[Federal Register Volume 62, Number 23 (Tuesday, February 4, 1997)]
[Proposed Rules]
[Pages 5183-5186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2293]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0960]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is publishing for comment proposed revisions to 
Regulation Z. The revisions implement an amendment to the Truth in 
Lending Act contained in the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 affecting the disclosure of a fifteen-year 
historical example of rates and payments. The amendment applies to 
variable-rate loans with a term exceeding one year and secured by the 
consumer's principal dwelling. The amendment allows creditors either to 
disclose a fifteen-year historical example or to give a statement that 
the periodic payment may substantially increase or decrease together 
with a maximum interest rate and payment based on a $10,000 loan.

DATES: Comments must be received on or before February 28, 1997.

ADDRESSES: Comments should refer to Docket No. R-0960, 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 the Board's 
mail room between 8:45 a.m. and 5:15 p.m. weekdays, or to the security 
control room at all other times. The mail room and the security control 
room are accessible from the courtyard on 20th Street, N.W. (between 
Constitution Avenue and C Street) at any time. Comments will be 
available for inspection 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: Kyung H. Cho-Miller, 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) only, contact Dorothea 
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 the cost of credit as a dollar amount (the finance charge) and 
as an annual percentage rate (the APR). Uniformity in creditors' 
disclosures is intended to assist consumers in comparison shopping. The 
TILA requires additional disclosures for loans secured by a consumer's 
home and permits consumers to rescind certain transactions that involve 
their principal dwelling. The act is implemented by the Board's 
Regulation Z (12 CFR Part 226).
    The credit transactions covered by TILA and Regulation Z fall into 
two categories--open- or closed-end credit transactions. Open-end 
credit is defined as a plan under which the creditor reasonably 
contemplates repeated transactions, which prescribes the terms of such 
transactions, and which provides for a finance charge that may be 
computed from time to time on the outstanding unpaid balance, for 
example, credit extended by means of a credit card (Sec. 226.2(a)(20)). 
Closed-end credit is defined as any credit arrangement that does not 
fall within the definition of open-end credit (Sec. 226.2(a)(10)). A 
mortgage loan with a definite maturity date is an example of closed-end 
credit.

II. Proposed Regulatory Provisions

    Under Regulation Z, the timing and number of disclosures required 
for variable-rate loans vary depending on the term and security for the 
loan. For all variable-rate loans, disclosures are generally provided 
once--prior to consummation. However, if the loan exceeds a term of one 
year and is secured by the consumer's principal dwelling, creditors are 
required to provide disclosures at three different times--when an 
application is received (or when a nonrefundable fee is paid, whichever 
occurs earlier), prior to consummation, and subsequent to consummation 
when certain rate or payment changes occur. (See Regulation Z, 12 CFR 
226.17(b), 18(f), 19, and 20(c).)
    Disclosures provided at application for a variable-rate mortgage 
include the Board-prescribed Consumer Handbook on Adjustable Rate 
Mortgages (or a suitable substitute) and a loan program disclosure for 
each variable-rate program the consumer is interested in. The loan 
program disclosure consists of twelve separate items as they apply to a 
variable-rate program, including information such as the identification 
of the index or formula to be used for adjustments and a fifteen-year 
historical example of how changes in the index values or formula used 
to compute interest rates would have affected the interest rates and 
payments on a $10,000 loan.
    On September 30, 1996, the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 3009) (1996 
amendment) amended the TILA by providing creditors the option to give a 
statement that the periodic payments may increase or decrease 
substantially together with the maximum interest rate and payment 
amount for a $10,000 loan in lieu of the fifteen-year historical 
example.
    The Board proposes to implement the TILA amendment as discussed 
below.

III. Section-by-Section Analysis

Subpart A--General

Section 226.19--Certain Residential Mortgage Transactions
    19(b) Certain variable-rate transactions. Section 226.19(b) 
requires the historical example disclosure for loans exceeding a term 
of one year that are secured by a consumer's principal dwelling and 
where the APR may increase after consummation (such as when the rate is 
tied to an index). The 1996 amendment does not explicitly limit 
application of the alternative disclosure to loans that exceed a term 
of one year. The Board believes, however, that the amendment was 
intended to apply only to loans where the fifteen-year historical 
example is currently required, namely loans that exceed one year. 
Accordingly, the Board proposes to apply the alternative disclosure 
option to variable-rate loans with a term greater than one year and 
secured by the consumer's principal dwelling.
    The 1996 amendment uses the term ``residential mortgage 
transactions,'' a

[[Page 5184]]

term defined in Regulation Z (Sec. 226.2(a)(24)) as credit secured by 
the consumer's principal dwelling to finance the acquisition or initial 
construction of that dwelling. The Board believes that the Congress did 
not intend to limit the flexibility in the 1996 amendment to purchase-
money transactions, but rather intended to provide this option to all 
credit transactions secured by the consumer's principal dwelling, given 
that the committee report to the 1996 amendment broadly states the 
alternative disclosure would be available to lenders in consumer credit 
transactions under closed-end plans.
    Paragraph 19(b)(2)(viii) currently sets forth the required 
historical example based on a $10,000 loan amount and paragraph 
19(b)(2)(x) the required disclosure of the maximum interest rate and 
payment for a $10,000 loan. To make clear that creditors may elect to 
provide either of the two disclosures, paragraph 19(b)(2)(viii) would 
be revised. The historical example requirements are contained in 
paragraph (19(b)(2)(viii)(A); the substance of paragraph 19(b)(2)(x) is 
redesignated as 19(b)(2)(viii)(B). The proposal provides that if the 
creditor chooses to disclose the maximum interest rate and payment in 
lieu of a historical example, a statement that the periodic payment may 
increase or decrease substantially must accompany the rate and payment 
amount. The statement requirement may be satisfied by the disclosure in 
paragraph 19(b)(2)(vi) if it states for example, ``your monthly payment 
can increase or decrease substantially based on annual changes in the 
interest rate.''
    Regulation Z currently requires creditors to disclose a maximum 
interest rate using the most recent interest rate shown in the 
historical example. Because the historical example is not required 
under the 1996 amendments, creditors instead must use a ``recent'' 
interest rate as determined by the Board. The Board proposes to require 
creditors to calculate the maximum rate and payment based on an initial 
rate that was in effect within one year of the disclosure. The Board 
believes that a more frequent basis for updating the index or formula 
would place more burden on creditors than currently exists under the 
regulation and that the Congress intended to reduce burden with the 
alternative. Creditors would have to calculate the maximum rate and 
payment on an initial rate in effect within one year of the date the 
loan program is provided and to disclose the applicable month and year. 
For example, using the information in appendix H-14, the disclosure 
could state ``the initial interest rate is 9.71 percent, the rate in 
effect January 1987.'' The Board solicits comment on whether there are 
circumstances where there is consumer benefit in updating the initial 
rate more frequently than annually that would outweigh the compliance 
burden of producing the disclosures more frequently.

IV. Form of Comment Letters

    Comment letters should refer to Docket No. R-0960, 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 in machine-readable form through electronic scanning, and will 
facilitate automated retrieval of comments for review. Also, if 
accompanied by an original document in paper form, comments may be 
submitted on 3 1/2 inch or 5 1/4 inch computer diskettes in any IBM-
compatible DOS-based format.
    The comment period ends on February 28, 1997. Normally, the Board 
provides a 60-day comment period, in keeping with the Board's policy 
statement on rulemaking (44 FR 3957, January 19, 1979). The proposed 
regulatory revisions implement changes in the law that provide 
regulatory compliance relief. The Board believes that an abbreviated 
comment period is desirable to ensure that a final rule is in place as 
soon as possible to provide guidance to creditors affected.

V. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 603), the Board's Office of the Secretary has reviewed the 
proposed amendments to Regulation Z. Overall, the amendments are not 
expected to have any significant impact on small entities. The proposed 
regulatory revisions required to implement the 1996 amendment reduce 
the number of disclosure required for variable-rate mortgages and ease 
compliance by providing creditors with the option of either providing a 
fifteen-year historical example or the maximum payment example. A final 
regulatory flexibility analysis will be conducted after consideration 
of comments received during the public comment period.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.), the Board has reviewed the proposed amendments under the 
authority delegated to the Board by the Office of Management and 
Budget. 5 CFR part 1320, Appendix A.1. Comments on the collection or 
disclosure of information associated with this regulation should be 
sent to the Office of Management and Budget, Paperwork Reduction 
Project (7100-0199), Washington, DC 20503, with copies of such comments 
to be sent to Mary M. McLaughlin, Chief, Financial Reports Section, 
Division of Research and Statistics, Mail Stop 97, Board of Governors 
of the Federal Reserve System, Washington, DC 20551.
    The respondents are individuals or businesses that regularly offer 
or extend consumer credit. The purpose of the TILA and Regulation Z is 
to promote the informed use of consumer credit by requiring creditors 
to disclose its terms and cost. Records must be retained by creditors 
for 24 months. The revisions to the requirements in this proposed 
regulation are found in 12 CFR 226.19 and appendix H.
    The Board's Regulation Z applies to all types of creditors, not 
just state member banks. Under the Paperwork Reduction Act, however, 
the Federal Reserve accounts for the paperwork burden associated with 
Regulation Z only for state member banks. Any estimates of paperwork 
burden for institutions other than state member banks that would be 
affected by the proposed amendments are to be provided by the federal 
agency or agencies that supervise those lenders.
    The proposed changes are not expected to increase the ongoing 
annual burden of Regulation Z. There are 1,042 state member banks with 
an estimated 5,750 disclosures, 6.5 minutes for each disclosure, for 
closed-end credit per state member bank annually. The proportion of 
such loans that are mortgages with an adjustable rate is estimated to 
be small. If all state member banks chose to eliminate the fifteen-year 
historical example from all their disclosures on such loans, the 
average time required for each disclosure would decrease by 2 minutes. 
The combined annual burden for all state member banks under Regulation 
Z is estimated to be 1,975,600 hours; the combined annual cost is 
estimated to be $39.5 million (an average of $37,920 per state member 
bank). The Federal Reserve estimates that there would be associated 
start-up cost of $160 per respondent to eliminate either the fifteen-
year historical example or the maximum payment example.
    The disclosures made by creditors to consumers under Regulation Z 
are mandatory. Since the Federal Reserve does not collect any 
information, no issue of confidentiality arises. Disclosures relating 
to specific transactions or accounts are not publicly available.

[[Page 5185]]

    Comments are invited on: (a) whether the proposed revised 
collection of information is necessary for the proper performance of 
the Federal Reserve's functions; including whether the information has 
practical utility; (b) the accuracy of the Federal Reserve's estimate 
of the burden of the proposed disclosures, including the cost of 
compliance; (c) ways to enhance the quality, utility, and clarity of 
the information disclosures; and (d) ways to minimize the burden of 
information disclosures on respondents, including through the use of 
automated techniques or other forms of information technology.
    An agency may not collect or sponsor the collection or disclosure 
of information, and an organization is not required to collect or 
disclose information unless a currently valid OMB control number is 
displayed. The OMB control number for Regulation Z is 7100-0199.

List of Subjects in 12 CFR Part 226

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

Text of Proposed Revisions

    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.
    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. Section 226.19 would be amended by:
    a. Republishing the introductory text of paragraph (b)(2);
    b. Revising paragraph (b)(2)(viii);
    c. Removing paragraph (b)(2)(x); and
    d. Redesignating paragraphs (b)(2)(xi), (b)(2)(xii), and 
(b)(2)(xiii) as paragraphs (b)(2)(x), (b)(2)(xi) and (b)(2)(xii) 
respectively.
    The revisions would read as follows:


Sec. 226.19  Certain residential mortgage and variable-rate 
transactions.

* * * * *
    (b) Certain variable-rate transactions. * * *
* * * * *
    (2) A loan program disclosure for each variable-rate program in 
which the consumer expresses an interest. The following disclosures, as 
applicable, shall be provided:
* * * * *
    (viii) Either of the following:
    (A) An historical example, based on a $10,000 loan amount, 
illustrating how payments and the loan balance would have been affected 
by interest rate changes implemented according to the terms of the loan 
program. The example shall be based upon index values beginning in 1977 
and be updated annually until a 15-year history is shown. Thereafter, 
the example shall reflect the most recent 15 years of index values. The 
example shall reflect all significant loan program terms, such as 
negative amortization, interest rate carryover, interest rate 
discounts, and interest rate and payment limitations, that would have 
been affected by the index movement during the period.
    (B) The maximum interest rate and payment for a $10,000 loan 
assuming the maximum periodic increases in rates and payments under the 
program; the initial interest rate and payment for that loan along with 
the month and year the rate was in effect (based on a rate in effect 
within one year of the date the disclosures are provided); and a 
statement that the periodic payment may increase or decrease 
substantially depending on changes in the rate.
* * * * *
    [(x) The maximum interest rate and payment for a $10,000 loan 
originated at the most recent interest rate shown in the historical 
example assuming the maximum periodic increases in rates and payments 
under the program; and the initial interest rate and payment for that 
loan.]
    [(xi)] (x) The fact that the loan program contains a demand 
feature.
    [(xii)] (xi) The type of information that will be provided in 
notices of adjustments and the timing of such notices.
    [(xiii)](xii) A statement that disclosure forms are available for 
the creditor's other variable-rate loan programs.
    3. In part 226, Appendix H is amended by revising the three 
paragraphs preceding the example in the H-14 Variable-Rate Mortgage 
Sample to read as follows:

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

* * * * *

H-14 Variable-Rate Mortgage Sample

* * * * *

How Your Monthly Payment Can Change

     Your monthly payment can [change yearly] increase or 
decrease substantially based on annual changes in the interest rate.
     For example, on a $10,000, 30-year loan with an initial 
interest rate of 9.71 percent the rate [shown in the interest rate 
column below for the year 1987] in effect in January 1987, the 
maximum amount that the interest rate can rise under this program is 
5 percentage points, to 14.71 percent, and the monthly payment can 
rise from a first-year payment of $85.62 to a maximum of $123.31 in 
the fourth year.
     You will be notified in writing 25 days before the 
annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan 
balance.
* * * * *
    4. In Supplement I to Part 226, under Section 226.19--Certain 
Residential Mortgage and Variable-Rate Transactions, under paragraph 
19(b) Certain variable-rate transactions, the following amendments 
would be made:
    a. The heading ``Paragraph 19(b)(2)(viii)'' would be revised to 
read ``Paragraph 19(b)(2)(viii)(A);''
    b. The heading ``Paragraph 19(b)(2)(x)'' would be revised to read 
``Paragraph 19(b)(2)(viii)(B)'' and the paragraph heading and text are 
transferred immediately preceding Paragraph 19(b)(2)(ix).
    c. Paragraph 1, under the heading ``Paragraph 19(b)(2)(viii)(B)'' 
would be revised.
    d. The heading ``Paragraph 19(b)(2)(xi)'' would be revised to read 
``Paragraph 19(b)(2)(x).''
    e. The heading ``Paragraph 19(b)(2)(xii)'' would be revised to read 
``Paragraph 19(b)(2)(xi).''
    f. The heading ``Paragraph 19(b)(2)(xiii)'' would be revised to 
read ``Paragraph 19(b)(2)(xii).''
    The revisions would read as follows:

Supplement I-Official Staff Interpretations

* * * * *

SUBPART C--CLOSED-END CREDIT

* * * * *

Section 226.19--Certain Residential Mortgage Transactions

* * * * *

19(b) Certain variable-rate transactions

* * * * *

Paragraph 19(b)(2)(viii)(A)

* * * * *

Paragraph 19(b)(2)[(x)](viii)(B)

    1. Initial and maximum interest rate and payment. The disclosure 
form must state the initial and maximum interest rates and payments 
for a $10,000 loan originated at the most recent interest rate 
(index value plus margin) [shown in the historical example] in 
effect within one year of the date the disclosure is provided. The 
month and year the rate is effective must be included in the 
disclosure. In calculating the maximum payments under this 
paragraph, a creditor should assume that the interest rate increases

[[Page 5186]]

as rapidly as possible under the loan program, and the maximum 
payment disclosed should reflect the amortization of the loan during 
this period. Thus, in a loan with 2 percentage point annual (and 5 
percentage point overall) interest rate limitations or ``caps,'' the 
maximum interest rate would be 5 percentage points higher than the 
[most recent rate shown in the historical example] initial rate 
disclosed. Moreover, the loan would not reach the maximum interest 
rate until the fourth year because of the 2 percentage point annual 
rate limitations, and the maximum payment disclosed would reflect 
the amortization of the loan during this period. If the loan program 
includes a discounted or premium initial interest rate, the [most 
recent rate shown in the historical example] initial rate should be 
adjusted by the amount of the discount or premium reflected 
elsewhere in the disclosure for purposes of the requirements of this 
paragraph. Furthermore, this disclosure should state the amount by 
which the most recent rate has been adjusted. (see the commentary to 
Sec. 226.19(b)(2)(viii) regarding disclosure of the amount of a 
discount or premium.) The creditor may use an interest rate 
applicable to the program that is more recent than the [latest rate 
shown in the historical example] initial rate.
* * * * *

Paragraph 19(b)(2)[(xi)](x)

* * * * *

Paragraph 19(b)(2)[(xii)] (xi)

* * * * *

Paragraph 19(b)(2)[(xiii)] (xii)

* * * * *
    5. In Supplement I to Part 226, all references to ``section 
226.19(b)(2)(viii)'' are revised to read ``section 
226.19(b)(2)(viii)(A)''.
    6. In Supplement I to Part 226, all references to ``comment 
19(b)(2)(viii)'' are revised to read ``comment 19(b)(2)(viii)(A)''.
    7. In Supplement I to Part 226, all references to ``section 
226.19(b)(2)(x)'' are revised to read ``section 
226.19(b)(2)(viii)(B)''.
    8. In Supplement I to Part 226, all references to ``comment 
19(b)(2)(x)'' are revised to read ``comment 19(b)(2)(viii)(B)''.
    9. In Supplement I to Part 226, Appendix H--Closed-End Model Forms 
and Clauses, Paragraph 18, would be amended by removing the fourth 
through the eighth sentences and adding seven new sentences in their 
place to read as follows:
* * * * *

Appendix H--Closed-End Model Forms, and Clauses

* * * * *
    18. Sample H-14. * * * It includes information on how the 
interest rate is determined and how it can change over time[, and]. 
Section 226.19(b)(2)(viii) permits creditors to provide either an 
historical example or an initial rate and maximum rate and payment 
example; both are illustrated in the sample disclosure. The 
historical example explains how the monthly payment can change based 
on a $10,000 loan amount, payable in 360 monthly installments, based 
on historical changes in the values for the weekly average yield on 
U.S. treasury securities adjusted to a constant maturity of one 
year. Index values are measured as of the first week ending in July 
for the years 1977 through 1987. This reflects the requirement that 
the index history be based on values for the same date or period 
each year beginning with index values for 1977. The [sample 
disclosure also illustrates the requirement under 
Sec. 226.19(b)(2)(x) that the] initial and the maximum interest 
rates and payments [be] are shown for a $10,000 loan originated at 
the most recent rate [shown in the historical example] in effect 
within one year of the date the loan program is provided along with 
the month and year the rate was in effect. In the sample, the loan 
is assumed to have an initial interest rate of 9.71 percent (which 
was the interest rate in [1987 for the example shown] in effect 
January 1987) and to have 2 percentage point annual (and 5 
percentage point overall) interest rate limitations or caps. * * *
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, January 24, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-2293 Filed 2-3-97; 8:45 am]
BILLING CODE 6210-01-P