[Federal Register Volume 62, Number 82 (Tuesday, April 29, 1997)]
[Proposed Rules]
[Pages 23189-23192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11041]


=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Reg. Z; Docket No. R-0969]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Public hearings and request for comments.

-----------------------------------------------------------------------

SUMMARY: The Board will hold public hearings on home-equity lending, 
and invites consumers, consumer advocacy organizations, lenders, and 
other interested parties to attend and to provide written comments on 
relevant issues. The hearings are required by the Home Ownership Equity 
Protection Act of 1994, which amended the Truth in Lending Act to 
impose additional disclosure requirements and substantive limitations 
on certain closed-end mortgage loans bearing rates or fees above a 
certain percentage or amount. The act directs the Board to examine the 
home-equity loan market and the adequacy of existing Truth in Lending 
provisions in protecting the interests of consumers. The Board will 
also use the hearings to examine broader Truth in Lending issues, 
primarily on how the finance charge could more accurately reflect the 
cost of consumer credit. In the Truth in Lending Act Amendments of 
1995, the Congress directed the Board to study the finance charge 
issue. The Board submitted a preliminary analysis last year, and the 
hearings will assist the Board in its further deliberations.

DATES: Hearings. The hearings are scheduled as follows:
    1. June 3, 1997, 8:15 a.m. to 4:30 p.m., in Los Angeles, 
California.
    2. June 5, 1997, 8:15 a.m. to 4:30 p.m., in Atlanta, Georgia.
    3. June 17, 1997, 8:15 a.m. to 4:30 p.m., in Washington, DC.
    Comments. Comments from persons unable to attend the hearings or 
wishing to submit written views on the issues raised in this notice 
must be received by Friday, July 18, 1997.

ADDRESSES: Hearings. Hearings will be held at the following locations:
    1. Los Angeles--Federal Reserve Bank of San Francisco, Los Angeles 
Branch, 950 South Grand Avenue.
    2. Atlanta--Federal Reserve Bank of Atlanta, 104 Marietta Street.
    3. Washington, DC--Terrace Room E of the Federal Reserve Board 
Martin Building, C Street Northwest, between 20th and 21st Streets.
    Comments. Comments on the questions listed in this document should 
refer to Docket No. R-0969, and may be mailed to William W. Wiles, 
Secretary, Board of Governors of the Federal Reserve System, 20th 
Street and Constitution Avenue, NW., Washington, DC 20551. Comments 
also may be delivered to Room B-2222 of the Eccles Building between 
8:45 a.m. and 5:15 p.m. weekdays, or to the guard station in the Eccles 
Building courtyard on 20th Street, NW. (between Constitution Avenue and 
C Street) at any time. Comments may be inspected in Room MP-500 of the 
Martin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as 
provided in 12 CFR 261.8 of the Board's Rules Regarding Availability of 
Information.

FOR FURTHER INFORMATION CONTACT: Jane E. Ahrens, Senior Attorney, or 
Sheilah A. Goodman, Staff Attorney, Division of Consumer and Community 
Affairs, at (202) 452-3667 or 452-2412; for copies of the Board's 
reports to the Congress on possible changes to the finance charge and 
on the adequacy of consumer protections for home-equity credit lines, 
Publications, at (202) 452-3244, Board of Governors of the Federal 
Reserve System; users of Telecommunications Device for the Deaf (TDD) 
only, contact Diane Jenkins at (202) 452-3544. The reports are also 
available on the Internet at http://www.bog.frb.fed.us/boarddocs/
RptCongress.
    For directions and other matters relating to the meeting facilities 
in Los Angeles, Public Information, Federal Reserve Bank of San 
Francisco, Los Angeles Branch, at (213) 683-2901; in Atlanta, Ms. Jess 
Palazzolo, Public Affairs Department, Federal Reserve Bank of Atlanta, 
at (404) 521-8747.

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).

II. Public Hearings

    The Home Ownership Equity Protection Act of 1994 (HOEPA), contained 
in the Riegle Community Development and Regulatory Improvement Act of 
1994, Pub. L. 103-325, 108 Stat. 2160, amends the TILA to impose new 
disclosure requirements and substantive limitations on certain closed-
end home-equity mortgage loans. The act also directs the Board to hold 
hearings on home-equity lending no later than September 1997.
    The Board has scheduled three one-day hearings in Los Angeles 
(Tuesday, June 3), Atlanta (Thursday, June 5), and Washington, DC 
(Tuesday, June 17). The hearings will focus for much of the day on 
statements from the public about home-equity lending, as mandated by 
the HOEPA. The remaining portion of the hearings will elicit views 
about broader Truth in Lending issues that are currently under Board 
consideration, primarily how the TILA's finance charge disclosure could 
more accurately reflect the cost of consumer credit. The Truth in 
Lending Act Amendments of 1995, Pub. L. 104-29, 109 Stat. 271, direct 
the Board to study the finance charge issue, including the feasibility 
of treating as

[[Page 23190]]

finance charges all costs associated with a credit transaction. A 
preliminary analysis of these matters was submitted to the Congress in 
April 1996, and additional information gathered at the hearings will 
assist the Board in its further deliberations.

Home-Equity Lending

    The HOEPA is the Congress's response to anecdotal evidence about 
abusive lending practices involving elderly and often unsophisticated 
homeowners who used their home as security for loans with high rates or 
high closing fees and with repayment terms the homeowners could not 
possibly meet. Changes to the TILA were implemented in section 32 of 
the Board's Regulation Z (12 CFR 226.32), effective in October 1995. 60 
FR 15463, March 24, 1995.
    The law does not prohibit creditors from making any home-secured 
loan, nor does it limit or cap rates that creditors may charge. 
Instead, the HOEPA amendments layer disclosure and timing requirements 
onto the requirements already imposed for consumer credit transactions. 
Creditors offering HOEPA-covered loans must provide abbreviated 
disclosures to consumers three days before the loan is closed. The 
disclosures provide that consumers are not obligated to complete the 
closing, remind borrowers that they could lose their home if they fail 
to make payments, and state a few key cost disclosures, including the 
APR, the regular payment, and, if the loan has a variable rate, a 
``worst case payment'' if rates increase as high and quickly as 
possible under the loan agreement.
    In addition, creditors making ``section 32'' loans are prohibited 
from including in their loan agreements, among other provisions: (1) 
Balloon payments in loans with maturities of less than five years, (2) 
payment schedules that result in negative amortization, (3) higher 
default interest rates, and (4) prepayment penalties in most instances. 
Consumers entering into a HOEPA-covered loan may rescind the 
transaction for up to three years after closing if creditors fail to 
provide the early disclosures or if they include a prohibited term in 
the loan agreement.
    Some types of home-secured loans are exempt from the section 32 
requirements. For example, home-purchase loans are exempt. Reverse 
mortgages are exempt from these requirements (but are subject to an 
alternative detailed disclosure scheme also a part of the HOEPA and 
implemented in section 33 of Regulation Z).
    Open-end lines of credit are also exempt from section 152 of the 
HOEPA, as congressional hearings preceding enactment did not reveal 
evidence of abusive practices connected with open-end home-equity 
lending. Instead of covering open-end credit, the Congress directed the 
Board to submit a report on whether the existing Truth in Lending rules 
provide adequate protections for consumers obtaining home-equity lines 
of credit, and to hold initial hearings within three years of the law's 
enactment. In November 1996, the Board submitted to the Congress a 
report finding that there was no evidence at that time to support the 
belief that excluding open-end home-secured lines of credit from the 
HOEPA encourages creditors to offer open-end home-equity loans as a way 
of evading the act's stricter disclosure rules and limitations for 
closed-end home-equity loans. The report concluded that the current 
TILA disclosure requirements give consumers important information that 
they generally find helpful, and generally provide consumers with 
adequate information and protection.
    Section 158 of the HOEPA requires the Board, in consultation with 
its Consumer Advisory Council, to conduct public hearings that examine 
home-equity loans in the marketplace and the adequacy of federal laws 
(including the new rules affecting section 32 mortgages and reverse 
mortgage transactions) in protecting consumers--particularly low-income 
consumers. The statute provides that the Board should solicit 
participation from consumers, representatives of consumers, lenders, 
and other interested parties.
    To focus the discussion at the hearings, interested parties wishing 
to present oral statements at the hearings (and persons submitting 
written comments to the Board) on these matters are asked to address 
the issues set forth below, as applicable.
General
    The HOEPA is a reaction to anecdotal evidence about sometimes dire 
consequences for homeowners with low or fixed incomes who live in 
communities lacking access to traditional lending institutions and who 
entered into home-equity loans with high rates or high fees. The law 
does not prohibit any type of home-equity lending or regulate the cost 
of home-equity loans, but seeks to curb possible consumer harm by 
additional disclosures and substantive contract limitations.
     What effect has the HOEPA had on homeowners seeking home-
equity credit and on credit opportunities in the communities that were 
the focus of the legislation: (1) Has there been a change in the volume 
of consumers seeking and obtaining home-equity installment loans? (2) 
Have costs for home-equity installment credit increased, decreased, or 
stayed about the same? (3) For consumers who have received them, what 
has been the effect of the HOEPA disclosures? For example, is there 
evidence that the disclosures or three-day waiting period have 
dissuaded consumers from consummating the loan, or caused them to 
question or renegotiate certain terms? (4) Are the current disclosures 
adequate? Could they be augmented to provide better protections? If so, 
describe the additional disclosures and how they would provide better 
protections.
Exemptions
    Section 129(l)(1) of the TILA authorizes the Board to exempt 
specific mortgage products or categories of mortgages from some or all 
of the HOEPA's prohibitions if the Board finds that the exemption (1) 
is in the interest of the borrowing public, and (2) will apply only to 
products that maintain and strengthen home ownership and equity 
protection.
     Discuss any suggested exemption for the Board to consider, 
identifying the specific mortgage product or categories of mortgages, 
the extent of the exemption believed to be appropriate, and how the 
exemption would meet the standards required for the Board to provide 
the exemption.
Prohibitions
    Section 129(l)(2) of the TILA authorizes the Board to prohibit acts 
or practices in connection with (1) mortgage loans that the Board finds 
to be unfair, deceptive, or designed to evade section 152 of the HOEPA; 
and (2) refinancings of mortgage loans that the Board finds to be 
associated with abusive lending practices or that are otherwise not in 
the interest of the borrower. In 1995 as a part of its study of the 
TILA's finance charge, the Congress asked the Board to address any 
abusive refinancing practices that creditors may use to avoid the 
TILA's three-day right of rescission for certain home-secured loans. In 
its report to the Congress on those issues, the Board noted certain 
practices identified by consumer advocates and governmental agencies. 
Overall, the Board concluded that the problem of creditors engaging in 
refinancings for the purpose of avoiding a consumer's rescission rights 
was not widespread, and that existing state and federal laws adequately 
provide protection against creditors that

[[Page 23191]]

circumvent the TILA or that engage in unfair and deceptive credit 
practices.
     Discuss any acts or practices that the Board might 
consider prohibiting, and the reasons why, or disclosure or other 
remedies the Board might consider to address the acts or practices.
Open-End Credit
    Open-end lines of credit are exempt from section 152 of the HOEPA. 
The Congress directed the Board to submit a report on whether the 
existing Truth in Lending rules provide adequate protections for 
consumers obtaining home-equity lines of credit. The Board's report 
concluded that in general existing rules provide adequate protections 
and that there was no evidence at that time to support the belief that 
the exclusion encourages creditors to offer open-end home-equity loans 
as a way to evade the HOEPA's stricter requirements for closed-end 
home-equity loans.
     Address the issue of whether the existing exemption for 
open-end home-equity loans is appropriate, and the reasons why. If 
additional protections are needed, specify the suggested changes and 
how those changes address the concerns which trigger the need for the 
additional requirements.
Reverse Mortgages
    Reverse mortgages--which typically contain payment schedules with 
negative amortization and a balloon payment--are exempt from the 
requirements of section 152. The Act provides for an alternative 
detailed disclosure scheme in section 154. Creditors must disclose 
costs associated with the reverse mortgage, including a total annual 
loan cost rate, at least three business days before consummation of the 
transaction (or before the first transaction under an open-end plan).
     (1) Are the current disclosures adequate? Could they be 
augmented to provide better protections? If so, describe the additional 
disclosures and how they would provide better protections. (2) What has 
been the effect of consumers receiving the new reverse mortgage 
disclosures at least three days before consumers consummate the loan? 
(3) Are you aware of any problems with the current regulatory scheme 
that the Board might consider addressing?

Finance Charge

    The TILA and Regulation Z require disclosure of the ``finance 
charge,'' the cost of consumer credit expressed as a dollar amount. The 
cost of credit is also expressed as an annual percentage rate. The 
uniform disclosure of financing costs is intended to assist consumers 
in shopping for credit products. The finance charge does not include 
every cost associated with obtaining consumer credit, such as many 
charges paid in a real estate-secured loan. Despite rules that attempt 
to define with precision which charges should or should not be 
considered finance charges, ambiguities--and litigation alleging 
incorrect categorization of charges--sometimes result.
    The Congress responded to creditors' concerns about liability in 
the Truth in Lending Act Amendments of 1995. The amendments expressly 
exclude from the finance charge some of the specific fees that have 
been the subject of litigation. The 1995 Amendments direct the Board to 
report to the Congress on how the finance charge could be modified to 
more accurately reflect the cost of consumer credit, including the 
feasibility of treating as finance charges all costs required by the 
creditor or paid by the consumer as an incident of the credit. The 
Board published a notice of the congressional report and sought comment 
from the public. 60 FR 66179 (December 21, 1995). The Board received 
about 200 comments relating to possible changes to the finance charge, 
mostly from creditors or their representatives.
    In April 1996 the Board submitted to the Congress a preliminary 
analysis of possible changes to the finance charge. The Board did not 
reach definitive conclusions, given the short statutory deadline for 
the report and the complexity of the issues. The preliminary report 
will be supplemented by a final report at a later date, allowing the 
Board to take advantage of additional sources of information, such as 
evidence that may presented at the June 1997 hearings.
    To focus discussion at the hearings, persons wishing to offer oral 
statements (or persons submitting written comments) should address the 
following issues presented in the Board's preliminary report:
Striving for a ``Meaningful'' Cost Disclosure
    The TILA is intended to help consumers compare costs when they shop 
for credit. To be meaningful, disclosures must be accurate and 
complete. They should be detailed enough to enable the borrower to 
understand the effect of different pricing alternatives, but generic 
enough to permit an easy comparison of the overall cost between 
products and creditors. To enable consumers to make comparisons, 
disclosures should be provided before the consumer decides which 
creditor to use.
    Today's credit marketplace is complex. Consumers are offered a 
myriad of choices for installment and revolving credit products. There 
are many pricing alternatives and opportunities to obtain ancillary 
products and services, such as optional credit life insurance. Some 
credit decisions are gradual, typically for a home-purchase loan. 
Others can be immediate, increasingly so as consumers shop for credit 
via the telephone or electronic communications. The TILA attempts in a 
single set of rules to ensure that consumers receive accurate, complete 
disclosures whether they are considering simple or complex credit 
transactions. For the most part, these disclosures are provided before 
the consumer becomes obligated for the debt but after the consumer has 
chosen which credit provider to use.
    The current regulatory disclosure scheme is admittedly imperfect. 
Early disclosures are unlikely to be complete, particularly in the case 
of real estate-secured loans or cases where decisions have not been 
made about optional products. Many consumers receive their TILA 
disclosures after the credit choice has been made. As a shopping tool, 
the disclosures may miss the mark. Instead, the TILA disclosures 
provide consumers with a standardized confirmation of the terms of the 
credit agreement.
     How can the TILA best provide meaningful cost disclosures? 
Would consumers be better served if fewer cost disclosures, such as the 
interest rate, closing costs, and payment schedule, were delivered 
earlier in the shopping process? How should the disclosures address 
costs for optional products or for required services with transaction-
specific pricing? If less precise disclosures are provided earlier, 
what disclosures, if any, should be provided after costs become known, 
and when should the more accurate disclosures be provided?
Defining the ``Cost'' of Credit
    The finance charge includes many but not all costs associated with 
a credit transaction. There is broad agreement that greater consistency 
for categorizing charges is needed, but not on how to achieve it. One 
view is that the TILA disclosures should identify ``what the consumer 
pays'' in connection with a credit transaction. Thus, finance charges 
should include all charges paid by the borrower to the creditor or to 
the creditor and to third parties, such as service providers (even if 
the service is optional, such as credit life insurance). Only costs 
that are paid in a comparable

[[Page 23192]]

cash transaction would be excluded from the finance charge.
    Another approach to the cost of credit looks at ``what the creditor 
requires'' to provide the credit. This perspective raises issues 
concerning the treatment of fees paid to third parties. Some would 
include fees for services required (or if not required, if the fee was 
retained by the creditor). Others would oppose any duty on creditors to 
include fees imposed by third parties, such as for appraisals, courier 
fees, and title insurance. Still others believe the price of optional 
services--whether paid to the creditor or a third party--should never 
be included as a ``cost'' of the credit.
     Address how the ``cost'' of credit is most accurately 
reflected, including the treatment of fees--whether optional, or 
required or retained by the creditor.
Charges Included in the APR
    The APR translates the dollar amount of the disclosed finance 
charge into a percentage figure. For open-end credit, the APR for 
advertisements and account-opening disclosures solely reflects the cost 
of interest, since the nature of the product typically involves 
fluctuating balances and account activity. The APR that appears on 
periodic billing statements is a somewhat broader measure. It reflects 
interest and certain finance charges that typically recur (a 
transaction fee for cash advances, for example); one-time fees or those 
associated with originating or renewing a credit line (such as 
``points'' imposed to open a home-secured line of credit) are not 
included, to avoid a skewed APR during a single billing cycle.
    The APR for closed-end loans includes the interest and certain 
other charges such as points and required insurance. There is broad 
support for improving this APR disclosure, but ideas differ widely on 
how to go about it. Some believe the APR for closed-end credit would be 
more meaningful if it reflected all costs paid by the consumer, 
including those currently excluded such as fees associated with real 
estate-secured loans (for example, fees for appraisals or title 
insurance) or premiums for credit life insurance purchased at the 
consumer's option. Others argue that the current APR figure is too 
broad and is not helpful because consumers are confused about the 
relationship between the APR and the contract interest rate and thus 
ignored it as a shopping tool. Others say the APR does not reflect the 
economic reality of the credit transaction in the case of home-purchase 
loans and that an APR based on an average time homeowners stay in a 
home would be more helpful than an APR based on a twenty-year loan 
term, for example.
    Changing the APR calculation for home-secured closed-end 
transactions would have dramatic implications for creditors and 
consumers. Creditors would face major and immediate costs--to reprogram 
computers, create new forms, and retrain personnel. Consumer education 
would be needed over an extended period to assist consumers in 
understanding the significance of new disclosures.
     Address the issue of how the APR disclosure for open-end 
plans or closed-end credit could be improved. Estimate the costs 
associated with creditor compliance and consumer education for any 
alternatives you offer to the present regulatory scheme.

III. Form of Statements and Comments

    These hearings are open to the public to attend. Invited speakers 
will participate in several panel discussions. In addition, about an 
hour is scheduled for brief statements by interested parties in each 
segment, starting at 11:45 a.m. for home-equity lending and at 3:45 
p.m. for issues concerning the TILA's finance charge. To allow as many 
persons in these segments to offer their views as possible, oral 
statements should be brief (about five minutes or less, if possible); 
written statements of any length may be submitted for the record. 
Interested parties who wish to participate are asked to contact the 
Board in advance of the hearing date, to facilitate planning for this 
portion of the hearings. The order of speakers will be based on their 
registration at the hearing site on the day of the hearing.
    Comment letters should refer to Docket No. R-0969, 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 into 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.

    By order of the Board of Governors of the Federal Reserve 
System, April 24, 1997.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 97-11041 Filed 4-28-97; 8:45 am]
BILLING CODE 6210-01-P