[Federal Register Volume 63, Number 65 (Monday, April 6, 1998)]
[Rules and Regulations]
[Pages 16669-16678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8829]


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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: Final rule; official staff interpretation.

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SUMMARY: The Board is publishing revisions to the official staff 
commentary to Regulation Z (Truth in Lending). The commentary applies 
and interprets the requirements of Regulation Z. The update addresses 
increased rates for open-end plans triggered by events such as late 
payments or exceeding credit limits. It provides guidance on deferred 
payment 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 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: This rule is effective March 31, 1998. Compliance is optional 
until October 1, 1998.

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

[[Page 16670]]

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.
    In December, the Board published proposed amendments to the 
commentary to Regulation Z (62 FR 64769, December 9, 1997). The Board 
received about 110 comments. Most of the comments were from financial 
institutions, retail merchant associations, and other creditors. About 
a dozen comments were received from state attorneys general or other 
agencies, and consumer representatives. Overall, commenters generally 
supported the proposed amendments. Views were mixed on a few comments, 
and there was broad industry opposition to the comment addressing the 
definition of open-end credit.
    Except as discussed below, the commentary is being adopted as 
proposed; some technical suggestions or concerns raised by commenters 
are addressed. Compliance is optional until October 1, 1998, the 
effective date for mandatory compliance.

II. Commentary 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 adopted as proposed with minor revisions for 
clarification. The comment clarifies that communications promoting new 
credit transactions or open-end credit plans, such as promotions to 
switch from a regular to a premium bank card, are advertisements, 
including promotions by on-line messages such as on the Internet. 
Communications encouraging additional or different uses of an existing 
credit account are not advertisements.

2(a)(18) Downpayment

    Under Regulation Z, the term ``downpayment'' refers to an amount 
paid to a seller to reduce the ``cash price'' in a credit sale 
transaction. Comment 2(a)(18)-3 gives guidance on how a creditor 
discloses the downpayment if a trade-in is involved in the sale and if 
the amount of an existing lien exceeds the value of the trade-in. The 
comment clarifies that creditors should disclose the downpayment as 
zero and not a negative amount. The comment addresses a credit sale and 
financed downpayment treated as a single transaction; it does not 
affect creditors' ability to disclose them as two transactions.
    Some commenters asked for further clarification about how to 
reflect costs associated with a ``negative downpayment,'' illustrated 
in the comment by an automobile with an existing lien of $10,000 and a 
trade-in value of $8,000; guidance is provided in a revision to comment 
Sec. 226.18(c)-2.

2(a)(20) Open-end Credit

    The proposal addressed two standards for determining whether credit 
is properly characterized as an open-end plan or a closed-end 
transaction. Comment 2(a)(20)-3 listed a number of factors that 
creditors should consider when determining whether they ``reasonably 
contemplate repeated transactions,'' and comment 2(a)(20)-5 provided 
guidance on whether a credit line is ``reusable.''
    The Board received a substantial number of comments regarding these 
proposed revisions. Most of the comments addressing the issue were from 
industry representatives, and they opposed the proposal. Many industry 
commenters acknowledged that some credit is improperly characterized as 
open-end; however, they opposed the proposal on procedural and 
substantive grounds. Procedurally, some recommended that the Board not 
address the issue in the commentary. Substantively, commenters 
expressed concern that the factors appeared to shift the focus from the 
creditor's plan as a whole to an analysis of individual transactions. 
Most commenters believed that, as stated, the proposed factors in 
comment 2(a)(20)-3 were not relevant to determining whether a creditor 
can reasonably contemplate repeated transactions. They expressed 
concern that the proposed interpretation could have had unintended 
consequences, because in attempting to address what can be viewed as a 
narrow problem, the proposed interpretation could apply to credit 
products that are legitimately and unquestionably open-end 
transactions.
    The Board believes that the analysis of whether a creditor 
reasonably contemplates repeated transactions should be based on the 
creditor's plan as a whole; the proposal was not meant to shift that 
focus. While the application of the factors as proposed could be viewed 
as overly broad, factors such as those articulated in the proposal 
could bear directly, depending on the facts and circumstances, on a 
determination of whether credit can properly be characterized as open-
end. Assume, for example, that a creditor establishes an open-end 
credit plan primarily for the financing of an infrequently purchased 
product or service, that the credit limits established for much of its 
customer base are close to the cost of that product or service, and 
that the creditor has little hard information of repeated transactions 
by much of its customer base. Read together, these assumed facts could 
have direct relevance on the issue of whether the plan comports with 
the Congress's intent that the Truth in Lending disclosures should show 
consumers the cost of the credit transaction for ``infrequently 
purchased products.''
    The Board recognizes that credit granting practices have changed 
significantly since the TILA was enacted in 1968. There has been a 
gradual shift to open-end credit products. These products have become 
commonplace in large measure because of the operational convenience for 
creditors. They also offer advantages of flexibility to consumers, who 
can draw on funds incrementally or finance purchases as needed and can 
repay as their circumstances permit. At the same time, the Board 
believes that concerns about some transactions being mischaracterized 
as open-end plans are legitimate concerns. For example, the Board 
received from nonindustry commenters documentation of transactions 
being characterized as open-end plans that involved the financing of 
used automobiles and the door-to-door credit sales of satellite dishes, 
water treatment systems, and home improvement contracts.
    In seeking to address the legitimate concerns expressed by industry 
about the proposed interpretation of Truth in Lending while dealing 
effectively with potential abuses, however, the Board has found it 
difficult to establish a clear rule that differentiates between 
spurious and legitimate open-end credit. The Board considered revising 
the proposal based on the comments received, to narrow the breadth of 
the factors articulated in the proposal. The Board ultimately 
determined, however, that to do so without the benefit of further 
public comment could unnecessarily raise uncertainties for legitimate 
open-end programs while not reaching the creditor abuses. Consequently, 
the Board has withdrawn the proposed

[[Page 16671]]

revisions to the commentary at this time, except with regard to an 
objective analysis which was addressed by proposed factor E.
    Each creditor's credit product may differ based on the type of 
business, the nature or variety of products or services available for 
purchase, and the creditor's relationship with its customers. Even so, 
the determination of whether a creditor can reasonably contemplate 
repeated transactions requires an objective analysis. Accordingly, 
comment 2(a)(20)-3 has been revised to clarify this interpretation by 
adding a direct reference to the need for an objective analysis in 
reaching a determination regarding repeated transactions. 2(a)(24) 
Residential Mortgage Transaction
    The comments are adopted as proposed. Comment 2(a)(24)-5 is revised 
from the existing comment for clarity, without substantive change. 
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. The addition is intended 
to reflect the rule for excluding closing costs from the finance charge 
under Sec. 226.4(c)(7); 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). The entire lump-sum may be 
excluded from the finance charge even if it includes incidental costs 
for services that are otherwise considered finance charges. The comment 
clarifies that charges attributed to 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 closing fee.

4(b) Examples of Finance Charges

Paragraph 4(b)(2)

    Comment 4(b)(2)-1, adopted as proposed with minor revisions, 
clarifies that a service charge on a checking or other transaction 
account with a credit feature is a finance charge only if the charge 
exceeds the charge for a similar account without a credit feature. In 
the proposal, a sentence in the existing commentary regarding 
participation fees was inadvertently deleted; the error has been 
corrected.
    Commenters requested that the comment clarify that charges 
excludable under Sec. 226.4(c)(3)--charges imposed on an account in 
cases where the institution has not agreed in writing to pay overdraft 
items--are not required to be included as finance charges under 
Sec. 226.4(b)(2); clarifying language has been added.

4(d) Insurance

    In response to commenters, comment 4(d)-1 has been revised to 
clarify that for purposes of Sec. 226.4(d), references to insurance 
also include debt cancellation coverage unless the context indicates 
otherwise.
    Comment 4(d)-11 has been adopted as proposed with minor revisions 
for clarity. 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 clarifies that the initial term 
is based on the period that the insurer or creditor is initially 
obligated to provide coverage. Comment 4(d)-12 clarifies that 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.
    In response to requests for guidance, comments 4(d)-4 and 4(d)-12 
have been revised to address disclosures for open-end plans where the 
amounts of coverage and periodic premiums are based on outstanding 
balances. Comment 4(d)-4 clarifies that creditors providing disclosures 
for open-end plans on a unit-cost basis must base the cost on the 
initial term of coverage, unless one of the options in comment 4(d)-12 
is available. Comment 4(d)-12 provides that its alternatives apply to 
creditors offering credit insurance or debt cancellation coverage for 
open-end plans or closed-end transactions. In addition, the comment 
clarifies that creditors with open-end plans may base their cost 
disclosures on periods less than one year, in some cases.

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

    Comment 5a(b)(1)-7 provides guidance on disclosing penalty rates--
an increase in the rate upon a specific event such as the consumer's 
making a late payment or exceeding the credit limit. The proposal 
required card issuers to disclose the increased rate, along with the 
condition for increasing the rate. The comment is adopted with some 
modification. Commenters expressed concern that requiring penalty rates 
along with the condition for imposing such rates would increase the 
length of the disclosures required by Sec. 226.5a. They believe the 
detail required by the proposal is inconsistent with the abbreviated 
information otherwise required to be disclosed for credit card 
applications and solicitations. Although information about penalty 
rates may add to the disclosure, the Board believes that the rate and 
the specified event or events that trigger a rate increase are 
important terms that assist consumers in comparing credit offers and 
deciding whether to apply for a credit card account. To address the 
concerns, however, the comment is modified to permit issuers using the 
tabular format to disclose the rate and the specified event or events 
that trigger an increased rate in the table, or to disclose the rate in 
the table along with an asterisk that refers to an explanation of the 
specified event or events disclosed outside the table.
    Commenters also expressed concern that the comment would prevent a 
risk-based approach to increasing the initial rate. Creditors often 
increase rates to cover the expenses associated with accounts that 
become delinquent or otherwise do not perform in accord with the 
contract. Moreover, several commenters said it would be impossible to 
disclose the increased rate at the time of disclosure since a number of 
factors used to determine whether a rate will increase are based on 
consumer behavior, which may be reflected in a credit score.
    Upon further analysis and after consideration of the comments 
received, a modified approach has been adopted. If the rate cannot be 
determined at the time of disclosure, issuers may include a description 
of the specified event or events that may result in an increased 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. In addition, a sentence has 
been added to clarify that the disclosure need not be as specific as 
that required in Sec. 226.6(a)(2). Creditors may list some of the 
considerations described in the contract that are used to determine the 
rate without providing a detailed

[[Page 16672]]

explanation of all the factors that the creditor may take into 
consideration when increasing the rate.

5a(b)(9) Late-Payment Fee and 5a(b)(10) Over-the-Limit Fee

    The proposal would have required that the late-payment and the 
over-the-limit disclosure, required under Sec. 226.5a contain a 
reference to the APR disclosure required under Sec. 226.5a(b)(1), where 
the APR will increase due to a late payment or exceeding the credit 
limit. Upon further analysis and given the tabular format requirements 
of Sec. 226.5a, the link seems unnecessary. Accordingly, the proposed 
comments are withdrawn.
Section 226.6--Initial Disclosure Statement

6(a) Finance Charge

6(a)(2) Annual Percentage Rate

    Comment 6(a)(2)-11 clarifies that if the APR will increase upon a 
specific event or events (such as the consumer's making a late payment 
or exceeding the credit limit), the creditor must include the increased 
rate in the disclosures required under Sec. 226.6(a)(2) with the 
condition that will trigger the increase. This comment is similar to 
the proposal; a few modifications have been made, in response to 
comments, along the same lines as the modifications to comment 
5a(b)(1)-7.
Section 226.7--Periodic Statement
    Creditors extending open-end credit offer a variety of payment 
plans that permit consumers to avoid finance charges if the purchase 
balance is paid by a certain date. For example, under some plans 
finance charges are only imposed if consumers do not pay the purchase 
balance in full by a specified date. In others, finance charges are 
imposed on the purchase balance, but consumers receive rebates of any 
finance charges attributable to the purchase if the purchase balance is 
paid in full by the specified date.
    Comment 7-3 gives guidance on the type of deferred payment program 
illustrated in the first example. In response to comments, language is 
added to emphasize that the comment addresses only a particular type of 
deferred payment feature, and is not intended to preclude creditors 
from offering other types. To ease compliance, three cross-references 
to the 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; a similar cross-reference is added under 
Sec. 226.5(b)(2), which addresses the timing of periodic statements for 
open-end plans offering free-ride periods.
    In response to comments, language is added providing sample 
descriptions for balance and finance charge amounts during the deferral 
period, and additional examples of how creditors may comply with the 
timing requirements for periodic statements for open-end plans offering 
free-ride periods. The comment also addresses periodic rates that may 
be applied to the deferred payment purchase.
Section 226.14--Determination of Annual Percentage Rate 14(c) Annual

Percentage Rate for Periodic Statements

    Comments 14(c)-5 and 14(c)-10 are adopted substantially as 
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. 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.'' (See 
comment 7-1.) Creditors may disclose APRs separately for each feature 
or may state a composite APR for the whole plan. 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 (but not less than zero). 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. Comments were mixed on whether 
``feature'' should be defined with more precision. The comment does not 
attempt to define ``feature'' for purposes of the APR calculation, so 
long as the creditor has a reasonable basis for creating the 
distinction. There is no evidence at this time that further limitations 
on operational or pricing considerations are necessary to guard against 
distinctions among account services that artificially lower the APR on 
a consumer's periodic statement.
    A commenter requested that Appendix F be amended to include an 
example of the guidance provided in comment 14(c)-5. Such an amendment 
will be considered in a future rulemaking amending Regulation Z or its 
appendices.
    The proposal requested comment 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. The commentary is 
silent on additional separate balance disclosure requirements under 
7(e). Nearly all commenters addressing the issue were opposed to an 
additional requirement; they said it would be costly for creditors to 
reconfigure their periodic statements and confusing for consumers to 
receive periodic statements showing several balances. No separate 
balance requirements under Sec. 226.7(e) relating to multifeatured 
plans have been added.
    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 is 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.
    The comment differs from the proposal in two respects. Comment 
14(c)-10 does not contain the proposed requirement to disclose an APR 
equal to the largest periodic rate that may be imposed on the account 
when adjustments from prior cycles would produce a negative APR in the 
current cycle. Commenters expressed concern that the requirement, which 
currently applies to creditors imposing transaction fees in addition to 
periodic rate finance charges, would create costly programming changes 
for creditors that impose finance charges solely due to periodic rates 
and are not required to make that calculation. Creditors must disclose 
on each periodic statement any periodic rate that may be applied during 
the billing cycle and the corresponding APR. The corresponding APR 
adequately informs consumers about the cost of credit under the plan in 
the occasional billing cycle that a consumer may receive a negative APR 
due to a finance charge adjustment.

[[Page 16673]]

    The comment includes an alternative disclosure when a finance 
charge debited to the account in the current billing cycle relates to 
activity for which a finance charge was debited to the account in a 
previous billing cycle (for example, if the finance charge relates to 
an adjustment such as the resolution of a billing error dispute, or an 
unintentional posting error, or a payment by check that was later 
returned unpaid for insufficient funds or other reasons). In response 
to concerns by commenters, as an alternative to the general 
interpretation set forth in the comment, the comment permits creditors 
to disclose the finance charge adjustment on the periodic statement. 
Creditors identifying the adjustment on the periodic statement would 
not include the finance charge adjustment in the numerator or in 
balances associated with the finance charge adjustment in the 
denominator when calculating the annual percentage rate for the current 
billing cycle .

Subpart C--Closed-end Credit

Section 226.18--Content of Disclosures

18(c) Itemization of Amount Financed

    Comment 18(c)-2 is revised in response to requests for guidance by 
creditors offering credit sales when downpayments involve a trade-in 
and an existing lien that exceeds the value of the trade-in. (See 
comment 2(a)(18)-3, where a consumer owes $10,000 on an existing 
automobile loan and the trade-in value of the automobile is $8,000, 
leaving a $2,000 deficit.)
    The amount by which the lien exceeds the trade-in value would be 
reflected in the amount financed. (See Sec. 226.18(b).) Assuming the 
cash price for the new car was $20,000, the amount financed would be 
$22,000 ($20,000 representing the cash price plus $2,000 representing 
the excess of the lien over the trade-in value financed by the 
creditor).
    The regulation provides great flexibility for disclosing the 
itemization of amount financed. Comment 18(c)-2.iii. (numbered to 
comply with Federal Register publication rules) is revised to clarify 
that any amounts financed by the creditor and representing the excess 
of the lien over the trade-in value ($2,000 in this example) must 
appear in the itemization of the amount financed. However, creditors 
may also add other categories to explain, in this example, the 
consumer's trade-in value of $8,000, the creditor's payoff of the 
existing lien of $10,000, and the resulting amount of $2,000 included 
in the amount financed.

18(g) Payment Schedule

    Section 226.18(g) requires creditors to disclose the timing of 
payments. To meet this requirement, creditors may list all of the 
payment due dates. Creditors also have the option of specifying the 
``period of payments'' scheduled to repay the obligation. Comment 
18(g)-4 clarifies the requirements for creditors choosing this option.
    As a general rule, creditors that do not disclose all of the 
payment due dates must disclose the payment intervals, such as 
``monthly'' or ``bi-weekly,'' and 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.'' This information, when 
combined with the number of payments, is necessary to define the 
repayment period and enable a consumer to determine all of the payment 
due dates.
    Some commenters viewed the inclusion of a beginning-payment date as 
a new requirement that is more appropriate for a regulatory revision 
than an interpretation in the commentary. The Board believes that the 
new comment merely interprets and clarifies the existing requirement in 
Sec. 226.18(g). The staff is aware that creditors could reasonably have 
interpreted the statutory requirement for specifying the ``period of 
payments'' in different ways. Because of confusion in this area, 
comment 18(g)-4 has been added to explain creditors' disclosure 
responsibilities.
    Several commenters provided examples of transactions where the 
beginning-payment date is unknown and difficult to determine at the 
time disclosures are made. For example, a consumer may become obligated 
on a credit contract that contemplates the delayed disbursement of 
funds based on a contingent event, such as the completion of home 
repairs. Disclosures may also accompany loan checks that are sent by 
mail, in which case the initial disbursement and repayment dates are 
solely within the consumer's control. These commenters believe that a 
narrative explanation of the events that will trigger the first payment 
due date would be more helpful to consumers than an estimated calendar 
date.
    Comment 18(g)-4 has been revised to address these concerns. In such 
cases, the creditor may use an estimated beginning-payment date and 
label the disclosure as an estimate pursuant to Sec. 226.17(c). 
Alternatively, the disclosure may refer to the occurrence of a 
particular event, for example, by disclosing that the beginning payment 
is due ``30 days after the first loan disbursement.'' This information 
also may be included with an estimated date to explain the basis for 
the creditor's estimate. See Comment 17(a)(1)-5(iii).

Subpart E--Special Rules for Certain Home Mortgage Transactions

Section 226.32--Requirements for Certain Closed-end Home Mortgages

32(a) Coverage

32(a)(1)(ii)

    Creditors must follow the rules in Sec. 226.32 if the total points 
and fees payable by the consumer at or before loan closing exceed the 
greater of $400 or 8 percent of the total loan amount. The Board is 
required to adjust the $400 amount each year. The adjusted amounts for 
1997 ($424), published on December 12, 1996 (61 FR 65317), and 1998 
($435), published on February 9, 1998 (63 FR 6474), are added to 
comment 32(a)(1)(ii)-2.
Section 226.33--Requirements for Reverse Mortgages

33(c) Projected Total Cost of Credit

33(c)(1) Costs to Consumer

    Under 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. 
Comment 33(c)(1)-2 provides guidance for determining when an annuity is 
purchased as part of a reverse mortgage transaction. Some commenters 
requested that the Board narrow the standard for including annuity 
costs in the total annual loan cost rate to annuities purchased ``by or 
through'' the creditor, expressing their concern about accurately 
disclosing the impact of any annuity consumers may purchase.
    The Board believes that the Congress intended a broad application 
of the terms ``costs and charges'' when applied to annuities. (60 FR 
15468, March 24, 1995.) Thus, the comment is adopted as proposed. 
Creditors may rely on information provided by the consumer concerning 
their intent to purchase an annuity as a part of the transaction.

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.
    For the reasons set forth in the preamble, the Board amends 12 CFR 
Part 226 as follows:

[[Page 16674]]

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 are made:
    a. Under Paragraph 2(a)(2) Advertisement., paragraph 1. is revised;
    b. Under Paragraph 2(a)(18) Downpayment., a new paragraph 3. is 
added;
    c. Under Paragraph 2(a)(20) Open-end credit., paragraph 3. is 
revised; and
    d. Under Paragraph (2)(a)(24) Residential mortgage transaction., 
paragraph 5. is revised and a new paragraph 7. is added.
    The additions and revisions read as follows:

SUPPLEMENT I--OFFICIAL STAFF INTERPRETATIONS

* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

     2(a) Definitions.
     (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 the availability of credit transactions, whether in visual, 
oral, or print media, are covered by Regulation Z (12 CFR part 226).
    i. Examples include:
    A. Messages in a newspaper, magazine, leaflet, promotional 
flyer, or catalog.
    B. Announcements on radio, television, or public address system.
    C. On-line messages, such as on the Internet.
    D. Direct mail literature or other printed material on any 
exterior or interior sign.
    E. Point-of-sale displays.
    F. Telephone solicitations.
    G. Price tags that contain credit information.
    H. Letters sent to customers as part of an organized 
solicitation of business.
    I. Messages on checking account statements offering auto loans 
at a stated annual percentage rate.
    J. 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 credit account (for example, 
a promotion encouraging additional or different uses of 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 
on the downpayment line rather than a negative number. To 
illustrate, assume a consumer owes $10,000 on an existing automobile 
loan and that the trade-in value 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 consumers under the credit plan as a whole and need 
not believe a consumer will reuse a particular feature of the plan. 
The determination of whether a creditor can reasonably contemplate 
repeated transactions requires an objective analysis. Information 
that much of the creditor's customer base with accounts under the 
plan make repeated transactions over some period of time is relevant 
to the determination, particularly when the plan is opened primarily 
for the financing of infrequently purchased products or services. A 
standard based on reasonable belief by a creditor necessarily 
includes some margin for judgmental error. The fact that particular 
consumers do 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 its customers. For 
example:
    i. 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.
    ii. It would be more reasonable for a financial institution 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.
* * * * *
     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 interest 
to the dwelling, even though the consumer had not acquired full 
legal title.
    ii. Examples of new 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, if the buyer had 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).
* * * * *
    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 are made:
    a. Under Paragraph 4(a)(2)., paragraph 2. is revised;
    b. Under Paragraph 4(b)(2)., paragraph 1. is revised; and
    c. Under Paragraph 4(d) Insurance and debt cancellation coverage., 
paragraphs 1., 4., and 11. are revised; paragraph 12. is redesignated 
as paragraph 13.; and a new paragraph 12. is added.
    The revisions and additions read as follows:
* * * * *

Section 226.4--Finance Charge

    4(a) Definition.
* * * * *
     4(a)(2) Special rule: closing agent charges.
* * * * *

[[Page 16675]]

    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 is incidental to a lump-sum closing fee 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 (where the institution has agreed in 
writing to pay an overdraft), while a $3 service charge is imposed 
on an account without a credit feature; the $2 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).)
    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 each item on a 
similar account without a credit feature; the $5 charge is not a 
finance charge.
* * * * *
    4(d) Insurance and debt cancellation coverage. 
    1. General. Section 226.4(d) permits insurance premiums and 
charges and debt-cancellation charges to be excluded from the 
finance charge. The required disclosures must be made in writing. 
The rules on location of insurance and debt-cancellation disclosures 
for closed-end transactions are in Sec. 226.17(a). For purposes of 
Sec. 226.4(d), all references to insurance also include debt 
cancellation coverage unless the context indicates otherwise.
* * * * *
    4. Unit-cost disclosures. i. Open-end credit. The premium or fee 
for insurance or debt cancellation for the initial term of coverage 
may be disclosed on a unit-cost basis in open-end credit 
transactions. The cost per unit should be based on the initial term 
of coverage, unless one of the options under comment 4(d)-12 is 
available.
    ii. Closed-end credit. One of the transactions for which unit-
cost disclosures (such as 50 cents per year for each $100 of the 
amount financed) may be used in place of the total insurance premium 
involves a particular kind of insurance plan. For example, a 
consumer with a current indebtedness of $8,000 is covered by a plan 
of credit life insurance coverage with a maximum of $10,000. The 
consumer requests an additional $4,000 loan to be covered by the 
same insurance plan. Since the $4,000 loan exceeds, in part, the 
maximum amount of indebtedness that can be covered by the plan, the 
creditor may properly give the insurance cost disclosures on the 
$4,000 loan on a unit-cost basis.
* * * * *
    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 one of the options 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 or coverage may end due to nonpayment 
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 
premiums are paid monthly 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.
    12. Initial term; alternative. i. General. 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 indefinite or 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. Open-end plans. For open-end plans, a creditor also has the 
option of providing unit-cost disclosures on the basis of a period 
that is less than one year if the consumer has agreed to pay a 
premium or fee that is assessed periodically, for example monthly, 
but the consumer is under no obligation to continue the coverage.
    iii. Examples. To illustrate:
    A. A credit life insurance policy providing coverage for a 30-
year mortgage loan has an initial term of 30 years even though 
premiums are paid 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 226.5--General 
Disclosure Requirements, under Paragraph 5(b)(2)(ii) a new paragraph 4 
is added as follows:
* * * * *

Subpart B--Open-End Credit

* * * * *

Section 226.5--General Disclosure Requirements

* * * * *
    5(b) Time of disclosures.
* * * * *
    Paragraph 5(b)(2)(ii).
* * * * *
    4. Deferred payment transactions. See comment 7-3(iv).
* * * * *
    5. In Supplement I to Part 226, under Section 226.5a--Credit and 
Charge Card Applications and Solicitations, under Paragraph 5a(b)(1) 
Annual Percentage Rate, a new paragraph 7 is added to read as follows:
* * * * *

Section 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 may increase 
upon the occurrence of one or more specific events, such as a late 
payment or an extension of credit that exceeds the credit limit, the 
card issuer must disclose in the table the initial rate and the 
increased penalty rate that may apply. If the penalty rate is based 
on an index and an increased margin, the issuer must also disclose 
in the table the index and the margin. The issuer must also disclose 
the specific event or events that may result in imposing the 
increased rate, such as ``22% APR, if 60 days late.'' If the penalty 
rate cannot be determined at the time disclosures are given, the 
issuer must provide an explanation of the specific event or events 
that may result in imposing an increased rate. In describing the 
specific event or events that may result in an increased rate, 
issuers need not be as detailed as for the disclosures required 
under Sec. 226.6(a)(2). Alternatively, for issuers using a tabular 
format, the specific event or events may be located outside of the 
table if the conditions are noted with an asterisk or other means 
that direct the consumer to the explanation. At its option, the 
issuer may disclose the period for which the increased rate will 
remain in effect, such as ``until you make three timely payments.'' 
The issuer need not disclose an increased rate that is imposed when 
credit privileges are permanently terminated.
* * * * *
    6. In Supplement I to Part 226, under Section 226.6--Initial 
Disclosure Statement, under Paragraph 6(a)(2), a new paragraph 11 is 
added to read as follows:
* * * * *

Section 226.6--Initial Disclosure Statement

* * * * *
    6(a) Finance charge.
* * * * *

[[Page 16676]]

    Paragraph 6(a)(2).
* * * * *
    11. Increased penalty rates. If the initial rate may increase 
upon the occurrence of one or more specific events, such as a late 
payment or an extension of credit that exceeds the credit limit, the 
creditor must disclose the initial rate and the increased penalty 
rate that may apply. If the penalty rate is based on an index and an 
increased margin, the issuer must disclose the index and the margin. 
The creditor must also disclose the specific event or events that 
may result in the increased rate, such as ``22% APR, if 60 days 
late.'' If the penalty rate cannot be determined at the time 
disclosures are given, the creditor must provide an explanation of 
the specific event or events that may result in the increased rate. 
At the creditor's option, the creditor may disclose the period for 
which the increased rate will remain in effect, such as ``until you 
make three timely payments.'' The creditor need not disclose an 
increased rate that is imposed when credit privileges are 
permanently terminated.
* * * * *
    7. In Supplement I to Part 226, under Section 226.7--Periodic 
Statement, the following amendments are made:
    a. Under introductory text, a new paragraph 3 is added;
    b. Under Paragraph 7(d) Periodic rates, a new paragraph 7 is added;
    c. Under Paragraph 7(e) Balance on which finance charge computed, a 
new paragraph 10 is added;
    d. Under Paragraph 7(f) Amount of finance charge, a new paragraph 9 
is added; and
    e. Under Paragraph 7(j) Free-ride period, a new paragraph 2 is 
added.
    The additions read as follows:
* * * * *

Section 226.7--Periodic Statement

* * * * *
    3. Deferred payment transactions. Creditors offer a variety of 
payment plans for purchases that permit consumers to avoid finance 
charges if the purchase balance is paid in full by a certain date. 
The following provides guidance for one type of deferred payment 
plan where, for example, no finance charge is imposed on a $500 
purchase made in January if the $500 balance is paid by March 31.
    i. Periodic rates. Under Sec. 226.7(d), creditors must disclose 
each periodic rate that may be used to compute the finance charge. 
Under some plans with a deferred payment feature, if the deferred 
payment balance is not paid by the payment due date, finance charges 
attributable to periodic rates applicable to the billing cycles 
between the date of purchase and the payment due date (January 
through March in this example) may be imposed. Periodic rates that 
may apply to the deferred payment balance ($500 in this example) if 
the balance is not paid in full by the payment due date must appear 
on periodic statements for the billing cycles between the date of 
purchase and the payment due date. However, if the consumer does not 
pay the deferred payment balance by the due date, the creditor is 
not required to identify, on the periodic statement disclosing the 
finance charge for the deferred payment balance, periodic rates that 
have been disclosed in previous billing cycles between the date of 
purchase and the payment due date.
    ii. 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) (such as ``deferred payment balance''). During any 
billing cycle in which a periodic rate finance charge on the 
deferred payment balance is debited to the account, the balance 
disclosed under Sec. 226.7(e) should include the deferred payment 
balance for that billing cycle.
    iii. Amount of finance charge. Under Sec. 226.7(f), creditors 
must disclose finance charges imposed during a billing cycle. For 
some deferred payment 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 
otherwise 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'' (such as 
``contingent finance charge'' or ``deferred finance charge''). The 
finance charge on a deferred payment balance should be reflected on 
the periodic statement under Sec. 226.7(f) for the billing cycle in 
which the finance charge is debited to the account.
    iv. 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 four 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 that would normally be 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.
    C. The creditor could include the $500 purchase and its due date 
on each periodic statement sent during the deferred payment period 
(January, February, and March in this example).
    D. If the due date for the deferred payment balance is March 7 
(instead of March 31), the creditor could include the $500 purchase 
and its due date on the periodic statement reflecting activity for 
January and sent on February 1, the most recent statement sent at 
least 14 days prior to the due date.
* * * * *
    7(d) Periodic rates. 
* * * * *
    7. Deferred payment transactions. See comment 7-3(i).
    7(e) Balance on which finance charge computed. 
* * * * *
    10. Deferred payment transactions. See comment 7-3(ii).
    7(f) Amount of finance charge. 
* * * * *
    9. Deferred payment transactions. See comment 7-3(iii).
* * * * *
    7(j) Free-ride period. 
* * * * *
    2. Deferred payment transactions. See comment 7-3(iv).
* * * * *
    8. In Supplement I to Part 226, under Section 226.14--Determination 
of Annual Percentage Rate, under Paragraph 14(c) Annual percentage rate 
for periodic statements., paragraph 5. and paragraph 10. are revised to 
read as follows:
* * * * *

Section 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 consider 
each bona fide feature separately in the calculation of the 
denominator. A creditor has considerable flexibility in defining 
features for open-end plans, as long as the creditor has a 
reasonable

[[Page 16677]]

basis for the distinctions. 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 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 on the periodic statement as follows:
    A. If a finance charge imposed in the current billing cycle is 
attributable to periodic rates applicable to prior billing cycles 
(such as when a deferred payment balance was not paid in full by the 
payment due date and finance charges from the date of purchase are 
now being debited to the account, or when a cash advance 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), and 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. At 
the creditor's option, balances relating to the finance charge 
adjustment may be included in the denominator if permitted by the 
legal obligation, if it was impracticable to post the transaction in 
the previous cycle because of timing, or if the adjustment is 
covered by comment 14(c)10.11.B.
    B. If a finance charge debited to the account relates to 
activity for which a finance charge was debited to the account in a 
previous billing cycle, for example, if the finance charge relates 
to an adjustment such as the resolution of a billing error dispute, 
or an unintentional posting error, or a payment by check that was 
later returned unpaid for insufficient funds or other reasons, the 
creditor shall at its option:
    1. Calculate the annual percentage rate in accord with comment 
14(c)10.11.A, or
    2. Disclose the finance charge adjustment on the periodic 
statement and calculate the annual percentage rate for the current 
billing cycle without including the finance charge adjustment in the 
numerator and balances associated with the finance charge adjustment 
in the denominator.
* * * * *
    9. In Supplement I to Part 226, under Section 226.18--Content of 
Disclosures, the following amendments are made:
    a. Under Paragraph 18(c) Itemization of amount financed., paragraph 
2. is revised; and
    b. Under Paragraph 18(g) Payment schedule., the 18(g) heading is 
revised, and a new paragraph 4. is added.
    The revisions and addition read as follows:
* * * * *

Supbart C-Closed-End Credit

* * * * *

Section 226.18--Content of Disclosures

* * * * *
    18(c) Itemization of amount financed. 
* * * * *
    2. Additional information. Section 226.18(c) establishes only a 
minimum standard for the material to be included in the itemization 
of the amount financed. Creditors have considerable flexibility in 
revising or supplementing the information listed in Sec. 226.18(c) 
and shown in model form H-3, although no changes are required. The 
creditor may, for example, do one or more of the following:
    i. Include amounts that reflect payments not part of the amount 
financed. For example, escrow items and certain insurance premiums 
may be included, as discussed in the commentary to Sec. 226.18(g).
    ii. Organize the categories in any order. For example, the 
creditor may rearrange the terms in a mathematical progression that 
depicts the arithmetic relationship of the terms.
    iii. Add categories. For example, in a credit sale, the creditor 
may include the cash price and the downpayment. If the credit sale 
involves a trade-in of the consumer's car and an existing lien on 
that car exceeds the value of the trade-in amount, the creditor may 
disclose the consumer's trade-in value, the creditor's payoff of the 
existing lien, and the resulting additional amount financed.
    iv. Further itemize each category. For example, the amount paid 
directly to the consumer may be subdivided into the amount given by 
check and the amount credited to the consumer's savings account.
    v. Label categories with different language from that shown in 
Sec. 226.18(c). For example, an amount paid on the consumer's 
account may be revised to specifically identify the account as 
``your auto loan with us.''
    vi. Delete, leave blank, mark ``N/A'' or otherwise not 
inapplicable categories in the itemization. For example, in a credit 
sale with no prepaid finance charges or amounts paid to others, the 
amount financed may consist of only the cash price less downpayment. 
In this case, the itemization may be composed of only a single 
category and all other categories may be eliminated.
* * * * *
    18(g) Payment schedule. 
* * * * *
    4. Timing of payments. i. General rule. Section 226.18(g) 
requires creditors to disclose the timing of payments. To meet this 
requirement, creditors may list all of the payment due dates. They 
also have the option of specifying the ``period of payments'' 
scheduled to repay the obligation. As a general rule, creditors that 
choose this option must disclose the payment intervals or frequency, 
such as ``monthly''or ``bi-weekly,'' and 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.'' This 
information, when combined with the number of payments, is necessary 
to define the repayment period and enable a consumer to determine 
all of the payment due dates.
    ii. Exception. In a limited number of circumstances, the 
beginning-payment date is unknown and difficult to determine at the 
time disclosures are made. For example, a consumer may become 
obligated on a credit contract that contemplates the delayed 
disbursement of funds based on a contingent event, such as the 
completion of home repairs. Disclosures may also accompany loan 
checks that are sent by mail, in which case the initial disbursement 
and repayment dates are solely within the consumer's control. In 
such cases, if the beginning-payment date is unknown the creditor 
may use an estimated date and label the disclosure as an estimate 
pursuant to Sec. 226.17(c). Alternatively, the disclosure may refer 
to the occurrence of a particular event, for example, by disclosing 
that the beginning payment is due ``30 days after the first loan 
disbursement.'' This information also may be included with an 
estimated date to explain the basis for the creditor's estimate. See 
Comment 17(a)(1)-5(iii).
* * * * *
    10. In Supplement I to Part 226, under Section 226.32--Requirements 
for Certain Closed-End Home Mortgages, under Paragraph 32(a)(1)(ii), 
paragraph 2. is revised to read as follows:
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 226.32--Requirements for Certain Closed-End Home Mortgages

    32(a) Coverage. 
* * * * *
    Paragraph 32(a)(1)(ii). 
* * * * *
    2. Annual adjustment of $400 amount. A mortgage loan is covered 
by Sec. 226.32 if the total points and fees payable by the consumer 
at or before loan consummation exceed the greater of $400 or 8 
percent of the total loan amount. The $400 figure is adjusted 
annually by the Board; the adjusted figure becomes effective on 
January 1 of the following year. The Board will publish adjustments 
after the June figures become available each year. The adjustment 
for the upcoming year will be included in any proposed commentary 
published in the fall, and incorporated into the commentary the 
following spring. The adjusted figures are:
    i. For 1996, $412, reflecting a 3.00 percent increase in the 
CPI-U from June 1994 to June 1995, rounded to the nearest whole 
dollar.
    ii. For 1997, $424, reflecting a 2.9 percent increase in the 
CPI-U from June 1995 to June 1996, rounded to the nearest whole 
dollar.

[[Page 16678]]

    iii. For 1998, $435, reflecting a 2.5 percent increase in the 
CPI-U from June 1996 to June 1997, rounded to the nearest whole 
dollar.
* * * * *
    11. In Supplement I to Part 226, under 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:
* * * * *

Section 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, March 31, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-8829 Filed 4-3-98; 8:45 am]
BILLING CODE 6210-01-P