[Federal Register Volume 66, Number 240 (Thursday, December 13, 2001)]
[Proposed Rules]
[Pages 64381-64383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30781]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / 
Proposed Rules  

[[Page 64381]]



FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1118]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; official staff commentary.

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SUMMARY: The Board is publishing for comment proposed revisions to the 
official staff commentary to Regulation Z, which implements the Truth 
in Lending Act. The commentary applies and interprets the requirements 
of Regulation Z. The proposed update would clarify how creditors that 
place Truth in Lending Act disclosures on the same document with the 
credit contract may satisfy the requirement for providing the 
disclosures in a form the consumer may keep before consummation. In 
addition, the proposed revisions provide guidance on disclosing costs 
for certain credit insurance policies and on the definition of 
``business day'' for purposes of the right to rescind certain home-
secured loans.

DATES: Comments must be received on or before February 1, 2002.

ADDRESSES: Comments should refer to Docket No. R-1118 and should be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551, or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson may 
also be delivered, between 8:45 a.m. and 5:15 p.m., to the Board's mail 
facility in the West Courtyard, located on 21st Street between 
Constitution Avenue and C Street, NW. Members of the public may inspect 
comments in Room MP-500 of the Martin Building between 9 a.m. and 5 
p.m. on weekdays pursuant to Sec. 261.12, except as provided in 
Sec. 261.14, of the Board's Rules Regarding Availability of 
Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: David A. Stein, Senior Attorney, or 
Dan S. Sokolov, 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, contact (202) 263-4869.

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.
    TILA 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. Good faith compliance 
with the commentary affords protection from liability under section 
130(f) of TILA. The commentary is a substitute for individual staff 
interpretations; it is updated periodically to address significant 
questions that arise. The Board expects to adopt final revisions to the 
commentary in March 2002; to the extent the revisions impose new 
requirements on creditors, compliance would be optional until October 
1, 2002, 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)(6) Business Day

    Generally, when consumers have a right to rescind a home-secured 
loan, they may exercise the right until midnight of the third business 
day following consummation or the delivery of certain disclosures, 
whichever occurs last. Comment 2(a)(6)-2 provides that for purposes of 
rescission, ``business day'' means all calendar days except Sundays and 
the federal legal holidays listed in 5 U.S.C. 6103(a). Four legal 
holidays are identified in that statute by a specific date. 
Independence Day, July 4, is one example. The comment would be revised 
to clarify that only the date specified in the statute is considered a 
legal holiday for purposes of rescission. The proposed comment 
identifies the four legal holidays in 5 U.S.C. 6103(a) that are defined 
by a specific date, and provides an example to aid in compliance. The 
comment also would be amended to include a cross-reference to comment 
31(c)(1)-1, which states that creditors may rely on the definition of 
``business day'' used for the rescission rule for purposes of complying 
with the timing requirements in furnishing disclosures for high-cost 
loans covered by Sec. 226.32.
Section 226.4--Finance Charge

4(d) Insurance and Debt Cancellation Coverage

    Under Sec. 226.4(d), amounts paid for credit 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 provides that the initial term 
is based on the period for which the insurer or creditor is initially 
obligated to provide coverage. Comment 4(d)-12 provides that creditors 
have the option of providing disclosures on the basis of one year of 
coverage, where the fee or premium for the coverage is assessed 
periodically and the consumer is under no obligation to continue the 
coverage after making the initial payment. Comment 4(d)-12 would be 
revised to clarify that this option applies even if the consumer can 
cancel the

[[Page 64382]]

coverage prior to making the initial payment.

Subpart C--Closed-End Credit

Section 226.17--General Disclosure Requirements

17(b) Time of Disclosures

    Creditors must give the required disclosures to the consumer in 
writing, in a form that the consumer may keep, before consummation of 
the transaction. See Sec. 226.17(a)(1) and (b). Comment 17(b)-3 would 
be added to clarify how creditors satisfy this timing requirement when 
TILA disclosures are placed on the same document with the credit 
contract, as permitted under comment 17(a)(1)-3.
    Questions have been raised about whether creditors must provide 
consumers with a separate copy of the document to keep before providing 
a second copy that the consumer may execute to become obligated on the 
credit contract. The proposed comment would clarify that creditors are 
not required to provide two separate copies to the consumer. A creditor 
satisfies the timing requirements by giving the consumer one copy of 
the unexecuted credit contract containing the disclosures to read and 
sign. The proposed comment would also clarify that it is not 
sufficient, however, if the document containing the TILA disclosures is 
merely shown to the consumer (and not given to the consumer) before the 
consumer signs and becomes obligated.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-1118, and, when 
possible, should use a standard typeface with a font size of 10 or 12. 
This will enable the Board to convert text submitted in paper form 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. Comments may also be mailed electronically to 
[email protected].

IV. Solicitation of Comments Regarding the Use of ``Plain 
Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the 
Board to use ``plain language'' in all proposed and final rules 
published after January 1, 2000. The Board invites comments on whether 
the proposed commentary is clearly stated and effectively organized, 
and how the Board might make the commentary easier to understand.

List of Subjects in 12 CFR Part 226

    Consumer protection, Disclosures, Federal Reserve System, 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:
    a. Under Section 226.2--Definitions and Rules of Construction, 
under 2(a)(6) Business Day, paragraph 2. is revised.
    b. Under Section 226.4--Finance Charge, under 4(d) Insurance and 
Debt Cancellation Coverage, paragraph 12. is revised.
    c. Under Section 226.17--General Disclosure Requirements, under 
17(b) Time of Disclosures, a new paragraph 3. is added.

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *

Sec. 226.2--Definition and Rules of Construction

* * * * *
    2(a)(6) Business day.
* * * * *
    2. Rescission rule. A more precise rule for what is a business day 
(all calendar days except Sundays and the federal legal holidays listed 
in 5 U.S.C. 6103(a)) applies when the right of rescission or 
mortgages subject to Sec. 226.32 are involved. See also comment 
31(c)(1)-1. Four federal legal holidays are identified in 5 U.S.C. 
6103(a) by a specific date: New Year's Day, January 1; Independence 
Day, July 4; Veteran's Day, November 11; and Christmas Day, December 
25. When one of these holidays falls on a Saturday, July 4 for example, 
federal offices and other entities may observe the holiday on the 
preceding Friday, July 3. The observed holiday, July 3, is a business 
day for purposes of rescission or the delivery of disclosures for 
certain high-cost mortgages covered by Sec. 226.32 [is 
involved].
* * * * *

Sec. 226.4--Finance Charge

* * * * *

4(d) Insurance and debt cancellation coverage.

* * * * *
    12. Initial term; alternative. i. General. A creditor has the 
option of providing cost disclosures on the basis of an 
assumed initial term 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 consummation [making the initial 
payment].
    ii. Open-end plans. For open-end plans, a creditor also has the 
option of providing unit-cost disclosure 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 consummation [making the initial payment]. 
The creditor has the option of making disclosures on the basis of 
coverage for an assumed initial term of one year.
* * * * *

Subpart C--Closed-End Credit

* * * * *

Sec. 226.17--General Disclosure Requirements

* * * * *
    17(b) Time of disclosures.
* * * * *
    3. Disclosures provided on credit contracts. Creditors 
must give the required disclosures to the consumer in writing, in a 
form that the consumer may keep, before consummation of the 
transaction. See Sec. 226.17(a)(1) and (b).

[[Page 64383]]

Sometimes the disclosures are placed on the same document with the 
credit contract, as permitted under comment 17(a)(1)-3. In such cases, 
the timing requirement is satisfied if the creditor gives a copy of the 
document containing the unexecuted credit contract and the disclosures 
to the consumer to read and sign, and the consumer is free to take 
possession of and review the document in its entirety before signing. 
It is not sufficient, however, if the document containing the 
disclosures is merely shown to the consumer before the consumer signs 
and becomes obligated; the creditor must give the document to the 
consumer. If after receiving the document, the consumer signs it and 
becomes obligated, the consumer may return it to the creditor to 
execute or process, provided the consumer is also given a copy at that 
time to keep.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, acting through the Director of the Division of Consumer and 
Community Affairs under delegated authority, December 7, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-30781 Filed 12-12-01; 8:45 am]
BILLING CODE 6210-01-P