152(b) of the HOEPA provides that Section 32 mortgage 
disclosures and certain practices involving these loans are 
``material'' for purposes of the TILA. The amendments to footnote 48 of 
the regulation implement the change. Consumers are provided with the 
right to rescind a Section 32 mortgage if a creditor fails to furnish 
the disclosures under Sec. 226.32(c) or if the loan documents include a 
credit term under Sec. 226.32(d).

Subpart D--Miscellaneous

Section 226.28--Effect on State Laws

28(b) Equivalent Disclosure Requirements

    Section 152(e) of the HOEPA provides that the procedure for 
substituting substantially similar state law disclosures for federal 
TILA requirements does not apply to state disclosure requirements for 
Section 32 mortgages. The amendments reflect this limitation.

Subpart E--Special Rules for Certain Home Mortgage Transactions

    The amendments to the TILA (section 129 dealing with mortgages 
having rates or fees above a certain percentage or amount and section 
138 dealing with reverse mortgage transactions) layer disclosure and 
timing requirements onto the requirements already imposed for these 
consumer credit transactions. The Board has implemented these 
provisions by adding a new subpart E to the regulation: Sec. 226.31 
addresses general requirements such as timing and format rules; 
Sec. 226.32 contains rules relating to mortgages having rates or fees 
above a certain percentage or amount; and Sec. 226.33 addresses reverse 
mortgages.
Section 226.31--General Rules

31(a) Relation to Other Subparts

    Section 31(a) explicitly states that the requirements and 
limitations of Subpart E are in addition to--not in lieu of--
requirements and limitations contained in other subparts of the 
regulation. For example, Subpart C requires creditors to provide 
disclosures at the time of application and prior to consummation for 
closed-end variable-rate loans that are secured by the consumer's 
principal dwelling and have a term greater than one year. If these 
transactions are also mortgage loans subject to Sec. 226.32, Subpart E 
requires creditors to provide the special disclosures at least three 
business days prior to the consummation.

31(c) Timing of Disclosures

31(c)(1) Disclosures for Certain Closed-end Home Mortgage Disclosures

    Implementing section 129(b) of the TILA, the regulation requires a 
three-day ``cooling off'' period between the time a consumer is 
furnished with special disclosures about a mortgage subject to 
Sec. 226.32 (Section 32 mortgage) and the time the consumer becomes 
obligated under the loan. Some commenters suggested that the final rule 
should provide flexibility in the timing requirements to facilitate 
delivery by mail or the contemporaneous delivery of other required 
disclosures. The Board believes, however, that the act requires that 
consumers considering a Section 32 mortgage loan be given the special 
disclosures at least three business days before completing the 
transaction, regardless of the creditor's method of delivering these 
disclosures or the timing of other disclosures.

31(c)(1)(i) Change in Terms

    Implementing section 129(b)(2) of the act, the regulation requires 
creditors to provide new Section 32 mortgage disclosures if, after 
giving the disclosures to the consumer and before consummation, the 
creditor changes any terms that make the disclosures inaccurate. New 
disclosures are triggered by a changed term only if it affects the APR, 
for example, or other disclosures set forth in Sec. 226.32(c). 
Commenters requested guidance on the scope of ``terms'' for which such 
a change could trigger new disclosures. The Board believes the scope 
extends both to a change in the terms of the loan agreement, as well as 
to a change in any charge associated with closing the loan.
31(c)(1)(iii) Consumer's Waiver of Waiting Period Before Consummation

    Section 129(b)(3) of the TILA authorizes the Board to permit the 
consumer to modify or waive the right to the three-day waiting period 
to meet bona fide personal financial emergencies. Sections 226.15(e) 
and 226.23(e) of the regulation discuss [[Page 15465]] waivers of the 
right to rescind to meet bona fide personal financial emergencies. 
Comment was solicited on whether the Board should provide a similar 
provision for waivers of the three-day waiting period on Section 32 
mortgages.
    In response to comments received and upon further analysis, the 
Board is adding a new paragraph providing that the consumer may modify 
or waive the three-day waiting period between delivery of Section 32 
mortgage disclosures and consummation, if the consumer determines that 
the extension of credit is needed to meet a bona fide personal 
financial emergency.
    Some commenters requested that the Board identify specific 
circumstances that are bona fide personal financial emergencies. 
Generally, the facts surrounding individual situations will determine 
whether the standard is met and the consumer may waive the three-day 
waiting period before consummation. The Board believes, however, that 
consummating a Section 32 mortgage loan to prevent the sale of the 
consumer's home at foreclosure is a bona fide personal financial 
emergency.
    For example, if the consumer's home is scheduled to be sold at 
foreclosure within the three-day waiting period, the consumer could 
waive the waiting period to consummate the Section 32 mortgage loan and 
forestall the foreclosure. The consumer may exercise the waiver, 
however, only after receiving the disclosures required by paragraph 
(c)(1).

31(c)(2) Disclosures for Reverse Mortgages

    Section 138 of the TILA requires creditors to furnish additional 
disclosures to consumers for a reverse mortgage transaction at least 
three business days prior to consummation. Under the statute, timing 
requirements for closed-end credit are often tied to the consummation 
of the transaction, and the regulation parallels the statute for 
closed-end reverse mortgage loans. However, reverse mortgage loans may 
also be structured as open-end credit plans. In that case, the 
regulation provides that the disclosures must be given at least three 
business days prior to the first transaction under the open-end credit 
plan or before the consumer becomes obligated on the plan. (See 
official staff interpretations of Sec. 226.5(b)(1) in Supplement I of 
this part.)

Conforming Paragraphs

    Paragraphs (d), (e), and (f) mirror provisions in subparts B and C 
(Sec. 226.5 and Sec. 226.17).

31(g) Accuracy of Annual Percentage Rate

    Creditors offering mortgages subject to Sec. 226.32 must include 
the APR as part of the new Section 32 mortgage disclosures. In response 
to comments received, the regulation clarifies that the APR shall be 
calculated in accordance with Sec. 226.22, which provides guidance for 
calculating an APR (and provides a tolerance for minor calculation 
errors) for transactions covered by Subpart C (closed-end). Commenters 
also suggested that the regulation should provide a tolerance for 
errors made in calculating payment amounts for the Section 32 mortgage 
loan disclosure. No tolerance exists for any such calculation errors 
under Subpart C, and the Board has not adopted a tolerance for payment 
amounts in Section 32 mortgage disclosures.

Section 226.32--Requirements for Certain Closed-End Home Mortgages

32(a) Coverage

    Section 103(aa) of the TILA defines the mortgages covered by new 
section 129 based on the rates charged and fees paid. The proposal 
referred to those mortgages as high-rate, high-fee mortgages. Many 
commenters opposed the label, stating that early versions of the 
legislation had been revised to delete any identification of the 
covered mortgages with their relative cost. The final rule follows the 
statutory approach.

32(a)(1)(i)

    The statute covers mortgages that charge rates above a specified 
standard. The rate-based test is tied to Treasury securities having 
terms comparable to the loan's maturity, and several commenters asked 
for more guidance on how creditors may determine if a particular 
transaction meets that test. The proposal cited the Board's Selected 
Interest Rates (statistical release H-15) as an example of a readily 
available source that identifies Treasury securities (bills, notes, and 
bonds) with maturities of 1, 2, 3, 5, 7, 10, 20, and 30 years. The same 
figures are published in other widely available sources, such as major 
financial and metropolitan newspapers.
    Commenters also sought guidance for selecting the proper maturity 
for loan maturities that do not match those of Treasury securities. The 
Board believes that creditors could use rounding. For example, if a 
creditor must compare the APR to Treasury securities with either seven-
year or ten-year maturities, the APR for an eight-year loan would be 
compared to securities with a seven-year maturity; a nine-year loan 
would be compared to securities with a ten-year maturity. If the loan 
maturity is exactly halfway between the maturities for two published 
Treasury securities, the creditor would compare the APR to the yield 
for the lower Treasury security.
    The act and regulation require creditors to compare the APR to 
yields as of the fifteenth day of the month immediately preceding the 
month in which the application for credit is received. Commenters asked 
the Board to clarify when an application is deemed to be received. The 
Board believes an application is received when it reaches the creditor 
in any of the ways applications are normally transmitted, even if the 
consumer did not provide all the information required for the creditor 
to make the credit decision. (See official staff interpretations of 
Sec. 226.19(a)(1) in Supplement I of this part.)

32(a)(1)(ii)

    The statute covers mortgages if the total points and fees payable 
by the consumer at or before loan closing exceed the greater of $400 or 
8 percent of the total loan amount. The Board contemplates that any 
adjustment to the $400 dollar amount will be published with the 
proposed updates to Regulation Z's official staff commentary (in the 
autumn of each year). The adjustment will be based on the annual 
percentage change in the Consumer Price Index (as reported on June 1) 
and will be effective on January 1 of the following year.
    Many commenters asked for further guidance to determine the ``total 
loan amount.'' Some suggested using the face amount of the note; others 
suggested using the ``amount financed'' as calculated according to 
Sec. 226.18(b). The Board believes the statute requires creditors to 
omit from the ``total loan amount'' any additional costs that may be 
incurred at closing--and included in the face amount of the note if 
financed by the creditor--when determining whether the ratio of fees to 
the total loan amount exceeds 8 percentage points. Thus, the ``total 
loan amount'' is the amount financed, as defined in Sec. 226.18(b), 
less any items that are required to be disclosed under Sec. 226.4(c)(7) 
and that are not excluded as fees under paragraph (b)(1)(iii) of this 
section.

32(a)(2)

    Section 103(aa) of the TILA provides that the Section 32 mortgage 
rules do not apply to a residential mortgage transaction, a reverse 
mortgage transaction, or an open-end credit plan. The regulation tracks 
those exceptions. [[Page 15466]] 

32(b) Definitions

32(b)(1) Points and Fees
    Section 103(aa) of the TILA defines points and fees as all finance 
charges (except interest or the time-price differential), all 
compensation paid to mortgage brokers, and all items identified in 
section 106(e) (other than amounts held for future payment of taxes). A 
charge is excluded from the definition if the charge is reasonable, the 
creditor receives no direct or indirect compensation from the charge, 
and the charge is not paid to an affiliate of the creditor.
    The Board believes the Congress intended a broad application of the 
term ``compensation,'' including, for example, amounts paid to brokers 
by creditors in addition to amounts paid by consumers. Many commenters 
considered this interpretation too expansive, and suggested that broker 
fees should only be considered ``fees'' if the broker is required by 
the creditor as a condition of obtaining the credit. (See official 
staff interpretations of Sec. 226.4(a) in Supplement I of this part.)
    RESPA requires creditors to provide consumers with estimates of 
closing costs--including fees paid by creditors to brokers--for certain 
real-estate secured loans (Regulation X, 24 CFR 3500, Appendix A, fact 
pattern 12). The Board believes that including in the total fee 
calculation all broker fees required to be disclosed under RESPA is 
consistent with the intent of the Congress and addresses the 
commenters' concerns about broker fees that are unknown to the 
creditor.
    Section 103(aa) authorizes the Board to identify other charges that 
are appropriate to include in the total fee calculation. The conference 
report cites credit insurance premiums as an example of fees that could 
be included, if evidence showed that the premiums were being used to 
circumvent the statute. Several commenters, mostly insurance industry 
representatives, opposed the regulation's including premiums for credit 
life insurance that is purchased at the consumer's option.
    Section 158 of the HOEPA requires the Board (in consultation with 
its Consumer Advisory Council) to conduct public hearings that examine 
home equity loans in the marketplace and the adequacy of federal laws 
(including the new rules affecting Section 32 mortgages and reverse 
mortgage transactions) in protecting consumers--particularly low-income 
consumers. The statute provides that the initial hearing must be held 
prior to September 1997, and the Board contemplates that the first 
hearing will occur sometime in 1996. The Board believes the hearings 
may provide an appropriate forum to explore whether any particular 
charges should be included in the total fee calculation. The regulation 
does not identify any additional fees at this time.

32(b)(2) Affiliate

    Section 129(k) of the TILA defines ``affiliate'' for purposes of 
the Section 32 mortgage rules by a statutory reference to the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(k)). That act defines 
affiliate as any company that controls, is controlled by, or is under 
common control with another company. It also defines ``company'' and 
defines when one company is considered to ``control'' another (12 
U.S.C. 1841(a) and (b)). The proposal defined the term by a statutory 
reference; to ease compliance, the final rule adds a brief narrative.

32(c) Disclosures

    The regulation tracks the disclosure requirements of section 
129(a). In response to comments, a new H-16--Mortgage Sample has been 
added to Appendix H. Creditors using it properly will be deemed to be 
in compliance with the regulation for those disclosures.

32(c)(3) Regular Payment

    The act requires creditors to disclose the amount of the regular 
``monthly'' payment. In response to comments received and upon further 
analysis, the final regulation clarifies that the disclosure 
contemplates monthly or other regularly scheduled periodic payments, 
such as monthly, bimonthly, or quarterly.

32(c)(4) Variable-rate
    The law requires creditors offering variable-rate transactions to 
disclose a monthly payment based on an interest rate cap required for 
consumer contracts by a provision in the Competitive Equality Banking 
Act of 1987 (CEBA), which is implemented in Sec. 226.30. The 
legislative history provides that in calculating the maximum payment 
based on the interest rate cap, creditors should assume the maximum 
possible increases in rates in the shortest possible timeframe. 
Paragraph Sec. 226.19(b)(2)(x)--which requires a similar maximum 
payment disclosure for adjustable-rate mortgage transactions--provides 
guidance for calculating the maximum possible increases in rates in the 
shortest possible timeframe.

32(d) Limitations

    Section 129 of the TILA prohibits mortgage creditors covered by 
Sec. 226.32 from including several terms in their contracts. In large 
measure, the final regulation follows the proposal. In the proposal, 
the headings for and substantive limitations in paragraphs (d)(1) and 
(d)(2) were inadvertently reversed; the error has been corrected.

32(d)(1)(i) Balloon Payment

    Under the act and regulation, the repayment schedule for a Section 
32 mortgage loan with a term of less than five years must fully 
amortize the outstanding principal balance through regular periodic 
payments. Many commenters requested further guidance on the phrase 
``regular periodic'' payments. Some were concerned that small interest-
only payments with occasional payments of principal would be 
prohibited, and the lack of flexibility in designing a payment schedule 
would ultimately be detrimental to consumers. Others suggested defining 
a ``regular periodic payment'' as one that is not more than twice the 
amount of other payments. The Board has adopted this approach and 
believes it reflects the intent of the Congress and provides certainty 
in compliance.

32(d)(1)(ii) Exception

    Section 129(l)(1) of the TILA authorizes the Board to create 
exemptions to the limitations set forth in paragraph (d) and paragraph 
(e) of this section, upon a finding that the exemption is in the 
interest of the borrowing public and will apply only to mortgage 
products or categories of products that maintain and strengthen home 
ownership and protect equity. The legislative history expresses the 
Congress's concern that the legislation might inappropriately apply to 
some government loans or short-term ``bridge'' construction loans. It 
also states that in granting the exemption authority to the Board, the 
Congress intended that the Board consider exemptions on a product-by-
product basis.
    Based on the legislative history, the comments received and upon 
further analysis, the Board is creating a narrowly drawn exemption from 
the balloon payment limitation for mortgage loans subject to 
Sec. 226.32 with maturities of less than one year, if the purpose of 
the loan is a ``bridge'' loan connected with the acquisition or 
construction of a dwelling intended to become the consumer's principal 
dwelling. These ``bridge'' loans remain subject to all other provisions 
of the section. [[Page 15467]] 

32(d)(2) Negative Amortization

    The act and regulation prohibit payment schedules with regular 
periodic payments that may result in increases to the principal 
balance. Technical changes to the regulation are made for clarity. The 
Board believes that the prohibition does not extend to increases in the 
principal balance unrelated to the payment schedule, such as when a 
consumer fails to obtain property insurance and the creditor purchases 
insurance and adds the premium to the consumer's principal balance.

32(d)(4) Increased Interest Rate

    The act and regulation prohibit creditors from increasing the 
interest rate after default. This prohibition does not prevent a 
creditor offering a variable-rate loan from changing the rate, if, for 
example, the rate is tied to an index and the index increases after the 
consumer has defaulted on the obligation.

32(d)(5) Rebates

    Section 129(d) of the TILA restricts how creditors may calculate 
refunds of interest when a Section 32 mortgage loan is accelerated due 
to a consumer's default. The regulation clarifies that the paragraph 
covers limitation on refunds of interest (not other charges--points, 
for example--that are considered finance charges under Sec. 226.4). The 
calculation would include odd-days interest, whether paid at or after 
consummation.

32(d)(6) Prepayment Penalties

    Section 129(c) of the TILA generally bars creditors from including 
a prepayment penalty in a Section 32 mortgage contract. The statute 
includes, as a prepayment penalty, refunds of unearned interest 
calculated less favorably than the actuarial method defined in section 
933(d) of the Housing and Community Development Act of 1992 (HCDA).
    The legislative history provides that where the actuarial method, 
as defined by state law, provides a refund that is greater than the 
refund received under the HCDA definition, creditors should apply state 
law to determine if a refund is a prepayment penalty for a Section 32 
mortgage. The legislative history states that the reference to the HCDA 
is not intended to be exclusive, and that penalties based on a 
percentage of the outstanding balance or on the number of months of 
interest are also prohibited.

32(d)(7) Prepayment Penalty Exception

    Section 129(c)(2) of the TILA allows creditors to include a 
prepayment penalty clause in a Section 32 mortgage loan under narrowly 
drawn circumstances. To include a prepayment penalty clause in the loan 
documents, a creditor must verify that the consumer's monthly debt-to-
income ratio is 50 percent or less. The Board believes that in 
calculating the consumer's monthly debts and income to determine the 
debt-to-income ratio, creditors may rely on widely accepted 
underwriting standards, such as those published by the Federal National 
Mortgage Association, the Federal Home Loan Mortgage Corporation, the 
Federal Housing Administration, or the Veteran's Administration. A 
creditor using one of these standards and determining that the 
consumer's monthly debt-to-income ration is 50 percent or less will be 
deemed to meet the requirements of this provision. The Board believes 
this safe harbor provides consistency and eases compliance.

32(e) Prohibited Acts and Practices

    Section 129(l)(2) of the TILA authorizes the Board to prohibit acts 
or practices in connection with mortgage loans that the Board finds to 
be unfair, deceptive, or designed to evade the Section 32 mortgage 
rules. The Board also may prohibit acts or practices related to 
refinancing mortgage loans that the Board finds are associated with 
abusive lending practices or that are not in the borrower's interest. 
Neither the proposal nor the final regulation identifies any prohibited 
practices pursuant to this authority.
    Section 157 of the HOEPA requires the Board to conduct a study and 
make recommendations to the Congress regarding, in part, the adequacy 
of federal laws protecting consumers with open-end credit plans secured 
by the consumer's principal dwelling. The study must be completed 
within eighteen months after the amendments are adopted. The Board 
believes the study and the hearing required by the HOEPA will assist 
the Board in determining whether certain acts or practices should be 
prohibited.

32(e)(1) Repayment Ability

    Section 129(h) of the TILA prohibits creditors extending mortgage 
loans subject to Sec. 226.32 from engaging in a pattern or practice of 
extending such credit to consumers based on the consumer's collateral 
without regard to the consumer's repayment ability, including the 
consumer's current and expected income, current obligations, and 
employment. Commenters requested that ``pattern or practice'' be 
defined; however, the Board believes a determination whether a creditor 
engages in a pattern or practice will depend on individual fact 
situations. Thus, the final regulation--like the proposal--does not 
define the phrase.
    Paragraph (d)(7) permits creditors to assess a prepayment penalty 
if, in part, the creditor verifies that the consumer's monthly debt to 
income ratio is 50 percent or less. In the supplementary materials 
accompanying the proposal, the Board stated that creditors could rely 
on information provided by the consumer in connection with paragraph 
(d)(7) when considering a consumer's ability to repay the debt. Many 
commenters were concerned that the Board intended to incorporate the 
income verification and debt-to-income ratio requirements into 
paragraph (e)(1). These concerns are unfounded. There is no debt-to-
income ratio requirement for paragraph (e)(1). The information provided 
to creditors in connection with paragraph (d)(7) may be used to 
demonstrate that the creditor considered the consumer's income and 
obligations before extending the credit. Other information--for 
example, information about gift income, expected retirement payments, 
or other unverifiable income--may also be considered. The Board 
believes any expected income can be considered by the creditor, other 
than equity income obtainable by the consumer through the foreclosure 
of a Section 32 mortgage with the creditor.

32(e)(2) Home Improvement Contracts

    Section 129(i) of the TILA restricts how creditors may disburse 
proceeds to contractors under a home improvement contract secured by a 
mortgage subject to Sec. 226.32. The regulation reflects the statutory 
requirement that the creditor must disburse the proceeds by an 
instrument payable to the consumer or jointly to the consumer and the 
contractor. The Board believes that if the contractor and the consumer 
are joint payees, the instrument must name as payees all consumers who 
are primarily obligated on the note.
    Alternatively, the regulation provides that at the election of the 
consumer, the creditor can disburse the proceeds through an escrow 
agent in accordance with terms established in a written agreement 
signed by the consumer, the creditor, and the contractor prior to the 
disbursement. The Board solicited comment on whether further guidance 
was needed regarding the use of a third party escrow agent, including 
an agent that is an affiliate of the creditor. The Board believes that 
RESPA adequately protects consumers dealing with an escrow agent that 
is an affiliate of the creditor. RESPA prohibits creditors from 
requiring the use of an affiliate, and [[Page 15468]] requires 
disclosures to be furnished if the consumer opts to use the services of 
an escrow agent that is in a ``controlled business arrangement'' with 
the creditor (Regulation X, 24 CFR 3500.15).

32(e)(3) Notice to Assignee

    The act and regulation require persons who sell or assign mortgages 
covered by Sec. 226.32 to furnish a notice of the potential liability 
under the TILA. In response to comments received, the notice more 
directly discloses an assignee's potential liability.

Section 226.33--Requirements for Reverse Mortgages

33(a) Definition

    Section 154 of the HOEPA defines a ``reverse mortgage'' as a 
nonrecourse transaction that is secured by the consumer's principal 
dwelling and that ties repayment (other than upon default) to the 
homeowner's death or permanent move from or transfer of the home. The 
definition in the regulation tracks the statute.
    A nonrecourse transaction limits the homeowner's liability to no 
more than the proceeds of the sale of the home (unless a lesser amount 
is provided for in the credit obligation, such as by an equity 
reservation or an equity conservation agreement between the consumer 
and creditor). Neither the statute nor the regulation defines 
``nonrecourse transactions.'' Similarly, specific acts of default for 
purposes of the reverse mortgage rules are not defined. Neither the act 
nor the legislative history identifies such acts, and the Board 
believes that the determination of ``default'' is most appropriately 
left to the legal obligation between the parties and state or other 
law.
33(b) Content of Disclosures

    Section 138 of the TILA establishes a new standard to measure the 
cost of reverse mortgage credit. The statute requires reverse mortgage 
creditors to disclose a good faith projection of the total cost of the 
credit to the consumer, by means of a table of annual interest rates. 
The legislative history states that the Congress contemplated a 
disclosure scheme modeled after the matrix disclosure currently 
required by section 255 of the National Housing Act and implemented by 
the Department of Housing and Urban Development's (HUD's) Home Equity 
Conversion Mortgage (HECM) program. The Board's regulation reflects 
that approach, except as noted below.
    The regulation requires creditors to use the term ``total annual 
loan cost rate'' rather than ``annual interest rate'' in complying with 
this section. The statute uses but does not mandate the term ``annual 
interest rate,'' and the Board believes that a different term will 
avoid possible confusion with the disclosure of the ``annual percentage 
rate'' (APR) required by other parts of the regulation. The term 
``total annual loan cost rate'' is unlikely to be confused with the APR 
and is a more accurate description of the percentage cost of reverse 
mortgages than ``annual interest rate.'' For example, the rate may 
reflect costs other than interest, such as annuity premiums, appraisal 
fees, and a percentage of any appreciation in the consumer's home.
    Section 138(a)(1) of the TILA requires creditors to disclose total 
annual loan cost rates for not less than three projected appreciation 
rates and not less than three credit transaction periods, as determined 
by the Board. HUD's HECM matrix similarly discloses nine ``average 
annual percentage rates'' based on three assumed annual home 
appreciation rates and three assumed loan terms. As discussed below, 
the Board has adopted the HECM model which requires the tabular 
disclosure of nine total annual loan cost rates, as described below. 
The regulation permits an additional assumed loan term, as described 
below.
    The HECM matrix is accompanied by a listing of the basic factors 
used in calculating the projected total cost of credit, such as the age 
of the borrower, the value of the consumer's home, etc., and a brief 
discussion of some assumptions used in calculating the rates in the 
matrix. The regulation requires that the matrix be accompanied by a 
listing of key factors used in calculating the total annual loan cost 
rates, along with a brief narrative that helps consumers to interpret 
the rates disclosed in the matrix. (See the supplementary material 
accompanying proposed Appendix K for further discussion of the model 
disclosure.)

33(c) Projected Total Cost of Credit

    Section 138 (a) and (b) of the TILA identify factors creditors must 
consider when calculating the projected total cost of credit and the 
corresponding total annual loan cost rates. The regulation lists those 
requirements in paragraph (c) of this section. (The mathematical 
formula for determining the total annual loan cost rate is contained in 
Appendix K.)

33(c)(1) Costs to Consumer

    Section 138(b)(2) of the TILA includes in the projected total cost 
of credit all costs and charges to the consumer, including the costs of 
any annuity that the consumer purchases (if any) as part of the reverse 
mortgage transaction. The regulation parallels the statute, except that 
the term ``associated'' has been deleted.
    The Board believes the Congress intended a broad application of the 
terms ``costs and charges.'' For example, the Board believes all costs 
and charges connected with the reverse mortgage transaction must be 
included in the projected total cost of credit, whether or not the 
charge is deemed to be a finance charge under Subpart A of the 
regulation.
    Some creditors require or permit consumers to purchase an annuity 
as part of the transaction that immediately, or at some future time, 
supplements or replaces the creditor's payments. The law and regulation 
require the amount paid by the consumer for the annuity to be included 
as a cost to the consumer. This is the case whether the purchase is 
made through the creditor or a third party, or whether the purchase is 
mandatory or voluntary.
    The HECM program does not include disposition costs as a part of 
the total annual loan cost rate, and the regulation follows that 
approach. Few commenters addressed the issue; they were about evenly 
split on whether to include disposition costs as part of the total 
annual loan cost rate. Based on these comments and upon further 
analysis, the Board has retained the rule as proposed.

33(c)(2) Advances to Consumer

    Section 138(b)(3) of the TILA requires creditors to consider in the 
projected total cost of credit all advances to and for the benefit of 
the consumer, including annuity payments received by the consumer from 
an annuity purchased as part of the reverse mortgage transaction. The 
regulation generally tracks the statute, with slight modifications for 
clarity.

33(c)(3) Additional Creditor Compensation

    Section 138(b)(1) of the TILA and the regulation include, in the 
total cost of a reverse mortgage loan, any shared appreciation or 
equity that the creditor is entitled to receive pursuant to the credit 
contract. For example, creditors sometimes offer a reduced interest 
rate in exchange for a portion of the appreciation or equity that may 
be realized when the dwelling is sold.

33(c)(4) Limitations on Consumer Liability

    Section 138(b)(4) of the TILA requires creditors to consider in the 
projected total cost of credit any limitation on the 
[[Page 15469]] consumer's liability under the reverse mortgage loan. 
This includes, for example, equity conservation agreements. These 
agreements protect a portion of the equity in the dwelling for the 
consumer or the consumer's estate.
    This paragraph also applies to the nonrecourse provision that is a 
part of any credit contract meeting the definition of a reverse 
mortgage transaction. (See paragraph (a) of this section.) Some reverse 
mortgage transactions provide that a consumer's liability will not 
exceed a specific percentage of the projected home value, say 75 
percent. Other reverse mortgages set the consumer's maximum liability 
at the ``net proceeds'' available from the sale of the home. That is, 
if a consumer sells the home for $100,000 and brokerage commissions and 
other incidental selling costs were $7,000, the creditor would receive 
no more than $93,000--the net proceeds of the sale.
    The Board believes that the purposes of the reverse mortgage 
disclosures are enhanced if the calculations of projected total costs 
for ``net proceeds'' recourse limitations are based on uniform 
assumptions about the costs associated with the sale of the home. Thus, 
if a contract does not otherwise specify a percentage for net proceeds, 
creditors must assume closing costs of 7 percent, which approximates 
the amounts paid for typical brokerage fees and other incidental costs. 
The Board solicited comment on this approach. Most commenters agreed 
both with the approach and the use of the 7 percent figure.

33(c)(5) Assumed Annual Appreciation Rates

    Section 138(a)(1) of the TILA requires each total annual loan cost 
rate to be based on one of (at least) three projected appreciation 
rates for the consumer's dwelling. The regulation tracks the 
appreciation rates used in HUD's HECM program. That is, the total 
annual loan cost rates are based on assumed annual home appreciation 
rates of 0 percent, 4 percent, and 8 percent. HUD's program based the 4 
percent annual appreciation rate on its assessment of long-term 
averages of historical housing appreciation rates. The 0 percent and 8 
percent rates help consumers understand the potential costs and 
benefits of the loan if their dwelling does not appreciate in value at 
all, or if its value appreciated at a rate double the 4 percent rate.
    Commenters were about equally divided on the use of these assumed 
appreciation rates. Those that opposed the proposed figures believed 
that 0 percent, 3 percent, and 6 percent would be more appropriate. 
Based on the comments received and upon further analysis, the Board 
believes that the percentages used by HUD are appropriate estimates for 
reverse mortgage disclosures, and are required by the final rule.

33(c)(6) Assumed Loan Period

    Section 138(a)(1) of the TILA also requires each total annual loan 
cost rate to be based on one of (at least) three credit transaction 
periods, as determined by the Board, including a short-term reverse 
mortgage, a term equaling the actuarial life expectancy of the 
consumer, and ``such longer term as the Board deems appropriate.'' The 
proposed regulation tracked the assumed loan periods required under the 
HECM program: a period of two years, a period equal to the consumer's 
life expectancy, and a period equal to approximately 1.4 times the 
consumer's life expectancy (the creditor would use the life expectancy 
of the youngest consumer in transactions involving multiple borrowers).
    The statute authorizes the Board to require total annual loan cost 
rates for more than three assumed loan periods. In the proposed rule, 
the Board noted that, depending on the age of the borrower, a 
significant time interval could exist between the shortest loan period 
(two years) and the consumer's life expectancy. Accordingly, the Board 
solicited comment on whether other assumed loan periods, such as an 
assumed loan period of one-half of the life expectancy figure, should 
be added to the regulation; and if so, whether calculations based on 
the additional assumed loan periods should be required or optional.
    About 10 commenters addressed this point, and views were mixed. 
Some believed an additional assumed loan period equal to one-half of 
the life expectancy figure would assist consumers in better 
understanding the costs of the reverse mortgage transaction in the 
event that, for example, they move permanently from the dwelling either 
sooner or later than anticipated; commenters were split on whether the 
additional period should be mandatory or optional. Those commenters 
opposing an additional assumed loan period expressed concern about 
increased compliance burden and possible consumer confusion.
    Based on the comments received and upon further analysis, the Board 
is permitting creditors to add a fourth assumed loan period equal to 
one-half of the life expectancy figure. Use of the additional period is 
permissive, to promote flexibility. The Board believes consumers will 
benefit by receiving information about the transaction's costs for a 
``midpoint'' assumed loan period, given the potential of an event such 
as a permanent move from the home during the borrower's lifetime. The 
benefits to the consumer outweigh any additional compliance burden: For 
lenders offering reverse mortgage transactions not covered by the HECM 
program, the compliance burden of choosing to implement a new 
disclosure scheme based on four (rather than three) assumed loan 
periods is not significant; HECM lenders will revise their disclosures 
to comply with other requirements, such as the narrative required in 
the model form, in any event, and are not required to add the fourth 
loan period to their forms.

Appendix K--Total Annual Loan Cost Rate Computations for Reverse 
Mortgage Transactions

    The final regulation bases the calculation of total annual loan 
cost rates on a commonly used computation tool, an internal rate of 
return formula. The formula uses the estimation or ``iteration'' 
procedure required to compute APRs under Appendix J of this part. 
However, Appendix J is written in the context of forward (not reverse) 
mortgages. The formulas are similar to those in Appendix J; however, to 
ease compliance and avoid confusion about terminology, definitions and 
instructions appropriate for reverse mortgages are placed in Appendix 
K. The final rule tracks the proposal, except as noted below.
(b) Instructions and Equations for the Total Annual Loan Cost Rate

(b)(5) Number of Unit-Periods Between Two Given Dates

    The total annual loan cost rates are based on an assumption that 
the reverse mortgage transaction begins on the first day of the month 
in which consummation is estimated to occur. The total annual loan cost 
rates are good-faith projections based on a number of assumptions. The 
Board believes that using the fractional unit-periods required under 
Appendix J for calculating APRs is unnecessary for these disclosures, 
and has omitted many of the definitions relating to time intervals.

(b)(8) Solution of General Equation by Iteration Process

    Rather than restate the iteration process required to be used in 
determining total annual loan cost rates under the appendix, the 
regulation refers lenders to Appendix J of this 
[[Page 15470]] regulation for the procedures to be followed.

(b)(9) Assumption for Discretionary Cash Advances

    Some reverse mortgage transactions permit the consumer to control 
when advances are received. The regulation requires creditors to use a 
special assumption for calculating the total annual loan cost rate in 
this case. Creditors must assume that 50 percent of the amount of the 
credit line is advanced when the consumer becomes obligated under the 
transaction (at the interest rate then in effect) and that no further 
advances are made during the remaining term. The Board believes this 
assumption is appropriate for reverse mortgage credit lines, given that 
the amount and timing of advances (and, thus, the estimated interest 
owed) are within the consumer's control. The assumption used in the 
final rule also is consistent with HUD'S HECM program (and with 
Appendix D's requirements for an estimated interest figure when the 
amount and timing of construction loan advances are unknown).
    Creditors should follow this approach for estimating interest on 
open-end reverse mortgage credit lines. Once the interest figure is 
determined, creditors should use the general equation in section (b)(8) 
of this appendix to calculate the total annual loan cost rate.

(b)(10) Assumption for Variable-Rate Reverse Mortgage Transactions

    Regulation Z provides that to calculate the APR, creditors offering 
variable-rate transactions must base disclosures on the initial 
interest rate and not assume the rate will increase. The Board proposed 
adopting the same convention for calculating total annual loan cost 
rates, and solicited comment on whether the assumption used in HUD's 
HECM program--the ``expected interest rate''--was more appropriate. The 
majority of commenters favored the use of the initial interest rate and 
the Board has adopted this approach in the final rule. Commenters also 
requested information on how to calculate the total annual loan cost 
rate when there is an initial discount rate. Creditors should apply the 
same rules for calculating the annual loan cost rate as are applied 
when calculating an APR for a loan with an initial discount rate 
(Sec. 226.17(c)).

(b)(11) Assumption for Closing Costs

    The regulation requires creditors to assume all closing and other 
consumer costs are financed by the creditor. These costs are generally 
financed as a part of the transaction, and the Board believes this 
assumption provides uniformity.

(c) Examples of Total Annual Loan Cost Rate Computations

    Three examples are provided to assist creditors in calculating the 
total annual loan cost rate. Some figures have been corrected, and 
interest rates have been added to the examples.

Reverse Mortgage Model Form and Sample Form

    The regulation requires that the matrix be accompanied by a 
disclosure substantially similar to the model form in this paragraph. 
Reverse mortgages are complicated transactions, and the Board believes 
a uniform disclosure will enhance consumer understanding of the 
proposed transaction and promote informed comparison shopping.
    The model form and sample form are placed in this appendix, because 
they apply to both open-end and closed-end reverse mortgage 
transactions. This avoids publishing the forms twice, in Appendix G 
(Open-end model forms and clauses) and Appendix H (Closed-end model 
forms and clauses). The sample form has technical corrections to some 
figures.

Appendix L--Assumed Loan Periods for Calculation of Total Annual Loan 
Cost Rates

    The law requires the total annual loan cost rate disclosures for 
reverse mortgage transactions to be based on at least three assumed 
loan periods, as determined by the Board. The regulation tracks the 
assumed loan period requirements of HUD's HECM program (two years, a 
period equal to the youngest consumer's life expectancy, and a period 
1.4 times that consumer's life expectancy), and adds an optional 
additional loan period equal to one-half of the youngest consumer's 
life expectancy.
    The Board proposed using the U.S. Decennial Life Tables for the 
life expectancy figures. These tables are published by the Department 
of Health and Human Services and are widely available to the public. 
The Board solicited comment on other sources of such data. Most 
commenters agreed with the use of the U.S. Decennial Life Tables, and 
the requirement to use those tables has been adopted in the final rule. 
The figures in the appendix are based on data currently available, that 
is, on tables for 1979-1981, as rounded to the nearest whole year. The 
Board contemplates updating the figures as data are published 
periodically.
    The regulation tracks the HECM program's use of female life 
expectancy figures for calculating total annual loan cost rates for all 
borrowers, as women are estimated to comprise the majority of borrowers 
under existing reverse mortgage programs.

IV. Regulatory Flexibility Analysis

    The Board's Office of the Secretary has prepared an economic impact 
statement on the amendments to Regulation Z. A copy of the analysis may 
be obtained from Publications Services, Board of Governors of the 
Federal Reserve System, Washington, D.C. 20551, at (202) 452-3245.

V. Paperwork Reduction Act

    In accordance with section 3507 of the Paperwork Reduction Act of 
1980 (44 U.S.C. 35; 5 CFR 1320.13), the amendments were reviewed by the 
Board under the authority delegated to the Board by the Office of 
Management and Budget after consideration of comments received during 
the public comment period.
    Regulation Z requires creditors offering mortgages subject to 
Sec. 226.32 and creditors offering reverse mortgage transactions to 
furnish to consumers at least three days prior to consummation a one-
time notice disclosing costs of the loan and reminding consumers that 
signing an application or receiving disclosures does not require the 
consumer to complete the transaction. Model forms are adopted to ease 
compliance for creditors furnishing Section 32 and reverse mortgage 
disclosures.
    The Board believes that the types of mortgage products that trigger 
these additional disclosures are not typically offered by state member 
banks; thus, the requirements have only a negligible impact on the 
paperwork burden for state member banks. Any estimates of paperwork 
burden for institutions other than state member banks that are affected 
by the amendments would be provided by the federal agency or agencies 
that supervise these lenders.

List of Subjects in 12 CFR Part 226

    Advertising, Credit, Federal Reserve System, Mortgages, Reporting 
and recordkeeping requirements, Truth in lending.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
part 226 as set forth below:

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 226.1 is amended as follows: [[Page 15471]] 
    a. Paragraph (b) is revised;
    b. Paragraph (d)(5) is redesignated as paragraph (d)(6);
    c. A new paragraph (d)(5) is added; and
    d. Redesignated paragraph (d)(6) is revised.
    The revisions and addition read as follows:


Sec. 226.1  Authority, purpose, coverage, organization, enforcement and 
liability.

* * * * *
    (b) The purpose of this regulation is to promote the informed use 
of consumer credit by requiring disclosures about its terms and cost. 
The regulation gives consumers the right to cancel certain credit 
transactions that involve a lien on a consumer's principal dwelling, 
regulates certain credit card practices, and provides a means for fair 
and timely resolution of credit billing disputes. The regulation does 
not govern charges for consumer credit. The regulation requires a 
maximum interest rate to be stated in variable-rate contracts secured 
by the consumer's dwelling. It also imposes limitations on home equity 
plans that are subject to the requirements of Sec. 226.5b and mortgages 
that are subject to the requirements of Sec. 226.32.
* * * * *
    (d) * * *
    (5) Subpart E relates to mortgage transactions covered by 
Sec. 226.32 and reverse mortgage transactions. It contains rules on 
disclosures, fees, and total annual loan cost rates.
    (6) Several appendices contain information such as the procedures 
for determinations about state laws, state exemptions and issuance of 
staff interpretations, special rules for certain kinds of credit plans, 
a list of enforcement agencies, and the rules for computing annual 
percentage rates in closed-end credit transactions and total annual 
loan cost rates for reverse mortgage transactions.
* * * * *
    3. In Sec. 226.2, footnote 3 in paragraph (a)(17)(i) is revised to 
read as follows:


Sec. 226.2  Definitions and rules of construction.

    (a) * * *
    (17) * * *
    (i) * * *3 * * *

    \3\A person regularly extends consumer credit only if it 
extended credit (other than credit subject to the requirements of 
Sec. 226.32) more than 25 times (or more than 5 times for 
transactions secured by a dwelling) in the preceding calendar year. 
If a person did not meet these numerical standards in the preceding 
calendar year, the numerical standards shall be applied to the 
current calendar year. A person regularly extends consumer credit 
if, in any 12-month period, the person originates more than one 
credit extension that is subject to the requirements of Sec. 226.32 
or one or more such credit extensions through a mortgage broker.
---------------------------------------------------------------------------

* * * * *
    4. In Sec. 226.5b, paragraph (f)(2) introductory text is revised 
and a new paragraph (f)(4) is added to read as follows:


Sec. 226.5b  Requirements for home equity plans.

* * * * *
    (f) * * *
    (2) Terminate a plan and demand repayment of the entire outstanding 
balance in advance of the original term (except for reverse mortgage 
transactions that are subject to paragraph (f)(4) of this section) 
unless:
* * * * *
    (4) For reverse mortgage transactions that are subject to 
Sec. 226.33, terminate a plan and demand repayment of the entire 
outstanding balance in advance of the original term except:
    (i) In the case of default;
    (ii) If the consumer transfers title to the property securing the 
note;
    (iii) If the consumer ceases using the property securing the note 
as the primary dwelling; or
    (iv) Upon the consumer's death.
* * * * *
    5. In Sec. 226.23, footnote 48 in paragraph (a)(3) is revised to 
read as follows:


Sec. 226.23  Right of rescission.

    (a) * * *
    (3) * * *\48\ * * *

    \48\The term ``material disclosures'' means the required 
disclosures of the annual percentage rate, the finance charge, the 
amount financed, the total payments, the payment schedule, and the 
disclosures and limitations referred to in Sec. 226.32 (c) and (d).
---------------------------------------------------------------------------

* * * * *
    6. In Sec. 226.28, the first sentence of paragraph (b) is revised 
to read as follows:


Sec. 226.28  Effect on State laws.

* * * * *
    (b) Equivalent disclosure requirements. If the Board determines 
that a disclosure required by state law (other than a requirement 
relating to the finance charge, annual percentage rate, or the 
disclosures required under Sec. 226.32) is substantially the same in 
meaning as a disclosure required under the act or this regulation, 
creditors in that state may make the state disclosure in lieu of the 
federal disclosure. * * *
* * * * *
    7. Part 226 is amended by adding a new Subpart E to read as 
follows:

Subpart E--Special Rules for Certain Home Mortgage Transactions

Sec.
226.31  General rules.
226.32  Requirements for certain closed-end home mortgages.
226.33  Requirements for reverse mortgages.

Subpart E--Special Rules for Certain Home Mortgage Transactions


Sec. 226.31  General rules.

    (a) Relation to other subparts in this part. The requirements and 
limitations of this subpart are in addition to and not in lieu of those 
contained in other subparts of this part.
    (b) Form of disclosures. The creditor shall make the disclosures 
required by this subpart clearly and conspicuously in writing, in a 
form that the consumer may keep.
    (c) Timing of disclosure--(1) Disclosures for certain closed-end 
home mortgages. The creditor shall furnish the disclosures required by 
Sec. 226.32 at least three business days prior to consummation of a 
mortgage transaction covered by Sec. 226.32.
    (i) Change in terms. After complying with paragraph (c)(1) of this 
section and prior to consummation, if the creditor changes any term 
that makes the disclosures inaccurate, new disclosures shall be 
provided in accordance with the requirements of this subpart.
    (ii) Telephone disclosures. A creditor may provide new disclosures 
by telephone if the consumer initiates the change and if, at 
consummation:
    (A) The creditor provides new written disclosures; and
    (B) The consumer and creditor sign a statement that the new 
disclosures were provided by telephone at least three days prior to 
consummation.
    (iii) Consumer's waiver of waiting period before consummation. The 
consumer may, after receiving the disclosures required by paragraph 
(c)(1) of this section, modify or waive the three-day waiting period 
between delivery of those disclosures and consummation if the consumer 
determines that the extension of credit is needed to meet a bona fide 
personal financial emergency. To modify or waive the right, the 
consumer shall give the creditor a dated written statement that 
describes the emergency, specifically modifies or waives the waiting 
period, and bears the signature of all the consumers entitled to the 
waiting period. Printed forms for this purpose are prohibited, except 
when creditors are permitted to use printed forms pursuant to 
Sec. 226.23(e)(2).
    (2) Disclosures for reverse mortgages. The creditor shall furnish 
the [[Page 15472]] disclosures required by Sec. 226.33 at least three 
business days prior to:
    (i) Consummation of a closed-end credit transaction; or
    (ii) The first transaction under an open-end credit plan.
    (d) Basis of disclosures and use of estimates. Disclosures shall 
reflect the terms of the legal obligation between the parties. 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 and shall state clearly that the 
disclosure is an estimate.
    (e) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor 
must comply with the requirements that this part imposes on any or all 
of them. If there is more than one consumer, the disclosures may be 
made to any consumer who is primarily liable on the obligation. If the 
transaction is rescindable under Sec. 226.15 or Sec. 226.23, however, 
the disclosures shall be made to each consumer who has the right to 
rescind.
    (f) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor delivers the 
required disclosures, the inaccuracy is not a violation of Regulation Z 
(12 CFR part 226), although new disclosures may be required for 
mortgages covered by Sec. 226.32 under paragraph (c) of this section, 
Sec. 226.9(c), Sec. 226.19, or Sec. 226.20.
    (g) Accuracy of annual percentage rate. For purposes of 
Sec. 226.32, the annual percentage yield shall be considered accurate 
if it is accurate according to the requirements and within the 
tolerances set forth in Sec. 226.22.


Sec. 226.32  Requirements for certain closed-end home mortgages.

    (a) Coverage. (1) Except as provided in paragraph (a)(2) of this 
section, the requirements of this section apply to a consumer credit 
transaction that is secured by the consumer's principal dwelling, and 
in which either:
    (i) The annual percentage rate at consummation will exceed by more 
than 10 percentage points the yield on Treasury securities having 
comparable periods of maturity to the loan maturity as of the fifteenth 
day of the month immediately preceding the month in which the 
application for the extension of credit is received by the creditor; or
    (ii) The total points and fees payable by the consumer at or before 
loan closing will exceed the greater of 8 percent of the total loan 
amount, or $400; the $400 figure shall be adjusted annually on January 
1 by the annual percentage change in the Consumer Price Index that was 
reported on the preceding June 1.
    (2) This section does not apply to the following:
    (i) A residential mortgage transaction.
    (ii) A reverse mortgage transaction subject to Sec. 226.33.
    (iii) An open-end credit plan subject to subpart B of this part.
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) For purposes of paragraph (a)(1)(ii) of this section, points 
and fees mean:
    (i) All items required to be disclosed under Sec. 226.4(a) and 
226.4(b), except interest or the time-price differential;
    (ii) All compensation paid to mortgage brokers; and
    (iii) All items required to be disclosed under Sec. 226.4(c)(7) 
(other than amounts held for future payment of taxes) unless the charge 
is reasonable, the creditor receives no direct or indirect compensation 
in connection with the charge, and the charge is not paid to an 
affiliate of the creditor.
    (2) Affiliate means any company that controls, is controlled by, or 
is under common control with another company, as set forth in the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
    (c) Disclosures. In addition to other disclosures required by this 
part, in a mortgage subject to this section the creditor shall disclose 
the following:
    (1) Notices. The following statement: ``You are not required to 
complete this agreement merely because you have received these 
disclosures or have signed a loan application. If you obtain this loan, 
the lender will have a mortgage on your home. You could lose your home, 
and any money you have put into it, if you do not meet your obligations 
under the loan.''
    (2) Annual percentage rate. The annual percentage rate.
    (3) Regular payment. The amount of the regular monthly (or other 
periodic) payment.
    (4) Variable-rate. For variable-rate transactions, a statement that 
the interest rate and monthly payment may increase, and the amount of 
the single maximum monthly payment, based on the maximum interest rate 
required to be disclosed under Sec. 226.30.
    (d) Limitations. A mortgage transaction subject to this section may 
not provide for the following terms:
    (1)(i) Balloon payment. For a loan with a term of less than five 
years, a payment schedule with regular periodic payments that when 
aggregated do not fully amortize the outstanding principal balance.
    (ii) Exception. The limitations in paragraph (d)(1)(i) of this 
section do not apply to loans with maturities of less than one year, if 
the purpose of the loan is a ``bridge'' loan connected with the 
acquisition or construction of a dwelling intended to become the 
consumer's principal dwelling.
    (2) Negative amortization. A payment schedule with regular periodic 
payments that cause the principal balance to increase.
    (3) Advance payments. A payment schedule that consolidates more 
than two periodic payments and pays them in advance from the proceeds.
    (4) Increased interest rate. An increase in the interest rate after 
default.
    (5) Rebates. A refund calculated by a method less favorable than 
the actuarial method (as defined by section 933(d) of the Housing and 
Community Development Act of 1992, 15 U.S.C. 1615(d)), for rebates of 
interest arising from a loan acceleration due to default.
    (6) Prepayment penalties. Except as allowed under paragraph (d)(7) 
of this section, a penalty for paying all or part of the principal 
before the date on which the principal is due. A prepayment penalty 
includes computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined by 
section 933(d) of the Housing and Community Development Act of 1992.
    (7) Prepayment penalty exception. A mortgage transaction subject to 
this section may provide for a prepayment penalty otherwise permitted 
by law (including a refund calculated according to the rule of 78s) if:
    (i) The penalty can be exercised only for the first five years 
following consummation;
    (ii) The source of the prepayment funds is not a refinancing by the 
creditor or an affiliate of the creditor; and
    (iii) At consummation, the consumer's total monthly debts 
(including amounts owed under the mortgage) do not exceed 50 percent of 
the consumer's monthly gross income, as verified by the consumer's 
signed financial statement, a credit report, and payment records for 
employment income.
    (e) Prohibited acts and practices. A creditor extending mortgage 
credit subject to this section may not:
    (1) Repayment ability. Engage in a pattern or practice of extending 
such credit to a consumer based on the consumer's collateral if, 
considering the consumer's current and expected income, current 
obligations, and [[Page 15473]] employment status, the consumer will be 
unable to make the scheduled payments to repay the obligation.
    (2) Home improvement contracts. Pay a contractor under a home 
improvement contract from the proceeds of a mortgage covered by this 
section, other than:
    (i) By an instrument payable to the consumer or jointly to the 
consumer and the contractor; or
    (ii) At the election of the consumer, through a third-party escrow 
agent in accordance with terms established in a written agreement 
signed by the consumer, the creditor, and the contractor prior to the 
disbursement.
    (3) Notice to assignee. Sell or otherwise assign a mortgage subject 
to this section without furnishing the following statement to the 
purchaser or assignee: ``Notice: This is a mortgage subject to special 
rules under the federal Truth in Lending Act. Purchasers or assignees 
of this mortgage could be liable for all claims and defenses with 
respect to the mortgage that the borrower could assert against the 
creditor.''


Sec. 226.33  Requirements for reverse mortgages.

    (a) Definition. For purposes of this subpart, reverse mortgage 
transaction means a nonrecourse consumer credit obligation in which:
    (1) A mortgage, deed of trust, or equivalent consensual security 
interest securing one or more advances is created in the consumer's 
principal dwelling; and
    (2) Any principal, interest, or shared appreciation or equity is 
due and payable (other than in the case of default) only after:
    (i) The consumer dies;
    (ii) The dwelling is transferred; or
    (iii) The consumer ceases to occupy the dwelling as a principal 
dwelling.
    (b) Content of disclosures. In addition to other disclosures 
required by this part, in a reverse mortgage transaction the creditor 
shall provide the following disclosures in a form substantially similar 
to the model form found in paragraph (d) of Appendix K of this part:
    (1) Notice. A statement that the consumer is not obligated to 
complete the reverse mortgage transaction merely because the consumer 
has received the disclosures required by this section or has signed an 
application for a reverse mortgage loan.
    (2) Total annual loan cost rates. A good-faith projection of the 
total cost of the credit, determined in accordance with paragraph (c) 
of this section and expressed as a table of ``total annual loan cost 
rates,'' using that term, in accordance with Appendix K of this part.
    (3) Itemization of pertinent information. An itemization of loan 
terms, charges, the age of the youngest borrower and the appraised 
property value.
    (4) Explanation of table. An explanation of the table of total 
annual loan cost rates as provided in the model form found in paragraph 
(d) of Appendix K of this part.
    (c) Projected total cost of credit. The projected total cost of 
credit shall reflect the following factors, as applicable:
    (1) Costs to consumer. All costs and charges to the consumer, 
including the costs of any annuity the consumer purchases as part of 
the reverse mortgage transaction.
    (2) Payments to consumer. All advances to and for the benefit of 
the consumer, including annuity payments that the consumer will receive 
from an annuity that the consumer purchases as part of the reverse 
mortgage transaction.
    (3) Additional creditor compensation. Any shared appreciation or 
equity in the dwelling that the creditor is entitled by contract to 
receive.
    (4) Limitations on consumer liability. Any limitation on the 
consumer's liability (such as nonrecourse limits and equity 
conservation agreements).
    (5) Assumed annual appreciation rates. Each of the following 
assumed annual appreciation rates for the dwelling:
    (i) 0 percent.
    (ii) 4 percent.
    (iii) 8 percent.
    (6) Assumed loan period. (i) Each of the following assumed loan 
periods, as provided in Appendix L of this part:
    (A) Two years.
    (B) The actuarial life expectancy of the consumer to become 
obligated on the reverse mortgage transaction (as of that consumer's 
most recent birthday). In the case of multiple consumers, the period 
shall be the actuarial life expectancy of the youngest consumer (as of 
that consumer's most recent birthday).
    (C) The actuarial life expectancy specified by paragraph 
(c)(6)(i)(B) of this section, multiplied by a factor of 1.4 and rounded 
to the nearest full year.
    (ii) At the creditor's option, the actuarial life expectancy 
specified by paragraph (c)(6)(i)(B) of this section, multiplied by a 
factor of .5 and rounded to the nearest full year.
    9. In Part 226, Appendix H is amended by:
    a. Revising the appendix heading;
    b. Revising the table of contents at the beginning of the appendix; 
and
    c. Adding a new H-16 Mortgage Sample in numerical order.
    The revisions and additions read as follows:

Appendix H to Part 226--Closed-End Model Forms and Clauses

H-1--Credit Sale Model Form (Sec. 226.18)
H-2--Loan Model Form (Sec. 226.18)
H-3--Amount Financed Itemization Model Form (Sec. 226.18(c))
H-4(A)--Variable-Rate Model Clauses (Sec. 226.18(f)(1))
H-4(B)--Variable-Rate Model Clauses (Sec. 226.18(f)(2))
H-4(C)--Variable-Rate Model Clauses (Sec. 226.19(b))
H-4(D)--Variable-Rate Model Clauses (Sec. 226.20(c))
H-5--Demand Feature Model Clauses (Sec. 226.18(i))
H-6--Assumption Policy Model Clause (Sec. 226.18(q))
H-7--Required Deposit Model Clause (Sec. 226.18(r))
H-8--Rescission Model Form (General) (Sec. 226.23)
H-9--Rescission Model Form (Refinancing) (Sec. 226.23)
H-10--Credit Sale Sample
H-11--Installment Loan Sample
H-12--Refinancing Sample
H-13--Mortgage with Demand Feature Sample
H-14--Variable-Rate Mortgage Sample (Sec. 226.19(b))
H-15--Graduated Payment Mortgage Sample
H-16--Mortgage Sample (Sec. 226.32)
* * * * *
BILLING CODE 6210-01-P

[[Page 15474]]

[GRAPHIC][TIFF OMITTED]TR24MR95.014


BIlLING CODE 6210-01-C
* * * * *
    10. In Part 226, a new Appendix K is added to read as follows:

Appendix K to Part 226--Total Annual Loan Cost Rate Computations for 
Reverse Mortgage Transactions

    (a) Introduction. Creditors are required to disclose a series of 
total annual loan cost rates for each reverse mortgage transaction. 
This appendix contains the equations creditors must use in computing 
the total annual loan cost rate for various transactions, as well as 
instructions, explanations, and examples for various transactions. 
This appendix is modeled after Appendix J of this part (Annual 
Percentage Rates Computations for Closed-end Credit Transactions); 
creditors should consult Appendix J of this part for additional 
guidance in using the formulas for reverse mortgages.
    (b) Instructions and equations for the total annual loan cost 
rate.
    (1) General rule. The total annual loan cost rate shall be the 
nominal total annual loan cost rate determined by multiplying the 
unit-period rate by the number of unit-periods in a year.
    (2) Term of the transaction. For purposes of total annual loan 
cost disclosures, the term of a reverse mortgage transaction is 
assumed to begin on the first of the month in which consummation is 
expected to occur. If a loan cost or any portion of a loan cost is 
initially incurred beginning on a date later than consummation, the 
term of the transaction is assumed to begin on the first of the 
month in which that loan cost is incurred. For purposes of total 
annual loan cost disclosures, the term ends on each of the assumed 
loan periods specified in Sec. 226.33(c)(6).
    (3) Definitions of time intervals.
    (i) A period is the interval of time between advances.
    (ii) A common period is any period that occurs more than once in 
a transaction.
    (iii) A standard interval of time is a day, week, semimonth, 
month, or a multiple of a week or a month up to, but not exceeding, 
1 year.
    (iv) All months shall be considered to have an equal number of 
days.
    (4) Unit-period.
    (i) In all transactions other than single-advance, single-
payment transactions, the unit-period shall be that common period, 
not to exceed one year, that occurs most frequently in the 
transaction, except that:
    (A) If two or more common periods occur with equal frequency, 
the smaller of such common periods shall be the unit-period; or
    (B) If there is no common period in the transaction, the unit-
period shall be that period which is the average of all periods 
rounded to the nearest whole standard interval of time. If the 
average is equally near two standard intervals of time, the lower 
shall be the unit-period.
    (ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 
one year.
    (5) Number of unit-periods between two given dates.
    (i) The number of days between two dates shall be the number of 
24-hour intervals between any point in time on the first date to the 
same point in time on the second date.
    (ii) If the unit-period is a month, the number of full unit-
periods between two dates shall be the number of months. If the 
unit-period is a month, the number of unit-periods per year shall be 
12.
    (iii) If the unit-period is a semimonth or a multiple of a month 
not exceeding 11 months, the number of days between two dates shall 
be 30 times the number of full months. The number of full unit-
periods shall be determined by dividing the number of days by 15 in 
the case of a semimonthly unit-period or by the appropriate multiple 
of 30 in the case of a multimonthly unit-period. If the unit-period 
is a semimonth, the number of unit-periods per year shall be 24. If 
the number of unit-periods is a multiple of a month, the number of 
unit-periods per year shall be 12 divided by the number of months 
per unit-period.
    (iv) If the unit-period is a day, a week, or a multiple of a 
week, the number of full unit-periods shall be determined by 
dividing the number of days between the two given dates by the 
number of days per unit-period. If the unit-period is a day, the 
number of unit-periods per year shall be 365. If the unit-period is 
a week or a multiple of a week, the number of unit-periods per year 
shall be 52 divided by the number of weeks per unit-period.
    (v) If the unit-period is a year, the number of full unit-
periods between two dates shall be the number of full years (each 
equal to 12 months).
    (6) Symbols. The symbols used to express the terms of a 
transaction in the equation set forth in paragraph (b)(8) of this 
appendix are defined as follows:

Aj=The amount of each periodic or lump-sum advance to the 
consumer under the reverse mortgage transaction.
i=Percentage rate of the total annual loan cost per unit-period, 
expressed as a decimal equivalent.
j=The number of unit-periods until the jth advance.
n=The number of unit-periods between consummation and repayment of 
the debt.
Pn=Min (Baln, Valn). This is the maximum amount that 
the creditor can be repaid at the specified loan term.
Baln=Loan balance at time of repayment, including all costs and 
fees incurred by the consumer (including any shared appreciation or 
shared equity amount) compounded to time n at the creditor's 
contract rate of interest.
Valn=Val0 (1 + )y, where Val0 is the 
property value at consummation,  is the assumed annual rate 
of appreciation for the dwelling, and y is the number of years in 
the assumed term. Valn must be reduced by the amount of any 
equity reserved for the consumer by agreement between the parties, 
or by 7 percent (or the amount or percentage specified in the credit 
agreement), if the amount required to be repaid is limited to the 
net proceeds of sale.
=The summation operator.
    Symbols used in the examples shown in this appendix are defined 
as follows:
[GRAPHIC][TIFF OMITTED]TR24MR95.015


[GRAPHIC][TIFF OMITTED]TR24MR95.007


w=The number of unit-periods per year. [[Page 15475]] 
I=wi x 100=the nominal total annual loan cost rate.

    (7) General equation. The total annual loan cost rate for a 
reverse mortgage transaction must be determined by first solving the 
following formula, which sets forth the relationship between the 
advances to the consumer and the amount owed to the creditor under 
the terms of the reverse mortgage agreement for the loan cost rate 
per unit-period (the loan cost rate per unit-period is then 
multiplied by the number of unit-periods per year to obtain the 
total annual loan cost rate I; that is, I = wi):
[GRAPHIC][TIFF OMITTED]TR24MR95.008


    (8) Solution of general equation by iteration process. (i) The 
general equation in paragraph (b)(7) of this appendix, when applied 
to a simple transaction for a reverse mortgage loan of equal monthly 
advances of $350 each, and with a total amount owed of $14,313.08 at 
an assumed repayment period of two years, takes the special form:
[GRAPHIC][TIFF OMITTED]TR24MR95.009


Using the iteration procedures found in steps 1 through 4 of 
(b)(9)(i) of Appendix J of this part, the total annual loan cost 
rate, correct to two decimals, is 48.53%.
    (ii) In using these iteration procedures, it is expected that 
calculators or computers will be programmed to carry all available 
decimals throughout the calculation and that enough iterations will 
be performed to make virtually certain that the total annual loan 
cost rate obtained, when rounded to two decimals, is correct. Total 
annual loan cost rates in the examples below were obtained by using 
a 10-digit programmable calculator and the iteration procedure 
described in Appendix J of this part.
    (9) Assumption for discretionary cash advances. If the consumer 
controls the timing of advances made after consummation (such as in 
a credit line arrangement), the creditor must use the general 
formula in paragraph (b)(7) of this appendix. The total annual loan 
cost rate shall be based on the assumption that 50 percent of the 
principal loan amount is advanced at closing, or in the case of an 
open-end transaction, at the time the consumer becomes obligated 
under the plan. Creditors shall assume the advances are made at the 
interest rate then in effect and that no further advances are made 
to, or repayments made by, the consumer during the term of the 
transaction or plan.
    (10) Assumption for variable-rate reverse mortgage transactions. 
If the interest rate for a reverse mortgage transaction may increase 
during the loan term and the amount or timing is not known at 
consummation, creditors shall base the disclosures on the initial 
interest rate in effect at the time the disclosures are provided.
    (11) Assumption for closing costs. In calculating the total 
annual loan cost rate, creditors shall assume all closing and other 
consumer costs are financed by the creditor.
    (c) Examples of total annual loan cost rate computations.
    (1) Lump-sum advance at consummation.

Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer 
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
[GRAPHIC][TIFF OMITTED]TR24MR95.010


Total annual loan cost rate (100(.010843293 x 12)) = 13.01%

    (2) Monthly advance beginning at consummation.

Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer 
at age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC][TIFF OMITTED]TR24MR95.011


Total annual loan cost rate (100(.009061140 x 12))=10.87%
    (3) Lump sum advance at consummation and monthly advances 
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
Estimated time of repayment (based on life expectancy of a consumer 
at age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%

[[Page 15476]]

[GRAPHIC][TIFF OMITTED]TR24MR95.012


Total annual loan cost rate (100(.007708844 x 12)) = 9.25%

    (d) Reverse mortgage model form and sample form.
    (1) Model form.
Total Annual Loan Cost Rate

Loan Terms

Age of youngest borrower:
Appraised property value:
Interest rate:
Monthly advance:
Initial draw:
Line of credit:

Initial Loan Charges

Closing costs:
Mortgage insurance premium:
Annuity cost:

Monthly Loan Charges

Servicing fee:

Other Charges:

Mortgage insurance:
Shared Appreciation:

Repayment Limits

------------------------------------------------------------------------
                                  Total annual loan cost rate           
   Assumed annual    ---------------------------------------------------
    appreciation      2-year loan   [  ]-year    [  ]-year    [  ]-year 
                          term      loan term]   loan term    loan term 
------------------------------------------------------------------------
0%..................                      [  ]                          
4%..................                      [  ]                          
8%..................                      [  ]                          
------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you 
keep the loan and how much your house appreciates in value. 
Generally, the longer you keep a reverse mortgage, the lower the 
total annual loan cost rate will be.
    This table shows the estimated cost of your reverse mortgage 
loan, expressed as an annual rate. It illustrates the cost for three 
[four] loan terms: 2 years, [half of life expectancy for someone 
your age,] that life expectancy, and 1.4 times that life expectancy. 
The table also shows the cost of the loan, assuming the value of 
your home appreciates at three different rates: 0%, 4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically 
include principal, interest, closing costs, mortgage insurance 
premiums, annuity costs, and servicing costs (but not costs when you 
sell the home).
    The rates in this table are estimates. Your actual cost may 
differ if, for example, the amount of your loan advances varies or 
the interest rate on your mortgage changes.

Signing an Application or Receiving These Disclosures Does Not Require 
You To Complete This Loan

    (2) Sample Form.

Total Annual Loan Cost Rate

Loan Terms

Age of youngest borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly advance: $301.80
Initial draw: $1,000
Line of credit: $4,000

Initial Loan Charges

Closing costs: $5,000
Mortgage insurance premium: None
Annuity cost: None

Monthly Loan Charges

Servicing fee: None

Other Charges

Mortgage insurance: None
Shared Appreciation: None

Repayment Limits

Net proceeds estimated at 93% of projected home sale

------------------------------------------------------------------------
                                  Total annual loan cost rate           
   Assumed annual    ---------------------------------------------------
    appreciation      2-year loan    [6-year      12-year      17-year  
                          term      loan term]   loan term    loan term 
------------------------------------------------------------------------
0%..................       39.00%     [14.94%]        9.86%        3.87%
4%..................       39.00%     [14.94%]       11.03%       10.14%
8%..................       39.00%     [14.94%]       11.03%       10.20%
------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you 
keep the loan and how much your house appreciates in value. 
Generally, the longer you keep a reverse mortgage, the lower the 
total annual loan cost rate will be.
    This table shows the estimated cost of your reverse mortgage 
loan, expressed as an annual rate. It illustrates the cost for three 
[four] loan terms: 2 years, [half of life expectancy for someone 
your age,] that life expectancy, and 1.4 times that life expectancy. 
The table also shows the cost of the loan, assuming the value of 
your home appreciates at three different rates: 0%,4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically 
include principal, interest, closing costs, mortgage insurance 
premiums, annuity costs, and servicing costs (but not disposition 
costs--costs when you sell the home).
    The rates in this table are estimates. Your actual cost may 
differ if, for example, the amount of your loan advances varies or 
the interest rate on your mortgage changes.

Signing an Application or Receiving These Disclosures Does Not Require 
You To Complete This Loan
    11. In Part 226, a new Appendix L is added to read as follows:

Appendix L to Part 226--Assumed Loan Periods for Computations of Total 
Annual Loan Cost Rates

    (a) Required tables. In calculating the total annual loan cost 
rates in accordance with Appendix K of this part, creditors shall 
assume three loan periods, as determined by the following table.
    (b) Loan periods.
    (1) Loan Period 1 is a two-year loan period.
    (2) Loan Period 2 is the life expectancy in years of the 
youngest borrower to become obligated on the reverse mortgage loan, 
as shown in the U.S. Decennial Life Tables for 1979-1981 for 
females, rounded to the nearest whole year. [[Page 15477]] 
    (3) Loan Period 3 is the life expectancy figure in Loan Period 
3, multiplied by 1.4 and rounded to the nearest full year (life 
expectancy figures at .5 have been rounded up to 1).
    (4) At the creditor's option, an additional period may be 
included, which is the life expectancy figure in Loan Period 2, 
multiplied by .5 and rounded to the nearest full year (life 
expectancy figures at .5 have been rounded up to 1).

------------------------------------------------------------------------
                                                Loan period             
   Age of youngest    Loan period   [Optional     2 (life    Loan period
      borrower           1 (in     loan period  expectancy)     3 (in   
                         years)    (in years)]   (in years)     years)  
------------------------------------------------------------------------
62..................            2         [11]           21           29
63..................            2         [10]           20           28
64..................            2         [10]           19           27
65..................            2          [9]           18           25
66..................            2          [9]           18           25
67..................            2          [9]           17           24
68..................            2          [8]           16           22
69..................            2          [8]           16           22
70..................            2          [8]           15           21
71..................            2          [7]           14           20
72..................            2          [7]           13           18
73..................            2          [7]           13           18
74..................            2          [6]           12           17
75..................            2          [6]           12           17
76..................            2          [6]           11           15
77..................            2          [5]           10           14
78..................            2          [5]           10           14
79..................            2          [5]            9           13
80..................            2          [5]            9           13
81..................            2          [4]            8           11
82..................            2          [4]            8           11
83..................            2          [4]            7           10
84..................            2          [4]            7           10
85..................            2          [3]            6            8
86..................            2          [3]            6            8
87..................            2          [3]            6            8
88..................            2          [3]            5            7
89..................            2          [3]            5            7
90..................            2          [3]            5            7
91..................            2          [2]            4            6
92..................            2          [2]            4            6
93..................            2          [2]            4            6
94..................            2          [2]            4            6
95 and over.........            2          [2]            3            4
------------------------------------------------------------------------

    By order of the Board of Governors of the Federal Reserve 
System, March 20, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-7231 Filed 3-23-95; 8:45 am]
BILLING CODE 6210-01-P