[Federal Register Volume 67, Number 235 (Friday, December 6, 2002)]
[Proposed Rules]
[Pages 72618-72622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30545]


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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. 67, No. 235 / Friday, December 6, 2002 / 
Proposed Rules  

[[Page 72618]]



FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1136]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; official staff commentary.

-----------------------------------------------------------------------

SUMMARY: This proposal would revise the official staff commentary to 
Regulation Z, which implements the Truth in Lending Act. The commentary 
interprets the requirements of Regulation Z. The proposed update would 
clarify the status of certain credit card-related fees. It also 
discusses the rules for replacing an accepted credit card with one or 
more cards; the treatment of private mortgage insurance payments in 
disclosing the payment schedule; and the selection of Treasury security 
yields for the purpose of determining whether a mortgage loan is 
covered by provisions in Regulation Z that implement the Home Ownership 
and Equity Protection Act.

DATES: Comments must be received on or before January 27, 2003.

ADDRESSES: Comments should refer to Docket No. R-1136 and should be 
mailed to 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: Krista P. DeLargy or Dan S. Sokolov, 
Attorneys, or Daniel G. Lonergan, Counsel, 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 (APR). 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 has delegated to officials in the Board's Division of 
Consumer and Community Affairs authority to issue official staff 
interpretations of Regulation Z. These interpretations, except in 
unusual circumstances, are incorporated in the official staff 
commentary (12 CFR part 226 (Supp. I)), which provides guidance to 
creditors in applying the regulation to specific transactions. Good 
faith compliance with the commentary affords creditors 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.
    Comments on all aspects of the proposed revision to the official 
staff commentary are invited. It is expected that final revisions to 
the commentary will be adopted in March 2003. To the extent the 
revisions impose new requirements on creditors, the effective date for 
mandatory compliance would be October 1, 2003. See TILA section 105(d).

II. Proposed Revisions

Subpart B--Open-End Credit

Section 226.6--Initial Disclosure Statement

6(b) Other Charges
    Representatives of the credit card industry have requested official 
guidance on the status under Regulation Z of two fees charged to 
consumers in connection with open-end credit plans--a fee imposed when 
a consumer requests that a particular payment on the credit plan be 
expedited and a fee imposed when a consumer requests expedited mailing 
of a credit card. Because the proper characterization of these fees 
under TILA previously has been unclear, the proposal would revise 
comment 6(b) to provide guidance on how these fees should be treated 
for purposes of Regulation Z. For purposes of the proposal, 
``expedited'' refers to any form of payment or delivery other than the 
standard mail service generally made available to the creditor's 
customers.
    Under Regulation Z, creditors must disclose fees that are ``finance 
charges,'' which are defined as ``charges payable directly or 
indirectly by the consumer and imposed directly or indirectly by the 
creditor as an incident to or a condition of the extension of credit.'' 
For open-end credit plans, fees that are not finance charges must be 
disclosed as ``other charges'' if they are significant fees related to 
the plan. Regulation Z does not require disclosure of charges that are 
not considered finance charges or ``other charges.''
    Card issuers increasingly have been making expedited payment 
services available to consumers. The expedited payment service provides 
consumers an alternative to mailing a payment that might not reach the 
card issuer by the due date. To avoid being assessed a late payment 
fee, the consumer requests expedited payment service for a lesser 
charge. The service is typically an electronic funds transfer or a 
draft on the customer's checking account.
    A fee charged for expediting a consumer's payment would not appear 
to be incidental to the extension of credit if this payment method is 
not established as the regular payment method for the account. 
Accordingly, the proposal indicates that an expedited payment charge 
under these

[[Page 72619]]

circumstances would not be a finance charge.
    Comment 6(b)-1 provides examples of ``other charges'' that must be 
disclosed to consumers under Regulation Z. The proposal would revise 
comment 6(b)-1 to indicate that a card issuer's fee for expediting a 
particular payment should be disclosed as an ``other charge'' provided 
that the method of payment was not authorized in advance as the regular 
payment method for the account. The charge appears to be a significant 
charge related to the credit plan because the fee is for a service 
provided in connection with a consumer's payment on the account and 
because typically the fee is paid to enable the consumer to avoid a 
late payment fee that is also considered to be an ``other charge'' for 
purposes of Regulation Z. Moreover, both expedited payment fees and 
late payment fees might be imposed on many consumers participating in a 
credit card plan and, for some consumers, might be regularly occurring 
charges.
    The proposal would also amend comment 6(b)-2, which provides 
examples of charges that are not ``other charges'' under Regulation Z, 
to indicate that a card issuer's fee for expediting delivery of a 
credit card is not required to be disclosed either as a finance charge 
or as an ``other charge'' under the regulation. An expedited delivery 
fee does not appear to be a finance charge because it would not be 
incidental to the extension of credit where the card is also available 
to consumers by standard mail service without paying the fee.
    Moreover, the charge would not appear to be an ``other charge'' 
under Regulation Z. The service does not appear to be a significant 
part of the credit plan because the card is also available without 
paying the fee and because the service is requested by consumers only 
occasionally, such as when a consumer seeks to replace a lost or stolen 
credit card and requests expedited mailing.
    Staff notes that where a creditor merely passes through a third-
party delivery charge, such as an express courier fee, and the creditor 
does not require the use of the service or retain any portion of the 
fee, the fee is not a finance charge or ``other charge'' that must be 
disclosed under Regulation Z.

Section 226.9--Subsequent Disclosure Requirements

9(c) Change in Terms
    Comment 9(c)(2)-1 would be revised to indicate that a change-in-
terms notice is not required when the change involves the fee charged 
for expediting a consumer's payment. Card issuers generally inform 
consumers of the amount of the specific charge at the time the consumer 
agrees to the expedited service. As noted above, consumers typically 
request the service and pay the expedited payment fee to avoid a late 
fee. Accordingly, the proposed comment would treat expedited payment 
fees that are disclosed as ``other charges,'' consistent with the 
treatment of fees for unanticipated late payment, which also do not 
require a change-in-terms notice.

Section 226.12--Special Credit Card Provisions

12(a) Issuance of Credit Cards
    Section 132 of TILA, which is implemented by Sec.  226.12(a) of 
Regulation Z, generally prohibits creditors from issuing credit cards 
except in response to requests or applications for cards. Section 132 
explicitly exempts from this prohibition credit cards issued as 
renewals of or substitutes for previously accepted credit cards. 
Existing comment 12(a)(2)-5, the ``one-for-one rule,'' interprets these 
statutory and regulatory provisions by providing that, in general, a 
creditor may not issue more than one credit card as a renewal of or 
substitute for an accepted card (as that term is defined under 
Regulation Z). The existing staff commentary, however, does not 
construe Section 132 as requiring one-for-one replacement in all 
circumstances: existing comment 12(a)(2)-6 provides that an accepted 
credit/debit card may be replaced by a credit card, and a second card 
with only debit functions (with or without overdraft capability), since 
debit cards may be issued on an unsolicited basis under the Electronic 
Fund Transfer Act and the Board's Regulation E.
    Advances in the technology used to send transaction information 
have allowed card issuers to issue credit cards in different sizes and 
formats. These changes may generally enhance consumer convenience. A 
merchant's equipment, however, may determine whether a consumer can use 
a particular credit card. Certain cards that are reduced in size can be 
used only if they are swiped through a card reader, while some 
merchants and automated teller machines use equipment that requires 
insertion of a ``full-size'' credit card. Accordingly, some card 
issuers have requested guidance on the issuance of cards using new 
technologies, which are intended to supplement but not necessarily 
replace a cardholder's existing card.
    To address these developments, comment 12(a)(2)-6 would be revised 
consistent with the statute and legislative purpose, to indicate that 
card issuers may replace an accepted card with more than one renewal or 
substitute card on the same account where the consumer's total 
liability for unauthorized use with respect to the account does not 
increase. In addition, any replacement cards must access only the 
account of the accepted card and all cards issued under that account 
must be governed by the same terms and conditions.
    Section 132 was one of several credit card provisions added to TILA 
in 1970, in response to the then-existing practice of mailing 
unsolicited credit cards to consumers. Proponents of these provisions 
asserted that unsolicited credit card mailings encouraged some 
consumers to spend beyond their means, were inconvenient to dispose of, 
were too easily stolen in the mails, and were a source of anxiety for 
consumers worried about theft and their own personal liability for 
unauthorized use. The legislative history also reflects concern about 
the resulting inconvenience to consumers of refuting unwarranted claims 
of liability.
    Under section 133 of TILA, consumers have no liability for 
unauthorized use of a credit card unless they have accepted the card. A 
credit card issued as a renewal or substitution is not deemed to be 
accepted until it is received by the cardholder. See 12 CFR 226.12(a), 
footnote 21. To avoid monetary losses from the theft of credit cards 
sent though the mail, card issuers generally send cards that are not 
activated and employ security procedures requiring the consumer to 
verify receipt of the card. These industry practices should be as 
effective when replacing an accepted card with one or more renewal or 
substitute cards.
    The proposed commentary revision is limited to interpreting the 
provision in section 132 of TILA that allows an unrequested card to be 
sent as a renewal of or substitution for an accepted card. Comment is 
also solicited on whether it would be appropriate to apply this view to 
additional cards issued for an existing account on the conditions 
specified in the proposal even when there is no renewal of or 
substitution for the cardholder's existing card.

Subpart C--Closed-End Credit

Section 226.18--Content of Disclosures

18(g) Payment Schedule
    The disclosures for closed-end loans must include the number, 
amounts, and timing of payments scheduled to repay

[[Page 72620]]

the obligation. Premiums paid for insurance that protects the creditor 
against the consumer's default or other credit loss (sometimes referred 
to as private mortgage insurance) are finance charges that must be 
included in the payment schedule. Under the Homeowners Protection Act 
of 1998, such insurance generally must terminate before the term of the 
loan expires, and the payment schedule should reflect this fact. 
Comment 18(g)-5 would be revised to provide additional guidance on how 
mortgage insurance premiums should be disclosed on the payment schedule 
when some premiums are collected in advance and escrowed at the time 
the loan is closed. The proposed comment provides an example to 
facilitate compliance.

Section 226.19--Certain Residential Mortgage Transactions

19(b) Certain Variable-Rate Transactions
    A technical amendment to comment 19(b)(1)-2 is proposed to change 
the citation to comment 19(b)-5, as amended (65 FR 17129, March 31, 
2000). No substantive change is intended.

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

32(a) Coverage
    Section 226.32 implements the Home Ownership and Equity Protection 
Act of 1994 (HOEPA), which is part of the Truth in Lending Act. HOEPA 
requires additional disclosures and provides substantive protections 
for certain home-secured loans carrying rates or fees above a specified 
amount. HOEPA's rate-based trigger covers mortgage loans where the 
annual percentage rate (APR) on the loan exceeds the yield on Treasury 
securities with a comparable maturity by a specified number of 
percentage points (8 for first-lien loans, 10 for subordinate-lien 
loans). For purposes of determining coverage under HOEPA, the loan's 
APR is compared with the yield on Treasury securities as of the 15th 
day of the month immediately preceding the month of application. 
Comment 32(a)(1)(i)-4 would be revised to clarify how creditors should 
determine the applicable yield on Treasury securities.
    Currently, comment 32(a)(1)(i)-4 provides that creditors may use 
the actual results of Treasury auctions or the Board's ``Selected 
Interest Rates'' (statistical release H-15), which is published daily 
and lists the yield on actively traded issues adjusted to constant 
maturities. The H-15 is posted on the Board's Internet Web site at: 
http://www.federalreserve.gov/releases/h15/update. The comment would be 
revised to respond to requests for additional guidance on using the H-
15. In addition, for the reasons discussed below, the option to use 
actual auction results would be eliminated.
    H-15 constant maturities. The H-15 lists yields for various 
instruments. Creditors that rely on the H-15 have asked for additional 
guidance on the appropriate instrument to use when the loan maturity is 
comparable with more than one instrument. For example, the H-15 lists 
yields for 6-month Treasury bills as well as for actively traded 
Treasury securities adjusted to constant maturities of 6 months. To 
ease compliance and aid in uniformity, the proposed comment would 
clarify that creditors should use the Treasury constant maturities 
listed on the H-15.
    Loans with 30-year maturities. Creditors relying on the H-15 have 
requested guidance on which Treasury security is deemed to have a 
maturity comparable with 30-year mortgage loans. The Department of the 
Treasury recently ceased auctioning 30-year securities; the H-15 
currently lists a long-term average of the yields for Treasury 
securities with terms to maturity of 25 years and over, and refers to 
Treasury's formula for estimating a 30-year yield.
    The proposed comment would clarify that for purposes of HOEPA's 
rate-based trigger, creditors should compare the APR on 30-year loans 
(and other loans longer than 20 years) with the yield for a 20-year 
constant maturity, and not with the average long-term yield for 
maturities over 25 years or an estimate for a 30-year yield.
    Actual auction results. The proposal would revise comment 
32(a)(1)(i)-4 to eliminate the option to use yields of actual auction 
results. Currently, the longest maturity for auctioned Treasury 
securities is 10 years, while home-secured loans commonly have terms of 
15 years or more. Further, Treasury auctions are held infrequently. The 
H-15 is updated daily, which affords a more precise determination of 
the yield for Treasury securities as of the fifteenth day of the month 
preceding the application, the date mandated by HOEPA. Requiring all 
creditors to use the H-15 would ensure uniform application of HOEPA by 
eliminating the possibility that some creditors could use yields from 
auctions held several months before the loan application, which might 
differ significantly from the yields updated daily on the H-15. Many 
creditors already rely on the H-15 rather than actual auction results, 
and the revision is not expected to significantly affect creditor 
practices.
Additional Issue
    Some financial institutions offer a service to transaction account 
customers that is commonly referred to as ``bounce protection.'' 
Institutions apparently provide ``bounce protection'' in lieu of 
establishing an overdraft line of credit for the customer. The service 
varies among institutions and questions have been raised about whether 
there are circumstances in which the service might be covered by TILA 
and Regulation Z.
    Although the institution generally reserves the right not to pay 
particular items, under these bounce protection programs, the 
institution typically establishes a dollar limit for the account 
holder, and then routinely pays overdrafts on the account up to that 
amount without a case-by-case assessment. Account holders whose 
overdrafts are paid pursuant to this service are assessed a fee; in 
some cases it may be the same amount that would be charged for an 
overdraft item that is returned unpaid or that is paid by the 
institution on an ad hoc basis.
    In the case of the traditional overdraft line of credit, a 
financial institution pays an overdraft on a consumer transaction 
account and extends consumer credit. An institution is not a 
``creditor'' subject to the disclosure requirements of TILA and 
Regulation Z, however, if the extension of credit is not subject to a 
finance charge. See Sec.  226.2(a)(17). Under Regulation Z, a finance 
charge does not include a charge imposed by a financial institution for 
paying items that overdraw an account unless, as is typically the case 
for overdraft lines of credit, the payment of such items and the 
imposition of the charge are previously agreed upon in writing. See 
Sec.  226.4(c)(3).
    Fees imposed in connection with ``bounce protection'' services may 
or may not meet the definition of a finance charge. See Sec.  226.4. 
Information and comment are solicited on how ``bounce protection'' 
services are designed and operated and how these services should be 
treated for purposes of TILA in order to assist the Board in 
determining whether and how to provide guidance on potential coverage 
under Regulation Z or to address possible concerns under fair lending 
or other laws.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-1136 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

[[Page 72621]]

automated retrieval of comments for review. Comments may be mailed 
electronically to [email protected]. If accompanied by 
an original document in paper form, comments also may be submitted on 
3\1/2\ inch computer diskettes in any IBM-compatible DOS- or Windows-
based format.

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 226.6--Initial Disclosure Statement, under 6(b) 
Other charges, paragraph 1.i. and paragraph 2. are revised.
    b. Under Section 226.9--Subsequent Disclosure Requirements, under 
9(c)(2) Notice Not Required, paragraph 1. is revised.
    c. Under Section 226.12--Special Credit Card Provisions, under 
Paragraph 12(a)(2), paragraph 6. is revised.
    d. Under Section 226.18--Content of Disclosures, under 18(g) 
Payment schedule, paragraph 5. is revised.
    e. Under Section 226.19--Certain Residential Mortgage and Variable-
Rate Transactions, under Paragraph 19(b)(1), paragraph 2. is amended by 
removing ``comment 19(b)-4'' and adding ``comment 19(b)-5'' in its 
place.
    f. Under Section 226.32--Requirements for Certain Closed-End Home 
Mortgages, under Paragraph 32(a)(1)(i), paragraph 4. is revised.

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart B--Open-End Credit

* * * * *

Section 226.6--Initial Disclosure Statement

* * * * *
    6(b) Other charges.
    1. General; examples of other charges. * * *
    [lsqbb]i. Late payment and over-the-credit-limit charges.[rsqbb]
    [rtrif]i. Over-the-credit-limit charges, late payment charges, and 
charges imposed for expediting a consumer's payment provided that 
method of payment was not established as the regular payment method for 
the account.[ltrif]
* * * * *
    2. Exclusions. The following are examples of charges that are not 
``other charges'':
    i. Fees charged for documentary evidence of transactions for income 
tax purposes.
    ii. Amounts payable by a consumer for collection activity after 
default; attorney's fees, whether or not automatically imposed; 
foreclosure costs; post-judgment interest rates imposed by law; and 
reinstatement or reissuance fees.
    iii. Premiums for voluntary credit life or disability insurance, or 
for property insurance, that are not part of the finance charge.
    iv. Application fees under Sec.  226.4(c)(1).
    v. A monthly service charge for a checking account with overdraft 
protection that is applied to all checking accounts, whether or not a 
credit feature is attached.
    vi. Charges for submitting as payment a check that is later 
returned unpaid (see commentary to Sec.  226.4(c)(2)).
    vii. Charges imposed on a cardholder by an institution other than 
the card issuer for the use of the other institution's ATM in a shared 
or interchange system. (See also comment 7(b)-2.)
    viii. Taxes and filing or notary fees excluded from the finance 
charge under Sec.  226.4(e).
    [rtrif]ix. Fees to expedite delivery of a credit card, either at 
account opening or during the life of the account, when card delivery 
is also available by standard mail service without paying the 
fee.[ltrif]
* * * * *

Section 226.9--Subsequent Disclosure Requirements

* * * * *
    9(c)(2) Notice Not Required.
    1. Changes not requiring notice. The following are examples of 
changes that do not require a change-in-terms notice:
    i. A change in the consumer's credit limit.
    ii. A change in the name of the credit card or credit card plan.
    iii. The substitution of one insurer for another.
    iv. A termination or suspension of credit privileges.
    v. Changes arising merely by operation of law; for example, if the 
creditor's security interest in a consumer's car automatically extends 
to the proceeds when the consumer sells the car.
    [rtrif]vi. A change in late payment charges or over-the-limit-
charges, or a change in the charge for expediting a consumer's payment 
provided that method of payment was not established in advance as the 
regular payment method for the account.[ltrif]
* * * * *

Section 226.12--Special Credit Card Provisions

    12(a) Issuance of credit cards.
* * * * *
    Paragraph 12(a)(2).
* * * * *
    6. One-for-one rule--exception [rtrif]s.[ltrif] The regulation does 
not prohibit the card issuer from:
    [rtrif]i.[ltrif] Replacing a debit/credit card with a credit card 
and another card with only debit functions (or debit functions plus an 
associated overdraft capability), since the latter card could be issued 
on an unsolicited basis under Regulation E.
    [rtrif]ii. Replacing an accepted card with more than one renewal or 
substitute card, provided that: any replacement cards access only the 
account of the accepted card; all cards issued under that account are 
governed by the same terms and conditions; and under the account's 
terms the consumer's total liability for unauthorized use with respect 
to the account does not increase.[ltrif]
* * * * *

Subpart C--Closed-End Credit

* * * * *

Section 226.18--Content of Disclosures

* * * * *

[[Page 72622]]

    18(g) Payment schedule.
* * * * *
    5. Mortgage insurance. The payment schedule should reflect the 
consumer's mortgage insurance payments until the date on which the 
creditor must automatically terminate coverage under applicable law, 
even though the consumer may have a right to request that the insurance 
be cancelled earlier. [rtrif]The payment schedule must reflect the 
legal obligation. For example, assume that under applicable law, 
mortgage insurance must terminate after the 130th scheduled monthly 
payment, and the creditor collects at closing and places in escrow two 
months of premiums. If the legal obligation provides that the creditor 
will collect 130 payments and refund the escrowed payments when the 
insurance is terminated, the payment schedule should reflect 130 
premium payments. If the legal obligation provides that the creditor 
will apply the amount escrowed to the two final insurance payments, the 
payment schedule should reflect 128 monthly premium payments.[ltrif] 
(For assumptions in calculating a payment schedule that includes 
mortgage insurance that must be automatically terminated, see comments 
17(c)(1)-8 and 17(c)(1)-10.)
* * * * *

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)(i).
* * * * *
    [rtrif]4. Treasury securities. To determine the yield on comparable 
Treasury securities for the annual percentage rate test, creditors may 
use the yield on actively traded issues adjusted to constant maturities 
published in the Board's ``Selected Interest Rates'' (statistical 
release H-15). Creditors must use the yield corresponding to the 
constant maturity that is closest to the loan's maturity. If the loan's 
maturity is exactly halfway between security maturities, the annual 
percentage rate on the loan should be compared with the yield for 
Treasury securities having the lower yield. For example:
    i. If the H-15 contains a yield for Treasury securities with 
constant maturities of 7 years and 10 years and no maturity in between, 
the annual percentage rate for an 8-year mortgage loan is compared with 
the yield of securities having a 7-year maturity, and the annual 
percentage rate for a 9-year mortgage loan is compared with the yield 
of securities having a 10-year maturity.
    ii. If a mortgage loan has a term of 15 years, and the H-15 
contains a yield of 5.21 percent for constant maturities of 10 years, 
and also contains a yield of 6.33 percent for constant maturities of 20 
years, then the creditor compares the annual percentage rate for a 15-
year mortgage loan with the yield for constant maturities of 10 years.
    iii. If a mortgage loan has a term of 30 years, and the H-15 does 
not contain a yield for 30-year constant maturities, but contains a 
yield for 20-year constant maturities, and an average yield for 
securities with remaining terms to maturity of 25 years and over, then 
the annual percentage rate on the loan is compared with the yield for 
20-year constant maturities.[ltrif]
    [lsqbb]4. Treasury securities. To determine the yield on a Treasury 
security for the annual percentage rate test, creditors may use the 
Board's ``Selected Interest Rates'' (statistical release H-15) or the 
actual auction results. Treasury auctions are held at regular intervals 
for the different types of securities. These figures are published by 
major financial and metropolitan newspapers and are also available from 
Federal Reserve Banks. Creditors must use the yield on the security 
that has the nearest maturity at issuance to the loan's maturity. For 
example, if a creditor must compare the annual percentage rate to 
Treasury securities with either 7-year or 10-year maturities, the 
annual percentage rate for an 8-year loan is compared with securities 
that have a 7-year maturity; the annual percentage rate for a 9-year 
loan is compared with securities that have a 10-year maturity. If the 
loan maturity is exactly halfway between, the annual percentage rate is 
compared with the Treasury security that has the lower yield. For 
example, if the loan has a maturity of 20 years and comparable 
securities have maturities of 10 years with a yield of 6.501 percent 
and 30 years with a yield of 6.906 percent, the annual percentage rate 
is compared with 10 percentage points over the yield of 6.501 percent, 
the lower of the two yields.[rsqbb]
* * * * *

    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, November 26, 2002.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-30545 Filed 12-5-02; 8:45 am]
BILLING CODE 6210-01-P