[Federal Register Volume 64, Number 214 (Friday, November 5, 1999)]
[Proposed Rules]
[Pages 60368-60370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29004]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1050]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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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 short-term cash advances commonly called 
``payday loans'' and includes technical revisions.

DATES: Comments must be received on or before January 10, 2000.

ADDRESSES: Comments, which should refer to Docket No. R-1050, may be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments addressed to Ms. Johnson may also be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. 
weekdays, and to the security control room at all other times. The mail 
room and the security control room, both in the Board's Eccles 
Building, are accessible from the courtyard entrance on 20th Street 
between Constitution Avenue and C Street, N.W. Comments may be 
inspected in room MP-500 in the Board's Martin Building between 9:00 
a.m. and 5:00 p.m., pursuant to the Board's Rules Regarding the 
Availability of Information, 12 CFR part 261.

FOR FURTHER INFORMATION CONTACT: Natalie E. Taylor, Michael E. Hentrel, 
or David A. Stein, Staff Attorneys; 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, contact 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. Uniformity in creditors' disclosures is 
intended to assist consumers in comparison shopping for credit. TILA 
requires additional disclosures for loans secured by consumers' homes 
and permits consumers to rescind certain transactions that involve 
their principal dwelling. In addition, the act regulates certain 
practices of creditors. 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 
2000; to the extent the revisions impose new requirements on creditors, 
compliance would be optional until October 1, 2000, 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)(14) Credit

    The Board has been asked to clarify whether ``payday loans''--also 
known as ``cash advance loans,'' ``check advance loans,'' and ``post-
dated check loans''--constitute credit for purposes of TILA. Typically 
in such transactions, a short-term cash advance is made to a consumer 
in exchange for the consumer's personal check in the

[[Page 60369]]

amount of the advance, plus a fee; sometimes the advance is made in 
exchange for the consumer's authorization to debit electronically the 
consumer's checking account in the amount of the advance, plus a fee. 
The transaction occurs with knowledge by both parties that the amount 
advanced is not, or may not be, available from the consumer's checking 
account at the time of the transaction. Thus, the parties agree that 
the consumer's check will not be cashed or the account electronically 
debited until a designated future date. On that date, the consumer 
usually has the option to repay the obligation by allowing the party 
advancing the funds to cash the check or electronically debit the 
consumer's checking account, or by providing cash or some other means 
of payment. The consumer may also have the option to defer repayment 
beyond the initial period by paying an additional fee.
    Section 226.2(a)(14) defines credit as the right to defer the 
payment of debt or the right to incur debt and defer its payment. In 
the case of payday loans, this includes the agreement to defer cashing 
the check or debiting the consumer's account. Comment 2(a)(14)-2 would 
be added to clarify that payday loan transactions constitute credit for 
purposes of TILA. Persons that regularly extend payday loans and impose 
a finance charge are required to provide TILA disclosures to consumers.

Subpart C--Closed-End Credit

Section 226.19--Certain Residential Mortgage and Variable-rate 
Transactions
19(b) Certain variable-rate transactions
    In December 1997, the Board revised the requirements in 
Sec. 226.19(b)(2) concerning the disclosure of a fifteen-year 
historical example of interest rates and payments. (62 FR 63441, 
December 1, 1997.) The amendments to Sec. 226.19(b)(2) provide 
creditors with the option of giving a statement that the periodic 
payments may increase or decrease substantially together with the 
maximum interest rate and payment amount for a $10,000 loan amount in 
lieu of having to give the fifteen-year historical example.
    The Board proposes technical amendments to comment 19(b)-5 to 
conform the citations in the comment to Sec. 226.19(b)(2), as amended. 
No substantive change is intended.

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)

    TILA imposes additional disclosure requirements and substantive 
limitations on certain closed-end mortgage loans bearing rates or fees 
above a certain percentage or amount. See Sec. 226.32. 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 amount for 2000 ($451) is published 
elsewhere in today's Federal Register and would be added to comment 
32(a)(1)(ii)-2.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-1050, and, when 
possible, should use a standard typeface with a font size of 10 or 12. 
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 computer diskettes 
in any IBM-compatible DOS-or Windows-based format.

List of Subjects in 12 CFR Part 226

    Advertising, 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 
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, under 2(a)(14) Credit., a new paragraph 2. 
would be added to read as follows:
    Supplement I to Part 226--Official Staff Interpretations
* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

  2(a) Definitions.
* * * * *
  2(a)(14) Credit.
* * * * *
     2. Payday loans. Credit includes a payday loan 
transaction in which a short-term cash advance is made to a consumer 
in exchange for the consumer's personal check, in the amount of the 
advance plus a fee, or in exchange for the consumer's authorization 
to debit the consumer's checking account, for the amount of the 
advance plus a fee. In both instances the parties agree that the 
check will not be cashed, or that the consumer's checking account 
will not be debited, until a designated future date.

    3. In Supplement I to Part 226, under Section 226.19--Certain 
Residential Mortgage and Variable-Rate Transactions, under 19(b) 
Certain variable-rate transactions, paragraph 5. would be revised to 
read as follows:
* * * * *

Subpart C--Closed-End Credit

* * * * *

Section 226.19--Certain Residential Mortgage and Variable-Rate 
Transactions

* * * * *
  19(b) Certain variable-rate transactions.
* * * * *
    5. Examples of variable-rate transactions. The following 
transactions, if they have a term greater than one year and are 
secured by the consumer's principal dwelling, constitute variable-
rate transactions subject to the disclosure requirements of 
Sec. 226.19(b).
    i. Renewable balloon-payment instruments where the creditor is 
both unconditionally obligated to renew the balloon-payment loan at 
the consumer's option (or is obligated to renew subject to 
conditions within the consumer's control) and has the option of 
increasing the interest rate at the time of renewal. (See comment 
17(c)(1)-11 for a discussion of conditions within a consumer's 
control in connection with renewable balloon-payment loans.)
    ii. Preferred-rate loans where the terms of the legal obligation 
provide that the initial underlying rate is fixed but will increase 
upon the occurrence of some event, such as an employee leaving the 
employ of the creditor, and the note reflects the preferred rate. 
The disclosures under Sec. 226.19(b)(1) and 226.19(b)(2)(v), (viii), 
(ix), [(x) and (xiii)] and (xii) are not 
applicable to such loans.
    iii. ``Price level adjusted mortgages'' or other indexed 
mortgages that have a fixed rate of interest but provide for 
periodic adjustments to payments and the loan balance to reflect 
changes in an index measuring prices or inflation. The disclosures 
under Sec. 226.19(b)(1) are not applicable to such loans, nor are 
the following provisions to the extent they relate to the 
determination of the interest rate by

[[Page 60370]]

the addition of a margin, changes in the interest-rate, or interest-
rate discounts: Section 226.19(b)(2)(i), (iii), (iv), (v), (vi), 
(vii), (viii), and (ix)[, and (x)]. (See comments 
20(c)-2 and 30-1 regarding the inapplicability of variable-rate 
adjustment notices and interest-rate limitations to price-level-
adjusted or similar mortgages.)
    iv. Graduated-payment mortgages and step-rate transactions 
without a variable-rate feature are not considered variable-rate 
transactions.
* * * * *
    4. In Supplement I to Part 226, under Section 226.32--Requirements 
for Certain Closed-End Home Mortgages, under 32(a)(1)(ii), paragraph 
2.v. would be added 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. 
* * *
* * * * *
    v. For 2000, $451, reflecting a 2.3 percent increase in 
the CPI-U from June 1998 to June 1999, rounded to the nearest whole 
dollar.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, acting through the Secretary of the Board under delegated 
authority, November 1, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-29004 Filed 11-4-99; 8:45 am]
BILLING CODE 6210-01-P