[Federal Register Volume 61, Number 66 (Thursday, April 4, 1996)]
[Rules and Regulations]
[Pages 14952-14959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8045]



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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: 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 provide 
guidance mainly on issues relating to reverse mortgages and mortgages 
bearing rates above a certain percentage or fees above a certain 
amount. The update also addresses issues of general interest, such as a 
card issuer's responsibilities when a cardholder asserts a claim or 
defense relating to a merchant dispute.

DATES: This rule is effective April 1, 1996. Compliance is optional 
until October 1, 1996.

FOR FURTHER INFORMATION CONTACT: For Subparts A and B (open-end 
credit), Jane Ahrens, Senior Attorney or Jane Jensen Gell, Staff 
Attorney; for Subparts A, C and E (closed-end credit, reverse 
mortgages, and mortgages bearing rates or fees above a certain 
percentage or amount), Ms. Ahrens or Michael Hentrel, 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.
    In December, the Board published proposed amendments to the 
commentary to Regulation Z (60 FR 62764, December 7, 1995). The Board 
received about 120 comments. Nearly 75 percent of the comments received 
were from financial institutions, mortgage lenders, credit or guarantee 
automobile protection (GAP) insurance providers, pawnbrokers or other 
creditors (or their representatives); the remainder were from consumer 
representatives, government officials, lawyers and individuals. 
Overall, commenters generally supported the proposed amendments. Views 
were mixed on a number of comments. In particular, nearly 60 percent of 
the commenters addressed the comment treating certain debt cancellation 
agreements as finance charges; most opposed the proposal. Except as 
discussed below, the update has been adopted as proposed. Technical 
amendments to proposed comments that respond to commenters' suggestions 
or concerns are not specifically addressed in these supplementary 
materials. Compliance with the commentary update is mandatory on 
October 1, 1996.
    The revisions mainly incorporate guidance given in the 
supplementary information that accompanied an amendment to Regulation Z 
implementing the Home Ownership and Equity Protection Act of 1994 
(HOEPA),

[[Page 14953]]
contained in the Riegle Community Development and Regulatory 
Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160. These 
amendments, published on March 24, 1995, and which became effective the 
following 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 (60 FR 15463). The amendments also 
impose new disclosure requirements for reverse mortgage transactions.
    The update does not reflect changes to the commentary regarding 
recent amendments to the TILA concerning finance charge disclosures for 
home mortgage loans. The Truth in Lending Act Amendments of 1995 (1995 
Amendments, Pub. L. 104-29, 109 Stat. 271) clarify the treatment of 
several fees typically associated with real estate-related lending. 
Some provisions exclude certain real estate-related closing costs from 
the finance charge, which generally codify interpretations already 
provided in this commentary. One provision categorizes all brokers fees 
paid by the consumer to the broker (or to the creditor for delivery to 
the broker) as finance charges. The 1995 Amendments also revise 
tolerances for finance charge calculations for loans secured by real 
estate or dwellings. The Board expects to publish proposed amendments 
to Regulation Z implementing the 1995 Amendments; corresponding 
revisions to the commentary will be proposed as part of that 
rulemaking.

II. Commentary Revisions

Subpart A--General

Section 226.4--Finance Charge

4(a)  Definition
    The Board received a substantial number of comments regarding 
proposed comment 4(a)-8, which addressed the treatment of fees charged 
in connection with debt cancellation agreements. Many commenters 
believed that debt cancellation fees should be treated as insurance 
premiums under Sec. 226.4(d), which 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. As proposed, the comment sought to clarify 
that, under the existing regulation, debt cancellation fees can be 
excluded from the finance charge only if they are ``insurance'' and all 
the requirements of Sec. 226.4(d) are satisfied. The Board has not 
defined the term ``insurance'' for purposes of the rules governing 
insurance premiums in Sec. 226.4(d), but has instead deferred to state 
law. The proposed comment was consistent with this approach.
    The comments, mostly from creditors or their trade associations, 
expressed concern about the need to determine on a state-by-state basis 
whether debt cancellation fees should be treated as insurance premiums. 
Many commenters believed that a state law analysis would create a lack 
of uniformity in measuring the cost of credit, contrary to the purposes 
of the TILA, because debt cancellation fees would be included in the 
finance charge and APR in some states and not in others. Several 
commenters expressed concern about potential liability if state law is 
unclear.
    In response to these concerns, the proposed comment regarding debt 
cancellation fees has been withdrawn. The issues raised by the 
commenters regarding equal treatment of such fees would be better 
addressed in the context of a regulatory amendment; it is anticipated 
that a proposed rule governing debt cancellation fees would be 
considered along with proposed regulations to implement the 1995 
Amendments.

Subpart B--Open-End Credit

Section 226.6--Initial Disclosure Statement

6(b)  Other Charges
    Comment 6(b)-1 clarifies 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 merely incidental. The comment clarifies that creditors 
cannot avoid disclosing a fee as an ``other charge'' by characterizing 
the fee as one entitling the consumer to belong to an organization, if 
the organization has no substantive benefits other than obtaining the 
credit. If an independent organization and a card issuer enter into an 
agreement offering the opportunity to apply for a credit card as one of 
several benefits of membership in the organization, these benefits 
would generally not be considered to be merely incidental to the credit 
feature.

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
    Comments 12(c)(2)-1 and -2 address a card issuer's responsibilities 
in responding to a cardholder's right to assert a claim or defense.
    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. Several commenters expressed concern that the 
proposed comment would not permit card issuers to terminate the 
investigation if the cardholder fails to respond to requests for 
information the card issuer can reasonably obtain only from the 
cardholder. A sentence has been added to clarify that in conducting an 
investigation, a card issuer's lack of knowledge resulting from the 
cardholder's failure or refusal to comply with a particular request may 
be used as a factor in resolving the dispute.
    Card issuers cannot satisfy the requirement to conduct a reasonable 
investigation by accepting a merchant's view of the dispute without 
also giving the cardholder an opportunity to respond. The comment 
clarifies that a reasonable investigation includes an independent 
assessment of the cardholder's claim based on information from both the 
merchant and the cardholder, if possible. The card issuer's dispute 
resolution experience, if any, with the merchant would be a factor in 
that assessment.
    Comment 12(c)(2)-1 also has been revised to clarify that a card 
issuer may continue its normal collection activities for the portion of 
the balance that is delinquent and undisputed. Some commenters believed 
that the regulation would permit card issuers to begin collection 
actions on an amount in dispute. Although the card issuer is not 
prohibited from undertaking its normal collection activities for 
delinquent accounts, amounts in dispute are not considered delinquent.
    One commenter recommended that consumers be given notice of their 
rights under the claims and defenses provision. Such a notice 
requirement would be better addressed in the context of a regulatory 
amendment.

Section 226.14--Determination of Annual Percentage Rate

14(c)  Annual Percentage Rate for Periodic Statements
    Comment 14(c)-10 provides 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. The comment 
clarifies how creditors using the date of the transaction to figure 
finance charges calculate the APR to reflect the delay in posting. 
Creditors using the posting date to calculate

[[Page 14954]]
finance charges are not affected by the comment. Creditors that 
calculate the APR in accord with comment 14(c)-10 for the billing cycle 
in which the transaction is posted need not furnish an amended 
statement for the previous cycle to reflect the missing transaction.

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 is revised to clarify that if a contract for a 
variable-rate transaction provides for a delay in implementing changes 
in index values, the creditor may use any index in effect during the 
delay period. The last paragraph has been renumbered, and the first 
sentence in that paragraph is revised for clarity.
    Comment 17(c)(1)-18 addresses pawn transactions. The comment 
clarifies that the term creditor may include pawnbrokers. The comment 
is adopted as proposed; it covers extensions of credit by pledging an 
item, or by selling an item with the opportunity to repurchase (which 
occurs seventy-five percent or more of the time, in the Board's 
understanding). Section 226.18 requires that creditors make certain 
disclosures as applicable, and this 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 annual percentage rate) should be 
disclosed in a pawn transaction. The comment also provides guidance on 
when a separate itemization of the amount financed must be disclosed, 
and how to calculate the finance charge when fees are charged.

Section 18--Content of Disclosures

18(c)  Itemization of Amount Financed

Paragraph 18(c)(1)(iii)

    Comment 18(c)(1)(iii)-2 concerns the treatment of certain charges, 
such as finder's fees or commissions, that may sometimes be added to a 
fee charged by a third party for services such as extended warranties 
and service contracts on automobiles. The comment offers guidance on 
how creditors may itemize and disclose the amount charged for the 
service (including any amount the creditor may have retained).
    For the most part, commenters agreed with the Board's proposed 
treatment. As proposed, the comment stated that a creditor could 
include in the ``amount paid to others,'' any amount retained by the 
creditor without itemizing or noting this fact. Concern is raised about 
the appropriateness of such treatment under the TILA where a 
substantial portion of a fee categorized as ``amounts paid to others,'' 
is in fact retained by the creditor. Accordingly, a sentence has been 
added to clarify that given the flexibility in itemizing the amount 
financed, creditors may reflect that they have retained a portion of 
the ``amount paid to others'' rather than disclosing the specific 
amount retained.

Section 226.20--Subsequent Disclosure Requirements

20(a)  Refinancings
    Comment 20(a)-3, as proposed, clarified that changing the index on 
a variable-rate transaction does not require new disclosures to 
consumers. Upon further analysis, the final comment provides that 
changing the index to a comparable index does not require new 
disclosures, whether the change replaces the existing index or 
substitutes 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

    Comment 31(c)(1)-1 clarifies that for purposes of Sec. 226.32, 
disclosures are furnished (that is, delivered) when received by the 
consumer, not when mailed by the creditor. The majority of the 
commenters opposed the proposal. Some suggested that the Board follow 
the timing requirements of Sec. 226.19(a), which allows creditors to 
provide certain disclosures by mail. The timing rules in 
Secs. 226.19(a) and 226.31 differ; however, the HOEPA requires a 
different interpretation of Sec. 226.31(c)(1). The HOEPA's disclosure 
scheme is intended to ensure that consumers who have applied for a loan 
covered by Sec. 226.32 are provided with basic cost information about 
the impending transaction, and have a period of time to consider 
whether to complete the transaction.
    Comment 31(c)(1)-2 clarifies that while the definition of business 
days is the same as that for the right of rescission, the timing rules 
differ.

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

    Comment 31(c)(1)(i)-1 addresses a creditor's duty to provide new 
Sec. 226.32(c) disclosures after a change in terms. As adopted, the 
comment incorporates the substance of proposed comment 31(d)-1, which 
provides that where there is a change in terms of disclosures labelled 
as estimates redisclosure is required. Further, language from the 
supplemental information accompanying the proposal has been added to 
clarify that a change in terms may result from a formal written 
agreement or otherwise.

31(c)(1)(ii)  Telephone Disclosures

    Based on comment and upon further analysis, comment 31(c)(1)(ii)-1, 
as adopted, uses business days for purposes of rescission, which is 
consistent with other timing requirements in Sec. 226.31. The proposal 
would have allowed creditors to use calendar days to calculate the 
timing requirements for telephone disclosures which are permitted when 
a consumer initiates a change in terms.

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

    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. Language has 
been added to clarify that the impending sale of the consumer's home at 
foreclosure is an example of a bona fide personal financial emergency 
where foreclosure would occur during the three-day waiting period.

31(c)(2)  Disclosures for Reverse Mortgages

    To achieve consistency with other timing rules in Sec. 226.31, 
comment 31(c)(2)-1 clarifies that for purposes of providing reverse 
mortgage disclosures to consumers, creditors are to use the definition 
of ``business day'' found in comment 31(c)(1)-2.
31(d)  Basis of Disclosures and Use of Estimates
    Comment 31(d)-1, as adopted, clarifies that, for purposes of 
Subpart E, the rule in Sec. 226.31(c)(1)(i) requiring new disclosures 
when creditors change terms also applies to disclosures marked as 
estimates.

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

32(a)  Coverage

Paragraph 32(a)(1)(ii)

    Comment 32(a)(1)(ii)-1, as adopted, includes an additional example 
illustrating the calculation of ``total loan amount.''
    Creditors must follow the rules in Sec. 226.32 if the total points 
and fees payable by the consumer at or before

[[Page 14955]]
loan closing exceed the greater of $400 or 8 percent of the total loan 
amount. The Board is required to adjust the $400 amount each year. 
Comment 32(a)(1)(ii)-2 states the adjusted amount for 1996 ($412), and 
addresses how the Board calculates the adjustment.

32(c)(3)  Regular Payment

    The substance of comments 32(c)(3)-1 and 32(c)(3)-2 are adopted as 
proposed, but the comments have been combined and reorganized to state 
more precisely the general rule and exceptions to that rule. The 
comment clarifies that creditors may rely on the rules in 
Sec. 226.18(g) for determining the regular payment, with one exception. 
Section 18(g) provides flexibility to creditors in reflecting optional 
amounts such as voluntary credit life insurance in the payment 
schedule. Language has been added to clarify that only optional amounts 
to which the consumer has agreed at the time the disclosures are given 
may be disclosed as a part of the regular payment.
32(d)  Limitations

32(d)(2)  Negative Amortization

    Comment 32(d)(2)-1 has been modified to clarify the interpretation 
of the prohibition against including negative amortization in a 
mortgage covered by Sec. 226.32.

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 226.4--Finance 
Charge, under 4(d) Insurance., paragraph 5. is revised to read as 
follows:
Supplement I--Official Staff Interpretations
* * * * *

Subpart A--General

* * * * *

Section 226.4--Finance Charge

* * * * *
    4(d)  Insurance.
* * * * *
    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 to purchase credit life 
insurance, or to assign an existing life insurance policy, or to 
pledge security such as a certificate of deposit--and the consumer 
purchases the credit life insurance policy, the premium must be 
included in the finance charge. (If the consumer assigns a 
preexisting policy or pledges security 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. is 
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 (such as a newsletter or 
a member information hotline) are merely incidental to the credit 
feature, the membership fee would have to be disclosed as 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., paragraph 1 is revised and paragraph 2 is added to read as 
follows:
* * * * *

Section 226.12--Special Credit Card Provisions

* * * * *
    12(c)(2)  Adverse credit reports prohibited.
    1. Scope of prohibition. Although an amount in dispute may not 
be reported as delinquent until the matter is resolved:
    i. That amount may be reported as disputed.
    ii. Nothing in this provision prohibits the card issuer from 
undertaking its normal collection activities for the delinquent and 
undisputed portion of the account.
    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. A reasonable 
investigation requires an independent assessment of the cardholder's 
claim based on information obtained from both the cardholder and the 
merchant, if possible. In conducting an investigation, the card 
issuer may request the cardholder's reasonable cooperation. The card 
issuer may not automatically consider a dispute settled if the 
cardholder fails or refuses to comply with a particular request. 
However, if the card issuer otherwise has no means of obtaining 
information necessary to resolve the dispute, 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.
* * * * *
    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. is 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, it may be impracticable to post a transaction that 
occurs at the end of a billing cycle until the following cycle, such 
as a cash advance that occurs on the last day of a billing cycle and 
is posted to the account in the following cycle. A card issuer that 
uses the date of the transaction to figure finance charges should 
calculate the annual percentage rate as follows for the billing 
cycle in which the transaction and charges are posted:
    i. The denominator is calculated as if the transaction occurred 
on the first day of the billing cycle; and
    ii. The numerator includes 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. is 
revised and a new paragraph 18. is added to read as follows:
* * * * *

[[Page 14956]]


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 index 
value in effect during the 45 day period 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 percentage rate tolerance of \1/4\ of 1 percent 
applies, in accordance with Sec. 226.22(a)(3).
    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.
    vi. A loan 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 is not a 
discounted variable-rate loan. 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. When, in connection with an extension of 
credit, a consumer pledges or sells an item to a pawnbroker 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, disclosures are required. In addition to other 
disclosure requirements that may be applicable under Sec. 226.18, 
for purposes of pawn transactions:
    i. The amount financed is the initial sum paid to the consumer. 
The pawnbroker creditor need not provide a separate itemization of 
the amount financed if that entire amount is paid directly to the 
consumer and the disclosed description of the amount financed is 
``the amount of cash given directly to you'' or a similar phrase.
    ii. The finance charge is the difference between the initial sum 
paid to the consumer and the redemption price plus any other finance 
charges paid in connection with the transaction. (See Sec. 226.4.)
    iii. The term of the transaction, for calculating the annual 
percentage rate, is the period of time agreed to by the pawnbroker 
creditor and the consumer. The term of the transaction does not 
include a grace period (including any statutory grace period) after 
the agreed redemption date.
* * * * *
    7. In Supplement I to Part 226, under Section 226.18--Content of 
Disclosures, under Paragraph 18(c)(1)(iii)., a new paragraph 2. is 
added to read as follows:
* * * * *

Section 226.18--Content of Disclosures

* * * * *
    18(c)  Itemization of amount financed.
* * * * *
    Paragraph 18(c)(1)(iii).
* * * * *
    2. Charges added to amounts paid to others. A sum is sometimes 
added to the amount of a fee charged to a consumer for a service 
provided by a third party (such as for an extended warranty or a 
service contract) that is payable in the same amount in comparable 
cash and credit transactions. In the credit transaction, the amount 
is retained by the creditor. Given the flexibility permitted in 
meeting the requirements of the amount financed itemization (see the 
commentary to Sec. 226.18(c)), the creditor in such cases may 
reflect that the creditor has retained a portion of the amount paid 
to others. For example, the creditor could add to the category 
``amount paid to others'' language such as ``(we may be retaining a 
portion of this amount).''
* * * * *
    8. In Supplement I to Part 226, under Section 226.20 Subsequent 
Disclosure Requirements, under Paragraph 20(a) Refinancings., paragraph 
3. is 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.
    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 to a comparable index, whether the change 
replaces the existing index or substitutes an index for one that no 
longer exists.
    iii. If either of the events in paragraph 20(a)3.ii.A. or ii.B. 
occurs 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 is added following subpart D to read 
as follows:
* * * * *

[[Page 14957]]


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 
Sec. 226.32 disclosures at least three business days prior to 
consummation. Under Sec. 226.32, ``business day'' has the same 
meaning as the rescission rule in comment 2(a)(6)-2--all calendar 
days except Sundays and the federal legal holidays listed in 5 USC 
6103(a). However, while the disclosure rule under Secs. 226.15 and 
226.23 extends to midnight of the third business day, the rule under 
Sec. 226.32 does not. For example, under Sec. 226.32, if disclosures 
were provided on a Friday, consummation could occur any time on 
Tuesday, the third business day following receipt of the 
disclosures. If the timing of the rescission rule were to be used, 
consummation could not occur until after midnight on Tuesday.
    Paragraph 31(c)(1)(i)  Change in terms.
    1. Redisclosure required. Creditors must provide new disclosures 
when a change in terms makes disclosures previously provided under 
Sec. 226.32(c) inaccurate, including disclosures based on and 
labeled as an estimate. A change in terms may result from a formal 
written agreement or otherwise.
    Paragraph 31(c)(1)(ii)  Telephone disclosures.
    1. Telephone disclosures. Disclosures by telephone must be 
furnished at least three business days prior to consummation, 
calculated in accord with the timing rules under Sec. 226.31(c)(1).
    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 under Sec. 226.23(e). Whether these criteria are met is 
determined by the facts surrounding individual situations. The 
imminent sale of the consumer's home at foreclosure during the 
three-day period is one example of a bona fide personal financial 
emergency. Each consumer entitled to the three-day waiting period 
must sign the handwritten 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'' has the same meaning as in comment 
31(c)(1)-2--all calendar days except Sundays and the federal legal 
holidays listed in 5 USC 6103(a). This means if disclosures are 
provided on a Friday, consummation could occur any time on Tuesday, 
the third business day following receipt of the disclosures.
    2. Open-end plans.  Disclosures for open-end reverse mortgages 
must be provided at least 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.  Section 226.31(d) 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. For purposes of Subpart E, the rule in 
Sec. 226.31(c)(1)(i) requiring new disclosures when the creditor 
changes terms also applies to disclosures labeled as estimates.

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 application is 
deemed received in September and 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. (See 
comment 19(b)-3 to determine whether a transaction involves an 
intermediary 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. Some examples follow, each using a $10,000 amount 
borrowed, a $300 appraisal fee, and $400 in points:
    i. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and pays $400 in points at closing, the amount financed 
under Sec. 226.18(b) is $9,900 ($10,000 plus the $300 appraisal fee 
that is paid to and 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 ($9,900) to derive a total loan 
amount of $9,600.
    ii. If the consumer pays the $300 fee for the creditor-conducted 
appraisal in cash at closing, the $300 is included in the points and 
fees calculation because it is paid to the creditor. However, 
because the $300 is not financed by the creditor, the 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).
    iii. If the consumer finances a $300 fee for an appraisal 
conducted by someone other than the creditor or an affiliate, the 
$300 fee is not included with other points and fees under 
Sec. 226.32(b)(1)(iii). The amount financed under Sec. 226.18(b) is 
$9,900 ($10,000 plus the $300 fee for an independently-conducted 
appraisal that is financed by the creditor, less the $400 paid in 
cash and deducted as prepaid finance charges).
    2. Annual adjustment of $400 amount. A mortgage loan is covered 
by Sec. 226.32 if the total points and fees payable by the consumer 
at or before loan consummation exceed the greater of $400 or 8 
percent of the total loan amount. The $400 figure is adjusted 
annually by the Board; the adjusted figure becomes effective on 
January 1 of the following year. The adjusted figure for 1996 is 
$412, reflecting a 3.00 percent increase in the CPI-U from June 1994 
to June 1995, rounded to the nearest whole dollar. The Board will 
publish adjustments after the June figures become available each 
year. The adjustment for the upcoming year will be included in any 
proposed commentary published in the fall, and incorporated into the 
commentary the following spring.

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

[[Page 14958]]
under other provisions of Sec. 226.4 are not included under 
paragraph 32(b)(1)(i), although a 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. Mortgage 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 the 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. The disclosures need not be a part of the 
note or mortgage document.
    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. In disclosing the regular payment, 
creditors may rely on the rules set forth in Sec. 226.18(g); 
however, the amounts for voluntary items not agreed to by the 
consumer such as credit life insurance may not be included in the 
regular payment.
    i. If the loan has more than one payment level, the regular 
payment for each level must be disclosed. For example:
    A. In a 30-year graduated payment mortgage where there will be 
payments of $300 for the first 120 months, $400 for the next 120 
months, and $500 for the last 120 months, each payment amount must 
be disclosed, along with the length of time that the payment will be 
in effect.
    B. If interest and principal are paid at different times, the 
regular amount for each must be disclosed.
    C. 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 initial 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 level, where a payment schedule provides for more 
than one payment level 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 
reasonable increases in the principal balance that result from 
events permitted by the legal obligation unrelated to the payment 
schedule. For example, when a consumer fails to obtain property 
insurance and the creditor purchases insurance, the creditor may add 
a reasonable premium to the consumer's principal balance, to the 
extent permitted by the legal obligation.
    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 changes in 
accordance with the legal obligation 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 precomputed (such as add-on) 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.
    Paragraph 32(d)(6)  Prepayment penalties.
    1. State law. For purposes of computing a refund of unearned 
interest, 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 should use the state 
law definition in determining if a refund is a prepayment penalty.
    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, as long as the creditor has 
a reasonable basis for believing that the income exists and will 
support the loan.
    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.

[[Page 14959]]

    Paragraph 33(a)(2).
    1. Default. Default is not defined by the statute or 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. 
Stating a definite maturity date or term of repayment in an 
obligation does not violate the definition of a reverse mortgage 
transaction if the maturity date or term of repayment used 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 events specified in this 
section had yet occurred would be permissible.
    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.
    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 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 are added at the end of the supplement 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 forth 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 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 (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 principal 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, as long as the 
pages constitute an integrated document and the table disclosing the 
total annual loan cost rates is on a single page.

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

    1. General. The life expectancy figures used in appendix L 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 appendix L 
must be used by creditors for all consumers (men and women). 
Appendix L 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, March 28, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-8045 Filed 4-3-96; 8:45 am]
BILLING CODE 6210-01-P