[Federal Register Volume 60, Number 63 (Monday, April 3, 1995)]
[Rules and Regulations]
[Pages 16771-16780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8071]



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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0863]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule; official staff interpretation.

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SUMMARY: The Board is publishing revisions to the official staff 
commentary to Regulation Z (Truth in Lending). The commentary applies 
and interprets the requirements of Regulation Z. The revisions clarify 
regulatory provisions and provide further guidance on issues of general 
interest, such as the treatment of various fees and taxes associated 
with real estate-secured loans and a creditor's 
[[Page 16772]] responsibilities when investigating a claim of the 
unauthorized use of a credit card.

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

FOR FURTHER INFORMATION CONTACT: For Subparts A and B (open-end 
credit), Jane Jensen Gell or Obrea Otey Poindexter, Staff Attorneys; 
for Subparts A and C (closed-end credit), Kyung Cho-Miller, Sheilah A. 
Goodman, W. Kurt Schumacher, Natalie E. Taylor, or Manley Williams, 
Staff Attorneys, Division of Consumer and Community Affairs, Board of 
Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412; 
for the hearing impaired only, Dorothea Thompson, Telecommunications 
Device for the Deaf, at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et 
seq.) is to promote the informed use of consumer credit. The act 
requires creditors to disclose credit terms and the cost of credit as 
an annual percentage rate (APR). The act requires additional 
disclosures for loans secured by a consumer's home, and permits 
consumers to cancel certain transactions that involve their principal 
dwelling. It also imposes limitations on some credit transactions 
secured by a consumer's principal dwelling. The act is implemented by 
the Board's Regulation Z (12 CFR part 226). The regulation authorizes 
the issuance of official staff interpretations of the regulation. (See 
Appendix C to Regulation Z.) The Board has published a staff commentary 
to Regulation Z which clarifies existing law and provides guidance to 
creditors in applying the regulation to specific transactions 
(Supplement I of this part). The Board updates the commentary 
periodically as a substitute for individual staff interpretations.
    In December, the Board published proposed amendments to the 
commentary to Regulation Z (59 FR 64351, December 14, 1994). The Board 
received about 150 comments. Nearly 90% were from creditors or their 
representatives; the remainder were from consumer advocates, government 
officials, and individuals. Overall, commenters generally supported the 
proposed amendments. Views were mixed on a number of comments, and some 
commenters expressed concerns about issues not addressed in the 
proposal. Except as discussed below, the commentary has been revised as 
proposed; some technical suggestions or concerns raised by commenters 
are addressed. Compliance with the amendments is mandatory on October 
1, 1995.

II. Commentary Revisions

Subpart A--General

Section 226.2--Definitions and Rules of Construction

2(a)  Definitions

2(a)(17)  Creditor

Paragraph 2(a)(17)(i)

    Comment 2(a)(17)(i)-8 clarifies the identity of the creditor for 
participant loans from an employee savings plan, such as 401(k) plans. 
The proposal would have clarified that the plan (and not the plan trust 
or trustee) is the creditor for purposes of the TILA.
    Some commenters asked for further guidance when the plan's trust or 
trustee provide disclosures for the plan's participant loan program. 
The comment is revised from the proposal for clarity. Creditors should 
look to the plan (not the trust or trustee) to determine whether the 
numerical tests for coverage have been met. The person to whom the 
participant's loan is initially made payable (whether the plan, the 
trust, or the trustee) is responsible for Regulation Z compliance for 
participant loans.
Section 226.4--Finance Charge

4(a)  Definition

    Comment 4(a)-1 is revised as proposed to indicate that section 12 
of the Real Estate Settlement Procedures Act (RESPA; 12 U.S.C. 2610) 
prohibits creditors from charging fees for preparing TILA disclosure 
statements in RESPA-covered transactions. The comments generally 
supported the revisions.
    The Board received a substantial number of comments relating to the 
proposed revision to comment 4(a)-3 on fees charged by third parties. 
While most commenters believed that the comment helped clarify the 
treatment of third-party fees generally, the examples of settlement 
agent charges, mortgage broker fees, and taxes raised a number of 
questions.
    Creditors had expressed concern about some charges imposed by loan-
closing agents being imputed to the creditor. Some had indicated that 
despite the fact that they require the use of a closing agent (and in 
limited ways the agent acts on behalf of the creditor), in the modern 
mortgage lending environment, creditors do not have control over 
certain fees that may be charged to consumers by these entities, 
particularly where there is no affiliation between the creditor and the 
third party, as is often the case. To address this concern, the 
proposed revision to comment 4(a)-3 provided by example that if a 
particular fee imposed by a settlement agent is not required or 
retained by the creditor, the fee is not a finance charge, even though 
the creditor requires use of a third party.
    Comment 4(a)-3, which applies to all types of credit extensions 
(not just home-purchase or other home-secured loans), is revised in the 
final version to clarify the general third-party rule. Upon further 
analysis, guidance about fees charged by settlement agents in real 
estate-secured transactions is provided in a separate comment 4(a)-4. 
This new comment gives the general rule for evaluating settlement agent 
fees, and is followed by an example. Comments previously numbered 4(a)-
4 through -6 are now renumbered.
    Many commenters also requested further clarification on the example 
of mortgage broker fees as a finance charge. The proposed clarification 
responded to questions about the existing mortgage broker fee example, 
which had been added to address programs offering lower rates and 
clearly more favorable terms to borrowers who use the creditor's 
affiliated mortgage broker than to borrowers who apply to the creditor 
directly. The particular example has been deleted; while the mortgage 
broker fee charged in this instance is still considered a finance 
charge, it is a much less common practice today, and therefore has 
caused confusion. The example of mortgage broker fees is amended to 
simply reflect the general rule that a fee is a finance charge if the 
creditor retains the fee.
    With regard to taxes, some commenters noted that the commentary 
addresses in several areas the issue of whether taxes are finance 
charges. These commenters requested that all comments referring to 
taxes be consolidated into one comment. To ease compliance, the 
reference to taxes currently contained in comment 4(a)-3 is removed. 
The general rules on the treatment of taxes under the TILA are 
contained in renumbered and revised comment 4(a)-7, formerly comment 
4(a)-6. The current reference to taxes under 4(e)-1 has been revised 
and the current reference to taxes under 4(a)-1 remains unaffected.

4(c)  Charges Excluded From the Finance Charge

Paragraph 4(c)(7)

    Comment 4(c)(7)-1 clarifies certain real-estate and residential 
mortgage [[Page 16773]] transaction costs that are excluded from the 
finance charge. In response to commenters' suggestions and upon further 
analysis, the comment is revised to state that fees excludable under 
this section include not only the cost of the charges excludable under 
this section, but also the cost of verifying or confirming information 
relating to excludable item itself. The previous language specifically 
stated that a credit report fee included the cost of verifying 
information in the report. This language was intended to be read only 
as an example. It is now more clearly shown as such. Verification or 
confirmation fees, like other excludable charges under this section, 
must be bona fide and reasonable in amount.
    The language addressing lump sum charges has been moved to a new 
comment, 4(c)(7)-2. This provision has been adopted as proposed, with 
some revisions for clarity. The comment states that a lump sum charge 
for conducting or attending a closing (charged, for example, by a 
lawyer or a title company) is excluded from the finance charge if the 
charge is primarily for services related to items listed in 
Sec. 226.4(c)(7) (such as reviewing or completing documents), even if 
other incidental services, such as explaining various documents or 
disbursing funds for the parties, are performed. This is an exception 
to the general rule on the treatment of lump sum fees. Most commenters 
supported the proposal as a clarification of the Board's existing 
position. Several, however, opposed allowing creditors to exclude fees 
for incidental services where the charge is primarily for services 
related to items listed in Sec. 226.4(c)(7), believing that this would 
result in less accurate disclosures.
    Comment 4(c)(7)-3 (proposed as 4(c)(7)-2) has been adopted as 
proposed, with minor changes for clarity. The comment states that 
charges excludable under Sec. 226.4(c)(7) are those imposed in 
connection with the initial decision to grant credit--for example, a 
fee to search for tax liens on the property or to determine if flood 
insurance is required. The comment also clarifies that fees for 
services to be performed during the loan term, for example, to monitor 
a consumer's continued compliance with contract provisions, such as 
paying property taxes or purchasing flood insurance, are not excludable 
under Sec. 226.4(c)(7), regardless of when they are paid. These 
recurring administrative fees, paid by the consumer to protect the 
creditor's security interest, are finance charges.
    Commenters generally agreed with the proposed language. Many, 
however, had concerns regarding the treatment of fees paid at closing 
for services attributable both to the initial credit decision and to 
services to be performed periodically over the term of the loan. For 
example, certain flood certification providers charge a consolidated 
fee, and it may not be clear to creditors what portion of the fee 
relates to the services connected with the initial credit decision. The 
final commentary addresses these concerns by specifying that a creditor 
may treat the entire charge as a finance charge if the creditor is 
uncertain of the portion properly attributable to the finance charge. 
Such sum need not be labelled as an estimate.

4(e)  Certain Security Interest Charges

    Comment 4(e)-1 provides examples of security interest charges that 
are and are not excludable as finance charges. The proposal stated that 
only recording fees relating to the obligation between the creditor and 
the consumer were excludable. Most commenters supported the proposal, 
although some were opposed. The comment is adopted as proposed, but 
indicates that fees to record documents such as an assignment between a 
creditor and a third party are finance charges.
    In response to comments and for clarity, the portion of comment 
4(e)-1 dealing with taxes has been revised. As discussed above, comment 
4(a)-7 (formerly 4(a)-6) contains the general rules on the treatment of 
taxes.
Subpart B--Open-End Credit

Section 226.5--General Disclosure Requirements

5(b)  Time of Disclosures

5(b)(1)  Initial Disclosures

    Comment 5(b)(1)-1 provides that initial disclosures must be 
provided before the consumer makes the first purchase under an open-end 
plan. The comment provides an example to illustrate that when a 
consumer makes a purchase and opens an account with a retailer 
contemporaneously, initial disclosures must be given to the consumer at 
that time.
    Comment 5(b)(1)-5 addresses the general rule as it relates to the 
timing of initial disclosures when a creditor offers consumers an 
option to transfer outstanding balances with other creditors as part of 
a preapproval or general solicitation of an open-end credit plan. The 
proposal required creditors to comply with initial disclosure 
requirements under Sec. 226.6 before the consumer authorized the 
balance transfer. The purpose of the proposal was to ensure that 
consumers receive initial disclosures before the first transaction is 
made under the plan.
    Commenters were divided on the proposal. Several commenters 
believed that the disclosures required under Sec. 226.5a at the time of 
solicitation adequately protect and sufficiently inform the consumer 
about the terms of the credit plan. The initial disclosures required 
under Sec. 226.6, however, contain important terms that are not 
included in the solicitation disclosures. For example, the initial 
disclosures give the cash advance APR, information that could be an 
important factor in a consumer's decision to authorize a balance 
transfer. To ease compliance, card issuers that are subject to the 
requirements of Sec. 226.5a may establish procedures that comply with 
both sections in a single disclosure statement. Comment 5a-2 provides 
guidance on the appropriate format for combined disclosures. For 
example, a creditor could provide the Sec. 226.5a disclosures in a 
tabular format, along with the additional disclosures required by 
Sec. 226.6 outside the table.
    Other commenters requested an ``opt-out'' provision that would 
allow card issuers to comply by establishing a procedure under which a 
consumer could cancel or reverse the balance transfer after receiving 
initial disclosures. This option raises concerns about the effect such 
an approach would have on a consumer whose balance with a third party 
would be paid by the card issuer. It could be difficult to cancel or 
reverse the balance transfer transaction.
    Commenters suggested that a creditor could comply with the initial 
disclosure requirements under Sec. 226.6 by delaying the requested 
transfer for a period of time after the initial disclosures are sent. 
The delay would ensure that the initial disclosures are received by the 
consumer before the transferred balance is applied to the new plan. 
Under the revised commentary, a creditor complies with this section if 
initial disclosures required under Sec. 226.6 are furnished before a 
balance transfer transaction occurs.
Section 226.6--Initial Disclosure Statement

6(b)  Other Charges

    Comment 6(b)-1 provides guidance for disclosing a termination fee 
imposed in an open-end credit plan, as proposed. Commenters generally 
supported the disclosure of a termination fee as an ``other charge.'' 
Some commenters believed disclosing the fee as a finance charge might 
better assist consumers in shopping for a credit plan. But this 
approach would not facilitate consumer [[Page 16774]] shopping based on 
the APR, since the APR in the initial disclosures reflects on finance 
charges based on periodic rates, and thus would not be affected by a 
termination fee. Furthermore, the consumer would gain little from 
receiving an APR (disproportionately high in some cases) on what might 
be the last periodic statement for a fee imposed when the consumer 
closes the plan.
Section 226.12--Special Credit Card Rules

12(b)  Liability of Cardholder for Unauthorized Use

    Comments 12(b)-2 and -3 address a card issuer's rights and 
responsibilities in responding to a claim of unauthorized use under 
Sec. 226.12. Comment 12(b)-2 clarifies that a card issuer is not 
required to impose any liability. Comment 12(b)-3 clarifies that a card 
issuer wishing to impose liability must investigate claims in a 
reasonable manner.
    Comment 12(b)-3 lists some of the procedures that may be involved 
in the investigation of a claim. The procedures involved in conducting 
a reasonable investigation depend on the facts of the situation; 
neither a minimum nor a maximum number of steps is required to deem a 
particular investigation ``reasonable.'' Some commenters expressed 
concern about card issuers advising consumers that they may be required 
to appear in a court action. These commenters believed such statements 
would possibly be misleading and intimidating, and that in any case a 
court action was independent of a card issuer's investigation. The 
reference to court appearances has been deleted.
    Commenters suggested a variety of other actions that a card issuer 
may take, in addition to those proposed, in a reasonable investigation 
of a claim of unauthorized use. The list has been expanded to clarify 
that a card issuer may request documentation to verify the claim and 
may request information regarding the cardholder's knowledge of the 
person who allegedly used the card or of that person's authority to do 
so.
    Many commenters expressed concern that the proposed comment 
prohibited a card issuer from denying a claim because a cardholder 
refused to comply with any request for cooperation, such as the failure 
to submit a signed statement. A card issuer may not automatically deny 
a claim based solely on the cardholder's failure or refusal to comply 
with a particular request. For example, a cardholder may return an 
unsigned questionnaire about the claim but may refuse to submit a sworn 
statement. The card issuer may not automatically deny the claim because 
it is unaccompanied by an affidavit. However, the comment also makes 
clear that the cardholder's failure to cooperate may affect the card 
issuer's ability to investigate the claim of unauthorized use. For 
example, if the cardholder fails to respond to requests for information 
the card issuer can reasonably obtain only from the cardholder, the 
comment provides that the card issuer, without further information, may 
reasonably terminate its investigation.
Section 226.15--Right of Rescission

15(a)  Consumer's Right To Rescind

Paragraph 15(a)(1)

    Comments 15(a)(1)-5 and -6 are revised to provide further guidance 
on the right to rescind a transaction secured by a consumer's principal 
dwelling. (See also comments 23(a)(1)-3 and -4.)
15(d)  Effects of Rescission

    Comment 15(d)(2)-1 is revised to clarify that if a consumer 
rescinds a credit transaction, the creditor must refund any broker fee 
that is part of the credit transaction, even though the consumer paid 
the fee to the broker rather than to the creditor. (See comment 
23(d)(2)-1.)
Section 226.16--Advertising

16(d)  Additional Requirements for Home Equity Plans

    Comment 16(d)-7 clarifies disclosure requirements for balloon 
payments in home equity plan advertisements. The commentary to 
Sec. 226.5b(d)(5)(ii) provides that for plans in which a balloon 
payment will occur if the consumer makes only the minimum payments, the 
disclosure must state that fact. A comparable requirement applies to 
advertisements, since the regulatory provisions on treatment of balloon 
payments in home equity advertising and in disclosures are generally 
parallel.
    A number of commenters thought the proposed comment would require a 
disclosure about balloon payments in any advertisement for a program in 
which a balloon payment occurs, regardless of whether the advertisement 
included a ``trigger term.'' The proposed comment was not intended to 
impose such a requirement. The comment has been revised to clarify that 
disclosure is required only if the advertisement contains a statement 
about a minimum periodic payment. The comment also addresses questions 
about the required content of the disclosure, including concerns about 
the effect of the cross-reference to comment 5b(d)(5)(ii)-3.

Subpart C--Closed-End Credit

Section 226.17--General Disclosures

17(a)  Form of Disclosures

Paragraph 17(a)(1)

    Comment 17(a)(1)-5 is revised to clarify that a late payment fee on 
a single payment loan is information directly related to the segregated 
disclosures. The introductory language has been revised to clarify that 
the list of directly related information is exhaustive.

17(c)  Basis of Disclosures and Use of Estimates

Paragraph 17(c)(4)

    Section 226.17(c)(4) allows creditors to disregard in the payment 
schedule and other calculations any small variations in the first 
payment due to a long or short first period. Comment 17(c)(4)-4 
clarifies that prepaid finance charges, such as ``odd-days'' or ``per-
diem'' interest paid at or prior to closing, may not be considered as 
the first payment on a loan. Thus, ``odd-days'' interest paid at or 
prior to closing cannot be considered a part of the payment schedule 
and disregarded as a irregularity in disclosing the finance charges in 
the payment schedule. The language has been adopted as proposed, with a 
minor change made to state that the comment applies to ``pre-paid'' and 
``odd-days'' interest, using those terms by name.
    Commenters favored treating odd-days or per-diem interest collected 
at closing as being the first payment for the purposes of these ``minor 
irregularities'' provisions when the consummation date is subject to 
change outside of the lender's control (for example, in some escrow-
closing states). If interest collected at, or prior to, consummation 
meets the definition of a prepaid finance charge, it must be treated as 
such.
    The regulation does not require creditors to collect odd-days or 
per-diem interest at, or prior to, consummation. If that interest is 
collected as part of the first periodic payment, instead, the minor 
irregularities provisions of Sec. 226.17(c)(4) would apply to the 
extent the amount is within those parameters.

17(f)  Early Disclosures

    Comment 226.17(f)-1 is revised to clarify that the regulation 
requires redisclosure not only if the APR, at consummation, differs 
from the earlier disclosed APR by more than the allowable 1/8 or 1/4 of 
1 percent [[Page 16775]] tolerance, but also if the early disclosures 
were not marked as estimates, and the terms at consummation, other than 
the APR, differ from the earlier disclosed terms. Language has been 
added to the second example to illustrate the case when terms at 
consummation differ from those previously disclosed, where they were 
not marked as estimates. To facilitate comparison of the two examples, 
the dates in the second example have been changed to those stated in 
the first example. A third example has been added to illustrate 
circumstances when the regulation does not require redisclosure even 
though the consummated terms, including the APR, differ from the 
disclosed terms.
Section 226.18--Content of Disclosures

18(c)  Itemization of Amount Financed

Paragraph 18(c)(1)(iv)

    Comment 18(c)(1)(iv)-2 clarifies disclosure requirements under the 
TILA that are affected by new aggregate accounting rules under the Real 
Estate Settlement Procedures Act (RESPA; 12 U.S.C. 2601). The comment 
provides that creditors may use the amount on line 1002 of the HUD-1 or 
HUD-1A, without adjustment, to calculate the prepaid finance charge 
under the TILA.
    In October 1994, the Department of Housing and Urban Development 
(HUD), which implements Real Estate Settlement Procedures Act (RESPA; 
12 U.S.C. 2601) through Regulation X (24 CFR Part 3500), amended its 
regulation to implement new procedures for calculating the amount 
consumers must pay into escrow accounts associated with RESPA-covered 
home mortgage loans (59 FR 53890, October 26, 1994, and 60 FR 8812, 
February 15, 1995). These procedures are being phased in over time for 
existing escrow accounts; all new escrow accounts established on or 
after April 24, 1995, must comply with the new procedures. Eventually, 
all lenders will be required to use an aggregate accounting method 
instead of a single-item method for RESPA transactions. The use of the 
aggregate method will affect disclosure requirements under Regulation 
Z.
    Currently, in calculating the amounts required to be paid into 
escrow accounts at closing, most lenders use what is referred to as the 
single-item analysis. (Property taxes, insurance, and mortgage 
insurance premiums are common examples of escrow items.) Under single-
item analysis, lenders account separately for each item to be collected 
at closing and held in escrow.
    Under the aggregate accounting method, rather than accounting for 
each item separately, the amount for escrow is determined as a whole. 
This will make it difficult for a creditor to determine how much of the 
aggregate amount is actually allocated to each escrow item.
    Regardless of how they collect the funds under RESPA, lenders will 
continue to disclose escrow items on the HUD settlement statement using 
the single-item analysis. If the amount actually collected at 
settlement is affected by the aggregate accounting method, the 
settlement statement will reflect the adjustment on a separate line in 
the 1000 series (Sec. 3500.8(c)(1), 60 FR 8816, February 15, 1995). 
Mortgage insurance premiums, one of the items typically paid at 
settlement and included in the escrow account, are listed on line 1002 
of the HUD statement. This amount is also a prepaid finance charge 
under Regulation Z.
    If a creditor is collecting the settlement charges using aggregate 
analysis the amount actually collected may be less than the amount 
listed on line 1002. Guidance had been requested on what amount lenders 
should use as the prepaid finance charge, since the amount disclosed is 
not precisely the amount collected. Various alternatives were 
considered to ensure as accurate and uniform a disclosure as possible. 
Comment 18(c)(1)(iv)-2 provides that creditors may use the amount on 
line 1002, without adjustment, to calculate the prepaid finance charge 
under the TILA. This approach will ease compliance and provide 
consumers with an easily identifiable amount for the mortgage 
insurance. While this method does slightly overstate the amount of the 
prepaid finance charge for mortgage insurance, nonetheless this method 
seems to provide the more accurate and equitable treatment possible 
given the problems associated with identifying the amount of any single 
item in an aggregate accounting analysis.
    Commenters generally supported this approach. Several commenters 
requested further clarification on whether the approach is mandatory, 
whether the figure used is considered an estimate, and how the 
tolerance is applied in this situation. A sentence has been added to 
the comment to clarify that the Board is deeming the figure used on the 
HUD-1 or HUD-1A as accurate, for purposes of Regulation Z, as long as 
that amount is computed in accordance with RESPA. Accordingly, the 
figure is not considered an estimate, and the tolerance would apply as 
it does for all other figures disclosed under Regulation Z. As long as 
the figure disclosed is accurate for purposes of RESPA, the figure is 
accurate to determine the finance charge tolerance. The approach is 
mandatory for all loans closed using the aggregate accounting method 
required by RESPA.

18(d)  Finance Charge

    Comment 18(d)-2 has been adopted as proposed, with some minor 
revisions for clarity. The comment states that although there is no 
specific tolerance for the amount financed, an error in that figure--
resulting from an error in the finance charge--does not violate the act 
or the regulation provided the finance charge disclosed under 
Sec. 226.18(d) is within the permissible tolerance provided in footnote 
41 of the regulation. This same interpretation applies to other 
disclosures for which the regulation provides no specific tolerance, 
such as the total of payments.
    Most commenters were in favor of the proposal. Views were split 
among those commenters opposing the proposal. Some suggested that a 
maximum tolerance of $10 was insufficient to adequately protect 
lenders. Several others opposed any tolerance for errors in the amount 
financed or the other disclosures that was not currently addressed in 
the regulation.
    Several commenters pointed out that the language suggested the 
error must result from an error in the finance charge ``that 
constitutes a part of the amount financed.'' This phrase has been 
deleted as unnecessary.
Section 226.19--Certain Residential Mortgage and Variable-Rate 
Transactions

19(b)  Certain Variable-Rate Transactions

Paragraph 19(b)(2)(vii)

    Comment 19(b)(2)(vii)-2, with the exception of a few technical 
changes, is adopted as proposed. It states that loans with more than 
one way to trigger negative amortization are separate variable-rate 
loan programs requiring separate disclosures to the extent they vary 
from each other. For example, a loan which provides for monthly 
interest rate changes but only annual payment changes and an option for 
the borrower to cap the amount of monthly payments whenever the new 
payment would exceed the old payment by more than a certain margin, 
contains two separate variable-rate programs. Each program may trigger 
negative amortization requiring separate disclosures. (See comments 
226.19(b)(2)-2 and -3 for a discussion on the definition of a variable-
rate program and consolidation of disclosures for more than one 
program.) [[Page 16776]] For the program that gives the borrower an 
option to cap monthly payments, the creditor must fully disclose the 
rules relating to the payment cap option, including the effects of 
exercising it (such as negative amortization occurs and that the 
principal balance will increase), except that the disclosure in 
Sec. 226.19(b)(2)(viii) need not be given for the option.
Section 226.22--Determination of the Annual Percentage Rate

22(a)  Accuracy of the Annual Percentage Rate

Paragraph 22(a)(1)

    Comment 22(a)(1)-5 corrects an erroneous footnote reference.
Section 226.23--Right of Rescission

23(a)  Consumer's Right To Rescind

Paragraph 23(a)(1)

    Comment 23(a)(1)-4, which contains an exception to the ``one 
principal dwelling'' rule in comment 23(a)(1)-3, is revised. Under the 
exception, a consumer may have, in effect, two principal dwellings for 
a time. Even if a consumer is acquiring or constructing a new principal 
dwelling, any loan subject to Regulation Z may be rescinded when the 
consumer's current principal dwelling secures the loan. A typical 
example is a bridge loan.
    The proposed comment provided, by example, that a loan secured by 
the new home and the current home is a residential mortgage 
transaction. While many commenters agreed with the proposal, some 
viewed it as a change in the existing interpretation. Upon further 
analysis, the proposed example would negate the exception to the 
general rule. The existing language of comment 23(a)(1)-4 has been 
retained with language and examples added for clarification. 
Accordingly, even if a loan is a purchase-money loan secured by the new 
home (that is, a residential mortgage transaction) where that loan also 
is secured by the consumer's current home, the loan is rescindable.

23(d)  Effects of Rescission

Paragraph 23(d)(2)
    Comment 23(d)(2)-1 has been revised to clarify that if a consumer 
rescinds a credit transaction, the creditor must refund to the consumer 
any broker fee that is part of the credit transaction, even though the 
consumer paid the fee to the broker rather than to the creditor. 
Several commenters expressed concern that the literal language of the 
comment could be construed to encompass a fee paid to a broker who did 
not participate in the credit transaction. Some commenters wanted 
broker fees covered only to the extent that the lender required the use 
of a broker. Creditors must refund to the consumer any broker's fee 
paid as part of the credit transaction, whether or not the creditor 
required the use of a broker.

(23)(f)  Exempt Transactions

Paragraph (23)(f)(4)

    Comment 23(f)-4 clarifies that Sec. 226.23(f)(2) exempts from the 
right of rescission refinancings by original creditors--to whom a 
written agreement was originally payable. Therefore, if a consumer 
refinances with any other creditor, the general rescission model form 
(model form H-8) is the appropriate form to provide to the consumer.
    Several commenters opposed the proposal, which they believe would 
result in an anomaly. That is, if the original creditor assigns the 
mortgage to a third party and the consumer returns to the original 
creditor to refinance (with no new advances), the original creditor 
would be excused from providing the consumer with the right of 
rescission.
    In certain circumstances the application of this rule may produce 
an anomalous result. Nevertheless, this interpretation is required by 
section 103(f) of the act and Sec. 226.2(a)(17) of the regulation, 
which define ``creditor'' as ``* * * the person to whom the debt 
arising from the consumer credit transaction is initially payable.* * 
*''.
    The comment also clarifies that in a merger, consolidation or 
acquisition, the acquiring creditor would be considered the original 
creditor for purposes of the exemption in Sec. 226.23(f)(2). For 
example, if two lending institutions merge, the resulting institution 
is considered the original creditor for refinancing mortgages 
previously originated by either of the two institutions. Accordingly, 
the new institution may use model form H-9 if new money is advanced. 
(See comment 2(a)(25)-6.)
Appendix J--Annual Percentage Rate Computations for Closed-End Credit 
Transactions
    As proposed, the Board has revised the 1981 changes paragraph in 
the reference section to make a technical correction to the second 
sentence.

List of Subjects in 12 CFR Part 226

    Advertising, Banks, banking, Consumer protection, Credit, Federal 
Reserve System, Mortgages, Reporting and recordkeeping requirements, 
Truth in lending.

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

PART 226--TRUTH IN LENDING (REGULATION Z)

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

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

    2. In Supplement I to Part 226, under Section 226.2--Definitions 
and Rules of Construction, under Paragraph 2(a)(17)(i)., paragraph 8. 
is revised to read as follows:

Supplement I--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

* * * * *
    Paragraph 2(a)(17)(i).
* * * * *
    8. Loans from employee savings plan. Some employee savings plans 
permit participants to borrow money up to a certain percentage of 
their account balances, and use a trust to administer the receipt 
and disbursement of funds. Unless each participant's account is an 
individual plan and trust, the creditor should apply the numerical 
tests to the plan as a whole rather than to the individual account, 
even if the loan amount is determined by reference to the balance in 
the individual account and the repayments are credited to the 
individual account. The person to whom the obligation is originally 
made payable (whether the plan, the trust, or the trustee) is the 
creditor for purposes of the act and regulation.
* * * * *
    3. In Supplement I to Part 226, under Section 226.4--Finance 
Charge, the following amendments are made:
    a. Under 4(a) Definition., paragraphs 1., and 3. are revised, 
paragraphs 4., 5., and 6 are redesignated as paragraphs 5., 6., and 7., 
a new paragraph 4. is added, and newly designated paragraph 7. is 
revised;
    b. Under Paragraph 4(c)(7)., paragraph 1. is revised and new 
paragraphs 2. and 3. are added; and
    c. Under (4)(e) Certain security interest charges., paragraph 1. is 
revised.
    The revisions and additions read as follows:
* * * * *

Section 226.4--Finance Charge

    4(a) Definition.
    1. Charges in comparable cash transactions. Charges imposed 
uniformly in cash and credit transactions are not finance charges. 
In determining whether an item is a [[Page 16777]] finance charge, 
the creditor should compare the credit transaction in question with 
a similar cash transaction. A creditor financing the sale of 
property or services may compare charges with those payable in a 
similar cash transaction by the seller of the property or service.
    i. For example, the following items are not finance charges:
    A. Taxes, license fees, or registration fees paid by both cash 
and credit customers.
    B. Discounts that are available to cash and credit customers, 
such as quantity discounts.
    C. Discounts available to a particular group of consumers 
because they meet certain criteria, such as being members of an 
organization or having accounts at a particular financial 
institution. This is the case even if an individual must pay cash to 
obtain the discount, provided that credit customers who are members 
of the group and do not qualify for the discount pay no more than 
the nonmember cash customers.
    D. Charges for a service policy, auto club membership, or policy 
of insurance against latent defects offered to or required of both 
cash and credit customers for the same price.
    ii. In contrast, the following items are finance charges:
    A. Inspection and handling fees for the staged disbursement of 
construction loan proceeds.
    B. Fees for preparing a Truth in Lending disclosure statement, 
if permitted by law (for example, the Real Estate Settlement 
Procedures Act prohibits such charges in certain transactions 
secured by real property).
    C. Charges for a required maintenance or service contract 
imposed only in a credit transaction.
    iii. If the charge in a credit transaction exceeds the charge 
imposed in a comparable cash transaction, only the difference is a 
finance charge. For example:
    A. If an escrow agent is used in both cash and credit sales of 
real estate and the agent's charge is $100 in a cash transaction and 
$150 in a credit transaction, only $50 is a finance charge.
    2. Costs of doing business. * * *
    3. Charges by third parties. Charges imposed on the consumer by 
someone other than the creditor are finance charges (unless 
otherwise excluded) if the creditor requires the use of a third 
party as a condition of or incident to the extension of credit, even 
if the consumer can choose the third party, or the creditor retains 
the charge. For example:
    i. The cost of required mortgage insurance, even if the consumer 
is allowed to choose the insurer.
    ii. A mortgage broker fee, to the extent that the broker shares 
the fee with the creditor.
    4. Charges by settlement agents. Charges imposed on the consumer 
by a settlement agent (such as an attorney, escrow agent, or title 
company) are finance charges only if the creditor requires the 
particular services for which the settlement agent is charging the 
borrower and the charge for those services is not otherwise excluded 
from the finance charge. For example, a fee for courier service 
charged by a settlement agent to send a document to the title 
company or some other party is not a finance charge, provided that 
the creditor has not required the use of a courier or retained the 
charge.
    5. Forfeitures of interest. * * *
    6. Treatment of fees for use of automated teller machines. * * *
    7. Taxes. i. Generally, a tax imposed by a state or other 
governmental body solely on a creditor is a finance charge if the 
creditor separately imposes the charge on the consumer.
    ii. In contrast, a tax is not a finance charge (even if the tax 
is collected by the creditor) if applicable law imposes the tax:
    A. Solely on the consumer;
    B. On the creditor and the consumer jointly;
    C. On the credit transaction, without indicating which party is 
liable for the tax; or
    D. On the creditor, if applicable law directs or authorizes the 
creditor to pass the tax on to the consumer. (For purposes of this 
section, if applicable law is silent as to passing on the tax, the 
law is deemed not to authorize passing it on.)
    iii. For example, a stamp tax, property tax, intangible tax, or 
any other state or local tax imposed on the consumer, or on the 
credit transaction, is not a finance charge even if the tax is 
collected by the creditor.
    iv. In addition, a tax is not a finance charge if it is excluded 
from the finance charge by an other provision of the regulation or 
commentary (for example, if the tax is imposed uniformly in cash and 
credit transactions).
* * * * *
    Paragraph 4(c)(7).
    1. Real estate or residential mortgage transaction charges. The 
list of charges in Sec. 226.4(c)(7) applies both to residential 
mortgage transactions (which may include, for example, the purchase 
of a mobile home) and to other transactions secured by real estate. 
The fees are excluded from the finance charge even if the services 
for which the fees are imposed are performed by the creditor's 
employees rather than by a third party. In addition, the cost of 
verifying or confirming information connected to the item is also 
excluded. For example, credit report fees cover not only the cost of 
the report, but also the cost of verifying information in the 
report. In all cases, charges excluded under Sec. 226.4(c)(7) must 
be bona fide and reasonable.
    2. Lump sum charges. If a lump sum charged for several services 
includes a charge that is not excludable, a portion of the total 
should be allocated to that service and included in the finance 
charge. However, a lump sum charged for conducting or attending a 
closing (for example, by a lawyer or a title company) is excluded 
from the finance charge if the charge is primarily for services 
related to items listed in Sec. 226.4(c)(7) (for example, reviewing 
or completing documents), even if other incidental services such as 
explaining various documents or disbursing funds for the parties are 
performed. The entire charge is excluded even if a fee for the 
incidental services would be a finance charge if it were imposed 
separately.
    3. Charges assessed during the loan term. Real estate or 
residential mortgage transaction charges excluded under 
Sec. 226.4(c)(7) are those charges imposed solely in connection with 
the initial decision to grant credit. This would include, for 
example, a fee to search for tax liens on the property or to 
determine if flood insurance is required. The exclusion does not 
apply to fees for services to be performed periodically during the 
loan term, regardless of when the fee is collected. For example, a 
fee for one or more determinations during the loan term of the 
current tax lien status or flood insurance requirements is a finance 
charge, regardless of whether the fee is imposed at closing, or when 
the service is performed. If a creditor is uncertain about what 
portion of a fee to be paid at consummation or loan closing is 
related to the initial decision to grant credit, the entire fee may 
be treated as a finance charge.
* * * * *
    (4)(e)  Certain security interest charges.
    1. Examples.
    i. Excludable charges. Sums must be actually paid to public 
officials to be excluded from the finance charge under 
Sec. 226.4(e)(1). Examples are charges or other fees required for 
filing or recording security agreements, mortgages, continuation 
statements, termination statements, and similar documents, and 
intangible property or other taxes imposed by the state solely on 
the creditor and payable by the consumer (if the tax must be paid to 
record a security agreement).
    ii. Charges not excludable. If the obligation is between the 
creditor and a third party (an assignee, for example), charges or 
other fees for filing or recording security agreements, mortgages, 
continuation statements, termination statements, and similar 
documents relating to that obligation are not excludable from the 
finance charge under this section.
* * * * *
    4. In Supplement I to Part 226, under Section 226.5--General 
Disclosure Requirements, under 5(b)(1) Initial disclosures., in 
paragraph 1., the first and second sentences are revised, and a new 
paragraph 5. is added to read as follows:
* * * * *

Subpart B--Open-End Credit

Section 226.5--General Disclosure Requirements

* * * * *
    5(b)(1)  Initial disclosures.
    1. Disclosure before the first transaction. The rule that the 
initial disclosure statement must be furnished ``before the first 
transaction'' requires delivery of the initial disclosure statement 
before the consumer becomes obligated on the plan. For example, the 
initial disclosures must be given before the consumer makes the 
first purchase (such as when a consumer opens a credit plan and 
makes purchases contemporaneously at a retail store), receives the 
first advance, or pays any fees or charges under the plan other than 
an application fee or refundable membership fee (see below).* * *
* * * * * [[Page 16778]] 
    5. Balance transfers. A creditor that solicits the transfer by a 
consumer of outstanding balances from an existing account to a new 
open-end plan must comply with Sec. 226.6 before the balance 
transfer occurs. Card issuers that are subject to the requirements 
of Sec. 226.5a may establish procedures that comply with both 
sections in a single disclosure statement.
* * * * *
    5. In Supplement I to Part 226, under Section 226.6--Initial 
Disclosure Statement, under 6(b) Other charges., paragraph 1. is 
revised to read as follows:
* * * * *

Section 226.6--Initial Disclosure Statement

* * * * *
    6(b)  Other charges.
    1. General; examples of other charges. Under Sec. 226.6(b), 
significant charges related to the plan (that are not finance 
charges) must also be disclosed. For example:
    i. Late payment and over-the-credit-limit charges.
    ii. Fees for providing documentary evidence of transactions 
requested under Sec. 226.13 (billing error resolution).
    iii. Charges imposed in connection with real estate transactions 
such as title, appraisal, and credit report fees (see 
Sec. 226.4(c)(7)).
    iv. A tax imposed on the credit transaction by a state or other 
governmental body, such as a documentary stamp tax on cash advances 
(see the commentary to Sec. 226.4(a)).
    v. A membership or participation fee for a package of services 
that includes an open-end credit feature, unless the fee is required 
whether or not the open-end credit feature is included. For example, 
a membership fee to join a credit union is not an ``other charge,'' 
even if membership is required to apply for credit.
    vi. Automated teller machine (ATM) charges described in comment 
4(a)-5 that are not finance charges.
    vii. Charges imposed for the termination of an open-end credit 
plan.
* * * * *
    6. In Supplement I to Part 226, under Section 226.12--Special 
Credit Card Provisions, under 12(b) Liability of cardholder for 
unauthorized use., new paragraphs 2. and 3. are added to read as 
follows:
* * * * *

Section 226.12--Special Credit Card Provisions

* * * * *
    12(b)  Liability of cardholder for unauthorized use.
* * * * *
    2. Imposing liability. A card issuer is not required to impose 
liability on a cardholder for the unauthorized use of a credit card; 
if the card issuer does not seek to impose liability, the issuer 
need not conduct any investigation of the cardholder's claim.
    3. Reasonable investigation. If a card issuer seeks to impose 
liability when a claim of unauthorized use is made by a cardholder, 
the card issuer must conduct a reasonable investigation of the 
claim. In conducting its investigation, the card issuer may 
reasonably request the cardholder's cooperation. The card issuer may 
not automatically deny a claim based solely on the cardholder's 
failure or refusal to comply with a particular request; however, if 
the card issuer otherwise has no knowledge of facts confirming the 
unauthorized use, the lack of information resulting from the 
cardholder's failure or refusal to comply with a particular request 
may lead the card issuer reasonably to terminate the investigation. 
The procedures involved in investigating claims may differ, but 
actions such as the following represent steps that a card issuer may 
take, as appropriate, in conducting a reasonable investigation:
    i. Reviewing the types or amounts of purchases made in relation 
to the cardholder's previous purchasing pattern.
    ii. Reviewing where the purchases were delivered in relation to 
the cardholder's residence or place of business.
    iii. Reviewing where the purchases were made in relation to 
where the cardholder resides or has normally shopped.
    iv. Comparing any signature on credit slips for the purchases to 
the signature of the cardholder or an authorized user in the card 
issuer's records, including other credit slips.
    v. Requesting documentation to assist in the verification of the 
claim.
    vi. Requesting a written, signed statement from the cardholder 
or authorized user.
    vii. Requesting a copy of a police report, if one was filed.
    viii. Requesting information regarding the cardholder's 
knowledge of the person who allegedly used the card or of that 
person's authority to do so.
* * * * *
    7. In Supplement I to Part 226, under Section 226.15 --Right of 
Rescission, the following amendments are made:
    a. Under Paragraph 15(a)(1)., paragraph 5. is revised;
    b. Under Paragraph 15(a)(1)., paragraph 6. is revised; and
    c. Under Paragraph 15(d)(2)., in paragraph 1., the third sentence 
is revised.
    The additions and revisions read as follows:
* * * * *

Section 226.15--Right of Rescission

* * * * *
    Paragraph 15(a)(1).
* * * * *
    5. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or 
other second home would not be a principal dwelling. A transaction 
secured by a second home (such as a vacation home) that is not 
currently being used as the consumer's principal dwelling is not 
rescindable, even if the consumer intends to reside there in the 
future. When a consumer buys or builds a new dwelling that will 
become the consumer's principal dwelling within one year or upon 
completion of construction, the new dwelling is considered the 
principal dwelling if it secures the open-end credit line. In that 
case, the transaction secured by the new dwelling is a residential 
mortgage transaction and is not rescindable. For example, if a 
consumer whose principal dwelling is currently A builds B, to be 
occupied by the consumer upon completion of construction, an advance 
on an open-end line to finance B and secured by B is a residential 
mortgage transaction. Dwelling, as defined in Sec. 226.2, includes 
structures that are classified as personalty under state law. For 
example, a transaction secured by a mobile home, trailer, or 
houseboat used as the consumer's principal dwelling may be 
rescindable.
    6. Special rule for principal dwelling. Notwithstanding the 
general rule that consumers may have only one principal dwelling, 
when the consumer is acquiring or constructing a new principal 
dwelling, a credit plan or extension that is subject to Regulation Z 
and is secured by the equity in the consumer's current principal 
dwelling is subject to the right of rescission regardless of the 
purpose of that loan (for example, an advance to be used as a bridge 
loan). For example, if a consumer whose principal dwelling is 
currently A builds B, to be occupied by the consumer upon completion 
of construction, a loan to finance B and secured by A is subject to 
the right of rescission. Moreover, a loan secured by both A and B 
is, likewise, rescindable.
* * * * *
    Paragraph 15(d)(2).
    1. Refunds to consumer. * * * ``Any amount'' includes finance 
charges already accrued, as well as other charges such as broker 
fees, application and commitment fees, or fees for a title search or 
appraisal, whether paid to the creditor, paid by the consumer 
directly to a third party, or passed on from the creditor to the 
third party. * * *
* * * * *
    8. In Supplement I to Part 226, under Section 226.16--Advertising, 
under 16(d) Additional Requirements for Home Equity Plans, a new 
paragraph 7. is added to read as follows:
* * * * *

Section 226.16--Advertising

* * * * *
    16(d)  Additional Requirements for Home Equity Plans.
* * * * *
    7. Balloon payment. In some programs, a balloon payment will 
occur if only the minimum payments under the plan are made. If an 
advertisement for such a program contains any statement about a 
minimum periodic payment, the advertisement must also state that a 
balloon payment will result (not merely that a balloon payment 
``may'' result). (See comment 5b(d)(5)(ii)-3 for guidance on items 
not required to be stated in the advertisement, and on situations in 
which the balloon payment requirement does not apply.)
* * * * *
    9. In Supplement I to Part 226, under Section 226.17--General 
Disclosure [[Page 16779]] Requirements, the following amendments are 
made:
    a. Under Paragraph 17(a)(1)., paragraph 5. is revised;
    b. Under Paragraph 17(c)(4)., a new paragraph 4. is added; and
    c. Under 17(f) Early disclosures., paragraph 1. is revised.
    The revisions and additions read as follows:
* * * * *

Subpart C--Closed-End Credit

Section 226.17--General Disclosure Requirements

* * * * *
    Paragraph 17(a)(1).
* * * * *
    5. Directly related. The segregated disclosures may, at the 
creditor's option, include any information that is directly related 
to those disclosures. The following is directly related information:
    i. A description of a grace period after which a late payment 
charge will be imposed. For example, the disclosure given under 
Sec. 226.18(l) may state that a late charge will apply to ``any 
payment received more than 15 days after the due date.''
    ii. A statement that the transaction is not secured. For 
example, the creditor may add a category labelled ``unsecured'' or 
``not secured'' to the security interest disclosures given under 
Sec. 226.18(m).
    iii. The basis for any estimates used in making disclosures. For 
example, if the maturity date of a loan depends solely on the 
occurrence of a future event, the creditor may indicate that the 
disclosures assume that event will occur at a certain time.
    iv. The conditions under which a demand feature may be 
exercised. For example, in a loan subject to demand after five 
years, the disclosures may state that the loan will become payable 
on demand in five years.
    v. An explanation of the use of pronouns or other references to 
the parties to the transaction. For example, the disclosures may 
state, ```You' refers to the customer and `we' refers to the 
creditor.''
    vi. Instructions to the creditor or its employees on the use of 
a multiple-purpose form. For example, the disclosures may state, 
``Check box if applicable.''
    vii. A statement that the borrower may pay a minimum finance 
charge upon prepayment in a simple-interest transaction. For 
example, when state law prohibits penalties, but would allow a 
minimum finance charge in the event of prepayment, the creditor may 
make the Sec. 226.18(k)(1) disclosure by stating, ``You may be 
charged a minimum finance charge.''
    viii. A brief reference to negative amortization in variable-
rate transactions. For example, in the variable-rate disclosure, the 
creditor may include a short statement such as ``Unpaid interest 
will be added to principal.'' (See the commentary to 
Sec. 226.18(f)(1)(iii).)
    ix. A brief caption identifying the disclosures. For example, 
the disclosures may bear a general title such as ``Federal Truth in 
Lending Disclosures'' or a descriptive title such as ``Real Estate 
Loan Disclosures.''
    x. A statement that a due-on-sale clause or other conditions on 
assumption are contained in the loan document. For example, the 
disclosure given under Sec. 226.18(q) may state, ``Someone buying 
your home may, subject to conditions in the due-on-sale clause 
contained in the loan document, assume the remainder of the mortgage 
on the original terms.''
    xi. If a state or Federal law prohibits prepayment penalties and 
excludes the charging of interest after prepayment from coverage as 
a penalty, a statement that the borrower may have to pay interest 
for some period after prepayment in full. The disclosure given under 
Sec. 226.18(k) may state, for example, ``If you prepay your loan on 
other than the regular installment date, you may be assessed 
interest charges until the end of the month.''
    xii. More than one hypothetical example under 
Sec. 226.18(f)(1)(iv) in transactions with more than one variable-
rate feature. For example, in a variable-rate transaction with an 
option permitting consumers to convert to a fixed-rate transaction, 
the disclosures may include an example illustrating the effects on 
the payment terms of an increase resulting from conversion in 
addition to the example illustrating an increase resulting from 
changes in the index.
    xiii. The disclosures set forth under Sec. 226.18(f)(1) for 
variable-rate transactions subject to Sec. 226.18(f)(2).
    xiv. A statement whether or not a subsequent purchaser of the 
property securing an obligation may be permitted to assume the 
remaining obligation on its original terms.
    xv. A late-payment fee disclosure under Sec. 226.18(l) on a 
single payment loan.
* * * * *
    Paragraph 17(c)(4).
* * * * *
    4. Relation to prepaid finance charges. Prepaid finance charges, 
including ``odd-days'' or ``per-diem'' interest, paid prior to or at 
closing may not be treated as the first payment on a loan. Thus, 
creditors may not disregard an irregularity in disclosing such 
finance charges.
* * * * *
    17(f)  Early disclosures.
    1. Change in rate or other terms. Redisclosure is required for 
changes that occur between the time disclosures are made and 
consummation if the annual percentage rate in the consummated 
transaction exceeds the limits prescribed in Sec. 226.22(a) (\1/8\ 
of 1 percentage point in regular transactions and \1/4\ of 1 
percentage point in irregular transactions). Redisclosure is also 
required, even if the annual percentage rate is within the permitted 
tolerance, if the disclosures were not based on estimates in 
accordance with Sec. 226.17(c)(2) and labelled as such. To 
illustrate:
    i. If disclosures are made in a regular transaction on July 1, 
the transaction is consummated on July 15, and the actual annual 
percentage rate varies by more than \1/8\ of 1 percentage point from 
the disclosed annual percentage rate, the creditor must either 
redisclose the changed terms or furnish a complete set of new 
disclosures before consummation. Redisclosure is required even if 
the disclosures made on July 1 are based on estimates and marked as 
such;
    ii. If disclosures are made on July 1, the transaction is 
consummated on July 15, and the finance charge increased by $35 but 
the disclosed annual percentage rate is within the permitted 
tolerance, the creditor must at least redisclose the changed terms 
that were not marked as estimates. (See Sec. 226.18(d) and footnote 
41 of this part); and
    iii. If early disclosures are marked as estimates and the 
disclosed annual percentage rate is within tolerance at 
consummation, the creditor need not redisclose the changed terms 
(including the annual percentage rate).
* * * * *
    10. In Supplement I to Part 226, under Section 226.18--Content of 
Disclosures, the following amendments are made:
    a. Under Paragraph 18(c)(1)(iv)., a new paragraph 2. is added; and
    b. Under 18(d) Finance charge., paragraph 2. is revised.
    The additions and revisions read as follows:
* * * * *

Section 226.18--Content of Disclosures

* * * * *
    Paragraph 18(c)(1)(iv).
* * * * *
    2. Prepaid mortgage insurance premiums. RESPA requires creditors 
to give consumers a settlement statement disclosing the costs 
associated with mortgage loan transactions. Included on the 
settlement statement are mortgage insurance premiums collected at 
settlement, which are prepaid finance charges. In calculating the 
total amount of prepaid finance charges, creditors should use the 
amount for mortgage insurance listed on the line for mortgage 
insurance on the settlement statement (line 1002 on HUD-1 or HUD 1-
A), without adjustment, even if the actual amount collected at 
settlement may vary because of RESPA's escrow accounting rules. 
Figures for mortgage insurance disclosed in conformance with RESPA 
shall be deemed to be accurate for purposes of Regulation Z.
    18(d) Finance charge.
* * * * *
    2. Tolerance. A tolerance for the finance charge is provided in 
footnote 41 of this part. When a miscalculation of the amount 
financed, or of some other numerical disclosure for which the 
regulation provides no specific tolerance, results from an error in 
a finance charge, the miscalculated amount financed or other 
numerical disclosure does not violate the act or the regulation if 
the finance charge disclosed under Sec. 226.18(d) is within the 
permissible tolerance under footnote 41 of this part.
* * * * *
    11. In Supplement I to Part 226, under Section 226.19--Certain 
Residential Mortgage and Variable-Rate Transactions, under paragraph 
[[Page 16780]] 19(b)(2)(vii)., paragraph 2. is revised to read as 
follows:

Section 226.19--Certain Residential Mortgage and Variable-Rate 
Transactions

* * * * *
    Paragraph 19(b)(2)(vii).
* * * * *
    2. Negative amortization and interest rate carryover. A creditor 
must disclose, where applicable, the possibility of negative 
amortization. For example, the disclosure might state, ``If any of 
your payments is not sufficient to cover the interest due, the 
difference will be added to your loan amount.'' Loans that provide 
for more than one way to trigger negative amortization are separate 
variable-rate programs requiring separate disclosures. (See the 
commentary to Sec. 226.19(b)(2) for a discussion on the definition 
of a variable-rate loan program and the format for disclosure.) If a 
consumer is given the option to cap monthly payments that may result 
in negative amortization, the creditor must fully disclose the rules 
relating to the option, including the effects of exercising the 
option (such as negative amortization will occur and the principal 
loan balance will increase); however, the disclosure in 
Sec. 226.19(b)(2)(viii) need not be provided.
* * * * *
    12. In Supplement I to Part 226, under Section 226.22--
Determination of the Annual Percentage Rate, under Paragraph 22(a)(1)., 
in paragraph 5., the reference ``Footnote 45a'' is revised to read 
``Footnote 45d''.
    13. In Supplement I to Part 226, under Section 226.23--Right of 
Rescission, the following amendments are made:
    a. Under Paragraph 23(a)(1)., paragraph 3.is revised;
    b. Under Paragraph 23(a)(1)., paragraph 4. is revised;
    c. Under Paragraph 23(d)(2)., in paragraph 1., the third sentence 
is revised; and
    d. Under 23(f) Exempt transactions., in paragraph 4., two new 
sentences are added following the first sentence, and a new sentence is 
added at the end of the paragraph.
    The additions and revisions read as follows:
* * * * *

Section 226.23--Right of Rescission

* * * * *
    Paragraph 23(a)(1).
* * * * *
    3. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or 
other second home would not be a principal dwelling. A transaction 
secured by a second home (such as a vacation home) that is not 
currently being used as the consumer's principal dwelling is not 
rescindable, even if the consumer intends to reside there in the 
future. When a consumer buys or builds a new dwelling that will 
become the consumer's principal dwelling within one year or upon 
completion of construction, the new dwelling is considered the 
principal dwelling if it secures the acquisition or construction 
loan. In that case, the transaction secured by the new dwelling is a 
residential mortgage transaction and is not rescindable. For 
example, if a consumer whose principal dwelling is currently A 
builds B, to be occupied by the consumer upon completion of 
construction, a construction loan to finance B and secured by B is a 
residential mortgage transaction. Dwelling, as defined in 
Sec. 226.2, includes structures that are classified as personalty 
under state law. For example, a transaction secured by a mobile 
home, trailer, or houseboat used as the consumer's principal 
dwelling may be rescindable.
    4. Special rule for principal dwelling. Notwithstanding the 
general rule that consumers may have only one principal dwelling, 
when the consumer is acquiring or constructing a new principal 
dwelling, any loan subject to Regulation Z and secured by the equity 
in the consumer's current principal dwelling (for example, a bridge 
loan) is subject to the right of rescission regardless of the 
purpose of that loan. For example, if a consumer whose principal 
dwelling is currently A builds B, to be occupied by the consumer 
upon completion of construction, a construction loan to finance B 
and secured by A is subject to the right of rescission. A loan 
secured by both A and B is, likewise, rescindable.
* * * * *
    Paragraph 23(d)(2).
    1. Refunds to consumer. * * * ``Any amount'' includes finance 
charges already accrued, as well as other charges, such as broker 
fees, application and commitment fees, or fees for a title search or 
appraisal, whether paid to the creditor, paid directly to a third 
party, or passed on from the creditor to the third party. * * *
* * * * *
    23(f) Exempt transactions.
* * * * *
    4. New advances. * * * The original creditor is the creditor to 
whom the written agreement was initially made payable. In a merger, 
consolidation or acquisition, the successor institution is 
considered the original creditor for purposes of the exemption in 
Sec. 226.23(f)(2). * * * The general rescission notice (model form 
H-8) is the appropriate form for use by creditors not considered 
original creditors in refinancing transactions.
* * * * *
    14. In Supplement I to Part 226, under Appendix J, under the 
heading References, under 1981 changes:, the last sentence is revised 
to read as follows:
* * * * *

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

* * * * *

References

* * * * *
    1981 changes: * * * Paragraph (b)(5)(vi) has been revised to 
permit creditors in single-advance, single-payment transactions in 
which the term is less than a year and is equal to a whole number of 
months, to use either the 12-month method or the 365-day method to 
compute the number of unit-periods per year.

    By order of the Board of Governors of the Federal Reserve 
System, acting through the Secretary of the Board under delegated 
authority, March 28, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-8071 Filed 3-31-95; 8:45 am]
BILLING CODE 6210-01-P