[Federal Register Volume 67, Number 68 (Tuesday, April 9, 2002)]
[Rules and Regulations]
[Pages 16980-16983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8373]


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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: Final rule; official staff interpretation.

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SUMMARY: The Board is publishing 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 revisions 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 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. The Board is also publishing 
technical corrections to the commentary and regulation.

DATES: The rule is effective April 9, 2002.

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 (15 U.S.C. 1640(f)). The commentary is a substitute for 
individual staff interpretations; it is updated periodically to address 
significant questions that arise.
    In December 2001, the Board published for comment proposed changes 
to the commentary (66 FR 64381, December 13, 2001). The Board received 
approximately 50 comment letters. About half of the comments were from 
financial institutions, other creditors, and their representatives. 
Most of the remaining comment letters were from consumer advocates. The 
comment letters focused mainly on the proposed comment concerning 
disclosures placed on the same document with the credit contract. 
Although commenters generally supported the proposal, most requested 
additional clarifications. Commenters also supported the proposed 
clarification concerning disclosure of insurance premiums, but were 
divided on the proposed comment concerning the definition of ``business 
day.''
    As discussed below, the commentary is being adopted substantially 
as proposed. In response to commenters' suggestions, some revisions 
have been made for clarity. In addition, several technical corrections 
are being made to the commentary and regulation. The

[[Page 16981]]

revisions represent a clarification of the existing law and do not 
impose new requirements.
    Generally, updates to the Board's staff commentary are effective 
upon publication. Consistent with the requirements of TILA section 
105(d), the Board typically provides an implementation period of six 
months or longer. During that period compliance with the published 
update is optional to afford creditors time to adjust their disclosure 
documents. The commentary revisions discussed below do not involve 
different disclosure requirements. Accordingly, the Board has 
determined that delayed implementation of the revisions is unnecessary.

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. For purposes of rescission, section 226.2(a)(6) 
defines ``business day'' to mean all calendar days except Sundays and 
the federal legal holidays listed in 5 U.S.C. 6103(a). The statute 
lists ten legal holidays; it identifies four holidays by a specific 
date (New Year's Day, January 1; Independence Day, July 4; Veterans 
Day, November 11; Christmas Day, December 25). Comment 2(a)(6)-2 was 
proposed to clarify that for these four holidays, only the date 
specified in the statute is considered a legal holiday for purposes of 
rescission. Thus, if the date specified in the statute falls on a 
weekend, the Friday before the specified date or the Monday following 
it are considered business days even if government offices are closed 
in observance of the holiday.
    Comments on this proposal were about evenly divided. Several 
industry trade associations supported the proposal. Some consumer 
advocates and a few commenters representing small financial 
institutions were concerned that confusion would result if weekdays 
observed as holidays are considered business days. Some commenters 
expressed concern that consumers might lose a day of their rescission 
period if they are unable to postmark or otherwise deliver their 
written notice of rescission on weekdays observed as holidays.
    The comment is being adopted as proposed. The comment does not 
represent a new rule, but merely restates and clarifies the requirement 
contained in section 226.2(a)(6) of the regulation. Consumers' ability 
to exercise their right to rescind is not affected because consumers 
can mail a notice of rescission on the observed holiday; the notice is 
not required to be postmarked or delivered on that day. Consumers are 
not likely to be confused because the rescission notice must indicate 
the specific date that the rescission period expires. See 
Sec. 226.15(b)(5), Sec. 226.23(b)(1)(v). A creditor may extend the 
rescission period at its option.

Section 226.4  Finance Charge

4(d) Insurance and Debt Cancellation Coverage
    Comment 4(d)-12(i) is adopted substantially as proposed. Under 
section 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. As revised, comment 4(d)-12(i) clarifies 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. The revision clarifies that this option applies when the 
consumer can cancel the coverage, whether or not the consumer has made 
an initial payment. Those that commented on this aspect of the proposal 
generally supported the change.
    Several industry commenters urged the Board to specify that unit-
cost disclosures would be permissible when premiums for coverage on 
closed-end loans are assessed periodically and the coverage can be 
cancelled. Regulation Z permits unit-cost disclosures in closed-end 
transactions only in limited circumstances. See Sec. 226.4(d)(1)(ii). 
Accordingly, the commenters' suggestion is beyond the scope of the 
proposed commentary revision.

Subpart B--Open-End Credit

Section 226.6  Initial Disclosure Statement

6(b) Other Charges
    The Board is adopting a technical amendment to comment 6(b)-1 to 
conform the citation in paragraph vi. to comment 4(a)-4, as amended (60 
FR 16771, April 3, 1995). No substantive change is intended.

Subpart C--Closed-End Credit

Section 226.17  General Disclosure Requirements

17(a) Form of Disclosures
    The Board is adopting a technical amendment to footnote 38 to 
conform the citation regarding variable-rate disclosures to 
Sec. 226.18(f)(1)(iv) of the regulation. No substantive change is 
intended.
17(b) Time of Disclosures
    The Board proposed to add comment 17(b)-3 to clarify how creditors 
that use a single document for the credit contract and TILA disclosures 
may satisfy the requirement that disclosures be provided to the 
consumer before consummation in a form the consumer may keep. For the 
reasons discussed below, the comment is being adopted substantially as 
proposed.
    The practice of putting TILA disclosures on the same document with 
the credit contract is common in connection with motor vehicle 
installment sales. Several recent court decisions have addressed 
whether creditors that use a single document must provide consumers 
with a separate copy of the disclosures to keep before providing a 
second copy that the consumer may execute to become obligated on the 
credit contract. The court decisions have not been uniform in their 
result.
    The comment clarifies that creditors satisfy TILA by giving a copy 
of the document containing the disclosures to the consumer to read and 
sign. Commenters generally agreed with this aspect of the proposal. In 
response to commenters' suggestions, the final comment has been revised 
to clarify that a creditor need not give the consumer two copies.
    Comment 17(b)-3 also clarifies that it is not sufficient for the 
creditor merely to show the document containing the TILA disclosures to 
the consumer before the consumer signs and becomes obligated. Rather, a 
creditor must give the disclosures to the consumer, so that the 
consumer is free to take possession of and review the disclosures in 
their entirety before signing.
    Commenters disagreed over the extent to which the comment should 
address the ability of a consumer to take physical possession of, and 
keep, the document containing the disclosures. Consumer advocates 
believe that a consumer should be able to take possession of and keep 
the disclosure whether or not the consumer consummates the transaction 
at that time. Some industry commenters

[[Page 16982]]

contended that the creditor need only present or show the document to 
the consumer.
    Comment 17(b)-3 is being adopted substantially as proposed. 
Allowing a consumer to take possession of and review TILA disclosures 
in their entirety--including any required information that may be on 
the reverse side or continued on the next page--is essential to 
meaningful disclosure and fulfillment of the regulation's requirement 
that disclosure be in a form the consumer may keep. Whether or not the 
consumer signs and becomes obligated, the consumer will have received a 
copy of the disclosures.
    Some industry commenters asserted that even though creditors must 
provide consumers written disclosures before consummation, there is no 
requirement that consumers receive a copy to keep at the time the 
credit transaction is consummated. These commenters suggest that 
creditors are required only to give consumers a copy to keep within a 
reasonable time after consummation. The Board believes such a result 
would be inconsistent with the regulation's requirement that consumers 
receive a copy, in a form they may keep, before consummation. Under the 
final comment as adopted, consumers must receive a copy to keep at the 
time they become obligated.
    A few commenters were concerned that the proposal could be 
interpreted to require a creditor to keep open indefinitely its offer 
of credit if a consumer decides not to sign and retains a copy of the 
unsigned document. The extent to which an offer of credit remains open 
is a matter of state law and is not determined by TILA.
    Several commenters questioned whether the language in the proposed 
comment allowing consumers to ``take possession'' of the disclosures 
was consistent with creditors' ability to provide the disclosures 
electronically if the consumer consents. Comment 17(b)-3 is not 
intended to affect the rules governing the use of electronic 
communications under Regulation Z.

Subpart E--Special Rules for Certain Home Mortgage Transactions

Section 226.32  Requirements for Certain Closed-end Home Mortgages

32(c) Disclosures
    The Board is republishing comment 32(c)(3)-3 in its entirety, as 
amended in December 2001, to reinsert language that was inadvertently 
deleted due to a technical error (66 FR 65604, December 20, 2001). A 
technical amendment is also made to comment 32(c)(4)-1 to conform a 
citation to section 226.19(b)(2), as amended. No substantive changes 
are intended.

List of Subjects in 12 CFR Part 226

    Consumer protection, Disclosures, Federal Reserve System, Truth in 
lending.

Text of Revisions

    Comments are numbered to comply with Federal Register publication 
rules. For the reasons set forth in the preamble, the Board amends 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).


Sec. 226.17  [Amended]

    2. Section 226.17, in paragraph (a)(1), footnote 38, is amended by 
removing ``Sec. 226.18(f)(4)'' and adding ``Sec. 226.18(f)(1)(iv)'' in 
its place.
    3. 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 226.6--Initial Disclosure Requirements, under 
Paragraph 6(b), paragraph 1.vi. is amended by removing ``comment 4(a)-
5'' and adding ``comment 4(a)-4'' in its place.
    d. Under Section 226.17--General Disclosure Requirements, under 
17(b) Time of Disclosures, a new paragraph 3. is added.
    e. Under Section 226.32--Requirements for Certain Closed-End Home 
Mortgages, under Paragraph 32(c)(3), paragraph 1. is revised; and under 
Paragraph 32(c)(4), paragraph 1. is amended by removing 
``Sec. 226.19(b)(2)(x)'' and adding Sec. 226.19(b)(2)(viii)(B)'' in its 
place.

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; Veterans Day, November 11; and Christmas Day, December 
25. When one of these holidays (July 4, for example) falls on a 
Saturday, federal offices and other entities might observe the 
holiday on the preceding Friday (July 3). The observed holiday (in 
the example, 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.
* * * * *

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, whether or not the consumer has made an 
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. Disclosures may be based on the initial term, 
but the creditor also 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). Sometimes the disclosures are placed on 
the

[[Page 16983]]

same document with the credit contract. Creditors are not required 
to give the consumer two separate copies of the document before 
consummation, one for the consumer to keep and a second copy for the 
consumer to execute. The disclosure requirement is satisfied if the 
creditor gives a copy of the document containing the unexecuted 
credit contract and disclosures to the consumer to read and sign; 
and the consumer receives a copy to keep at the time the consumer 
becomes obligated. It is not sufficient for the creditor merely to 
show the consumer the document containing the disclosures before the 
consumer signs and becomes obligated. The consumer must be free to 
take possession of and review the document in its entirety before 
signing.
    i. Example. To illustrate:
    A. A creditor gives a consumer a multiple-copy form containing a 
credit agreement and TILA disclosures. The consumer reviews and 
signs the form and returns it to the creditor, who separates the 
copies and gives one copy to the consumer to keep. The creditor has 
satisfied the disclosure requirement.
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Sec. 226.32--Requirements for Certain Closed-End Home Mortgages

* * * * *
    Paragraph 32(c)(3) Regular payment; balloon payment.
    1. General. The regular payment is the amount due from the 
borrower at regular intervals, such as monthly, bimonthly, 
quarterly, or annually. There must be at least two payments, and the 
payments must be in an amount and at such intervals that they fully 
amortize the amount owed. In disclosing the regular payment, 
creditors may rely on the rules set forth in Sec. 226.18(g); 
however, the amounts for voluntary items, such as credit life 
insurance, may be included in the regular payment disclosure only if 
the consumer has previously agreed to the amounts.
    i. If the loan has more than one payment level, the regular 
payment for each level must be disclosed. For example:
    A. In a 30-year graduated payment mortgage where there will be 
payments of $300 for the first 120 months, $400 for the next 120 
months, and $500 for the last 120 months, each payment amount must 
be disclosed, along with the length of time that the payment will be 
in effect.
    B. If interest and principal are paid at different times, the 
regular amount for each must be disclosed.
    C. In discounted or premium variable-rate transactions where the 
creditor sets the initial interest rate and later rate adjustments 
are determined by an index or formula, the creditor must disclose 
both the initial payment based on the discount or premium and the 
payment that will be in effect thereafter. Additional explanatory 
material which does not detract from the required disclosures may 
accompany the disclosed amounts. For example, if a monthly payment 
is $250 for the first six months and then increases based on an 
index and margin, the creditor could use language such as the 
following: ``Your regular monthly payment will be $250 for six 
months. After six months your regular monthly payment will be based 
on an index and margin, which currently would make your payment 
$350. Your actual payment at that time may be higher or lower.''
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, acting through the Director of the Division of Consumer and 
Community Affairs and the Secretary of the Board under delegated 
authority, April 2, 2002.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-8373 Filed 4-8-02; 8:45 am]
BILLING CODE 6210-01-P