[Federal Register Volume 68, Number 237 (Wednesday, December 10, 2003)]
[Proposed Rules]
[Pages 68793-68799]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29945]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1167]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is proposing to amend Regulation Z, which implements 
the Truth in Lending Act, and the staff commentary to the regulation. 
Regulation Z would be revised to define more specifically the standard 
for providing ``clear and conspicuous'' disclosures, and to provide a 
more uniform standard among the Board's regulations. The staff 
commentary would be revised to include examples of how to meet this 
standard. Similar proposed revisions to Regulations B, E, M, and DD 
appear elsewhere in today's Federal Register. These revisions are 
intended to help ensure that consumers receive noticeable and 
understandable information that is required by law in connection with 
obtaining consumer financial products and services. In addition, 
consistency among the regulations should facilitate compliance by 
institutions. The Board also is proposing to add an interpretative rule 
of construction to state that the word ``amount'' represents a 
numerical amount throughout Regulation Z. The proposed updates to the 
staff commentary also provide guidance on consumers' exercise of the 
right to rescind certain home-secured loans. In addition, the proposal 
includes several technical revisions to the staff commentary.

DATES: Comments must be received on or before January 30, 2004.

ADDRESSES: Comments should refer to Docket No. R-1167 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. However, because paper mail in the Washington 
area and at the Board of Governors is subject to delay, please consider 
submitting your comments by e-mail to [email protected], 
or faxing them to the Office of the Secretary at (202) 452-3819 or 452-
3102. 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 and Elizabeth A. 
Eurgubian, Attorneys, Division of Consumer and Community Affairs, Board 
of Governors of the Federal Reserve System, at (202) 452-3667 or 452-
2412; for users of Telecommunications Device for the Deaf (``TDD'') 
only, contact (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). An official staff

[[Page 68794]]

commentary interprets the requirements of Regulation Z (12 CFR part 226 
(Supp. I)).

II. Proposed Revisions

Subpart A--General

Section 226.2--Definitions and Rules of Construction
2(a)(27) Clear and Conspicuous
    Section 122(a) of TILA requires disclosures to be made clearly and 
conspicuously. See 15 U.S.C. 1632. This standard is implemented in 
Regulation Z. See Sec.  226.5(a)(1); Sec.  226.17(a)(1); Sec.  
226.31(b). Guidance on how creditors may comply with the clear and 
conspicuous standard is contained in the staff commentary. See comment 
5(a)(1)-1; 17(a)(1)-1. The commentary states that under this standard, 
disclosures must be in a reasonably understandable form. For purposes 
of the disclosures provided with credit card solicitations and 
applications, the commentary also notes that disclosures must be 
readily noticeable to the consumer. See comment 5a(a)(2)-1.
    Consumer financial services and fair lending laws and the Board 
regulations that implement them contain similar but not identical 
standards for providing disclosures that consumers will notice and 
understand. Generally, disclosures must be ``clear and conspicuous'' 
under Regulations B (Equal Credit Opportunity), M (Consumer Leasing), 
Regulation P (Privacy of Consumer Financial Information), Z (Truth in 
Lending) and DD (Truth in Savings), and ``clear and readily 
understandable'' under Regulation E (Electronic Fund Transfers). In 
interpreting the ``clear and conspicuous'' standard, the staff 
commentaries to Regulations B, M and Z provide that disclosures must be 
``in a reasonably understandable'' form; similarly, under Regulation DD 
disclosures must be in a format that allows consumers ``to readily 
understand the terms of their account.'' In contrast, the Board's 
Regulation P (Privacy of Consumer Financial Information) defines the 
``clear and conspicuous'' standard to mean that a disclosure is 
``reasonably understandable and designed to call attention to the 
nature and significance of the information'' in the disclosure. 12 CFR 
216.3(b)(1). Regulation P also provides a series of examples of how to 
satisfy the standard. 12 CFR 216.3(b)(2).
    The Board believes that the recently implemented standard in 
Regulation P (65 FR 35162, June 1, 2000), articulates with greater 
precision than the other regulations the concepts underlying the duty 
to provide disclosures that consumers will notice and understand. 
Therefore, to provide consistent guidance on the clear and conspicuous 
standard among its regulations, the Board is proposing to amend 
Regulation Z by adding a definition for clear and conspicuous in Sec.  
226.2(a)(27), consistent with the ``clear and conspicuous'' definition 
in Regulation P. The staff commentary to Regulation Z also would be 
revised to add comments 2(a)(27)-1 and -2, consistent with Regulation 
P's examples of how to meet the clear and conspicuous standard. Similar 
proposed revisions to Regulations B, E, M, and DD appear elsewhere in 
today's Federal Register. These revisions are intended to help ensure 
that consumers receive noticeable and understandable information that 
is required by law in connection with obtaining consumer financial 
products and services. In addition, consistency among the regulations 
should facilitate compliance by institutions.
    Proposed comments 2(a)(27)-3 and -4 contain guidance currently in 
comment 5(a)(1)-1. The ``clear and conspicuous'' standard does not 
prohibit adding other items to the federally required disclosures (such 
as contractual provisions or state-required disclosures); nor does it 
prohibit sending promotional material with the disclosures. Proposed 
comment 2(a)(27)-3 would clarify, however, that the presence of other 
information may be a factor in determining whether the ``clear and 
conspicuous'' standard is met. Generally, segregating federally 
mandated disclosures from other information is more likely to satisfy 
the clear and conspicuous standard.
    The Board also proposes to adopt for Regulations B, E, M, Z and DD, 
guidance concerning type-sizes that are deemed to meet the ``clear and 
conspicuous'' standard and those that would likely be too small (this 
guidance currently applies only to credit card solicitations and 
applications under Regulation Z). See proposed comment 2(a)(27)-2(ii).
    The proposal does not add special format requirements to the 
regulation where none currently exist. Accordingly, even though the 
revisions clarify that type size can be one factor to consider in 
determining whether a disclosure is conspicuous, the proposal would not 
add a specific type size requirement. Similarly, the proposal also 
would not affect other format rules, such as the existing requirement 
for making some disclosures more conspicuous than others (See Sec.  
226.5(a)(2); Sec.  226.17(a)(2)), or segregating some specific 
information (See Sec.  226.17(a)(1)).
    To eliminate redundancy with proposed Sec.  226.2(a)(27) and its 
accompanying commentary, the Board also proposes to revise the 
following commentary provisions in Regulation Z that address the 
``clear and conspicuous'' standard: comments 5(a)(1)-1, 5a(a)(2)-1, 16-
1, 24-1, and Appendix K (d)(2)-1. In this regard, in comment 5a(a)(2)-
1, the guidance regarding disclosures for credit card applications and 
solicitations that are transmitted by electronic communication, has 
been deleted. Guidance regarding the ``clear and conspicuous'' standard 
for disclosures transmitted by electronic communication will be 
considered in the context of rulemakings dealing specifically with 
electronic delivery of disclosures.
2(b) Rules of Construction
    The Board proposes to add an interpretative rule of construction in 
Sec.  226.2(b)(5) stating that where the word ``amount'' is used to 
describe a disclosure requirement it refers to a numerical amount 
throughout Regulation Z. This interpretation addresses a matter 
discussed in a recent court decision regarding the disclosure of 
payments scheduled to repay a closed-end credit transaction. See 15 
U.S.C. 1638(a)(6); 12 CFR 226.18(g). The Board believes that the 
decision, by endorsing narrative descriptions of amounts rather than 
numerical amounts, may lead to confusion in disclosures.
    The term ``amount'' has general applicability throughout Regulation 
Z and the term ``amount'' is used throughout TILA, for example, to 
describe disclosures such as the amount financed, the amounts being 
disbursed to the consumer and to third parties, and the total of 
payments, which is defined as the amount the consumer will have paid 
after making all scheduled payments. A broad interpretation of the term 
suggesting that narrative descriptions may replace numerical 
``amounts'' contravenes TILA's purpose to provide consumers with clear 
and uniform credit disclosures. Proposed comment 2(b)-2 would provide 
examples of how the interpretative rule of construction for ``amount'' 
applies in certain disclosures required by Regulation Z.

Subpart B--Open-end Credit

Section 226.15--Right of Rescission

15(a) Consumer's Right To Rescind
15(a)(2)
    Section 125(a) of TILA provides that, in certain credit 
transactions in which

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the consumer's principal dwelling secures an extension of credit, the 
consumer may rescind the transaction for three business days after 
becoming obligated on the debt (and for open-end plans, after opening 
or increasing the credit limit on the plan). See 15 U.S.C. 1635(a); 12 
CFR 226.15(a)(1). The rescission period may extend up to three years in 
certain cases. The right of rescission was created to allow consumers 
time to reexamine their credit contracts and cost disclosures and to 
reconsider whether they want to place their home at risk by offering it 
as security for the credit. A consumer exercises the right to rescind 
by notifying the creditor of the rescission by mail, telegram, or other 
means of written communication. Creditors must provide consumers with a 
form to use in exercising the right to rescind, which must include the 
name and address of the creditor or agent of the creditor to receive 
the notice. See Sec.  226.15(b). Notice is considered given when 
mailed, or when filed for telegraphic transmission, or, if sent by 
other means, when delivered to the creditor's designated place of 
business. See Sec.  226.15(a)(2).
    Comment 15(a)(2)-1 states that a creditor may designate an agent to 
receive the notification so long as the agent's name and address appear 
on the notice provided to the consumer under Sec.  226.15(b). The 
comment would be revised to address situations where a creditor fails 
to provide the required form or designate an address for sending the 
notice. The proposed comment would provide that in such cases, if a 
consumer sends the notice to someone other than the creditor or 
assignee, such as a third-party loan servicer acting as the creditor's 
agent, the consumer's notice of rescission may be effective if under 
the applicable state law, delivery to that person would be deemed to 
constitute delivery to the creditor or assignee.
15(d) Effects of Rescission
    When a consumer exercises the right to rescind a mortgage 
transaction, the consumer is not liable for any finance charges or 
other charges and any security interest in the consumer's home becomes 
void. See 15 U.S.C. 1635(b); Sec.  226.15(d)(1). After the transaction 
is rescinded, the creditor must tender any money or property given to 
anyone in connection with the transaction within a specified time 
frame, which triggers the consumer's duty to return any money or 
property that the creditor delivered to the consumer, although a court 
may modify these procedures. See Sec.  226.15(d)(2)-(4).
    Comment 15(d)(4)-1 would be revised to state expressly that a 
consumer's substantive right to rescind under Sec.  226.15(a)(1) and 
Sec.  226.15(d)(1) is not affected by the procedures referred to in 
Sec.  226.15(d)(2) and (3), or the modification of those procedures by 
a court. Accordingly, where consumers seek rescission and the matter is 
contested by the creditor, a determination regarding consumers' right 
to rescind would normally be made before a court determines the amounts 
owed and establishes the procedures for the parties to tender any money 
or property. The sequence of procedures should not affect consumers' 
ability under TILA to establish their substantive right to rescind and 
to have the lien amount reduced, which may be necessary before 
consumers are able to establish how they will refinance or otherwise 
repay the loan.

Subpart C--Closed-End Credit

Section 226.18--Content of Disclosures

18(c) Itemization of Amount Financed
    A technical revision would be made to comment 18(c)(1)(iii)-1, to 
conform a citation to footnote 41 of Regulation Z. No substantive 
change is intended. Section 226.19--Certain Residential Mortgage and 
Variable-Rate Transactions
19(b) Certain Variable-Rate Transactions
    Section 226.19(b) applies to all closed-end variable-rate 
transactions that are secured by the consumer's principal dwelling and 
have a term greater than one year. Guidance about the applicability of 
Sec.  226.19 to construction loans was published in comment 19(b)-1. 54 
FR 9422, March 7, 1989. That guidance has been inadvertently appended 
to comment 19(b)(1)-1 in the Code of Federal Regulations. The two 
comments are restated in their correct form for reprinting in the Code 
of Federal Regulations. No substantive change is intended.

Section 226.23--Right of Rescission

23(a) Consumer's Right To Rescind
    For the reasons discussed above, comment 23(a)(2)-1 would be 
revised to state the rule for effective delivery of a rescission notice 
when the creditor fails to provide the required form or designate an 
address for sending the notice (See supplementary information to 
proposed comment 15(a)(2)-1.)

Section 226.23--Right of Rescission

23(d) Effects of Rescission
    For the reasons discussed above, comment 23(d)(4)-1 would be 
revised to expressly state that a consumer's substantive right to 
rescind under Sec.  226.23(a)(1) and Sec.  226.23(d)(1) is not affected 
by the procedures referred to in Sec.  226.23(d)(2) and (3), or the 
modification of those procedures by a court. (See supplementary 
information to proposed comment 15(d)(4)-1.)

Subpart D--Miscellaneous

Section 226.27--Language of Disclosures

    In March 2001, the Board revised Sec.  226.27 to permit creditors 
to provide disclosures in languages other than English as long as 
disclosures in English are available to consumers who request them. 66 
FR 1739, March 30, 2001. Technical revisions would be made to comment 
27-1, and comment 27-2 would be deleted to conform the commentary to 
Sec.  226.27, as amended. No substantive change is intended.

Subpart E--Special Rules for Certain Home Mortgage Transactions

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

32(a) Coverage
    Rules for certain closed-end mortgage loans in Sec.  226.32 are 
triggered, in part, by the amount of ``points and fees'' payable by the 
consumer at or before loan closing and the ``total loan amount.'' See 
Sec.  226.32(a)(1)(ii). Comment 32(a)(1)(ii)-1, which was added in 
1996, provides examples for calculating the ``total loan amount.'' 61 
FR 14952, April 4, 1996. A technical revision would be made to comment 
32(a)(1)(ii)-1, to correct a dollar amount given in one of the 
examples. No substantive change is intended.

Request for Information Regarding Debt Cancellation and Debt Suspension 
Agreements

    Some lenders have replaced credit insurance products with products 
known as debt cancellation agreements and debt suspension agreements. 
Under a debt cancellation agreement or debt suspension agreement, a 
creditor agrees to cancel, or temporarily suspend, all or part of the 
borrower's repayment obligation upon the occurrence of a specified 
event, such as death, disability, or unemployment. The fee for a debt 
cancellation or debt suspension agreement can be collected monthly or 
in a lump sum.
    At least one state has said it will regulate debt cancellation and

[[Page 68796]]

suspension products as insurance, other states have said they will 
regulate the products as bank products and not as insurance, and still 
others have not yet announced positions. The Office of the Comptroller 
of the Currency (OCC) has recently issued regulations governing sales 
of debt cancellation and suspension agreements by national banks. See 
12 CFR 37.1 et seq.
    Under the TILA and Regulation Z, debt cancellation agreements are 
generally subject to the same disclosure rules as credit insurance. In 
1996, the Board revised Regulation Z to establish essentially identical 
disclosure rules for credit insurance and debt cancellation agreements. 
Accordingly, although debt cancellation fees satisfy the definition of 
a ``finance charge,'' they may be excluded from the finance charge on 
the same conditions as credit insurance premiums (without regard to 
whether debt cancellation agreements are deemed to be insurance 
contracts under state law). The types of debt cancellation agreements 
eligible for the exclusion are limited to those that provide for 
cancellation of or all or part of a debtor's liability (1) in case of 
accident or loss of life, health, or income or (2) for amounts 
exceeding the value of collateral securing the debt (commonly referred 
to as ``gap'' coverage, frequently sold in connection with motor 
vehicle loans). See Sec.  226.4(b)(7) and (10), 4(d)(1) and (3).
    Industry representatives have asked the Board to address disclosure 
issues under TILA and Regulation Z that may be raised by the sale of 
debt cancellation and debt suspension products. Anecdotal evidence 
suggests that the sale of those products in lieu of credit insurance 
has increased and that creditors are offering expanded coverage, for 
example to suspend repayment obligations for life-cycle events such as 
marriage and divorce. Some industry representatives have stated that 
additional guidance may be useful in clarifying the circumstances in 
which products offering expanded coverage qualify for the exclusions in 
Sec.  226.4(d)(3) for debt cancellation fees, and in clarifying what 
disclosures should be provided to consumers in certain circumstances.
    To consider the requests for guidance more fully, information and 
comment are solicited as follows:
    [sbull] What are the similarities and differences among credit 
insurance, debt cancellation coverage, and debt suspension coverage, in 
the case of both closed-end and open-end credit?
    [sbull] With what types of closed-end and open-end credit are debt 
cancellation and debt suspension products sold? Do creditors typically 
package multiple types of coverage (e.g., disability and divorce), or 
sell them separately? Do creditors typically sell the products at, or 
after, consummation (for closed-end credit) or account opening (for 
open-end credit plans)?
    [sbull] What disclosures are made with the sale of a product or 
upon conversion from one product to another, whether required by TILA 
or other laws? How are monthly or other periodic fees disclosed to 
consumers?
    [sbull] Under Regulation Z, fees for credit protection programs 
written in connection with a credit transaction are finance charges but 
some fees may be excluded from the disclosed finance charge if required 
disclosures are made and the consumer affirmatively elects the optional 
coverage in writing. See Sec.  226.4(b)(7) and (10), 4(d)(1) and (3). 
Is there a need for guidance concerning the applicability of those 
provisions to certain types of coverage now available? Are the required 
disclosures adequate for all types of products subject to Sec.  4(d)(1) 
or 4(d)(3)?
    [sbull] Under TILA, a credit card issuer must notify a consumer 
before changing the consumer's credit insurance provider. See 15 U.S.C. 
1637(g); 12 CFR 226.9(f). Card issuers that intend to change credit 
insurance providers need only notify consumers that they may opt out of 
the new coverage. Should the Board interpret or amend Sec.  226.9(f) to 
address conversions from credit insurance to debt cancellation or debt 
suspension agreements? If so, is there a need to address conversions 
other than for credit card accounts?
    [sbull] OCC regulations for national bank sales of debt 
cancellation and suspension agreements require a customer's affirmative 
election of the product. If the Board interprets or amends Sec.  
226.9(f) to address conversions from credit insurance to debt 
cancellation or debt suspension agreements, what additional guidance 
would card issuers need, if any, to comply with both rules?

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-1167 and, when 
possible, should use a standard typeface with a font size of 10 or 12; 
this will enable the Board to convert text submitted in paper form to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Comments may be mailed 
electronically to [email protected].

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

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

V. Initial Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act, 
the Board has reviewed the proposed amendments to Regulation Z. The 
proposed amendments are not expected to have any significant impact on 
small entities. A final regulatory flexibility analysis will be 
conducted after consideration of comments received during the public 
comment period.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the rule under 
the authority delegated to the Board by the Office of Management and 
Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number is 7100-0199.
    The collection of information that is revised by this rulemaking is 
found in 12 CFR part 226. This collection is mandatory (15 U.S.C. 1601 
et seq.) to evidence compliance with the requirements of Regulation Z 
and the Truth in Lending Act (TILA). The respondents and recordkeepers 
are for-profit financial institutions, including small businesses. 
Institutions are required to retain records for twenty-four months. 
This regulation applies to all types of creditors, not just state 
member banks; however, under Paperwork Reduction Act regulations, the 
Federal Reserve accounts for the burden of the paperwork associated 
with the regulation only for state member banks. Other agencies account 
for the paperwork burden on their respective constituencies under this 
regulation.
    The proposed revisions would provide creditors with a more uniform 
definition of providing ``clear and conspicuous'' disclosures and 
examples of how to satisfy the ``clear and conspicuous'' standard. The 
proposed revisions also would provide that the term ``amount'' 
represents a numerical

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amount throughout Regulation Z. The proposed updates to the staff 
commentary also provide guidance on consumers' exercise of rescission 
for certain home-secured loans. While the proposal would amend 
Regulation Z and the staff commentary, it is expected that these 
revisions would not increase the paperwork burden of creditors. With 
respect to state member banks, there are 1,312 respondents and 
recordkeepers. Current annual burden is estimated to be 618,398 hours.
    Because the records would be maintained at state member banks and 
the notices are not provided to the Federal Reserve, no issue of 
confidentiality arises under the Freedom of Information Act.
    Comments on the collection of information should be sent to the 
Office of Management and Budget, Paperwork Reduction Project (7100-
0199), Washington, DC 20503, with copies of such comments sent to 
Cynthia Ayouch, Federal Reserve Board Clearance Officer, Division of 
Research and Statistics, Mail Stop 41, Board of Governors of the 
Federal Reserve System, Washington, DC 20551.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside bold-faced arrows while 
language that would be deleted is set off with bold-faced brackets.

List of Subjects in 12 CFR Part 226

    Advertising, Consumer protection, Federal Reserve System, Reporting 
and recordkeeping requirements, Truth in Lending.

    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation Z, 12 CFR part 226, as set forth below:

PART 226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 226 would continue to read as 
follows:

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).

    2. Section 226.2 is amended by adding a new paragraph (a)(27) and 
adding a new paragraph (b)(5) to read as follows:

Subpart A--General

* * * * *


Sec.  226.2  Definitions and rules of construction.

    (a) Definitions. For purposes of this regulation, the following 
definitions apply:
* * * * *
    (27) Clear and conspicuous means that a disclosure is reasonably 
understandable and designed to call attention to the nature and 
significance of the information in the disclosure.
* * * * *
    (b) Rules of construction. For purposes of this regulation, the 
following rules of construction apply:
* * * * *
    (5) Where the word ``amount'' is used in this regulation to 
describe disclosure requirements, it refers to a numerical amount.
    3. In Supplement I to Part 226:
    a. Under Section 226.2 Definitions and Rules of Construction, under 
2(a) Definitions, a new paragraph title 2(a)(27) Clear and conspicuous 
is added, and new paragraphs (27) 1. through (27) 4. are added; and 
under 2(b) Rules of Construction, a new paragraph (b)2. is added.
    b. Under Section 226.5 General Disclosure Requirements, under 
Paragraph 5(a)(1), paragraph 1. is revised.
    c. Under Section 226.5a Credit and Charge Card Applications and 
Solicitations, under Paragraph 5a(a)(2), paragraph 1. is revised.
    d. Under Section 226.15 Right of Rescission, under Paragraph 
15(a)(2), paragraph 1. is revised, and under Paragraph 15(d)(4), 
paragraph 1. is revised.
    e. Under Section 226.16 Advertising, paragraph 1. is revised.
    f. Under Section 226.18 Content of Disclosures, under Paragraph 
18(c)(1)(iii), paragraph 1. is revised.
    g. Under Section 226.19 Certain Residential Mortgage and Variable-
Rate Transactions, under 19(b) Certain variable-rate transactions, 
paragraph 1. is revised, and under Paragraph 19(b)(1), paragraph 1. is 
revised.
    h. Under Section 226.23 Right of Rescission, under Paragraph 
23(a)(2), paragraph 1. is revised, and under Paragraph 23(d)(4), 
paragraph 1. is revised.
    i. Under Section 226.24 Advertising, paragraph 1. is revised.
    j. Under Section 226.27, the section title is revised, paragraph 1. 
is revised, and paragraph 2. is removed and reserved.
    k. Under Section 226.32 Requirements for Certain Closed-End Home 
Mortgages, under Paragraph 32(a)(1)(ii), paragraph 1.ii. is revised.
    l. Under Appendix K--Total Annual Loan Cost Rate Computations for 
Reverse Mortgage Transaction, under (d) Reverse mortgage model form and 
sample form, under (d)(2), paragraph 1. would be revised.

Supplement I To Part 226--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

2(a) Definitions.

* * * * *
    2(a)(27) Clear and conspicuous.
    1. Reasonably understandable. Examples of disclosures that are 
reasonably understandable include disclosures that:
    i. Present the information in the disclosure in clear, concise 
sentences, paragraphs, and sections;
    ii. Use short explanatory sentences or bullet lists whenever 
possible;
    iii. Use definite, concrete, everyday words and active voice 
whenever possible;
    iv. Avoid multiple negatives;
    v. Avoid legal and highly technical business terminology 
whenever possible; and
    vi. Avoid explanations that are imprecise and readily subject to 
different interpretations.
    2. Designed to call attention. Examples of disclosures that are 
designed to call attention to the nature and significance of the 
information include disclosures that:
    i. Use a plain-language heading to call attention to the 
disclosure;
    ii. Use a typeface and type size that are easy to read. 
Disclosures in 12-point type generally meet this standard. 
Disclosures printed in less than 12-point type do not automatically 
violate the standard; however, disclosures in less than 8-point type 
would likely be too small to satisfy the standard;
    iii. Provide wide margins and ample line spacing;
    iv. Use boldface or italics for key words; and
    v. In a document that combines disclosures with other 
information, use distinctive type size, style, and graphic devices, 
such as shading or sidebars, to call attention to the disclosures.
    3. Other information. Except as otherwise provided, the ``clear 
and conspicuous'' standard does not prohibit adding to the required 
disclosures such items as contractual provisions, explanations of 
contract terms, state disclosures, and translations; or sending 
promotional material with the required disclosures. However, the 
presence of this other information may be a factor in determining 
whether the ``clear and conspicuous'' standard is met.
    4. Use of codes or symbols. The ``clear and conspicuous'' 
standard does not prohibit using codes or symbols such as APR (for 
annual percentage rate), FC (for finance charge), or Cr (for credit 
balance), so long as

[[Page 68798]]

a legend or description of the code or symbol is provided on the 
disclosure statement.
* * * * *

2(b) Rules of Construction

* * * * *
    2. Amount. A creditor would state a dollar amount when 
disclosing the amount financed, finance charge, or the amount of any 
payment for a closed-end transaction (Subpart C). A creditor might 
explain how the amount of any finance charge will be determined by 
stating a percentage (for example, where the fee is a percentage of 
each cash advance) or a dollar amount (for example, a minimum 
finance charge of $1.00) in disclosures provided before the first 
transaction under an open-end plan (Subpart B).
* * * * *

Subpart B--Open-End Credit

* * * * *

Section 226.5--General Disclosure Requirements

5(a) Form of Disclosures

    Paragraph 5(a)(1).
    1. Clear and conspicuous. See Sec.  226.2(a)(27) and 
accompanying comments. [The ``clear and conspicuous'' standard 
requires that disclosures be in a reasonably understandable form. 
Except where otherwise provided, the standard does not require that 
disclosures be segregated from other material or located in any 
particular place on the disclosure statement, or that numerical 
amounts or percentages be in any particular type size. (But see 
comments 5a(a)(2)-1 and -2 for special rules concerning section 
226.5a disclosures for credit card applications and solicitations.) 
The standard does not prohibit:
    [sbull] Pluralizing required terminology (finance charge and 
annual percentage rate).
    [sbull] Adding to the required disclosures such items as 
contractual provisions, explanations of contract terms, state 
disclosures, and translations.
    [sbull] Sending promotional material with the required 
disclosures.
    [sbull] Using commonly accepted or readily understandable 
abbreviations (such as mo. for month or Tx. for Texas) in making any 
required disclosures.
    [sbull] Using codes or symbols such as APR (for annual 
percentage rate), FC (for finance charge), or Cr (for credit 
balance), so long as a legend or description of the code or symbol 
is provided on the disclosure statement.]
* * * * *

Section 226.5a--Credit and Charge Card Applications and 
Solicitations

* * * * *

5a(a) General Rules

5a(a)(2) Form of Disclosures

    1. Clear and conspicuous standard. See Sec.  226.2(a)(27) and 
accompanying comments. [For purposes of Sec.  226.5a disclosures, 
``clear and conspicuous'' means in a reasonably understandable form 
and readily noticeable to the consumer. As to type size, disclosures 
in 12-point type are deemed to be readily noticeable for purposes of 
section 226.5a. Disclosures printed in less than 12-point type do 
not automatically violate the standard; however, disclosures in less 
than 8-point type would likely be too small to satisfy the standard. 
Disclosures that are transmitted by electronic communication are 
judged for purposes of the clear-and-conspicuous standard based on 
the form in which they are provided even though they may be viewed 
by the consumer in a different form.]
* * * * *

Section 226.15--Right of Rescission

15(a) Consumer's Right to Rescind

* * * * *
    Paragraph 15(a)(2).
    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec.  226.15(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.  
226.15(d)(2) does not begin to run until the notification has been 
received. The creditor may designate an agent to receive the 
notification so long as the agent's name and address appear on the 
notice provided to the consumer under Sec.  226.15(b). Where the 
creditor fails to provide the consumer with a designated address for 
sending the notification of rescission and the consumer sends the 
notification to someone other than the creditor or assignee, such as 
a third-party loan servicer acting as the creditor's agent, state 
law determines whether delivery to that person constitutes delivery 
to the creditor or assignee.
* * * * *

15(d) Effects of Rescission

* * * * *
    Paragraph 15(d)(4).
    1. Modifications. The procedures outlined in Sec.  226.15(d)(2) 
and (3) may be modified by a court. For example, when a consumer is 
in bankruptcy proceedings and prohibited from returning anything to 
the creditor, or when the equities dictate, a modification might be 
made. The consumer s substantive right to rescind under Sec.  
226.15(a)(1) and Sec.  226.15(d)(1) is not affected by the 
procedures referred to in Sec.  226.15(d)(2) and (3), or the 
modification of those procedures by a court.
* * * * *

Section 226.16--Advertising

    1. Clear and conspicuous standard. See Sec.  226.2(a)(27) and 
accompanying comments. [Section 226.16 is subject to the general 
``clear and conspicuous'' standard for subpart B (see Sec.  
226.5(a)(1)) but prescribes no specific rules for the format of the 
necessary disclosures. The credit terms need not be printed in a 
certain type size nor need they appear in any particular place in 
the advertisement.]
* * * * *

Subpart C--Closed-End Credit

* * * * *

Section 226.18--Content of Disclosures

* * * * *

18(c) Itemization of Amount Financed

* * * * *
    Paragraph 18(c)(1)(iii).
    1. Amounts paid to others. This includes, for example, tag and 
title fees; amounts paid to insurance companies for insurance 
premiums; security interest fees, and amounts paid to credit 
bureaus, appraisers or public officials. When several types of 
insurance premiums are financed, they may, at the creditor's option, 
be combined and listed in one sum, labeled ``insurance'' or similar 
term. This includes, but is not limited to, different types of 
insurance premiums paid to one company and different types of 
insurance premiums paid to different companies. Except for insurance 
companies and other categories noted in footnote [40] 41, third 
parties must be identified by name.
* * * * *

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

* * * * *

19(b) Certain Variable-Rate Transactions

    1. Coverage. Section 226.19(b) applies to all closed-end 
variable-rate transactions that are secured by the consumer's 
principal dwelling and have a term greater than one year. The 
requirements of this section apply not only to transactions 
financing the initial acquisition of the consumer's principal 
dwelling, but also to any other closed-end variable-rate transaction 
secured by the principal dwelling. Closed-end variable-rate 
transactions that are not secured by the principal dwelling, or are 
secured by the principal dwelling but have a term of one year or 
less, are subject to the disclosure requirements of Sec.  
226.18(f)(1) rather than those of Sec.  226.19(b). (Furthermore, 
``shared-equity'' or ``shared-appreciation'' mortgages are subject 
to the disclosure requirements of Sec.  226.18(f)(1) rather than 
those of Sec.  226.19(b) regardless of the general coverage of those 
sections.) For purposes of this section, the term of a variable-rate 
demand loan is determined in accordance with the commentary to Sec.  
226.17(c)(5). In determining whether a construction loan that may be 
permanently financed by the same creditor is covered under this 
section, the creditor may treat the construction and the permanent 
phases as separate transactions with distinct terms to maturity or 
as a single combined transaction. For purposes of the disclosures 
required under Sec.  226.18, the creditor may nevertheless treat the 
two phases either as separate transactions or as a single combined 
transaction in accordance with Sec.  226.17(c)(6). Finally, in any 
assumption of a variable-rate transaction secured by the consumer's 
principal dwelling with a term greater than one year, disclosures 
need not be provided under Sec. Sec.  226.18(f)(2)(ii) or 226.19(b).
* * * * *
    Paragraph 19(b)(1).
    1. Substitute. Creditors who wish to use publications other than 
the Consumer Handbook on Adjustable Rate Mortgages must make a good 
faith determination that their brochures are suitable substitutes to 
the

[[Page 68799]]

Consumer Handbook. A substitute is suitable if it is, at a minimum, 
comparable to the Consumer Handbook in substance and 
comprehensiveness. Creditors are permitted to provide more detailed 
information than is contained in the Consumer Handbook. [In 
determining whether a construction loan that may be permanently 
financed by the same creditor is covered under this section, the 
creditor may treat the construction and the permanent phases as 
separate transactions with distinct terms to maturity or as a single 
combined transaction. For purposes of the disclosures required under 
Sec.  226.18, the creditor may nevertheless treat the two phases 
either as separate transactions or as a single combined transaction 
in accordance with Sec.  226.17(c)(6). Finally, in any assumption of 
a variable-rate transaction secured by the consumer's principal 
dwelling with a term greater than one year, disclosures need not be 
provided under Sec. Sec.  226.18(f)(2)(ii) or 226.19(b).]
* * * * *

Section 226.23--Right of Rescission

23(a) Consumer's Right To Rescind

* * * * *
    Paragraph 23(a)(2).
    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec.  226.23(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.  
226.23(d)(2) does not begin to run until the notification has been 
received. The creditor may designate an agent to receive the 
notification so long as the agent's name and address appear on the 
notice provided to the consumer under Sec.  226.23(b). Where the 
creditor fails to provide the consumer with a designated address for 
sending the notification of rescission and the consumer sends the 
notification to someone other than the creditor or assignee, such as 
a third-party loan servicer acting as the creditor's agent, state 
law determines whether delivery to that person constitutes delivery 
to the creditor or assignee.
* * * * *

23(d) Effects of Rescission.

* * * * *
    Paragraph 23(d)(4).
    1. Modifications. The procedures outlined in Sec.  226.23(d)(2) 
and (3) may be modified by a court. For example, when a consumer is 
in bankruptcy proceedings and prohibited from returning anything to 
the creditor, or when the equities dictate, a modification might be 
made. The consumer's substantive right to rescind under Sec.  
226.23(a)(1) and Sec.  226.23(d)(1) is not affected by the 
procedures referred to in Sec.  226.23(d)(2) and (3), or the 
modification of those procedures by a court.
* * * * *

Section 226.24--Advertising

    1. Clear and conspicuous standard. See Sec.  226.2(a)(27) and 
accompanying comments. On a merchandise tag that is an advertisement 
under the regulation, a creditor is not prohibited under the ``clear 
and conspicuous'' standard from including the necessary credit terms 
on both sides of the tag, so long as each side is accessible. [This 
section is subject to the general ``clear and conspicuous'' standard 
for this subpart but prescribes no specific rules for the format of 
the necessary disclosures. The credit terms need not be printed in a 
certain type size nor need they appear in any particular place in 
the advertisement. For example, a merchandise tag that is an 
advertisement under the regulation complies with this section if the 
necessary credit terms are on both sides of the tag, so long as each 
side is accessible.]
* * * * *

Subpart D--Miscellaneous

* * * * *

Section 226.27--[Spanish] Language of Disclosures

    1. Subsequent disclosures. If a creditor [in Puerto Rico] 
provides initial disclosures in [Spanish] a language other than 
English, subsequent disclosures need not be in [Spanish] that other 
language. For example, if the creditor gave Spanish-language initial 
disclosures, periodic statements and change-in-terms notices may be 
made in English.
    2. [Removed and reserved.]
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

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

* * * * *
    Paragraph 32(a)(1)(ii).
    1. Total loan amount. For purposes of the ``points and fees'' 
test, the total loan amount is calculated by taking the amount 
financed, as determined according to section 226.18(b), and 
deducting any cost listed in section 226.32(b)(1)(iii) and section 
226.32(b)(1)(iv) that is both included as points and fees under 
section 226.32(b)(1) and financed by the creditor. Some examples 
follow, each using a $10,000 amount borrowed, a $300 appraisal fee, 
and $400 in points. A $500 premium for optional credit life 
insurance is used in one example.
* * * * *
    ii. If the consumer pays the $300 fee for the creditor-conducted 
appraisal in cash at closing, the $300 is included in the points and 
fees calculation because it is paid to the creditor. However, 
because the $300 is not financed by the creditor, the fee is not 
part of the amount financed under section 226.18(b) [($10,000, in 
this case)]. In this case, the amount financed is the same as the 
total loan amount [is] $9,600 ($10,000, less $400 in prepaid finance 
charges).
* * * * *

Appendix K--Total-Annual-Loan-Cost Rate Computations for Reverse-
Mortgage Transactions

* * * * *

(d) Reverse-Mortgage Model Form and Sample Form

* * * * *

(d)(2) Sample Form

    1. General. [The ``clear and conspicuous'' standard for reverse-
mortgage disclosures does not require disclosures to be printed in 
any particular type size.] The ``clear and conspicuous'' standard 
applies to disclosures required by Sec.  226.33. Disclosures may be 
made on more than one page, and use both the front and the reverse 
sides, as long as the pages constitute an integrated document and 
the table disclosing the total annual loan-cost rates is on a single 
page.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, November 25, 2003.
Jennifer J. Johnson,
Secretary of the Board.

[FR Doc. 03-29945 Filed 12-9-03; 8:45 am]
BILLING CODE 6210-01-P