[Federal Register Volume 61, Number 20 (Tuesday, January 30, 1996)]
[Proposed Rules]
[Pages 2968-2969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1651]



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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0913]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Request for comments.

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SUMMARY: The Board is soliciting comment on whether the Truth in 
Lending Act cost disclosure and other rules for open-end home-secured 
lines of credit provide adequate consumer protections. The Riegle 
Community Development and Regulatory Improvement Act of 1994 directs 
the Board to submit a report to the Congress regarding this matter. 
Under present law, creditors offering open-end home-equity lending 
programs have to provide detailed disclosures at the time a consumer 
applies for a line of credit. The law also imposes specific substantive 
limitations on how these programs may be structured; however they are 
not subject to the type of disclosure and restrictions imposed by the 
Home Ownership and Equity Act of 1994 for closed-end credit.

DATES: Comments must be received on or before April 1, 1996.

ADDRESSES: Comments should refer to Docket No. R-0913, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street NW. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 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: Obrea Poindexter, Staff Attorney, 
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), please contact Dorothea 
Thompson at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The Home Ownership and Equity Protection Act (HOEPA) amendments to 
the Truth in Lending Act, contained in the Riegle Community Development 
and Regulatory Improvement Act of 1994 (RCDRIA) require special 
disclosures and impose substantive limitations on certain closed-end 
home-equity loans with rates or fees above a certain percentage or 
amount. The requirements and prohibitions contained in the HOEPA, which 
became effective in October 1995, do not apply to open-end home-secured 
lines of credit. The legislative history notes that congressional 
hearings on home-equity lending practices revealed little evidence of 
abusive practices in the open-end home-equity credit market. The 
legislative history also states that, if the market changes or if the 
Board finds that open-end credit plans are being used to circumvent the 
HOEPA, the Board has the authority to address abuses under section 
152(d) of the HOEPA.
    In addition, the RCDRIA directs the Board to conduct a study and 
submit a report to the Congress, including recommendations for 
legislation, on whether existing rules for open-end home-equity lending 
programs provide consumers obtaining home-equity lines of credit with 
adequate protections.

II. Current Rules for Home-Equity Lines of Credit

    The Home Equity Loan Consumer Protection Act amendments to the 
Truth in Lending Act, enacted in November 1988, require creditors to 
give consumers extensive disclosures and an educational brochure for 
home-equity plans at the time an application is provided. For example, 
creditors must provide information about payment terms, fees imposed 
under the plans, and, for variable-rate plans, information about the 
index used to determine the rate and a fifteen-year history of changes 
in the index values. In addition, the law imposes certain substantive 
limitations on home-equity plans, such as limiting the right of 
creditors to terminate a plan and accelerate an outstanding balance or 
to change the terms of a plan after it has been opened.
    The Board's Regulation Z (12 CFR part 226) implements the Truth in 
Lending Act. Regulation Z requirements for home-equity lines of credit 
closely mirror the statutory requirements. As the statute sets forth 
specific requirements that are restrictive in many cases, the rules 
implementing the statute are similarly restrictive.
    Specific rules on home-equity lines of credit are contained in 
Regulation Z, Secs. 226.5b, 226.6(e), 226.9(c)(3), and 226.16(d) and 
its accompanying commentary. Requirements for home-equity lines of 
credit apply to all open-end credit plans secured by a consumer's 
dwelling. The rules require creditors offering home-equity plans (and 
third-parties in some instances) to give specific disclosures about 
costs and terms and limits how creditors may structure programs.

Format and Timing of Disclosures

    In most cases, at the time a consumer is provided with an 
application for a home-secured line of credit, disclosures must be 
given. These disclosures must be in writing, grouped together, and 
segregated from all unrelated information. Each consumer must also be 
given an educational pamphlet prepared by the Board entitled ``When 
Your Home is On the Line: What You Should Know About Home Equity Lines 
of Credit,'' or a similar substitute. Program-specific initial 
disclosures must be given in writing before the first transaction is 
made under the plan.

Content of Disclosures

    Creditors offering home-equity plans must provide information to 
consumers that is required under section 226.5b of the regulation. This 
includes, but is not limited to, the following:
    (1) The payment terms, including the length of the draw and any 
repayment period, an explanation of how the minimum periodic payment 
will be determined and the timing of payments, and an example based on 
a $10,000 

[[Page 2969]]
outstanding balance and a recent annual percentage rate (APR):1

    \1\The example must show the minimum periodic payment and the 
time it would take to repay the $10,000 balance if the consumer made 
only those payments and obtained no additional credit extensions.
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    (2) The APR;
    (3) Fees imposed by the creditor and third parties;
    (4) A statement that negative amortization may occur and that as a 
result a consumer's equity in a home may decrease; and
    (5) Several statements, including a statement that loss of the home 
could occur in the event of default.

Subsequent Disclosures

    Subject to certain limitations on changes in terms, creditors are 
generally required to send the consumer a fifteen-day advance notice if 
a term on the plan is changed. In addition, a notice must also be sent 
if additional extensions of credit are prohibited or if the credit 
limit is reduced; this notice must be sent no later than three business 
days after the action is taken. 12 CFR 226.9(c)

Limitations on Home-equity Plans

    Regulation Z prescribes substantive limitations on the changes that 
a creditor can make in the annual percentage rate, termination of a 
plan, and any other change in the credit terms that were initially 
disclosed. For example, a creditor cannot terminate a plan and demand 
repayment of the entire outstanding balance unless the consumer has 
engaged in fraud or misrepresentation, failed to meet the repayment 
terms, or adversely affected the creditor's security by action or 
inaction. A creditor generally cannot change a term unless the change 
was provided for in the initial agreement, the consumer agrees to the 
change in writing, or the change is insignificant or ``unequivocally 
beneficial'' to the consumer throughout the remainder of the plan; and 
cannot apply a new index and margin unless the original index becomes 
unavailable. 12 CFR 226.5b(f)

Advertising

    Creditors generally trigger additional disclosures, in 
advertisements, if they advertise account-opening disclosures relating 
to finance charges and other significant charges or repayment terms for 
a plan. If a home-equity plan advertisement contains a trigger term, 
creditors must also state the following:
    (1) The periodic rate used to compute the finance charge (expressed 
as an APR);
    (2) Loan fees that are a percentage of the credit limit, along with 
an estimate of other plan fees; and
    (3) The maximum APR that could be imposed in a variable-rate plan.
    If a minimum payment for the home-equity plan is stated, the 
advertisement must also state if a balloon payment will result. For a 
variable-rate plan, if the advertisement states a rate other than one 
based on the contract's index and margin, the advertisement must also 
state how long the introductory rate will be in effect. The 
introductory rate and the fully-indexed rate must be disclosed with 
equal prominence. In addition, creditors cannot advertise home-equity 
plans as ``free money'' (or using a similar term) and cannot discuss 
the tax consequences of interest deductions in a misleading way. 12 CFR 
226.16(d)

III. Request for Comments

    The Board requests comment on whether the existing home-equity 
lending rules provide adequate protections for consumers and whether 
any statutory or regulatory changes are warranted to ensure adequate 
disclosure and other consumer protections in connection with open-end 
home-equity lines of credit.
    The Board will submit its report to the Congress in early fall 
1996, based on the comments of interested parties and its own analysis.

    By order of the Board of Governors of the Federal Reserve 
System, January 24, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-1651 Filed 1-29-96; 8:45 am]
BILLING CODE 6210-01-P