[Federal Register Volume 60, Number 235 (Thursday, December 7, 1995)]
[Proposed Rules]
[Pages 62764-62772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29711]



 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / 
Proposed Rules  

[[Page 62764]]


FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0903]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; official staff interpretation.

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

SUMMARY: The Board is publishing for comment proposed revisions to the 
official staff commentary to Regulation Z (Truth in Lending). The 
commentary applies and interprets the requirements of Regulation Z. The 
proposed update provides guidance mainly on issues relating to reverse 
mortgages and mortgages bearing rates above a certain percentage or 
fees above a certain amount. It also addresses issues of general 
interest, such as the treatment of debt cancellation contracts and a 
card issuer's responsibilities when a cardholder asserts a claim or 
defense relating to a merchant dispute.

DATES: Comments must be received on or before February 2, 1996.

ADDRESSES: Comments should refer to Docket No. R-0903, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding the availability of information.

FOR FURTHER INFORMATION CONTACT: For Subparts A and B (open-end 
credit), Jane Jensen Gell or Obrea O. Poindexter, Staff Attorneys; for 
Subparts A, C and E (closed-end credit, reverse mortgages, and 
mortgages bearing rates or fees above a certain percentage or amount), 
Jane Ahrens, Senior Attorney, or Kyung Cho-Miller, Kurt Schumacher, 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 users of Telecommunications Device for the 
Deaf (TDD) only, please contact Dorthea Thompson, at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et 
seq.) is to promote the informed use of consumer credit by requiring 
disclosures about its terms and cost. The act requires creditors to 
disclose credit terms and the cost of credit as 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 Board also has an official staff commentary (12 
CFR part 226 (Supp. I)) that interprets the regulation, and provides 
guidance to creditors in applying the regulation to specific 
transactions. It is updated periodically to address significant 
questions that arise, and is a substitute for individual staff 
interpretations. The Board expects to adopt amendments in final form in 
March 1996 with compliance optional until October 1, 1996, the 
effective date for mandatory compliance.
    On March 24, 1995, the Board published amendments to Regulation Z 
implementing the Home Ownership and Equity Protection Act of 1994, 
contained in the Riegle Community Development and Regulatory 
Improvement Act of 1994, Public Law 103-325, 108 Stat. 2160 (60 FR 
15463). These amendments, which became effective on October 1, impose 
new disclosure requirements and substantive limitations on certain 
closed-end mortgage loans bearing rates or fees above a certain 
percentage or amount. The amendments also impose new disclosure 
requirements for reverse mortgage transactions, which provide advances 
primarily to elderly homeowners and rely principally on the home's 
value for repayment. In large measure, the proposed commentary 
incorporates the supplementary information accompanying that 
rulemaking, and addresses other issues that have arisen since the 
publication of the final rule.
    The Congress recently amended TILA provisions concerning finance 
charge disclosures for home mortgage loans. The Truth in Lending Act 
Amendments of 1995 (``1995 Act,'' Public Law 104-29, 109 Stat. 271) 
clarify the treatment of several fees typically associated with real 
estate-related lending, and revise tolerances for finance charge 
calculations for loans secured by real estate or dwellings. The 
statutory amendments, which were enacted in response to a number of 
lawsuits, also address consumer remedies for creditors' past and future 
disclosure violations. The 1995 Act became effective immediately for 
provisions relating to tolerances, past and future liability, and the 
exclusion of certain closing costs from the finance charge calculation. 
The statutory amendments that exclude certain real estate related 
closing costs from the finance charge generally codify interpretations 
previously issued by the Board, and no further revisions to the 
commentary are contemplated at this time.
    Another statutory provision categorizes all brokers fees paid by 
the consumer to the broker (or to the creditor for delivery to the 
broker) as finance charges; this provision will become effective 60 
days after the Board issues a final rule or no later than 12 months 
after enactment of the amendments to the act. It is anticipated that 
the Board will issue a proposed amendment to Regulation Z addressing 
brokers fees during the first quarter of 1996, and will make any 
changes to the commentary relating to the treatment of brokers fees as 
part of that rulemaking.

II. Proposed Commentary

Subpart A--General

Section 226.4--Finance Charge

4(a) Definition

    Proposed comment 4(a)-8 addresses the treatment of fees charged in 
connection with debt cancellation agreements. In the case of motor 
vehicle loans, debt cancellation agreements (sometimes referred to as 
``gap'' 

[[Page 62765]]
agreements) offer protection to consumers in the event the vehicle is 
stolen or destroyed and the motor vehicle insurance proceeds are 
insufficient to extinguish the debt. Under these agreements, in return 
for a fee paid, the consumer is not held liable for the remaining 
balance due on the loan. Other types of agreements may provide for debt 
cancellation if the borrower dies or becomes disabled. In some states, 
debt cancellation agreements may be regulated as or otherwise 
considered insurance contracts.
    The Board has received questions from creditors about the proper 
treatment of fees for debt cancellation agreements. Section 226.4(d) 
allows a creditor to exclude optional credit life and certain property 
insurance premiums from the finance charge if the creditor meets 
certain conditions, including disclosure of the premium. Some creditors 
believe that debt cancellation fees should uniformly be treated as 
Sec. 226.4(d) insurance premiums under the regulation. These creditors 
generally believe that the fees for optional debt cancellation 
contracts should be excluded from the finance charge. An alternative 
view is that the fees may be treated as insurance premiums only if the 
contract is considered insurance under state law.
    Proposed comment 4(a)-8 follows the state law analysis. The 
proposed comment provides that if a debt cancellation agreement is 
regulated as or considered insurance under state law, the fee may be 
excludable from the finance charge in accordance with the rules in 
Sec. 226.4(d). That is, under the proposed comment the fee may be 
excludable if the insurance is properly characterized as credit life, 
accident, health or loss-of-income insurance as specified in 
Sec. 226.4(d)(1), or as insurance against loss of or damage to 
property, or against liability arising out of the ownership or use of 
property as specified in Sec. 226.4(d)(2). Insurance protecting the 
creditor against credit loss is a finance charge. (See Sec. 226.4(b)(5) 
and accompanying commentary.)
    If state law does not regulate or consider the agreement to be 
insurance, then the general rules in Sec. 226.4(a) apply. Under 
Sec. 226.4(a), debt cancellation fees paid to a creditor are treated as 
finance charges because they are charged by the creditor as an incident 
to the extension of credit and, although optional, the fees are not of 
a type payable in a comparable cash transaction.

4(d)  Insurance

    Comment 4(d)-5 would be revised to clarify that insurance is deemed 
to be required--and the premiums treated and disclosed as finance 
charges--when a consumer has several alternatives to fulfill a 
condition to a credit extension, one of which is to purchase insurance 
from the creditor and the consumer elects that option. For example, 
where, as a condition to obtaining a credit card, a consumer must 
purchase a life insurance policy from the creditor, assign an existing 
policy, or pledge another form of security, such as a certificate of 
deposit, if the consumer purchases the insurance from the creditor, the 
premiums are finance charges.

Subpart B--Open-end Credit

Section 226.6--Initial Disclosure Statement

6(b)  Other Charges

    Comment 6(b)-1 would be revised to state that a membership fee to 
join an organization is an ``other charge'' if the primary benefit of 
membership is the opportunity to apply for a credit card and other 
benefits are incidental. For example, if an organization offers, in 
addition to the opportunity for a credit card account, only minor 
benefits such as a newsletter and a member information hotline, a fee 
to join the organization should be disclosed as an ``other charge.''
Section 226.12--Special Credit Card Rules

12(c)  Right of Cardholder to Assert Claims or Defenses Against Card 
Issuer

12(c)(2)  Adverse Credit Reports Prohibited

    Proposed comment 12(c)(2)-2 provides guidance on when a card issuer 
may consider a dispute settled for purposes of reporting an amount in 
dispute as delinquent. Until the card issuer conducts a reasonable 
investigation, the disputed amount may not be collected or reported as 
delinquent.
Section 226.14--Determination of Annual Percentage Rate

14(c)  Annual Percentage Rate for Periodic Statements

    Comment 14(c)-10 would provide guidance on calculating the APR on 
periodic statements when a transaction occurs at the end of one cycle, 
but is posted to the account in a subsequent cycle, such as when a 
cardholder obtains a cash advance (for which there is a transaction 
fee) on the last day of a billing cycle and the transaction is posted 
to the cardholder's account on the second day of the following cycle. 
The transaction (and fee, if applicable) are included on the statement 
reflecting the cycle in which the transaction posted, and the proposed 
comment clarifies how creditors calculate the APR to reflect the delay 
in posting.

Subpart C--Closed-end Credit

Section 17--General Disclosure Requirements

17(c)  Basis of Disclosure and Use of Estimates

Paragraph 17(c)(1)

    Comment 17(c)(1)-10 would be revised to clarify that if a contract 
for a variable rate transaction provides for a delay in the 
implementation of changes to an index value, the creditor may use any 
index value in effect during the delay period. For example, if a 
contract specifies that rate changes are based on the index value in 
effect 45 days before the change date, the creditor may use any index 
value in effect within that 45-day delay period.
    Proposed comment 17(c)(1)-18 addresses pawn transactions. There has 
been some confusion about the coverage and compliance of pawn 
transactions under the TILA. The comment clarifies how some of the 
items required to be disclosed under Sec. 226.18 such as the amount 
financed, the finance charge, and the percentage should be disclosed. 
Disclosure of these transactions under the open-end credit provisions 
is not addressed based on the belief that typically pawn transactions 
are not open-end credit transactions.
Section 18--Content of Disclosures

18(c)  Itemization of Amount Financed

Paragraph 18(c)(1)(iii)

    Proposed comment 18(c)(1)(iii)-2 concerns the treatment of certain 
charges known as ``upcharges'' that creditors may sometimes add to a 
fee charged by a third party for services such as maintenance and 
service contracts on automobiles. The comment, which only applies in 
cases where a creditor charges the same amount of an upcharge in both 
cash and credit transactions, offers flexibility in how creditors can 
choose to itemize and disclose the amount charged for the service 
(including the amount of the upcharge). The treatment of these fees for 
purposes of disclosures under the TILA does not govern the imposition 
or amount of such upcharges. 

[[Page 62766]]

Section 226.20--Subsequent Disclosure Requirements

20(a)  Refinancings

    The Board has been asked whether certain actions constitute adding 
a variable-rate feature for purposes of this section. Comment 20(a)-3 
would be revised to clarify that changing the index on a variable-rate 
transaction is not adding a variable-rate feature, nor is substituting 
an index for one that no longer exists.

Subpart E--Special Rules for Certain Home Mortgage Transactions

Section 226.31--General Rules

31(c)  Timing of Disclosures

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

    Numerous creditors have suggested that the rule for furnishing 
disclosures should be deemed to be satisfied as long as the creditor 
places the disclosures in the mail three days prior to consummation. 
The word ``furnish'' for purposes of Sec. 226.32 disclosures has the 
same meaning as ``deliver'' for the other disclosure requirements of 
Regulation Z. Accordingly, proposed comment 31(c)(1)-1 clarifies that 
disclosures are furnished, or delivered, when received by the consumer, 
not when mailed by the creditor.
    Proposed comment 31(c)(1)-2 clarifies that creditors may rely on 
the definition of ``business days'' in comment 2(a)(6)-2 for purposes 
of complying with the timing requirements for furnishing disclosures 
under this section.

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

    Proposed comment 31(c)(1)(i)-1 clarifies that a creditor must 
provide new Sec. 226.32(c) disclosures if a change in terms (whether in 
the formal written agreement or otherwise, such as an oral agreement 
affecting the amount of a fee required to be paid at closing) makes the 
previously provided disclosures inaccurate.

31(c)(1)(iii)  Consumer's Waiver of Waiting Period Before Consummation

    Proposed comment 31(c)(1)(iii)-1 provides guidance on circumstances 
in which the consumer may modify or waive the right to the three-day 
waiting period to meet bona fide personal financial emergencies. 
Generally, whether a bona fide personal financial emergency exists is a 
matter to be decided between the parties. The provisions in comments 
23(e)-1 and 34(e)-2 apply to this section. For example, a consumer's 
waiver does not automatically insulate the creditor from liability for 
failing to provide the three-day waiting period.

31(c)(2)  Disclosures for Reverse Mortgages

    Proposed comment 31(c)(2)-1 clarifies the definition of ``business 
day'' for purposes of providing reverse mortgage disclosures to 
consumers.

31(d)  Basis of Disclosures and Use of Estimates

    Section 226.31(d) mirrors the provisions in Sec. 226.5(c) and 
Sec. 226.17(c), and allows the use of estimates when information 
necessary for an accurate disclosure is unknown to the creditor, 
provided that the disclosure is clearly identified as an estimate. 
Proposed comment 31(d)-1 clarifies that when a disclosure required by 
Sec. 226.32 is marked as an estimate and becomes inaccurate due to a 
change in terms that occurs before consummation, new disclosures must 
be provided.
Section 226.32--Requirements for Certain Closed-end Home Mortgages

32(a)  Coverage

Paragraph  32(a)(1)(i)

    Proposed comment 32(a)(1)(i)-1 clarifies when an application is 
received, for purposes of determining which Treasury securities yield 
should be used to compare the APR. Proposed comment 32(a)(1)(i)-2 
provides guidance on comparing loan maturities to yields on Treasury 
securities, for purposes of determining whether a mortgage loan is 
covered by Sec. 226.32. Proposed comment 32(a)(1)(i)-3 clarifies rules 
for calculating the APR for variable-rate, discount, premium, or 
stepped-rate loans.
    Proposed comment 32(a)(1)(i)-4 clarifies which Treasury security to 
use for the APR test, and where the yields on these securities can be 
found. Creditors may request the Board statistical release H-15 by 
calling (202) 452-3245. Treasury security yields are also available 
from the Federal Reserve Bank of New York by calling (212) 720-6619.

Paragraph  32(a)(1)(ii)

    Creditors must follow the rules in Sec. 226.32 if, in part, 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 is required to adjust the $400 amount, based on the annual 
percentage change in the Consumer Price Index as reported on June 1, 
effective January 1 of the following year. The Board anticipates that 
adjustments to the $400 dollar figure will be published each yearend 
and incorporated into the commentary the following spring.

Paragraph  32(b)(1)

Paragraph  32(b)(1)(i)

    Comment 32(b)(1)(i)-1 clarifies the scope of items defined as 
finance charges under Sec. 226.4 that are considered ``points and 
fees.''

Paragraph  32(b)(1)(ii)

    Proposed comment 32(b)(1)(ii)-1 addresses the treatment of mortgage 
brokers fees. Section 226.32(b)(1) defines ``points and fees'' to 
include all finance charges (except interest or the time-price 
differential), as well as all compensation paid to mortgage brokers. 
Accordingly, compensation paid to a mortgage broker must be included as 
``points and fees'' even if the amount is not disclosed as a finance 
charge.
    Section 32(b)(1)(ii) at the time it was issued was interpreted to 
include all mortgage broker fees that are required to be disclosed 
under the Real Estate Settlement Procedures Act. Under that 
interpretation, amounts paid by creditors to mortgage brokers would be 
included, as are amounts paid by consumers. Upon further analysis, a 
narrower interpretation is being proposed. Proposed comment 
32(b)(1)(ii)-1 states that for purposes of the ``points and fees'' 
test, only mortgage broker fees paid by the consumer are included in 
the calculation. The comment further clarifies that mortgage broker 
fees should not be double counted; that is, where such fees are 
included in the finance charge, they are already included as ``points 
and fees'' under Sec. 226.32(b)(1)(i) and should not be counted again 
under Sec. 226.32(b)(1)(ii).

32(c)(3)  Regular payment

    Proposed comment 32(c)(3)-1 clarifies that the regulation 
contemplates the disclosure of monthly or other regularly scheduled 
periodic payments, such as bimonthy or quarterly. The comment also 
clarifies that there must be at least two payments, and they must be in 
an amount and occur at such intervals that the payments fully amortize 
the loan. For the amount of the payment, proposed comment 32(c)(3)-2 
clarifies that creditors may rely on Sec. 226.18(g) for guidance.

32(c)(4)  Variable-rate

    Proposed comment 32(c)(4)-1 provides additional guidance on 
calculating ``worst-case'' payment examples when the transaction has 
more than one payment stream. 

[[Page 62767]]


32(d)  Limitations

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

    The statute and regulation prohibit the use of balloon payments for 
mortgages covered by Sec. 226.32 that have a term of less than five 
years. For such loans, the repayment schedule must fully amortize the 
outstanding principal balance through ``regular periodic payments.'' 
The proposed comment provides guidance on the definition of ``regular 
periodic payments.''

32(d)(2)  Negative Amortization

    Proposed comment 32(d)(2)-1 clarifies that the prohibition against 
including negative amortization in a mortgage covered by Sec. 226.32 
does not extend to increases in the principal balance unrelated to the 
payment schedule, such as an increase related to the purchase of force-
placed insurance.

32(d)(4)  Increased Interest Rate

    Proposed comment 32(d)(4)-1 clarifies that a rate increase in a 
variable-rate transaction is not prohibited by the act or regulation, 
even if the rate increases after the consumer has defaulted on the 
obligation.

32(d)(5)  Rebates

    Section 226.32(d)(5) restricts how creditors may calculate refunds 
of interest when a mortgage loan subject to this section is accelerated 
due to a consumer's default. The proposed comment clarifies that this 
restriction applies to refunds of interest only, and not to refunds of 
other items such as origination fees or points. In addition, the 
proposed comment clarifies that the refund calculation includes odd-
days interest, regardless of when it is paid.

32(d)(7)  Prepayment Penalty Exception

    Proposed comment 32(d)(7)-1 provides guidance on calculating a 
consumer's debt-to-income ratio. Proposed comment 32(d)(7)-2 clarifies 
that verification of employment satisfies the regulation's requirement 
that the creditor obtain ``payment records for employment income.''

32(e)  Prohibited Acts and Practices

32(e)(1)  Repayment Ability

    For mortgage loans subject to Sec. 226.32, the regulation prohibits 
creditors from engaging in a pattern or practice of extending such 
credit 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. Proposed comment 
32(e)(1)-1 provides guidance on determining the consumer's repayment 
ability. The comment clarifies that creditors may rely on the same 
information provided by the consumer in connection with 
Sec. 226.32(d)(7), or other information, including information about 
unverified income.
Section 226.33--Requirements for Reverse Mortgages
    The U.S. Department of Housing and Urban Development (HUD) has 
modified its software regarding reverse mortgages originated under the 
Home Equity Conversion Mortgage (HECM) program to conform with the 
requirements and the terminology used for reverse mortgages under 
Regulation Z and the appendices to the regulation. (The HECM program 
has been temporarily suspended, pending the reauthorization of funding 
by the Congress.) For example, HUD's software now allows creditors to 
use the initial interest rate, rather than the ``expected interest 
rate,'' in calculating the total annual loan cost rate for a variable-
rate transaction. Although creditors may find HUD's software helpful in 
meeting the disclosure requirements under Regulation Z, they should 
first take steps to verify the accuracy of the software, including any 
instructions, before using it. Neither HUD nor the Board provides a 
``safe harbor'' to creditors regarding use of this software.

33(a)  Definition

    Proposed comment 33(a)-1 addresses an implication relative to the 
definition of a reverse mortgage transaction under the regulation. If a 
transaction structured as a reverse mortgage loan is a recourse 
transaction (that is, one that imposes personal liability on the 
consumer for the difference between the loan balance at maturity and 
the value of the property), it is not a reverse mortgage under 
Sec. 226.33. Thus, if the transaction is also closed-end, and the 
annual percentage rate or the points and fees assessed in the 
transaction exceed those specified in Sec. 226.32(a)(1), the 
transaction is covered by Sec. 226.32. Such transactions may not 
generally contain a balloon payment or negative amortization (both of 
which are found in reverse mortgages by definition). Open-end credit 
plans are exempt from the provisions of Sec. 226.32(a).

33(c)(2)  Payments to Consumer

    Proposed comment 33(c)(2)-1 provides guidance where the legal 
obligation of a reverse mortgage transaction includes a benefit, such 
as a ``death benefit,'' in which a payment to the consumer's estate (or 
a credit to the outstanding loan balance) will be made upon the 
occurrence of an event (for example, the consumer's death within a 
certain period of time).

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-0903, and, when 
possible, should use a standard courier typeface with a type size of 10 
or 12 characters per inch. This will enable the Board to convert the 
text to machine-readable form through electronic scanning, and will 
facilitate automated retrieval of comments for review. Also, along with 
an original document in paper form, commenters are encouraged to submit 
their comments on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any 
IBM-compatible DOS-based format.

List of Subjects in 12 CFR Part 226

    Advertising, Banks, Banking, Consumer protection, Credit, Federal 
Reserve System, Mortgages, Reporting and recordkeeping requirements, 
Truth in lending.
    Certain conventions have been used to highlight the proposed 
revisions to the regulation. New language is shown inside bold-faced 
arrows, while language that would be deleted is set off with bold-faced 
brackets. Comments are numbered to comply with new Federal Register 
publication rules.

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

PART 226--TRUTH IN LENDING (REGULATION Z)

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

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

    2. In supplement I to Part 226, under section 226.4--Finance 
Charge, the following amendments would be made:
    1. Under 4(a) Definition., a new paragraph 8. would be added; and
    2. Under 4(d) Insurance., paragraph 5. would be revised.
    The additions and revisions read as follows:

Supplement I--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *

Section 226.4--Finance Charge

    4(a) Definition.
* * * * *
    8. Treatment of Debt Cancellation Agreements. Some 
creditors may require debt cancellation agreements while others may 
offer them as an option. In the case of motor 

[[Page 62768]]
vehicle loans, these agreements, sometimes referred to as ``gap'' 
agreements, offer protection to consumers if the vehicle is stolen 
or destroyed and the motor vehicle insurance proceeds are 
insufficient to extinguish the debt. In return for a fee, the 
consumer will not be held liable for the remaining balance due on 
the loan. Other types of agreements provide for debt cancellation if 
the borrower dies or becomes disabled. In some states these 
agreements are regulated as or otherwise considered insurance under 
state law.
    i. Insurance. If the agreement is regulated as or considered 
insurance under state law, the fee paid by the consumer may be 
excludable from the finance charge if it meets the requirements in 
Sec. 226.4(d). Insurance protecting the creditor against credit 
loss, however, is a finance charge under Sec. 226.4(b)(5).
    ii. Other. If the agreement is not considered insurance under 
state law, debt cancellation fees paid to the creditor, whether 
required or optional, are incident to the extension of credit and 
must be disclosed as a finance charge. An optional debt cancellation 
fee paid to a third-party is a finance charge only to the extent 
that the third-party shares the fee with the creditor. If a creditor 
cannot determine whether state law considers the agreement 
insurance, the fees must be treated as if the agreement is not 
insurance.
* * * * *
    Paragraph 4(d).
* * * * *
    5. Required credit life insurance. Credit life, accident, 
health, or loss-of-income insurance must be voluntary in order for 
the premium or charges to be excluded from the finance charge. 
Whether the insurance is in fact required or optional is a factual 
question. If the insurance is required, the premiums must be 
included in the finance charge, whether the insurance is purchased 
from the creditor or from a third party. If the consumer 
is required to elect one of several options--such as 
[only option the creditor gives the consumer is] to purchase credit 
life insurance from the creditor, [or to] 
assign an existing life insurance policy,  or pledge 
security such as a certificate of deposit, and the 
consumer purchases the credit life insurance, the premium must be 
included in the finance charge. (If the consumer assigns a 
preexisting policy instead, no premium is included in the finance 
charge. The security interest would be disclosed under 
Sec. 226.6(c) or Sec. 226.18(m). See the commentary to 
Sec. 226.(4)(b) (7) and (8).)
* * * * *
    3. In supplement I to part 226, under section 226.6--Initial 
Disclosure Statement, under 6(b) Other charges., paragraph 1.v. would 
be revised to read as follows:
* * * * *

Subpart B--Open-End Credit

* * * * *

Section 226.6--Initial Disclosure Statement

* * * * *
    6(b) Other charges.
    1. * * *
    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. For 
the fee to be excluded from disclosure as an ``other charge,'' 
however, the package of services must have some substantive purpose 
other than access to the credit feature. For example, if the primary 
benefit of membership in an organization is the opportunity to apply 
for a credit card, and the other benefits offered are incidental to 
the credit feature, the membership fee is an ``other 
charge.''
* * * * *
    4. In supplement I to part 226, under Section 226.12--Special 
Credit Card Provisions, under 12(c)(2) Adverse credit reports 
prohibited., new paragraph 2. would be added to read as follows:
* * * * *

Section 226.12--Special Credit Card Provisions

* * * * *
    12(c)(2) Adverse credit reports prohibited.
* * * * *
    2. Settlement of dispute. A card issuer may not 
consider a dispute settled and report an amount disputed as 
delinquent or begin collection of the disputed amount until it has 
completed a reasonable investigation of the cardholder's claim. In 
conducting an investigation, the card issuer may reasonably request 
the cardholder's cooperation. The card issuer may not automatically 
consider a dispute settled due to the cardholder's failure or 
refusal to comply with a particular request.
* * * * *
    5. In supplement I to Part 226, under Section 226.14--Determination 
of Annual Percentage Rate, under 14(c) Annual percentage rate for 
periodic statements., a new paragraph 10. would be added to read as 
follows:
* * * * *

Section 226.14--Determination of Annual Percentage Rate

* * * * *
    14(c) Annual percentage rate for periodic statements.
* * * * *
    10. Transactions at end of billing cycle. The annual 
percentage rate reflects transactions and charges imposed during the 
billing cycle. However, a transaction that occurs at the end of a 
billing cycle may be impracticable to post until the following 
cycle, such as a cash advance that occurs on the last day of a 
billing cycle. The transaction is posted to the account in the 
following cycle. In this case, the annual percentage rate shall be 
calculate as follows for the billing cycle in which the transaction 
and charges are posted:
    i. The denominator shall be calculated as if the transaction 
occurred on the first day of the billing cycle, and
    ii. The numerator shall include the amount of the transaction 
charge plus all finance charges derived from the application of the 
periodic rate to the amount of the transaction (including all 
charges from a prior cycle).
* * * * *
    6. In Supplement I to Part 226, under Section 226.17--General 
Disclosure Requirements, under Paragraph 17(c)(1)., paragraph 10. would 
be revised and a new paragraph 18. would be added to read as follows:
* * * * *

Subpart C--Closed-End Credit

Section 226.17--General Disclosure Requirements

* * * * *
    17(c) Basis of disclosures and use of estimates.
    Paragraph 17(c)(1).
* * * * *
    10. Discounted and premium variable-rate transactions. In some 
variable-rate transactions, creditors may set an initial interest 
rate that is not determined by the index or formula used to make 
later interest rate adjustments. Typically, this initial rate 
charged to consumers is lower than the rate would be if it were 
calculated using the index or formula. However, in some cases the 
initial rate may be higher. In a discounted transaction, for 
example, a creditor may calculate interest rates according to a 
formula using the six-month Treasury bill rate plus a 2 percent 
margin. If the Treasury bill rate at consummation is 10 percent, the 
creditor may forgo the 2 percent spread and charge only 10 percent 
for a limited time, instead of setting an initial rate of 12 
percent.
    i. When creditors use an initial interest 
rate that is not calculated using the index or formula for later 
rate adjustments, the disclosures should reflect a composite annual 
percentage rate based on the initial rate for as long as it is 
charged and, for the remainder of the term, the rate that would have 
been applied using the index or formula at the time of consummation. 
The rate at consummation need not be used if a contract provides for 
a delay in the implementation of changes in an index value. For 
example, if the contract specifies that rate changes are based on 
the index value in effect 45 days before the change date, creditors 
may use any [the] index value in effect 
during the 45 day period [not more than 45 
days] before consummation in calculating a composite annual 
percentage rate.
    ii. The effect of the multiple rates must 
also be reflected in the calculation and disclosure of the finance 
charge, total of payments, and payment schedule.
    iii. If a loan contains a rate or payment 
cap that would prevent the initial rate or payment, at the time of 
the first adjustment, from changing to the rate determined by the 
index or formula at consummation, the effect of that rate or payment 
cap should be reflected in the disclosures.
    iv. Because these transactions involve 
irregular payment amounts, an annual 

[[Page 62769]]
percentage rate tolerance of \1/4\ of 1 percent applies, in accordance 
with Sec. 226.22(a)(3) of the regulation.
    v. Examples of discounted variable-rate 
transactions include:
    A. A 30-year loan for $100,000 with no 
prepaid finance charges and rates determined by the Treasury bill 
rate plus 2 percent. Rate and payment adjustments are made annually. 
Although the Treasury bill rate at the time of consummation is 10 
percent, the creditor sets the interest rate for one year at 9 
percent, instead of 12 percent according to the formula. The 
disclosures should reflect a composite annual percentage rate of 
11.63 percent based on 9 percent for one year and 12 percent for 29 
years. Reflecting those two rate levels, the payment schedule should 
show 12 payments of $804.62 and 348 payments of $1,025.31. The 
finance charge should be $266,463.32 and the total of payments 
$366,463.32.
    B. Same loan as above, except with a 2 
percent rate cap on periodic adjustments. The disclosures should 
reflect a composite annual percentage rate of 11.53 percent based on 
9 percent for the first year, 11 percent for the second year, and 12 
percent for the remaining 28 years. Reflecting those three rate 
levels, the payment schedule should show 12 payments of $804.62, 12 
payments of $950.09, and 336 payments of $1,024.34. The finance 
charge should be $265,234.76 and the total of payments $365,234.76.
    C. Same loan as above, except with a 7\1/
2\ percent cap on payment adjustments. The disclosures should 
reflect a composite annual percentage rate of 11.64 percent, based 
on 9 percent for one year and 12 percent for 29 years. Because of 
the payment cap, five levels of payments should be reflected. The 
payment schedule should show 12 payments of $804.62, 12 payments of 
$864.97, 12 payments of $929.84, 12 payments of $999.58, and 312 
payments of $1,070.04. The finance charge should be $277,040.60, and 
the total of payments $377,040.60.
    D. This paragraph does not apply to 
variable-rate loans in which the initial interest rate is set 
according to the index or formula used for later adjustments but is 
not set at the value of the index or formula at consummation. For 
example, if a creditor commits to an initial rate based on the 
formula on a date prior to consummation, but the index has moved 
during the period between that time and consummation, a creditor 
should base its disclosures on the initial rate.
* * * * *
    18. Pawn Transactions. For a transaction in which a 
consumer pledges or sells an item to a creditor in return for a sum 
of money, and retains the right to redeem the item for a greater sum 
(the redemption price) within a specified period of time:
    i. The amount financed is the initial sum paid to the consumer.
    ii. The finance charge is the difference between the initial sum 
paid to the consumer and the redemption price.
    iii. The term of the transaction, for calculating the annual 
percentage rate, is the specified period of time agreed to by the 
creditor and the consumer.
* * * * *
    7. In Supplement I to Part 226, under Section 226.18--Content of 
Disclosures, under Paragraph 18(c)(1)(iii)., a new paragraph 2. would 
be added to read as follows:
* * * * *

Section 226.18--Content of Disclosures

* * * * *
    Paragraph 18(c)(1)(iii).
* * * * *
    2. Creditor-imposed charges added to amounts paid to 
others. A creditor that offers an item for sale in both cash and 
credit transactions sometimes adds an amount (often referred to as 
an ``upcharge'') to a fee charged to a consumer by a third party for 
a service (such as for a maintenance or service contract) that is 
payable in an equal amount in both types of transactions, and 
retains that amount. At its option, the creditor may list the total 
charge (including the portion retained by it) as an amount paid to 
others, or it may choose to reflect the amounts in the manner in 
which they were actually paid to or retained by the appropriate 
parties.
* * * * *
    8. In Supplement I to Part 226, under Section 226.20 Subsequent 
Disclosure Requirements, under Paragraph 20(a) Refinancings., paragraph 
3. would be revised to read as follows:
* * * * *

Section 226.20--Subsequent Disclosure Requirements

    Paragraph 20(a) Refinancings.
* * * * *
    3. Variable-rate.
    i. If a variable-rate feature was properly 
disclosed under the regulation, a rate change in accord with those 
disclosures is not a refinancing. For example, no new 
disclosures are required when the variable-rate feature is invoked 
on a renewable balloon-payment mortgage that was previously 
disclosed as a variable-rate transaction. [For example, a 
renewable balloon-payment mortgage that was disclosed as a variable-
rate transaction is not subject to new disclosure requirements when 
the variable-rate feature is invoked. However, even]
    ii. Even if it is not accomplished by the 
cancellation of the old obligation and substitution of a new one, a 
new transaction subject to new disclosures results if the creditor 
either:
    A. Increases the rate based on a variable-
rate feature that was not previously disclosed, or
    B. Adds a variable-rate feature to the 
obligation. A creditor does not add a variable-rate 
feature by changing the index of a variable-rate transaction or 
substituting a new index for one that no longer exists.
    iii. If either of the above 
[these] two events occur in a transaction secured by a principal 
dwelling with a term longer than one year, the disclosures required 
under Sec. 226.19(b) also must be given at that time.
* * * * *
    9. In Supplement I to Part 226, a new Subpart E--Special Rules for 
Certain Home Mortgage Transactions would be added as follows:
* * * * *

Subpart E--Special Rules for Certain Home Mortgage 
Transactions

Section 226.31--General Rules

    31(c) Timing of disclosure.
    Paragraph 31(c)(1) Disclosures for certain closed-end home 
mortgages.
    1. Furnishing disclosures. Disclosures are considered furnished 
when received by the consumer.
    2. Pre-consummation waiting period. A creditor must furnish the 
special disclosures at least three business days prior to 
consummation. For purposes of Sec. 226.32, ``business day'' means 
every calendar day except Sundays and federal legal holidays. For 
example, if disclosures are provided on Friday, consummation could 
occur any time on Tuesday, the third business day following receipt 
of disclosures.
    Paragraph 31(c)(1)(i) Change in terms.
    1. Redisclosure required. Creditors must provide new disclosures 
if the regular payment or any other disclosure required by 
Sec. 226.32(c) becomes inaccurate.
    Paragraph 31(c)(1)(ii) Telephone disclosures.
    1. Telephone disclosures. Disclosures by telephone must be 
furnished at least three calendar days prior to consummation.
    Paragraph 31(c)(1)(iii) Consumer's waiver of waiting period 
before consummation.
    1. Modification or waiver. A consumer may modify or waive the 
right to the three-day waiting period only after receiving the 
disclosures required by Sec. 226.32 and only if the circumstances 
meet the criteria for establishing a bona fide personal financial 
emergency in Sec. 226.23(e). Whether these criteria are met are 
determined by the facts surrounding individual situations. The 
impending sale of the consumer's home at foreclosure is one example 
of a bona fide personal financial emergency. Each consumer entitled 
to the three-day waiting period must sign a written statement for 
the waiver to be effective.
    Paragraph 31(c)(2) Disclosures for reverse mortgages.
    1. Business days. For purposes of providing reverse mortgage 
disclosures, ``business day'' means a day on which the creditor's 
offices are open to the public for carrying on substantially all of 
its business functions.
    2. Open-end plans. Disclosures for open-end reverse mortgages 
must be provided three business days before the first transaction 
under the plan (see Sec. 226.5(b)(1)).
    31(d) Basis of disclosures and use of estimates.
    1. Redisclosure. When a disclosure required by Sec. 226.32 is 
based on and labeled as an estimate and becomes inaccurate due to a 
change in terms that occurs before consummation, new disclosures 
must be provided. 

[[Page 62770]]


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

    32(a) Coverage.
    Paragraph 32(a)(1)(i).
    1. Application date. An application is deemed received when it 
reaches the creditor in any of the ways applications are normally 
transmitted. (See Sec. 226.19(a).) For example, if a borrower 
applies for a 10-year loan on September 30 and the creditor 
counteroffers with a 7-year loan on October 10, the creditor must 
measure the annual percentage rate against the appropriate Treasury 
security yield as of August 15. An application transmitted through 
an intermediary agent or broker is received when it reaches the 
creditor, rather than when it reaches the agent or broker.
    2. When fifteenth not a business day. If the 15th day of the 
month immediately preceding the application date is not a business 
day, the creditor must use the yield as of the business day 
immediately preceding the 15th.
    3. Calculating annual percentage rates for variable-rate loans 
and discount loans. Creditors must use the rules set out in the 
commentary to Sec. 226.17(c)(1) in calculating the annual percentage 
rate for variable-rate loans (assume the rate in effect at the time 
of disclosure remains unchanged) and for discount, premium, and 
stepped-rate transactions (which must reflect composite annual 
percentage rates).
    4. Treasury securities. To determine the yield on a Treasury 
security for the annual percentage rate test, creditors may use the 
Board's Selected Interest Rates (statistical release H-15) or the 
actual auction results. Treasury auctions are held at regular 
intervals for the different types of securities. These figures are 
published by major financial and metropolitan newspapers, and are 
also available from Federal Reserve Banks. Creditors must use the 
yield on the security that has the nearest maturity at issuance to 
the loan's maturity. For example, if a creditor must compare the 
annual percentage rate to Treasury securities with either seven-year 
or ten-year maturities, the annual percentage rate for an eight-year 
loan is compared with securities that have a seven-year maturity; 
the annual percentage rate for a nine-year loan is compared with 
securities that have a ten-year maturity. If the loan maturity is 
exactly halfway between, the annual percentage rate is compared with 
the Treasury security that has the lower yield. For example, if the 
loan has a maturity of 20 years and comparable securities have 
maturities of 10 years with a yield of 6.501 percent and 30 years 
with a yield of 6.906 percent, the annual percentage rate is 
compared with 10 percentage points over the yield of 6.501 percent, 
the lower of the two yields.
    Paragraph 32(a)(1)(ii).
    1. Total loan amount. For purposes of the ``points and fees'' 
test, the total loan amount is calculated by taking the amount 
financed, as determined according to Sec. 226.18(b), and deducting 
any cost listed in Sec. 226.32(b)(1)(iii) that is both included as 
points and fees under Sec. 226.32(b)(1) and financed by the 
creditor. For example, if a consumer borrows $10,000, finances a 
$300 fee for a creditor-conducted appraisal, and pays $400 in points 
at closing, the amount financed according to Sec. 226.18(b) is 
$9,900 ($10,000 plus the $300 appraisal fee that is financed by the 
creditor, less $400 in prepaid finance charges). The $300 appraisal 
fee paid to the creditor is added to other points and fees under 
Sec. 226.32(b)(1)(iii). It is deducted from the amount financed 
under Sec. 226.18(b) ($9,900) to derive a total loan amount of 
$9,600. If the $300 appraisal fee is paid in cash at closing, the 
$300 is included in the points and fees calculation. However, 
because it is not financed by the creditor, the $300 fee is not part 
of the amount financed under Sec. 226.18(b) ($10,000, in this case). 
The total loan amount is $9,600 ($10,000, less $400 in prepaid 
finance charges).
    32(b) Definitions.
    Paragraph 32(b)(1)(i).
    1. General. Items defined as finance charges under Sec. 226.4(a) 
and 226.(4)(b) are included under this paragraph as a component of 
the total ``points and fees.'' Items excluded from the finance 
charge under other provisions of Sec. 226.4 are not included in the 
calculation under this paragraph 32(b)(1)(i), although the fee may 
be included in ``points and fees'' under paragraphs 32(b)(1)(ii) and 
32(b)(1)(iii).
    Paragraph 32(b)(1)(ii).
    1. Mortgage broker fees. In determining ``points and fees'' for 
purposes of this section, compensation paid by a consumer to a 
mortgage broker (directly or through the creditor for delivery to 
the broker) is included in the calculation whether or not the amount 
is disclosed as a finance charge. Mortgage broker fees that are not 
paid by the consumer are not included. Broker fees already included 
in the calculation as finance charges under Sec. 226.32(b)(1)(i) 
need not be counted again under Sec. 226.32(b)(1)(ii).
    2. Example. Section 226.32(b)(1)(iii) defines ``points and 
fees'' to include all items listed in Sec. 226.4(c)(7), other than 
amounts held for future payment of taxes. An item listed in 
Sec. 226.4(c)(7) may be excluded from the ``points and fees'' 
calculation, however, 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. For example, a 
reasonable fee paid by the consumer to an independent, third-party 
appraiser may be excluded from the points and fees calculation 
(assuming no compensation is paid to the creditor). A fee paid by 
the consumer for an appraisal performed by the creditor must be 
included in the calculation, even though the fee may be excluded 
from the finance charge if it is bona fide and reasonable in amount.
    32(c) Disclosures.
    1. Format. The disclosures must be clear and conspicuous but 
need not be in any particular type size or typeface, nor presented 
in any particular manner. For example, the disclosures need not be a 
part of the mortgage.
    Paragraph 32(c)(3) Regular payment.
    1. General. The regular payment is the amount due from the 
borrower at regular intervals, such as monthly, bimonthly, 
quarterly, or annually. There must be at least two payments, and the 
payments must be in an amount and at such intervals that they fully 
amortize the amount owed. If the loan has two payment streams, the 
regular payment for each must be disclosed.
    2. Discount and premium rates. In disclosing the regular 
payment, creditors may rely on the rules set forth in 
Sec. 226.18(g). In discounted or premium variable rate transactions 
where the creditor sets the initial interest rate and later rate 
adjustments are determined by an index or formula, the creditor must 
disclose both the payment based on the discount or premium and the 
payment that will be in effect thereafter. Additional explanatory 
material which does not detract from the required disclosures may 
accompany the disclosed amounts. For example, if a monthly payment 
is $250 for the first six months and then increases based on an 
index and margin, the creditor could use language such as the 
following: ``Your regular monthly payment will be $250 for six 
months. After six months your regular monthly payment will be based 
on an index and margin, which currently would make your payment 
$350. Your actual payment at that time may be higher or lower.''
    Paragraph 32(c)(4) Variable-rate.
    1. Calculating ``worst-case'' payment example. Creditors may 
rely on instructions in Sec. 226.19(b)(2)(x) for calculating the 
maximum possible increases in rates in the shortest possible 
timeframe, based on the face amount of the note (not the 
hypothetical loan amount of $10,000 required by 
Sec. 226.19(b)(2)(x)). The creditor must provide a maximum payment 
for each payment stream, where a payment schedule provides for more 
than one payment stream and more than one maximum payment amount is 
possible.
    32(d) Limitations.
    Paragraph 32(d)(1)(i) Balloon payment.
    1. Regular periodic payments. The repayment schedule for a 
Sec. 226.32 mortgage loan with a term of less than five years must 
fully amortize the outstanding principal balance through ``regular 
periodic payments.'' A payment is a ``regular periodic payment'' if 
it is not more than twice the amount of other payments.
    Paragraph 32(d)(2) Negative amortization.
    1. Negative amortization. The prohibition against negative 
amortization in a mortgage covered by Sec. 226.32 does not preclude 
increases in the principal balance that result from events unrelated 
to the payment schedule, such as when a consumer fails to obtain 
property insurance and the creditor purchases and adds the premium 
to the consumer's principal balance.
    Paragraph 32(d)(4) Increased interest rate.
    1. Variable-rate transactions. The limitation on interest rate 
increases does not apply to rate increases resulting from index 
changes in a variable-rate transaction, even if the increase occurs 
after default by the consumer.
    Paragraph 32(d)(5) Rebates.
    1. Calculation of refunds. The limitation applies only to 
refunds of interest and not to any other charges that are considered 
finance charges under Sec. 226.4 (for example, points and fees paid 
at closing). The calculation of the refund of interest includes odd-
days interest, whether paid at or after consummation. 

[[Page 62771]]

    Paragraph 32(d)(6) Prepayment penalties.
    1. State law. If using the actuarial method defined by 
applicable state law results in a refund that is greater than the 
refund calculated by using the method described in section 933(d) of 
the Housing and Community Development Act of 1992, creditors must 
use the state law definition in determining if a refund is a 
prepayment penalty under Sec. 226.32(d)(6).
    32(d)(7) Prepayment penalty exception.
    Paragraph 32(d)(7)(iii).
    1. Calculating debt-to-income ratio. ``Debt'' does not include 
amounts paid by the borrower in cash at closing or amounts from the 
loan proceeds that directly repay an existing debt. Creditors may 
consider combined debt-to-income ratios for transactions involving 
joint applicants.
    2. Verification. Verification of employment satisfies the 
requirement for payment records for employment income.
    32(e) Prohibited acts and practices.
    Paragraph 32(e)(1) Repayment ability.
    1. Determining repayment ability. The information provided to 
the creditor in connection with Sec. 226.32(d)(7) may be used to 
show that the creditor considered the consumer's income and 
obligations before extending the credit. Any expected income can be 
considered by the creditor, except equity income that the consumer 
would obtain through the foreclosure of a mortgage covered by 
Sec. 226.32. For example, a creditor may use information about 
income other than regular salary or wages such as gifts, expected 
retirement payments, or income from housecleaning or childcare. The 
creditor also may use unverified income, so long as the creditor has 
a reasonable basis for believing that the income exists.
    Paragraph 32(e)(2) Home-Improvement Contracts.
    Paragraph 32(e)(2)(i).
    1. Joint payees. If a creditor pays a contractor with an 
instrument jointly payable to the contractor and the consumer, the 
instrument must name as payee each consumer who is primarily 
obligated on the note.
    Paragraph 32(e)(3) Notice to Assignee.
    1. Subsequent sellers or assignors. Any person, whether or not 
the original creditor, that sells or assigns a mortgage subject to 
this section must furnish the notice of potential liability to the 
purchaser or assignee.
    2. Format. While the notice of potential liability need not be in 
any particular format, the notice must be prominent. Placing it on the 
face of the note, such as with a stamp, is one means of satisfying the 
prominence requirement.

Section 226.33--Requirements for Reverse Mortgages

    33(a) Definition.
    1. Nonrecourse transaction. A nonrecourse reverse mortgage 
transaction limits the homeowner's liability to the proceeds of the 
sale of the home (or any lesser amount specified in the credit 
obligation). If a transaction structured as a closed-end reverse 
mortgage transaction allows recourse against the consumer, and the 
annual percentage rate or the points and fees exceed those specified 
under Sec. 226.32(a)(1), the transaction is subject to all the 
requirements of Sec. 226.32, including the limitations concerning 
balloon payments and negative amortization.
    Paragraph 33(a)(2).
    1. Default. Default is not defined by the regulation, but rather 
by the legal obligation between the parties and state or other law.
    2. Definite term or maturity date. To meet the definition of a 
reverse mortgage transaction, a creditor cannot require any 
principal, interest, or shared appreciation or equity to be due and 
payable (other than in the case of default) until after the 
consumer's death, transfer of the dwelling, or the consumer ceases 
to occupy the dwelling as a principal dwelling. Some state laws 
require legal obligations secured by a mortgage to specify a 
definite maturity date or term of repayment in the instrument. Such 
a provision in an obligation does not violate the definition of a 
reverse mortgage transaction if the maturity date or term or 
repayment required by state law would in no case operate to cause 
maturity prior to the occurrence of any of the events recognized in 
the regulation. For example, a provision that allows a reverse 
mortgage loan to become due and payable only after the consumer's 
death, transfer, or cessation of occupancy, or after a specified 
term, but which automatically extends the term for consecutive 
periods as long as none of the other events has occurred would meet 
the definition of a reverse mortgage transaction.
    33(c) Projected total cost of credit.
    Paragraph 33(c)(1) Costs to consumer.
    1. Costs and charges to consumer--relation to finance charge. 
All costs and charges to the consumer that are incurred in a reverse 
mortgage transaction are included in the projected total cost of 
credit, and thus in the total annual loan cost rates, whether or not 
the cost or charge is a finance charge under Sec. 226.4 of the 
regulation.
    2. Annuity costs. As part of the credit transaction, some 
creditors require or permit a consumer to purchase an annuity that 
immediately--or at some future time--supplements or replaces the 
creditor's payments. The amount paid by the consumer for the annuity 
is a cost to the consumer under this section, regardless of whether 
the annuity is purchased through the creditor or a third party, or 
whether the purchase is mandatory or voluntary.
    3. Disposition costs excluded. Disposition costs incurred in 
connection with the sale or transfer of the property subject to the 
reverse mortgage are not included in the costs to the consumer under 
this paragraph. (However, see the definition of Valn in 
appendix K to the regulation to determine the effect certain 
disposition costs may have on the total annual loan cost rates.)
    Paragraph 33(c)(2) Payments to consumer.
    1. Payments upon a specified event. The projected total cost of 
credit should not reflect contingent payments in which a credit to 
the outstanding loan balance or a payment to the consumer's estate 
is made upon the occurrence of an event (for example, a ``death 
benefit'' payable if the consumer's death occurs within a certain 
period of time). Thus, the table of total annual loan cost rates 
required under Sec. 226.33(b)(2) would not reflect such payments. At 
its option, however, a creditor may put an asterisk, footnote, or 
similar type of notation in the table next to the applicable total 
annual loan cost rate, and state in the body of the note, apart from 
the table, the assumption upon which the total annual loan cost is 
made and any different rate that would apply if the contingent 
benefit were paid.
    Paragraph 33(c)(3) Additional creditor compensation.
    1. Shared appreciation or equity. Any shared appreciation or 
equity that the creditor is entitled to receive pursuant to the 
legal obligation must be included in the total cost of a reverse 
mortgage loan. For example, if a creditor agrees to a reduced 
interest rate on the transaction in exchange for a portion of the 
appreciation or equity that may be realized when the dwelling is 
sold, that portion is included in the projected total cost of 
credit.
    Paragraph 33(c)(4) Limitations on consumer liability.
    1. In general. Creditors must include any limitation on the 
consumer's liability (such as a nonrecourse limit or an equity 
conservation agreement) in the projected total cost of credit. These 
limits and agreements protect a portion of the equity in the 
dwelling for the consumer or the consumer's estate. For example, the 
following contractual provisions are limitations on the consumer's 
liability that must be included in the projected total cost of 
credit:
    i. A limit on the consumer's liability to a certain percentage 
of the projected value of the home.
    ii. A limit on the consumer's liability to the net proceeds from 
the sale of the property subject to the reverse mortgage.
    2. Uniform assumption for ``net proceeds'' recourse limitations. 
If the legal obligation between the parties does not specify a 
percentage for the ``net proceeds'' liability of the consumer, for 
purposes of the disclosures required by Sec. 226.33, a creditor must 
assume that the costs associated with selling the property will 
equal 7 percent of the projected sale price (see the definition of 
the Valn symbol under appendix K(b)(6)).
* * * * *
    10. In Supplement I to Part 226, a new Appendix K--Total Annual 
Loan Cost Rate Computations for Reverse Mortgage Transactions and a new 
Appendix L--Assumed Loan Periods for Computations of Total Annual Loan 
Cost Rates would be added to read as follows:
* * * * *

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

    1. General. The calculation of total annual loan cost rates 
under appendix K is based on the principles set and the estimation 
or ``iteration'' procedure used to compute annual percentage rates 
under appendix J. Rather than restate this iteration process in 
full, the regulation cross-references the procedures found in 
appendix J. In other aspects the appendix reflects the special 

[[Page 62772]]
nature of reverse mortgage transactions. Special definitions and 
instructions are included where appropriate.
    (b) Instructions and equations for the total annual loan cost 
rate.
    (b)(5) Number of unit-periods between two given dates.
    1. Assumption as to when transaction begins. The computation of 
the total annual loan cost rate is based on the assumption that the 
reverse mortgage transaction begins on the first day of the month in 
which consummation is estimated to occur. Therefore, fractional 
unit-periods (as used under appendix J for calculating annual 
percentage rates) are not used.
    (b)(9) Assumption for discretionary cash advances.
    1. Amount of credit. Creditors should compute the total annual 
loan cost rates for transactions involving discretionary cash 
advances by assuming that 50 percent of the initial amount of the 
credit available under the transaction is advanced at closing or, in 
an open-end transaction, when the consumer becomes obligated under 
the plan. (For the purposes of this assumption, the initial amount 
of the credit is the principle loan amount less any costs to the 
consumer under section 226.33(c)(1).)
    (b)(10) Assumption for variable-rate reverse mortgage 
transactions.
    1. Initial discount or premium rate. Where a variable-rate 
reverse mortgage transaction includes an initial discount or premium 
rate, the creditor should apply the same rules for calculating the 
total annual loan cost rate as are applied when calculating the 
annual percentage rate for a loan with an initial discount or 
premium rate (see the commentary to Sec. 226.17(c)).
    (d) Reverse mortgage model form and sample form.
    (d)(2) Sample form.
    1. General. The ``clear and conspicuous'' standard for reverse 
mortgage disclosures does not require disclosures to be printed in 
any particular type size. Disclosures may be made on more than one 
page, and use both the front and the reverse sides, so long as the 
pages constitute an integrated document.

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

    1. General. The life expectancy figures used in this appendix 
are those found in the U.S. Decennial Life Tables for women, as 
rounded to the nearest whole year and as published by the U. S. 
Department of Health and Human Services. The figures contained in 
this appendix must be used by creditors for all consumers (men and 
women). This appendix will be revised periodically by the Board to 
incorporate revisions to the figures made in the Decennial 
Tables.

    By order of the Board of Governors of the Federal Reserve 
System, acting through the Secretary of the Board under delegated 
authority, December 1, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-29711 Filed 12-6-95; 8:45 am]
BILLING CODE 6210-01-P