[Federal Register Volume 62, Number 63 (Wednesday, April 2, 1997)]
[Proposed Rules]
[Pages 15624-15626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8407]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0954]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Request for comments.

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SUMMARY: The Economic Growth and Regulatory Paperwork Reduction Act of 
1996 directs the Board and the Department of Housing and Urban 
Development (HUD), where possible, to simplify and improve consumer 
disclosures required under the Truth in Lending Act (TILA) and the Real 
Estate Settlement Procedures Act (RESPA) and to provide a single format 
satisfying the requirements of those laws. If legislation is necessary 
to accomplish these goals, the agencies are to submit legislative 
recommendations to the Congress. In December 1996, the agencies 
published for comment an advance notice of proposed rulemaking. After 
consideration of the comments and further review, the Board has 
determined that regulatory changes alone would be inadequate to achieve 
the goals of the Congress and that legislative changes are necessary to 
harmonize TILA and RESPA. Later this year, the Board and HUD will 
prepare a report to the Congress concerning potential legislative 
changes. The Board is publishing this notice to invite additional 
public comment on possible legislative action.

DATES: Comments are due June 30, 1997.

ADDRESSES: Comments should refer to Docket No. R-0954, 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, D.C. 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 entrance on 20th Street (between 
Constitution Avenue and C Street, NW). 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. 
Comments received will be available for inspection and copying 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 
Availability of Information.

FOR FURTHER INFORMATION CONTACT: Sheilah A. Goodman or Manley Williams, 
Staff Attorneys, Division of Consumer and Community Affairs, Board of 
Governors of the Federal Reserve System, at (202) 452-3667; for the 
hearing impaired only, Diane Jenkins, Telecommunications Device for the 
Deaf (TDD), at (202) 452-3544.

SUPPLEMENTARY INFORMATION: On September 30, 1996, the President signed 
into law the Economic Growth and Regulatory Paperwork Reduction Act of 
1996 (Pub. L. 104-208, 110 Stat. 3009). Section 2101 of that act 
directs the Board and HUD to simplify and improve the disclosures given 
in a home mortgage transaction subject to TILA and RESPA, and to create 
a single disclosure that will satisfy the requirements of both 
statutes, if possible. If legislation is necessary to develop a single 
simplified disclosure, the Board and HUD are directed to submit 
legislative recommendations to the Congress.
    The statutes impose numerous requirements and serve various 
purposes. TILA seeks to promote the informed use of consumer credit by 
requiring standardized disclosures about credit terms and costs. The 
disclosures are intended to focus consumers' attention on certain 
aspects of their transaction and to assist them in comparison shopping. 
TILA establishes additional disclosure requirements for home-secured 
loans, and in some cases permits consumers to rescind such loans. RESPA 
contains both disclosure and price-related provisions. It requires that 
certain disclosures be given at various points in most mortgage 
transactions to ensure that consumers receive timely and useful 
information about the costs associated with the transaction. It also 
prohibits kickbacks and referral fees to protect consumers from 
unnecessarily high settlement costs.
    In December, the Board and HUD jointly published for comment an 
advance notice of proposed rulemaking on the issue of simplifying and 
combining the disclosure requirements of RESPA and TILA (61 FR 69055, 
Dec. 31, 1996). The notice requested comment on both regulatory and 
statutory changes to improve the current disclosure scheme. The Board 
and HUD received more than 80 comment letters, primarily from creditors 
and their representatives.
    Public comments covered a wide range of issues, and are discussed 
below. Nearly all of the recommendations for reconciling the two 
regulations would require legislative action, such as certain suggested 
changes to the timing of disclosures under the two statutes. Some that 
would not require legislative change have been addressed already; where 
disclosures overlap the requirements have generally been consolidated. 
For example, Regulation Z permits creditors to substitute the good 
faith estimate and the settlement statement required under RESPA for 
the itemization of the ``amount financed'' under TILA. Similarly, 
Regulation X permits Regulation Z's disclosures for home equity lines 
of credit to substitute for the RESPA disclosures. Consistency between 
the regulations also increased when HUD amended Regulation X to cover 
subordinate lien loans, and through the Board's updates to the 
Regulation Z official staff commentary. For example, the agencies' 
regulations now use similar definitions for the terms ``assumption,'' 
``refinance,'' and ``business day.''
    The remainder of the recommendations for harmonizing TILA and RESPA 
generally involve small changes that could produce minor improvements 
in the disclosures, but probably would not be worth the corresponding 
compliance costs associated with the change, such as for retraining 
employees and printing new forms. More fundamentally, some commenters 
noted the importance of addressing the disclosure scheme under the two 
statutes in a comprehensive fashion rather than by piecemeal revisions.
    Many other commenters recommended changes solely to Regulation Z--
changes that would not directly further the objective of creating a 
single simplified disclosure, but that could simplify compliance. For

[[Page 15625]]

example, many commenters suggested simplifying the Regulation Z 
disclosures for adjustable rate mortgages, recommended consolidating 
the various model forms, or raised such matters as the permissibility 
of providing electronic disclosures.
    After reviewing the comments, and upon further analysis in 
consultation with HUD, the Board has determined not to propose any 
changes to Regulation Z at this time. The Board believes that 
harmonizing TILA and RESPA to any significant degree requires changes 
that can only come about through legislative action. The Board will 
continue to work with HUD to develop legislative recommendations that 
would ease compliance for creditors and provide consumers useful 
information in a more timely manner. As part of this process, the Board 
will explore other mechanisms for obtaining further guidance from 
interested parties (such as public meetings or convening a working 
group), as suggested by many of the commenters. The Board is also 
reopening the comment period for three months to allow for additional 
public comment on legislative options.
    In addition, the Board has several initiatives currently planned or 
under way that should assist in creating legislative recommendations, 
and that also will involve the consideration of many of the commenters' 
suggestions, discussed below, for amending Regulation Z. These 
initiatives include a consumer survey that the Board has commissioned, 
hearings that will be held in mid-1997 on the finance charge, a final 
rulemaking that involves streamlining certain adjustable rate mortgage 
loan disclosures, a proposal on electronic disclosures, and an upcoming 
comprehensive review of Regulation Z that will be undertaken pursuant 
to the Board's Regulatory Planning and Review program.

Developing a Single Format and Simplifying Disclosure Requirements

    Both TILA and RESPA require creditors to provide preliminary 
disclosures soon after they receive an application. A number of 
commenters recommended the consolidation of the ``early'' TILA and 
RESPA disclosures for home purchase loans on a single form, and some 
commenters included samples of their own forms which combined the TILA 
disclosures on half the page and the RESPA disclosure of the good faith 
estimate of settlement costs on the other half. The Board notes that 
Regulation Z already permits creditors to place multiple disclosures on 
the same page or document, provided that they segregate the TILA 
disclosures from other information and meet the general disclosure 
requirements, such as the clear and conspicuous standard. This 
interpretation is made explicit in the March 1997 update to the 
official staff commentary to Regulation Z (62 FR 10193, March 6, 1997).
    Many commenters suggested that to achieve the goal of simplified 
disclosures, the agencies would have to develop a new disclosure 
scheme. In commenting on possible alternatives, a number of commenters 
noted that RESPA and TILA reflect differing but related goals that 
exist within each statute and that they need to be harmonized. The goal 
for some of the disclosures is comparison shopping. These disclosures 
must be given very early, before the consumer has decided what 
transaction to enter into, and estimates of costs would suffice for 
these disclosures. The goal of other disclosures is to highlight 
certain specific features of the transaction. These disclosures can 
only be made once the terms of the transaction are agreed to, and must 
be accurate to be useful. More generally, TILA focuses on credit costs 
(interest, points, and document preparation fees, for example), while 
RESPA includes both credit costs and the costs associated with the 
property transaction (property appraisal, real estate taxes, and the 
downpayment, for example).
    A number of commenters made recommendations on what information 
might be disclosed under a new disclosure scheme. Some suggested that 
the new disclosure should list all the fees paid in connection with the 
transaction (this would include, for example, the mortgage broker, 
application, hazard insurance, title search, and recording fees), a 
simple interest rate and perhaps the annual percentage rate (APR), and 
certain terms like the monthly payment amount and escrow amounts. They 
suggested that all of the other required disclosures--including the 
amount financed, the finance charge, and the list of required 
providers--be eliminated. Others recommended adding an itemization of 
the finance charge to the existing TILA disclosures and identifying all 
costs on the RESPA settlement statement as part of either the finance 
charge or the amount financed.
    Some commenters recommended that the disclosures provided at 
application should have the same format and content as the disclosures 
provided at settlement. Other commenters recommended that the 
disclosures at application contain just a few items of the most 
significance for comparison shopping and the disclosures at settlement 
contain comprehensive information about the terms of the transaction. 
Some commenters recommended that the disclosures at application should 
contain estimates of the range of costs a consumer could expect to pay, 
while other commenters urged that the cost disclosures be as accurate 
as possible, particularly where the creditor has control over the cost, 
and be specific to the particular contemplated transaction.
    Many commenters urged the Board and HUD to adopt consistent timing 
rules for disclosures. For TILA, the statute establishes the timing 
rules for all the required disclosures except those for variable-rate 
transactions (adjustable rate mortgages, or ``ARMs''), which are set by 
regulation. The timing of disclosures goes to whether the purpose of 
the disclosures is to facilitate shopping, in which case the 
disclosures should be provided as early as possible, or to reveal 
critical features of the transaction, in which case the disclosures can 
only be provided once the details are resolved.
    Several commenters urged that the scope of transactions covered by 
RESPA and TILA disclosure requirements be consistent. For example, 
RESPA's good faith estimate of closing costs is required for both 
purchase money and refinance transaction, while RESPA's special 
information booklet and the early TILA disclosures are required only 
for purchase money transactions. In preparing the report to the 
Congress on potential legislative changes, the Board will consider 
whether the current distinctions between purchase money transactions 
and refinancings, for example, are appropriate or whether, as some 
commenters recommended, the disclosure requirements--even if expanded--
should be the same for all transactions.

Improving Disclosure Requirements Under TILA

    TILA requires the disclosure of the APR (the cost of credit as a 
yearly rate) and the finance charge (the cost of credit as a lump sum). 
A number of commenters expressed concerns regarding this framework. 
Several focused on the exclusion from the finance charge of certain 
fees that a consumer pays as part of mortgage transactions, such as 
appraisal and application fees. They asserted that the mixed treatment 
of mortgage costs increases the complexity of compliance and reduces 
the usefulness of the APR. In addition, the fees included in the 
calculation of the APR and finance charge under TILA do not wholly 
correspond to the fees disclosed under

[[Page 15626]]

RESPA. Some asserted that the APR can be misleading because it assumes 
the loan is held to maturity, when most consumers hold their loans for 
a much shorter period. A few commenters objected to the inclusion in 
the finance charge of all the interest that would accrue over the life 
of the loan. They claimed the resulting APR is misleading because too 
much interest is included in the APR and because the interest is not 
discounted to its present value.
    TILA requires that up to 16 items be disclosed in addition to the 
APR and finance charge. The commenters raised a number of general 
concerns about these other disclosures. Some questioned the value of 
certain disclosures required by the statute, including the total of 
payments and the security interest. Other commenters recommended 
modifications to certain disclosures. For example, creditors must 
disclose whether or not a penalty will be imposed if the obligation is 
prepaid in full. Some commenters asserted that the penalty should be 
disclosed only if it might be imposed. Several commenters recommended 
that the payment schedule disclosure be modified to require only the 
monthly payment amount, not the number of payments and dates too. Other 
commenters recommended that the disclosures concerning the contract 
reference, security interest, assumption policy, required deposit, 
demand feature, late payment, and prepayment penalty be explained in a 
booklet, perhaps as part of RESPA's special information booklet.
    Other commenters noted that recent legislative changes have given 
the Board the authority to exempt certain transactions from TILA. The 
legislation directs the Board, in exercising this authority, to 
consider the amount of the loan, the financial sophistication of the 
borrower, and whether the loan is secured, among other factors. Some 
commenters made recommendations on how to exercise that authority, and 
recommended that similar exemptions be made under RESPA.
    A number of commenters recommended changes to the right of 
rescission rules under TILA. They recommended limiting the types of 
transactions that are subject to the right of rescission and increasing 
the circumstances under which a consumer may waive that right. Some 
commenters recommended that creditors be required to provide a single 
copy of the notice of the right to rescind, instead of two copies as 
currently required.
    A number of commenters recommended that the ARM disclosures be 
simplified. Detailed disclosures for ARM loans must be provided at 
application or before a nonrefundable fee is paid, whichever is 
earlier. Commenters recommended eliminating the requirement that a 
creditor provide a historical example of how rates had varied in the 
past. Several commenters recommended that the Board modify the 
requirements so that creditors disclose the actual terms of the 
transaction and the actual contract language.
    Commenters also recommended improvements to the disclosures 
required for home-equity lines of credit. Several consumer group 
commenters urged that the disclosures for these transactions should 
reflect the particulars of the transaction and assume that the maximum 
amount of the line of credit is borrowed immediately, that only the 
minimum monthly payments are made, and that the interest rate will vary 
as it has in the past. A number of commenters recommended that the 
Board eliminate the requirement to disclose a historical example. 
Commenters also urged the Board to modify the disclosures for home-
secured loans to facilitate comparisons between lines of credit and 
installment loans by including all fees in the calculation of the APR.
    Commenters identified other minor adjustments to TILA's disclosure 
requirements. For example, several commenters recommended that the 
Board require creditors to disclose a simple interest rate in addition 
to the APR and an explanation of how the APR is related to the interest 
rate. One commenter recommended that the Board add an introductory 
statement to each disclosure, explaining the purpose of the disclosure. 
(The Board notes that the regulation does not preclude creditors from 
providing additional information, and creditors can currently make 
these disclosures, separate from the required disclosures, if they 
choose.) A number of commenters recommended that the Board provide 
guidance on the permissible use of electronic disclosures. Some 
commenters recommended some reorganization of the required disclosure 
booklets, and suggested that the Board and HUD combine the special 
information booklet, the home-equity line of credit booklet, and 
adjustable rate mortgage booklet into one.

Legislative Recommendations

    The information required to be disclosed under RESPA and TILA is 
extensive, the concepts disclosed are complex, and the statutes are 
written with different goals in mind. After consideration of the 
comments and further analysis, the Board has determined that the 
changes that could be made to Regulation Z alone would not achieve the 
goals the Congress identified: simplifying and improving the TILA and 
RESPA disclosures and providing a single format that satisfies the 
requirements of the two laws. Improving the TILA and RESPA disclosures 
to make them significantly shorter, easier to understand, and 
consistent requires legislative change.
    The Board will continue to work with HUD to develop a set of 
legislative recommendations that would promote streamlined disclosures 
for transactions subject to both RESPA and TILA. In preparing the 
report, the Board and HUD will consider the issues raised by the 
commenters and take steps to seek additional public views, such as by 
jointly convening a forum or task force. The public is invited to 
submit comments with any further suggestions they may have for 
legislative changes.

    By order of the Board of Governors of the Federal Reserve 
System, March 28, 1997.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 97-8407 Filed 4-1-97; 8:45 am]
BILLING CODE 6210-01-P