[Federal Register Volume 62, Number 236 (Tuesday, December 9, 1997)]
[Proposed Rules]
[Pages 64769-64775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31896]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0992]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; official staff interpretation.

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SUMMARY: The Board is publishing for comment proposed revisions to the 
official staff commentary to Regulation Z (Truth in Lending). The 
commentary applies and interprets the requirements of Regulation Z. The 
proposed update addresses increased rates for credit card accounts 
triggered by events such as late payments or exceeding credit limits. 
It provides guidance on ``same-as-cash'' transactions in open-end 
plans. It also addresses how creditors may determine whether credit is 
an open-end plan or a closed-end transaction. In addition, the proposed 
update discusses issues such as the treatment of annuity costs in 
reverse mortgage transactions and transaction fees imposed on checking 
accounts with overdraft protection.

DATES: Comments must be received on or before January 20, 1998.

ADDRESSES: Comments should refer to Docket No. R-0992, 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 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, N.W. 
(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: For Subparts A and B (open-end 
credit), Jane E. Ahrens, Senior Attorney, or Obrea O. Poindexter, Staff 
Attorney; for Subparts A, C, and E (closed-end credit and reverse 
mortgages), Ms. Ahrens or James A. Michaels, Senior Attorney, or 
Michael E. Hentrel, 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, Diane Jenkins 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 providing 
for 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 Board's official staff commentary (12 CFR Part 226 (Supp. I)) 
interprets the regulation, and provides guidance to creditors in 
applying the regulation to specific transactions. The commentary is a 
substitute for individual staff interpretations; it is updated 
periodically to address significant questions that arise. The Board 
expects to adopt revisions to the commentary in final form in March 
1998; to the extent the revisions impose new requirements on creditors, 
compliance would be optional until October 1, 1998, the effective date 
for mandatory compliance.

II. Proposed Revisions

Subpart A--General

Section 226.2--Definitions and Rules of Construction

2(a) Definitions

2(a)(2) Advertisement

    Comment 2(a)(2)-1 is revised to address communications to consumers 
about existing accounts. In response to requests for guidance, the 
proposed comment provides examples of communications that are and are 
not advertisements.

2(a)(18) Downpayment

    Proposed comment 2(a)(18)-3 gives guidance on how a creditor 
discloses the downpayment in a credit sale if a trade-in is involved 
and if the amount of the existing lien on the trade-in exceeds its 
value. The comment clarifies that creditors should disclose zero and 
not a negative amount.

2(a)(20) Open-end Credit

    The Board has been asked by Attorneys General of several states to 
provide additional guidance concerning how to determine whether credit 
is an open-end plan or a closed-end transaction. The Attorneys General 
are concerned that some retailers selling big-ticket items have 
established questionable ``revolving charge accounts'' to finance the 
purchase of such items, resulting in consumers making major purchases 
without adequate information about the true cost of the transactions. 
Proposed comment 2(a)(20)-3 includes factors that creditors, 
particularly those engaged in credit sales, should consider in 
determining the difference between an open-end plan and a closed-end 
transaction. Proposed comment 2(a)(20)-5 clarifies when a line of 
credit is not self-replenishing.

[[Page 64770]]

2(a)(24) Residential Mortgage Transaction

    Comment 2(a)(24)-5 is revised for clarity. No substantive change is 
intended.
    Proposed comment 2(a)(24)-7 clarifies that the definition of a 
residential mortgage transaction includes a loan for financing the 
construction of a primary dwelling on land already owned by the 
consumer.
Section 226.4--Finance Charge

4(a) Definition

4(a)(2) Special Rule: Closing Agent Charges

    Comment 4(a)(2)-2 is revised to address charges to conduct a 
closing for a real estate-secured transaction. Creditors may exclude 
from the finance charge a lump-sum settlement or closing fee that 
includes a charge for conducting or attending a closing if the lump-sum 
fee is primarily for services listed in Sec. 226.4(c)(7), even if the 
lump-sum fee includes incidental costs for services that are otherwise 
considered finance charges. The comment clarifies that charges for 
conducting or attending the closing are finance charges and may not be 
excluded from the finance charge unless the charge is incidental to the 
lump-sum fee.

4(b) Examples of Finance Charges

Paragraph 4(b)(2)

    Comment 4(b)(2)-1 is revised to clarify that a service charge on a 
checking or other transaction account with a credit feature is a 
finance charge only if the charge on the account exceeds the charge for 
a similar account without a credit feature.

4(d) Insurance

    Comment 4(d)-11 is revised for clarification. Under Sec. 226.4(d), 
amounts paid for insurance or debt cancellation coverage may be 
excluded from the finance charge if the creditor discloses the fee or 
premium for the initial term of coverage, among other conditions. 
Comment 4(d)-11 contains examples of what constitutes the initial term 
of coverage, and also gives creditors, in certain circumstances, the 
option of providing the cost disclosure for one year of coverage if it 
is clearly labeled as such.
    The proposed revision clarifies that the initial term of coverage 
is based on the period that the insurer or creditor is initially 
obligated to provide. It also clarifies that the fact that a consumer 
is permitted to cancel the coverage at any time does not signify that 
creditor may treat the initial term of coverage for purposes of this 
regulation as the period covered by the consumer's first payment. Where 
the fee or premium for the coverage is assessed periodically and the 
consumer is under no obligation to continue making the payments, 
creditors have the option of providing disclosures on the basis of one 
year of coverage. Creditors also have this option if the initial term 
of the insurance is not clear.

Subpart B--Open-end Credit

Section 226.5a--Credit and Charge Card Applications and Solicitations

5a(b) Required Disclosures

5a(b)(1) Annual Percentage Rate

    Proposed comment 5a(b)(1)-7 clarifies that if the APR will increase 
upon a stated event (such as the consumer's making a late payment or 
exceeding the credit limit), the card issuer must disclose the 
increased rate, along with the condition for increasing the rate. 
Providing only a general description of the condition, such as stating 
that the rate will increase if the consumer ``fails to remain in good 
standing,'' is not an adequate description.

5a(b)(9) Late-Payment Fee

    Proposed comment 5a(b)(9)-2 addresses cross references to the APR 
disclosure required under Sec. 226.5a(b)(1), where the APR will 
increase due to a late payment.

5a(b)(10) Over-the-Limit Fee

    Proposed comment 5a(b)(10)-2 addresses cross references to the APR 
disclosure required under Sec. 226.5a(b)(1), where the APR will 
increase if the credit limit is exceeded.
Section 226.6--Initial Disclosure Statement

6(a) Finance Charge

6(a)(2) Annual Percentage Rate

    Proposed comment 6(a)(2)-11 clarifies that if the APR will increase 
upon a stated event (such as the consumer's making a late payment or 
exceeding the credit limit), the card issuer must include the increased 
rate in the disclosures required under Sec. 226.6(a)(2), along with the 
condition that will trigger the increase.
Section 226.7--Periodic Statement
    Some creditors offer open-end plans with a deferred payment feature 
that allows consumers to avoid finance charges if the purchase balance 
is paid by a certain date. An example of these ``same as cash'' 
features would permit a consumer purchasing a $500 item in January to 
avoid any finance charge on the purchase if the $500 balance is paid by 
March 31. Proposed comment 7-3 gives guidance on same-as-cash 
transactions. To ease compliance, three cross-references to the 
proposed comment are added to provisions of Sec. 226.7 addressing 
balances to which periodic rates are applied, the amount of the finance 
charge, and free-ride periods. Comment is requested on whether to add a 
similar cross-reference under Sec. 226.5(b)(2), which addresses the 
timing of periodic statements for open-end plans offering free-ride 
periods.
Section 226.14--Determination of Annual Percentage Rate

14(c) Annual Percentage Rate for Periodic Statements

    Revisions to two comments are proposed. Comment 14(c)-5 addresses 
the calculation of the APRs for multifeatured plans that charge 
transaction fees in addition to periodic rates. In response to requests 
for guidance, the comment clarifies that creditors may separately 
consider each feature in calculating the denominator.
    Multifeatured plans are defined to include plans with features such 
as purchases, cash advances, or overdraft checking, or plans with 
groups of transactions with different pricing structures. (See comment 
7-1). Creditors may disclose APRs separately for each feature or may 
state a composite APR for the whole plan. Some creditors offer cash 
advances with fees that vary if the cash advance is obtained by check, 
at a proprietary ATM, or at a foreign financial institution. They treat 
each fee structure as a ``feature.'' Appendix F gives instructions for 
calculating the APR when the finance charge includes interest and 
transaction fees. Appendix F requires creditors to include in the 
denominator: (1) the balance subject to a transaction fee, plus (2) the 
balance subject to periodic rates, less the amount of the balance 
subject to a transaction charge. The appendix is silent on calculating 
the denominator when separate features are involved.
    Comment 14(c)-5 clarifies that separate features may be considered 
in calculating the denominator. The proposal does not attempt to define 
``feature'' for purposes of the APR calculation. Comment is requested 
on how to retain flexibility for creditors in defining features of an 
open-end plan while guarding against distinctions among account 
services that artificially lower the APR on a consumer's periodic 
statement. An example of distinctions that serve to lower the APR is 
the situation where the creditor treats as individual features each 
possible

[[Page 64771]]

method of obtaining a cash advance, even though there are no real 
differences in pricing or operational characteristics. Comment is also 
requested on whether a creditor should separately disclose the balances 
related to each feature under Sec. 226.7(e), if features are treated 
separately for purposes of calculating the denominator in the APR 
computation.
    Comment 14(c)-10 addresses the treatment of fees imposed on 
transactions that occur late in a billing cycle and are impracticable 
to post until the following billing cycle. The comment would be revised 
to provide broader guidance for calculating the APR when finance 
charges posted in the billing cycle include charges relating to 
activity in prior cycles, such as adjustments relating to error 
resolution. It is intended to provide uniformity and simplify 
compliance for the variety of circumstances under which adjustments may 
occur. For instances in which adjustments from prior cycles would 
produce a negative APR in the current cycle, the comment incorporates 
the calculation rule from Sec. 226.14(c)(3)--the APR should never be 
less than the APR corresponding to the periodic rate imposed on the 
account.

Subpart C--Closed-end Credit

Section 226.18--Content of Disclosures

18(g) Payment Schedule

    Proposed comment 18(g)-4 clarifies the requirements for disclosing 
the timing of payments. It explains that creditors must include the 
calendar date when the beginning payment is due and clarifies that 
reference to the occurrence of a particular event, for example, 
disclosing that the first payment is due ``30 days after the completion 
of construction,'' is not sufficient. If a precise date is unknown, the 
creditor must estimate a date and label the disclosure as an estimate.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.33--Requirements for Reverse Mortgages

33(c) Projected Total Cost of Credit

33(c)(1) Costs to Consumer

    Under Sec. 226.33, the disclosed cost of a reverse mortgage 
transaction must contain all costs and charges paid by the consumer, 
including the cost of any annuity, whether the annuity purchase is 
mandatory or voluntary or whether it is made through the creditor or a 
third party. In implementing this rule, the Board stated its belief 
that the Congress intended a broad application of the terms ``costs and 
charges.'' (60 FR 15468, March 24, 1995.) Proposed comment 33(c)(1)-2 
provides further guidance for determining when an annuity is purchased 
as part of a reverse mortgage transaction.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-0992, and, when 
possible, should use a standard typeface with a type size of 10 or 12 
characters per inch. This will enable the Board to convert the text to 
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.

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.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions to the text of the staff commentary. New language is shown 
inside bold-faced arrows, while language that would be deleted is set 
off with bold-faced brackets. Comments are numbered to comply with new 
Federal Register publication rules.
    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. In Supplement I to Part 226, under Section 226.2--Definitions 
and Rules of Construction, the following amendments would be made:
    a. Under Paragraph 2(a)(2) Advertisement., paragraph 1. would be 
revised;
    b. Under Paragraph 2(a)(18) Downpayment., a new paragraph 3. would 
be added;
    c. Under Paragraph 2(a)(20) Open-end credit., paragraphs 3. and 5. 
would be revised; and
    d. Under Paragraph (2)(a)(24) Residential mortgage transaction., 
paragraph 5. would be revised and a new paragraph 7. would be added.
    The additions and revisions would read as follows:
* * * * *

Supplement I--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *


Sec. 226.2    Definitions and Rules of Construction.

    2(a) Definitions.
    2(a)(2) Advertisement.
    1. Coverage. Only commercial messages that promote consumer 
credit transactions requiring disclosures are advertisements. 
Messages inviting, offering, or otherwise announcing generally to 
prospective customers that availability of credit transactions, 
whether in visual, oral, or print media, are covered by the 
regulation.
    i. Examples include:
    A. Messages in a newspaper, magazine, leaflet, promotional 
flyer, or catalog.
    B. Announcements on radio, television, or public address system.
    C. Direct mail literature or other printed material on any 
exterior or interior sign.
    D. Point-of-sale displays.
    E. Telephone solicitations.
    F. Price tags that contain credit information.
    G. Letters sent to customers as part of an organized 
solicitation of business.
    H. Messages on checking account statements offering auto loans 
at a stated annual percentage rate.
    I. Communications promoting a new open-end plan or closed-end 
transaction.
    ii. The term does not include:
    A. Direct personal contacts, such as follow-up letters, cost 
estimates for individual consumers, or oral or written communication 
relating to the negotiation of a specific transaction.
    B. Informational material, for example, interest rate and loan 
term memos, distributed only to business entities.
    C. Notices required by federal or state law, if the law mandates 
that specific information be displayed and only the information so 
mandated is included in the notice.
    D. News articles the use of which is controlled by the news 
medium.
    E. Market research or educational materials that do not solicit 
business.
    F. Communications about an existing account (for 
example, a promotion in connection with an existing credit card 
account).
* * * * *
    2(a)(18) Downpayment.
* * * * *
    3. Effect of existing liens. In a credit sale, the 
``downpayment'' may only be used to reduce the cash price. For 
example, when the existing lien on an automobile to be traded in 
exceeds the value of the automobile, creditors must disclose a zero 
rather than a negative number. To illustrate, assume a consumer owes 
$10,000 on an existing automobile loan and that the trade-in value

[[Page 64772]]

of the automobile is only $8,000, leaving a $2,000 deficit. The 
creditor should disclose a downpayment of $0, not -
$2,000.
* * * * *
    2(a)(20) Open-end credit.
* * * * *
    3. Repeated transactions. Under this criterion, the creditor 
must reasonably contemplate repeated transactions. This means that 
the credit plan must be usable from time to time and the creditor 
must legitimately expect that there will be repeat business rather 
than a one-time credit extension. The creditor must expect repeated 
dealings with the consumer under the credit plan as a whole and need 
not believe the consumer will reuse a particular feature of the 
plan.
    i. Factors. Each credit plan may differ, and no one 
factor will determine whether a creditor reasonably contemplates 
repeated transactions. Some of the factors to be considered in 
determining whether a creditor could reasonably contemplate repeated 
transactions are:
    A. Whether the line of credit is limited to the purchase of a 
certain product if it is a product that consumers would not likely 
purchase in multiples. The greater the variety of products available 
for purchase under the credit line, the more likely it is that the 
creditor reasonably contemplates repeated transactions. Some 
creditors may not offer a variety of products for purchase, but 
given the nature of the creditor's products or services, it is 
nonetheless likely that consumers will make repeated purchases--as 
in the case of gasoline companies that issue credit cards.
    B. Whether the creditor establishes a line of credit for the 
purpose of enabling the consumer to purchase a designated item. It 
is more likely that a creditor reasonably contemplates repeated 
transactions if a consumer may use the credit to purchase any one of 
a number of items. For example, if a retailer of pianos establishes 
a line of credit for the purpose of the consumer purchasing a piano, 
it is unlikely that the creditor can reasonably contemplate repeated 
transactions.
    C. If the creditor establishes a line of credit to finance the 
consumer's purchase of a designated item, the amount of the 
transaction relative to the credit made available to the consumer. 
The larger the amount of the transaction, the less likely it is that 
the creditor reasonably contemplates repeated transactions. For 
example, if a retailer of satellite dishes makes credit of $5,000 
available to a consumer for the purchase of a satellite dish, and 
the cost of the satellite dish is $4,500, it is not likely the 
creditor contemplates repeated transactions. The fact that the 
retailer sells other products that are nominal in amount (compared 
with the cost of the major purchase) is not a sufficient basis to 
contemplate repeated transactions.
    D. The extent to which a creditor reasonably solicits customers 
with its line of credit to make additional purchases under the 
credit line. For example, if a home improvement contractor issues a 
private label credit card with a $10,000 limit to a consumer paying 
for roof repairs in the amount of $9,000, and sends monthly 
solicitations for aluminum siding, the creditor does not reasonably 
contemplate repeated transactions.
    E. Whether the creditor has information on consumers with the 
credit line showing that consumers have made repeat purchases. The 
more information that shows that consumers have made repeat 
purchases, the more likely it is that the creditor reasonably 
contemplates repeated transactions.
    ii. Standard. A standard based on reasonable belief 
by a creditor necessarily includes some margin for judgmental error. 
The fact that a particular consumer does not return for further 
credit extensions does not prevent a plan from having been properly 
characterized as open-end. For example, if much of the customer base 
of a clothing store makes repeat purchases, the fact that some 
consumers use the plan only once would not affect the 
characterization of the store's plan as open-end credit. The 
criterion regarding repeated transactions is a question of fact to 
be decided in the context of the creditor's type of business and the 
creditor's relationship with the consumer. For example:
    A. It would be more reasonable for a thrift institution 
chartered for the benefit of its members to contemplate repeated 
transactions with a member than for a seller of aluminum siding to 
make the same assumption about its customers.
    B. It would be more reasonable for a bank to make advances from 
a line of credit for the purchase of an automobile than for an 
automobile dealer to sell a car under an open-end plan.
* * * * *
    5. Reusable line. i. The total amount of credit that may be 
extended during the existence of an open-end plan is unlimited 
because available credit is generally replenished as earlier 
advances are repaid. A line of credit is self-replenishing even 
though the plan itself has a fixed expiration date, as long as 
during the plan's existence the consumer may use the line, repay, 
and reuse the credit. However, a line of credit generally 
is not self-replenishing where the initial line of credit is less 
than, or not much more than, the amount of an item purchased to open 
the credit line or, based on the minimum monthly payments, the 
principal reduction is so nominal that the credit line is not 
reusable for an extended period of time. The creditor may 
verify credit information such as the consumer's continued income 
and employment status or information for security purposes. This 
criterion of unlimited credit distinguishes open-end credit from a 
series of advances made pursuant to a closed-end credit loan 
commitment.
    ii. For example:
    A. Under a closed-end commitment, the creditor might agree to 
lend a total of $10,000 in a series of advances as needed by the 
consumer. When a consumer has borrowed the full $10,000, no more is 
advanced under that particular agreement, even if there has been 
repayment of a portion of the debt.
    iii. This criterion does not mean that the creditor must 
establish a specific credit limit for the line of credit or that the 
line of credit must always be replenished to its original amount. 
The creditor may reduce a credit limit or refuse to extend new 
credit in a particular case due to changes in the economy, the 
creditor's financial condition, or the consumer's creditworthiness. 
(The rules in Sec. 226.5b(f), however, limit the ability of a 
creditor to suspend credit advances for home equity plans.) While 
consumers should have a reasonable expectation of obtaining credit 
as long as they remain current and within any present credit limits, 
further extensions of credit need not be an absolute right in order 
for the plan to meet the self-replenishing criterion.
* * * * *
    2(a)(24) Residential mortgage transaction.
* * * * *
    5. Acquisition. i. A residential mortgage transaction 
finances the acquisition of a consumer's principal dwelling. The 
term does not include a transaction involving a consumer's principal 
dwelling if the consumer had previously purchased and acquired some 
title to the dwelling, even though the consumer had not acquired 
full legal title.
    ii. Examples of transactions involving a previously acquired 
dwelling include the financing of a balloon payment due under a land 
sale contract and an extension of credit made to a joint owner of 
property to buy out the other joint owner's interest. In these 
instances, disclosures are not required under Sec. 226.18(q) or 
Sec. 226.19(a) (assumability policies and early disclosures for 
residential mortgage transactions). However, the rescission rules of 
Secs. 226.15 and 226.23 do apply to these new transactions.
    iii. In other cases, the disclosure and rescission rules do not 
apply. For example, where a buyer enters into a written agreement 
with the creditor holding the seller's mortgage allowing the buyer 
to assume the mortgage where the buyer previously purchased the 
property and agreed with the seller to make the mortgage payments, 
Sec. 226.20(b) does not apply (assumptions involving residential 
mortgages).  [A transaction is not ``to finance the 
acquisition'' of the consumer's principal dwelling (and therefore is 
not a residential mortgage transaction) if the consumer had 
previously purchased the dwelling and acquired some title to the 
dwelling, even though the consumer has not acquired full legal 
title. Thus, the following types of transactions are not a 
residential mortgage transactions:
     The financing of a balloon payment due under a land 
sale contract.
     An extension of credit made to a joint owner of 
property to buy out the other joint owner's interest.
    As a result, in giving the disclosures for these transactions 
several provisions of the regulations are not applicable, for 
example, the exceptions to the right of rescission 
(Secs. 226.23(f)(1) and 226.15(f)(1), the early disclosure 
requirement (Sec. 226.19(a)), and the disclosure concerning 
assumability (Sec. 226.18(q)). In the following situation, by 
contrast, since the transaction is not a residential mortgage 
transaction, no disclosures are required by Sec. 226.20(b) and 
therefore the right of rescission does not apply:

[[Page 64773]]

     A written agreement between a creditor holding a 
seller's mortgage and the buyer of the property which allows the 
buyer to assume the mortgage, where the buyer previously purchased 
the property and agreed with the seller to make the mortgage 
payments.
* * * * *
    7. Construction on previously acquired vacant land. A 
residential mortgage transaction includes a loan to finance the 
construction of a consumer's principal dwelling on a vacant lot 
previously acquired by the consumer.
* * * * *
    3. In Supplement I to Part 226, under Section 226.4--Finance 
Charge, the following amendments would be made:
    a. Under Paragraph 4(a)(2)., paragraph 2. would be revised;
    b. Under Paragraph 4(b)(2)., paragraph 1. would be revised; and
    c. Under Paragraph 4(d) Insurance and debt cancellation coverage., 
paragraph 11. would be revised; paragraph 12. would be redesignated as 
paragraph 13.; and a new paragraph 12. would be added.
    The revisions and additions would read as follows:
* * * * *


226.4  Finance Charge.

    4(a) Definition.
* * * * *
    4(a)(2) Special rule: closing agent charges.
* * * * *
    2. Required closing agent. If the creditor requires the use of a 
closing agent, fees charged by the closing agent are included in the 
finance charge only if the creditor requires the particular service, 
requires the imposition of the charge, or retains a portion of the 
charge. Fees charged by a third-party closing agent may be otherwise 
excluded from the finance charge under Sec. 226.4. For example, a 
fee that would be paid in a comparable cash transaction may be 
excluded under Sec. 226.4(a)[;]. A charge for conducting 
or attending a closing is a finance charge and may be excluded only 
if the charge is included in and incidental to a lump-sum 
fee for real estate closing costs [may be] excluded under 
Sec. 226.4(c)(7).
* * * * *
    4(b) Examples of finance charges.
* * * * *
    Paragraph 4(b)(2).
    1. Checking account charges.A checking or transaction 
account charge imposed in connection with a credit feature is a 
finance charge under Sec. 226.4(b)(2) to the extent the charge 
exceeds the charge for a similar account without a credit feature. 
If a charge for an account with a credit feature does not exceed the 
charge for an account without a credit feature, the charge is not a 
finance charge under Sec. 226.4(b)(2). To illustrate:
    i. A $5 service charge is imposed on an account with an 
overdraft line of credit, while a $3 service charge is imposed on an 
account without a credit feature; the $2 difference is a finance 
charge.
    ii. A $5 service charge is imposed for each item that results in 
an overdraft on an account with an overdraft line of credit, while a 
$25 service charge is imposed for paying or returning the item on a 
similar account without a credit feature; the $5 charge is not a 
finance charge. [The checking or transaction account 
charges discussed in Sec. 226.4(b)(2) include, for example, the 
following situations:
     An account with an overdraft line of credit incurs a 
$4.50 service charge, while an account without a credit feature has 
a $2.50 service charge; the $2.00 difference is a finance charge. If 
the difference is not related to account activity, however, it may 
be excludable as a participation fee. (See the commentary to 
Sec. 226.4(c)(4).)
     A service charge of $5.00 for each item that triggers 
an overdraft credit line is a finance charge. However, a charge 
imposed uniformly for any item that overdraws a checking account, 
regardless of whether the items are paid or returned and whether the 
account has a credit feature or not, is not a finance charge.]
* * * * *
    4(d) Insurance and debt cancellation coverage.
* * * * *
    11. Initial term. i. The initial term of the insurance 
or debt cancellation coverage determines the 
period for which a premium amount or fee must 
be disclosed, unless the one-year option discussed under 
comment 4(d)-12 is available. For purposes of Sec. 226.4(d), the 
initial term is the period for which the insurer or creditor is 
obligated to provide coverage, even though the consumer may be 
allowed to cancel the coverage before that term expires.
    ii. For example:
    A. The initial term of a property insurance policy on an 
automobile that is written for one year is one year even though 
monthly premiums are paid and the term of the credit transaction is 
four years.
    B. The initial term of an insurance policy is the full term of 
the credit transaction if the consumer pays or finances a single 
premium in advance. [In some cases the initial term is 
clear, for example a property insurance policy on an automobile 
written for one year (even though the term of the credit transaction 
is four years) or a credit life insurance policy for the term of the 
credit transaction purchased by paying or financing a single 
premium. In other cases, however, it may not be clear what the 
initial term of the insurance is, for example, when the consumer 
agrees to pay a premium that is assessed periodically and the 
consumer is under no obligation to continue making the payments. In 
cases such as this, the cost disclosure may be made on the basis of 
a premium for one year of insurance coverage. The premium must be 
clearly labeled as being for one year.]
    12. Initial term; alternative. i. A creditor has the 
option of providing cost disclosures on the basis of one year of 
insurance or debt cancellation coverage instead of a longer initial 
term (provided the premium or fee is clearly labeled as being for 
one year) if:
    A. The initial term is not clear, or
    B. The consumer has agreed to pay a premium or fee that is 
assessed periodically but the consumer is under no obligation to 
continue the coverage after making the initial payment.
    ii. For example:
    A. A credit life insurance policy providing coverage for a 30-
year mortgage loan has an initial term of 30 years even though 
premium payments are made monthly and the consumer is not required 
to continue the coverage after making the initial payment. The 
creditor has the option of making disclosures on the basis of 
coverage for one-year.
* * * * *
    4. In Supplement I to Part 226, under Section 226.5a--Credit and 
Charge Card Applications and Solicitations, the following amendments 
would be made:
    a. Under Paragraph 5a(b)(1) Annual Percentage Rate., a new 
paragraph 7. is added;
    b. Under Paragraph 5a(b)(9) Late Payment Fee., a new paragraph 2. 
is added; and
    c. Under Paragraph 5a(b)(10) Over-the-Limit Fee., a new paragraph 
2. is added.
    The additions would read as follows:
* * * * *

Subpart B--Open End Credit

* * * * *


Sec. 226.5a  Credit and Charge Card Applications and Solicitations.

* * * * *
    5a(b) Required Disclosures.
    5a(b)(1) Annual Percentage Rate.
* * * * *
    7. Increased penalty rates. If the initial rate will 
increase upon the occurrence of a specified event such as a late 
payment or an extension of credit that exceeds the credit limit, the 
card issuer must disclose along with the initial rate the increased 
penalty rate that would apply. The issuer must also disclose the 
specific condition or conditions for imposing the increased rate, 
such as ``22% APR, if 60 days late.'' The issuer may disclose the 
period for which the increased rate will remain in effect, such as 
``until you make three timely payments.'' A creditor need not 
disclose an increased rate that is imposed when credit privileges 
are permanently terminated.
* * * * *
    5a(b)(9) Late Payment Fee.
* * * * *
    2. Increased penalty rates. If the annual percentage 
rate will increase as a result of late payments, the disclosures 
under Sec. 226.5a(b)(9) must include a reference to the disclosures 
required under Sec. 226.5a(b)(1).
    5a(b)(10) Over-the-Limit Fee.
* * * * *
    2. Increased penalty rates. If the annual percentage 
rate will increase as a result of the cardholder's exceeding the 
credit limit, the disclosures under Sec. 226.5a(b)(10) must

[[Page 64774]]

include a reference to the disclosures required under 
Sec. 226.5a(b)(1).
* * * * *
    5. In Supplement I to Part 226, Section 226.6--Initial Disclosure 
Statement, under Paragraph 6(a)(2)., a new paragraph 11. would be added 
to read as follows:
* * * * *
    Section 226.6--Initial Disclosure Statement
* * * * *
    6(a) Finance charge.
* * * * *
    Paragraph 6(a)(2).
* * * * *
    11. Increased penalty rates. If the annual percentage 
rate will increase upon the occurrence of a specified event such as 
a late payment or an extension of credit that exceeds the credit 
limit, the creditor must disclose along with the initial rate the 
increased penalty rate that would apply. The issuer must also 
disclose the specific condition for imposing the increased rate, 
such as ``22% APR, if 60 days late.'' The issuer may disclose the 
period for which the increased rate will remain in effect. A 
creditor need not disclose an increased rate that is imposed when 
credit privileges are permanently terminated.
* * * * *
    6. In Supplement I to Part 226, under Section 226.7--Periodic 
Statement, the following amendments would be made:
    a. Under introductory text, a new paragraph 3. would be added;
    b. Under Paragraph 7(e) Balance on which finance charge computed., 
a new paragraph 10. would be added;
    c. Under Paragraph 7(f) Amount of finance charge., a new paragraph 
9. would be added; and
    d. Under Paragraph 7(j) Free-ride period., a new paragraph 2. would 
be added.
    The additions would read as follows:
* * * * *


Sec. 226.7  Periodic Statement.

* * * * *
    3. Same-as-cash transactions. Some creditors offer a 
deferred payment feature for purchases in which consumers avoid 
finance charges if the purchase balance is paid in full by a certain 
date. For example, no finance charge is imposed on a $500 purchase 
made in January if the $500 balance is paid by March 31.
    i. Balances subject to periodic rates. Under Sec. 226.7(e), 
creditors must disclose the balances subject to periodic rates 
during a billing cycle. The deferred payment balance ($500 in this 
example) is not subject to a periodic rate for billing cycles 
between the date of purchase and the payment due date. Periodic 
statements sent for those billing cycles should not include the 
deferred payment balance in the balance disclosed under 
Sec. 226.7(e). At the creditor's option, this amount may be 
disclosed on periodic statements provided it is identified by a term 
other than the term used to identify the balance disclosed under 
Sec. 226.7(e).
    ii. Amount of finance charge. Under Sec. 226.7(f), creditors 
must disclose finance charges imposed during a billing cycle. For 
some same-as-cash purchases, the creditor may impose a finance 
charge from the date of purchase if the deferred payment balance 
($500 in this example) is not paid in full by the due date, but will 
not impose finance charges for billing cycles between the date of 
purchase and the payment due date. Periodic statements for billing 
cycles preceding the payment due date should not include in the 
finance charge disclosed under Sec. 226.7(f) the amounts a consumer 
may owe if the deferred payment balance is not paid in full by the 
payment due date. In this example, the February periodic statement 
should not identify as finance charges interest attributable to the 
$500 January purchase. At the creditor's option, this amount may be 
disclosed on periodic statements provided it is identified by a term 
other than ``finance charge.''
    iii. Free-ride period. Assuming monthly billing cycles ending at 
month-end and a free-ride period ending on the 25th of the following 
month, here are two examples illustrating how a creditor may comply 
with the requirement to disclose the free-ride period applicable to 
a deferred payment balance ($500 in this example), and with the 14-
day rule for mailing or delivering periodic statements before 
imposing finance charges (see Sec. 226.5):
    A. The creditor could include the $500 purchase on the periodic 
statement reflecting account activity for February and sent on March 
1 and identify March 31 as the payment due date for the $500 
purchase. (The creditor could also identify March 31 as the payment 
due date for any other amounts due on March 25.)
    B. The creditor could include the $500 purchase on the periodic 
statement reflecting activity for March and sent on April 1 and 
identify April 25 as the payment due date for the $500 purchase, 
permitting the consumer to avoid finance charges if the $500 is paid 
in full by April 25.
* * * * *
    7(e) Balance on which finance charge computed.
* * * * *
    10. Same-as-cash transactions. See comment 7-
3(i).
    7(f) Amount of finance charge.
* * * * *
    9. Same-as-cash transactions. See comment 7-
3(ii).
* * * * *
    7(j) Free-ride period.
* * * * *
    2. Same-as-cash transactions. See comment 7-
3(iii).
* * * * *
    7. In Supplement I to Part 226, Section 226.14--Determination of 
Annual Percentage Rate, under Paragraph 14(c) Annual percentage rate 
for periodic statements., paragraph 5. and paragraph 10. would revised 
to read as follows:
* * * * *


Sec. 226.14  Determination of Annual Percentage Rate.

* * * * *
    14(c) Annual percentage rate for periodic statements.
* * * * *
    5. Transaction charges. i. Section 226.14(c)(3) transaction 
charges include, for example:
    A. A loan fee of $10 imposed on a particular advance.
    B. A charge of 3% of the amount of each transaction.
    ii. The reference to avoiding duplication in the computation 
requires that the amounts of transactions on which transaction 
charges were imposed not be included both in the amount of total 
balances and in the ``other amounts on which a finance charge was 
imposed'' figure. In a multifeatured plan, creditors may 
separately consider each bona fide feature in the calculation of the 
denominator. For further explanation and examples of how 
to determine the components of this formula, see appendix F.
* * * * *
    10. Prior-cycle adjustments. i. The annual percentage 
rate reflects the finance charges imposed during the billing cycle. 
However, finance charges imposed during the billing cycle may relate 
to activity in a prior cycle. Examples of circumstances when this 
may occur are:
    A. A cash advance that occurs on the last day of a billing cycle 
on an account that uses the transaction date to figure finance 
charges, and it is impracticable to post the transaction until the 
following cycle.
    B. An adjustment to the finance charge is made following the 
resolution of a billing error dispute.
    C. A consumer fails to pay the purchase balance under a deferred 
payment feature by the payment due date, and finance charges are 
imposed from the date of purchase.
    ii. Finance charges relating to activity in prior cycles should 
be reflected in the annual percentage rate for the billing cycle in 
which the charges are posted. If the creditor uses the quotient 
method to calculate the annual percentage rate, the numerator would 
include the amount of any transaction charges plus any other finance 
charges posted during the billing cycle. Balances relating to the 
finance charge adjustment may be included in the denominator if 
permitted by the legal obligation, the transaction was impracticable 
to post in the previous cycle due to its timing, or the charge 
relates to an adjustment such as the resolution of a billing error 
dispute or an unintentional posting error. An annual percentage rate 
calculated under this paragraph shall not be less than the highest 
rate determined by multiplying each periodic rate imposed during the 
billing cycle by the number of periods in a year. 
[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

[[Page 64775]]

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).]
* * * * *
    8. In Supplement I to Part 226, Section 226.18--Content of 
Disclosures, under Paragraph 18(g) Payment schedule., the 18(g) heading 
would be revised, and a new paragraph 4. would be added to read as 
follows:
* * * * *

Subpart C--Closed End Credit

* * * * *


Sec. 226.18  Content of Disclosures.

* * * * *
    [Paragraph] 18(g) Payment schedule.
* * * * *
    4. Timing of payments. Creditors must disclose when 
payments are due, including the calendar date that the beginning 
payment is due. For example, a creditor may disclose that payments 
are due ``monthly beginning on July 1, 1998.'' A reference to the 
occurrence of a particular event, for example, disclosing that the 
first payment is due ``30 days after the completion of 
construction,'' is not sufficient. If the beginning-payment date is 
unknown, the creditor must use an estimated date and label the 
disclosure as an estimate pursuant to Sec. 226.17(c).
* * * * *
    9. In Supplement I to Part 226, Section 226.33--Requirements for 
Reverse Mortgages, under Paragraph 33(c)(1) Costs to consumer, in 
paragraph 2., a new sentence is added at the end of the paragraph to 
read as follows:
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions


Sec. 226.33  Requirements for Reverse Mortgages.

* * * * *
    33(c) Projected total cost of credit.
    Paragraph 33(c)(1) Costs to consumer.
* * * * *
    2. Annuity costs. * * * For example, this includes 
the costs of an annuity that a creditor offers, arranges, assists 
the consumer in purchasing, or that the creditor is aware the 
consumer is purchasing as a part of the transaction.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, acting through the Secretary of the Board under delegated 
authority, December 1, 1997.

William W. Wiles,
Secretary of the Board.
[FR Doc. 97-31896 Filed 12-8-97; 8:45 am]
BILLING CODE 6210-01-P