[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
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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