[Federal Register Volume 68, Number 64 (Thursday, April 3, 2003)]
[Rules and Regulations]
[Pages 16185-16190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8022]


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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: Final rule; official staff commentary.

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SUMMARY: This final rule revises the official staff commentary to 
Regulation Z, which implements the Truth in Lending Act. The commentary 
interprets the requirements of Regulation Z. The revisions state the 
rules for disclosing fees to expedite a payment or delivery of a card. 
The revisions interpret the rules for replacing an accepted credit card 
to permit an issuer, under certain conditions, to replace an accepted 
card with more than one card. The revisions also discuss the treatment 
of private mortgage insurance payments in disclosing the payment 
schedule and the selection of Treasury security yields for determining 
whether a mortgage loan is covered by provisions in Regulation Z that 
implement the Home Ownership and Equity Protection Act.

DATES: This rule is effective April 1, 2003; the date for mandatory 
compliance is October 1, 2003.

FOR FURTHER INFORMATION CONTACT: Krista P. DeLargy or Dan S. Sokolov, 
Attorneys, or Jane E. Ahrens, Senior 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 uniform disclosures about its terms and cost. TILA gives consumers 
the right to rescind certain transactions that involve a lien on their 
principal dwelling, and it requires additional disclosures and imposes 
substantive restrictions on certain home-secured loans with rates or 
fees above a certain amount. The act also addresses the rights and 
responsibilities of credit card issuers and cardholders.
    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. 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.
    In December 2002, the Board published for comment proposed changes 
to the commentary (67 FR 72,618, December 6, 2002). The revisions 
discuss the rules for disclosing fees to expedite a payment or delivery 
of a card; replacing an accepted credit card; including private 
mortgage insurance premiums in the payment schedule disclosure; and 
selecting Treasury security yields for determining whether a mortgage 
loan is covered by the Home Ownership and Equity Protection Act. The 
Board received approximately 350 comment letters, most on the inquiry 
about overdraft or ``bounced check'' services. About 280 of the 
comments were from financial institutions, other creditors, and their 
representatives. The remaining comment letters were from consumer 
groups, individuals, and one state agency.
    With one exception, the final rule is being adopted substantially 
as proposed; the proposed comment concerning expedited payment fees has 
not been adopted. In addition, some changes have been made for clarity 
in response to commenters' suggestions.
    In addition to the proposed commentary revisions, the Board's staff 
requested information on overdraft or ``bounced check'' protection 
services. Institutions provide the service in lieu of establishing a 
traditional overdraft line of credit for the customer. Under these 
programs, even though the institution generally reserves the right not 
to pay particular items, a dollar limit is typically established for 
the account holder and then the institution routinely pays overdrafts 
on the account up to that amount without a case-by-case assessment. The 
staff solicited comment and information from the public about how these 
services are designed and operated, to determine the need for 
additional guidance to financial institutions under Regulation Z or 
other laws.
    About 300 of the comment letters responded to the request to 
provide information about the various ways that depository institutions 
offer bounced check protection services. The comment letters describe 
programs being offered to depository institutions by a number of 
vendors. The programs vary from vendor to vendor, and also appear to 
vary in their implementation from institution to institution. The 
Board's staff is continuing to gather information on these services, 
which are not addressed in the final rule.

II. Commentary Revisions

Subpart B--Open-End Credit

Section 226.6--Initial Disclosure Statement

6(b) Other Charges

    Representatives of the credit card industry requested official 
guidance on the rules for disclosing two fees charged to consumers in 
connection with open-end credit plans--a fee imposed when a consumer 
requests that an individual payment be expedited, and a fee imposed 
when a consumer requests expedited delivery of a credit card. Because 
the proper characterization of these fees under TILA previously has 
been unclear, the staff proposed to revise comment 6(b) to provide 
guidance.
    Under Regulation Z, creditors must disclose fees that are ``finance 
charges,'' which are defined as ``charges payable

[[Page 16186]]

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 but that may be imposed as part of the plan must also 
be disclosed; these are commonly referred to as ``other charges.'' The 
commentary interprets this requirement to apply to ``significant 
charges related to the plan.'' Regulation Z does not require disclosure 
of charges that are not considered either finance charges or ``other 
charges.''

Fee To Expedite a Payment on a Credit or Charge Card Account

    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. Typically to avoid being assessed a late 
fee, consumers request expedited payment service for a lesser charge.
    Comment 6(b)-1 provides examples of ``other charges'' that must be 
disclosed to consumers under Regulation Z; the list of examples is not 
exhaustive. A revision to comment 6(b)-1 was proposed indicating that a 
fee imposed for expediting an individual payment at the consumer's 
request should be disclosed as an ``other charge.'' The proposed 
comment only covered an expedited payment service where that method of 
payment was not established in advance as the regular payment method 
for the account. Under the proposal, changes in the amount of the fee 
would not trigger a change-in-terms notice.
    Generally, consumer groups agreed with the proposal to treat the 
fee for an expedited payment service as an ``other charge'' subject to 
the condition that creditors document consumers knowing and voluntary 
assent to the fee. Otherwise, they believed the fee is a finance 
charge. They also advocated that the change-in-terms notice 
requirements apply.
    Most industry commenters opposed the proposed comment on expedited 
payment fees. They asserted that the fee should not be disclosed under 
TILA as an ``other charge'' because in their view the payment service 
is not part of the credit plan and is not significant in its occurrence 
or in amount. Industry commenters disagreed that the fee resembles a 
late charge or substitutes for it. They noted that the fee is disclosed 
to consumers at the time they request the payment service and, 
therefore, they believe consumers will not benefit materially from 
disclosure of the fee on account-opening disclosures or on periodic 
statements under TILA. More generally, industry commenters believe that 
because there is another reasonable payment option available to the 
consumer without paying a charge, the expedited payment fee should not 
be disclosed either as a finance charge or as an ``other charge'' under 
TILA. They contend that the creditor's fee should be considered 
separate from the credit plan as though it were imposed by a third-
party courier or wire transfer service. Some commenters expressed 
concern about the potential effect of treating an expedited payment fee 
as part of the credit plan for home-equity lines of credit; they 
believe the fee should not be considered a term of the plan subject to 
the rules in Sec.  226.5b that limit unilateral changes.
    The proposal was intended to address fees charged to consumers who 
request an expedited payment service as an alternative to mailing a 
payment that might not reach the card issuer by the due date. This 
service typically allows consumers to avoid being assessed a late fee, 
which typically is higher than the fee imposed for the expedited 
payment service. The expedited payment service covered by the proposal 
is not a payment method established in advance as the expected method 
for making regular payments on the account. Where a card issuer offers 
an expedited payment service, it is usually available to all account 
holders; the proposal was not directed to situations where the issuer 
makes an ad hoc accommodation to satisfy the request of a particular 
customer. The proposal also was not intended to address electronic 
payment options that are not offered as an alternative to paying a late 
fee, or bill-payment services offered in connection with a consumer's 
deposit account that might be used to pay credit card bills as well as 
other bills.
    For the reasons discussed in the proposal, expedited payment fees, 
as currently constructed and described above, are not finance charges 
under TILA and Regulation Z because the consumer has a reasonable means 
for making payment on the account without paying a fee to the creditor. 
As noted above, the act and regulation also require disclosure by the 
creditor of the amount of any charge other than a finance charge ``that 
may be imposed as part of the plan * * *. '' 15 U.S.C. 1637(a)(5); 12 
CFR 226.6(b). The official staff commentary interprets this requirement 
to apply to ``significant charges related to the plan (that are not 
finance charges)'' and provides examples of charges that are ``other 
charges'' under this standard as well as charges that are not ``other 
charges'' under this standard. See comments 6(b)-1 and -2.
    Based on the record established by the comment letters, the fee for 
expediting a payment that was described in the proposal does not 
clearly meet the standard for treatment as an ``other charge.'' 
Accordingly, the proposed revision to comment 6(b)-1, classifying the 
fee as an ``other charge,'' is not being adopted. In order to provide 
clear compliance guidance, comment 6(b)-2 is being revised to indicate 
that, at this time, creditors are not required to disclose the fee 
under TILA and Regulation Z. Creditors should continue their current 
practice of informing consumers of the amount of the charge at the time 
the service is requested. In addition, when the fee is charged to the 
credit account, creditors must include the cost on the periodic 
statement for that billing cycle. See Sec.  226.7(b).
    In response to the request for comment on the proper classification 
of this fee and the fee to expedite delivery of a credit card discussed 
below, commenters suggested that the Board adopt a general rule for 
classifying fees under TILA. In their view, the adoption of such a rule 
would aid creditors' compliance, particularly when determining how new 
fees should be treated under TILA. There is significant merit in 
reviewing this area to assess whether general principles can be 
articulated for determining the appropriate treatment of creditors' 
fees. Accordingly, in connection with a broader review of Regulation Z, 
the staff plans to recommend that the Board undertake such an 
assessment to determine if a general rule can be established consistent 
with the requirements of TILA. This review would include assessing the 
treatment of existing fees to determine if a different classification 
for individual fees is appropriate.

Fees for Expediting Delivery of a Credit or Charge Card

    Comment 6(b)-2 provides examples of charges that are neither 
finance charges nor ``other charges.'' A revision to comment 6(b)-2 was 
proposed to add, as an example, a card issuer's fee for expediting 
delivery of a card upon request, provided the issuer does not charge 
for delivery by standard mail service. The proposed comment is being 
adopted substantially as proposed. A minor revision has been made to 
clarify that the comment also applies when the card is delivered 
without a fee by a means other than standard mail service that is at 
least as fast as standard mail service.

[[Page 16187]]

    Industry commenters uniformly agreed that fees for expedited credit 
card delivery should not have to be disclosed under TILA as long as the 
consumer can obtain the card without paying a fee; some of these 
commenters believe it should be sufficient if the card issuer sends the 
card without a fee by any ``reasonable method.'' Consumer groups 
contended that the fee should be disclosed as an ``other charge'' if 
the creditor documents consumers' knowing and voluntary assent to the 
fee, the fee charged for expediting delivery is reasonably related to 
the actual cost of delivery, and the card is available without a fee by 
first-class mail or faster. If these conditions are not satisfied, 
consumer advocates believe the fee should be disclosed as a finance 
charge.
    The final comment reflects the view that a fee for expedited 
delivery of a credit card is not incidental to the extension of credit 
and thus is not a finance charge where the consumer requests the 
service and the card is also available by standard mail service (or 
another means that is at least as fast) without a fee. In those 
circumstances, the amount of the voluntary charge for expedited 
delivery in relation to the creditor's cost is not a factor in 
determining whether the fee is a finance charge.
    In addition, the fee does not appear to be an ``other charge'' 
under Regulation Z. An expedited card delivery service does not appear 
to be significant or related to the credit plan because the service is 
provided only occasionally, such as when a consumer seeks to replace a 
lost or stolen credit card and requests expedited delivery. Finally, 
nothing in the record suggests the need for additional documentation to 
demonstrate that the consumer's assent to the service is knowing and 
voluntary.
Section 226.9--Subsequent Disclosure Requirements

9(c) Change in Terms

    A revision to comment 9(c)(2)-1 was proposed to address expedited 
payment fees consistent with the proposed revision to comment 6(b)-1. 
Because expedited payment fees are not being classified as ``other 
charges'' at this time, the proposed revision to comment 9(c)(2)-1 is 
unnecessary and is not being adopted.
Section 226.12--Special Credit Card Provisions

12(a) Issuance of Credit Cards

    Under the proposal, comment 12(a)(2)-6 would be revised to allow 
card issuers, subject to certain conditions, to replace an accepted 
credit card with one or more replacement cards. Most commenters 
supported the proposed commentary provision with some suggested 
revisions, as discussed below. The proposal is adopted with revisions.
    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 a request or application. 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 does not, however, construe Section 132 as 
requiring one-for-one replacement in all circumstances. See comment 
12(a)(2)-6.
    Advances in technology used for information transmittal have 
enabled card issuers to issue credit cards in different sizes and 
formats. These new cards may enhance consumer convenience. A merchant's 
card reading equipment determines, however, whether a consumer can use 
a particular credit card with that merchant. For example, some 
merchants' equipment and some automated teller machines require 
insertion of a ``full-size'' credit card. Certain cards that are 
reduced in size may require different card readers than those presently 
used for ``full-size'' cards. 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, under the proposal, comment 
12(a)(2)-6 would be revised to provide additional guidance, consistent 
with the statute and legislative purpose. The proposed comment 
indicated that a card issuer may replace an accepted credit card with 
more than one renewal or substitute card on the same account where: (1) 
The replacement cards access only the account of the accepted card; (2) 
all cards issued under the account are governed by the same terms and 
conditions; and (3) the consumer's total liability for unauthorized use 
with respect to the account does not increase.
    Several industry commenters requested that the first condition be 
revised to require only that any replacement card access the same 
``credit plan'' as the accepted card. This suggested revision is too 
broad. For example, some open-end credit plans might include multiple 
accounts, such as a credit card account and a home equity line of 
credit (HELOC), where the consumer's credit card does not access the 
HELOC account. The commenters' suggestion to broaden the comment would 
permit creditors to replace an accepted card with one that accesses the 
credit card account and another that accesses the HELOC. Because the 
consumer did not previously have credit card access to the HELOC, 
adding such access on an unsolicited basis would be inconsistent with 
the legislative purposes of Section 132. Accordingly, the final comment 
provides that the replacement cards should access only the accounts 
previously accessed by the consumer's accepted card. Minor revisions 
have been made to this part of the final comment for clarity; no change 
in meaning is intended.
    Some industry commenters requested a clarification in the final 
rule that a supplemental card need not access all of the features of 
the consumer's existing card account. Neither the proposal nor the 
final comment requires that all replacement cards issued access all of 
the account features of the accepted card.
    Commenters also requested a clarification that issuers would not be 
prevented from issuing multiple replacement cards when there is a 
substitution due to a change in the card issuer's name or account 
number, or where there is a successor card issuer. The requirement that 
supplemental cards must access the same account as the accepted card 
does not preclude issuers from issuing multiple replacement cards as 
part of a proper substitution. See, e.g., comments 12(a)(2)-2 and -3.
    Some industry commenters opposed the second condition--that all 
cards issued in connection with a renewal or substitution be subject to 
the same terms and conditions. Some commenters noted that for safety 
and soundness reasons, an issuer might limit use of a supplemental 
access device to low-dollar sales transactions (such as purchases at a 
vending machine or gas pump); limit the availability of credit on a 
supplemental card (such as a card for the cardholder's dependent 
child); or limit use of particular access devices to transactions with 
merchants that employ special security procedures or agree to special 
risk-sharing arrangements. Other commenters requested clarification 
that all credit features accessible with a supplemental card need not 
be subject to the same terms, for example, a different APR

[[Page 16188]]

might apply to purchase transactions and cash advances.
    As proposed, the final comment provides that where a card issuer 
replaces an accepted card with more than one renewal or substitute card 
on an unsolicited basis, all replacement cards must be issued subject 
to the same terms and conditions. The final comment clarifies that this 
requirement applies only to terms and conditions that are required to 
be disclosed under Sec.  226.6 of Regulation Z, except that a creditor 
may vary terms for which no change-in-terms notice is required under 
Sec.  226.9(c). For example, a card issuer could issue a supplemental 
card that has a lower APR, has a lower credit limit, can only be used 
for small dollar transactions or for a subset of merchants, or is 
subject to different security procedures than the accepted card. 
Moreover, the comment does not suggest that all the credit features 
available with the unsolicited supplemental card must be subject to the 
same terms; for example, the APRs for purchase transactions and cash 
advances might differ for the supplemental card to the same extent that 
these terms differ for the accepted card.
    Commenters generally supported the third condition, that the 
consumer's total liability for unauthorized use of the account must not 
increase as a result of the creditor's issuance of a supplemental card. 
That condition is adopted without revision in the final comment.
    Several consumer groups advocated adding a condition that either 
the replacement cards all be mailed in the same envelope to deter 
identity theft or the consumer be given written notice seven days 
before the mailing of an additional card. They also recommended 
requiring other security measures, such as consumer-initiated card 
activation.
    Card issuers typically send cards that are not activated and employ 
security procedures requiring the consumer to verify receipt of the 
card, to avoid or limit monetary losses from the theft of credit cards 
sent through the mail. These measures have become increasingly common 
and are used on a substantial portion of cards now issued. It is 
expected that industry will continue these practices, which should be 
as effective when replacing an accepted card with one or more renewal 
or substitute cards.
    Comment was also solicited on whether it would be appropriate to 
allow the unsolicited issuance of supplemental cards for an existing 
account on the conditions specified above even when there is no renewal 
of or substitution for the cardholder's existing card. Industry 
commenters stated that allowing additional cards to be sent outside of 
renewal or substitution would reduce card issuers' costs by eliminating 
the need to produce and distribute unnecessary replacement cards. They 
also noted that the issuance of supplemental cards alone (as opposed to 
issuance in connection with a renewal or substitution) would not result 
in increased risk of liability for unauthorized use of the cards. 
Consumer advocates opposed the unsolicited issuance of more than one 
card on an existing account (when there is no renewal or substitution) 
unless consumers are notified by mail seven days before an additional 
card is sent and security measures such as consumer-initiated card 
activation are required, to protect against any added risk of theft and 
unauthorized use.
    Based on the comments received, staff plans to recommend that the 
Board consider amending Sec.  226.12(a) to allow the unsolicited 
issuance of additional cards on an existing account outside of renewal 
or substitution under certain conditions. Also, consideration may be 
given to whether changes to Regulation E's restrictions on the 
unsolicited issuance of additional debit cards on a consumer's existing 
asset account are warranted.

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 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. The payment schedule should reflect the fact 
that, under the Homeowners Protection Act of 1998 (HPA), such insurance 
generally must terminate before the term of the loan expires.
    With some revisions for clarity, changes to comment 18(g)-5 are 
adopted as proposed to provide additional guidance on how mortgage 
insurance premiums should be disclosed on the payment schedule when 
some premiums are collected and escrowed at the time the loan is 
closed. Creditors are required to disclose a payment schedule based on 
the borrower's legal obligation. The comment provides an example to 
facilitate compliance.
    Commenters generally supported the proposal. Several commenters 
noted that the loan documents might be silent on how the termination of 
insurance premiums will be implemented under the HPA. TILA disclosures 
must be based on the legal obligation, which is determined by 
applicable state or other law, and not solely by the parties' written 
agreement. See comment 17(c)(1)-1. Comment 18(g)-5 has been revised to 
reflect this guidance.
    Two commenters sought clarification that the rules for disclosing 
mortgage insurance premiums under TILA would not affect the rules for 
escrow accounts under the Real Estate Settlement Procedures Act 
(RESPA). The text of the final comment has been modified to allay those 
concerns; the comment in no way affects creditors' compliance with 
RESPA's aggregate escrow accounting rules.
Section 226.19--Certain Residential Mortgage Transactions

19(b) Certain Variable-Rate Transactions

    A technical amendment to comment 19(b)(1)-2 is adopted, as 
proposed, to change the citation to comment 19(b)-5, as amended (65 FR 
17129, March 31, 2000). 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

    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 specified 
triggers. HOEPA covers mortgage loans for which the annual percentage 
rate (APR) 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). The APR is compared with the 
yield on Treasury securities as of the 15th day of the month 
immediately preceding the month of application.
    Revisions to comment 32(a)(1)(i)-4 were proposed to clarify how 
creditors should determine the applicable yield on Treasury securities. 
The proposal provided that creditors should not use results of Treasury 
auctions. Instead, creditors should use yields on actively traded 
issues adjusted to constant maturities that are listed on the Board's

[[Page 16189]]

``Selected Interest Rates'' (statistical release H-15). The H-15 is 
published daily and is posted on the Board's Internet Web site at 
http://www.federalreserve.gov/releases/h15.
    The proposed comment also clarified that for purposes of HOEPA's 
rate-based trigger, creditors should compare the APR on 30-year loans 
(and other loans of 20 or more years) with the yield reported on the H-
15 for a 20-year constant maturity. The Department of the Treasury 
recently ceased auctioning 30-year securities. Creditors asked for 
additional guidance since the H-15 lists a 20-year constant maturity 
and a long-term average of the yields for Treasury securities with 
terms to maturity of 25 or more years, and refers to a Treasury formula 
for estimating a 30-year yield.
    Commenters generally supported the proposed revisions as enhancing 
uniformity and easing compliance. However, several credit unions that 
commented preferred having flexibility to use any figure on the H-15 
comparable to a loan's maturity, including the Treasury formula for 
estimating a 30-year yield. Other commenters, while concurring with the 
guidance to use 20-year constant maturities to calculate the APR 
trigger for 30-year loans, encouraged the Board to explore alternatives 
and make further revisions to the commentary if more suitable 
alternatives become available. One commenter requested guidance on the 
effect of an irregular first payment period on the loan's maturity.
    The comment has been adopted substantially as proposed, with a 
minor revision for clarification. Requiring that all creditors use the 
yields on the H-15 for Treasury constant maturities should ensure 
uniform application of HOEPA. The final comment clarifies that for 
purposes of determining a loan's maturity under HOEPA's rate-based 
trigger, creditors may rely on the rules in Sec.  226.17(c)(4). Under 
the rule, creditors may ignore the effect of first payment periods that 
are slightly longer or shorter than other scheduled payment periods.

List of Subjects in 12 CFR Part 226

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

Text of Revisions

0
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)

0
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).


0
2. In Supplement I to Part 226:
0
a. Under Section 226.6--Initial Disclosure Statement, under 6(b) Other 
charges, paragraph 2. is revised.
0
b. Under Section 226.12--Special Credit Card Provisions, under 
Paragraph 12(a)(2), paragraph 6. is revised.
0
c. Under Section 226.18--Content of Disclosures, under 18(g) Payment 
schedule, paragraph 5. is revised.
0
d. 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.
0
e. 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.
* * * * *
    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).
    ix. A fee to expedite delivery of a credit card, either at account 
opening or during the life of the account, provided delivery of the 
card is also available by standard mail service (or other means at 
least as fast) without paying a fee for delivery.
    x. A fee charged for arranging a single payment on the credit 
account, upon the consumer's request (regardless of how frequently the 
consumer requests the service), if the credit plan provides that the 
consumer may make payments on the account by another reasonable means, 
such as by standard mail service, without paying a fee to the creditor.
* * * * *

Section 226.12--Special Credit Card Provisions

    12(a) Issuance of credit cards.
* * * * *
    Paragraph 12(a)(2).
* * * * *
    6. One-for-one rule--exceptions. The regulation does not prohibit 
the card issuer from:
    i. 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.
    ii. Replacing an accepted card with more than one renewal or 
substitute card, provided that:
    A. No replacement card accesses any account not accessed by the 
accepted card;
    B. For terms and conditions required to be disclosed under Sec.  
226.6, all replacement cards are issued subject to the same terms and 
conditions, except that a creditor may vary terms for which no change 
in terms notice is required under Sec.  226.9(c); and
    C. Under the account's terms the consumer's total liability for 
unauthorized use with respect to the account does not increase.
* * * * *

Subpart C--Closed-End Credit

* * * * *

Section 226.18--Content of Disclosures

* * * * *
    18(g) Payment schedule.
* * * * *
    5. Mortgage insurance. The payment schedule should reflect the 
consumer's

[[Page 16190]]

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. The payment schedule must reflect the legal obligation, as 
determined by applicable state or other law. 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, under the legal 
obligation, the creditor will include mortgage insurance premiums in 
130 payments and refund the escrowed payments when the insurance is 
terminated, the payment schedule should reflect 130 premium payments. 
If, under the legal obligation, the creditor will apply the amount 
escrowed to the two final insurance payments, the payment schedule 
should reflect 128 monthly premium payments. (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).
* * * * *
    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. In determining the loan's 
maturity, creditors may rely on the rules in Sec.  226.17(c)(4) 
regarding irregular first payment periods. 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.
* * * * *

    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, March 28, 2003.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 03-8022 Filed 4-2-03; 8:45 am]
BILLING CODE 6210-01-P