[Federal Register Volume 69, Number 62 (Wednesday, March 31, 2004)]
[Rules and Regulations]
[Pages 16769-16775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-7150]


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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: Final rule.

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SUMMARY: The Board is publishing revisions to Regulation Z, which 
implements the Truth in Lending Act, and to the staff commentary to the 
regulation. Regulation Z is revised to add an interpretative rule of 
construction providing that where the word ``amount'' is used in the 
regulation to describe disclosure requirements, it refers to a 
numerical amount. The staff commentary is revised to provide guidance 
on consumers' exercise of the right to rescind certain home-secured 
loans. In addition, several technical revisions to the staff commentary 
are being published.

DATES: The rule is effective April 1, 2004. Compliance is mandatory 
beginning October 1, 2004.

FOR FURTHER INFORMATION CONTACT: Elizabeth A. Eurgubian, Attorney, and 
Krista P. DeLargy, Senior Attorney, Division of Consumer and Community

[[Page 16770]]

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 commentary interprets the requirements of Regulation 
Z (12 CFR part 226 (Supp. I)), and is updated annually.
    In December 2003, the Board published for comment proposed 
revisions to Regulation Z and to the staff commentary. 68 FR 68793, 
December 10, 2003. The revisions sought to add a rule of construction 
to clarify that the word ``amount'' represents a numerical amount 
throughout Regulation Z and the staff commentary; and to provide 
guidance on consumers' exercise of rescission rights for certain home-
secured loans. Several technical revisions to the staff commentary were 
proposed. In addition, the staff requested information regarding debt 
cancellation and debt suspension products. Finally, as part of a 
rulemaking under several of the Board's consumer financial services and 
fair lending regulations, the Board sought to establish a more uniform 
standard for providing clear and conspicuous disclosures and provide 
guidance on how to meet that standard.
    The Board received approximately 150 comment letters; about 140 
letters were from financial institutions, other creditors and their 
representatives, and insurance providers. Eight letters were received 
from consumer representatives, and two letters from government 
officials. Most comment letters focused on the proposed definition of 
``clear and conspicuous'' and related guidance. About 30 comment 
letters discussed the other proposed revisions to Regulation Z and the 
staff commentary.
    The proposed amendment to Regulation Z defining ``clear and 
conspicuous'' and the related guidance in the proposed staff commentary 
are not being adopted in this rulemaking, as discussed below. With 
respect to the other proposed revisions to Regulation Z and the staff 
commentary, commenters generally supported the proposed revisions. 
Accordingly, the final rule and remaining staff interpretations are 
being adopted substantially as proposed, although some changes have 
been made for clarity in response to the commenters' suggestions, as 
discussed below.

Comments on the ``Clear and Conspicuous'' Standard

    Under the consumer financial services and fair lending laws 
administered by the Board, consumer disclosures generally must be 
``clear and conspicuous.'' Assuming that most institutions already 
provide consumer disclosures that satisfy the clear and conspicuous 
standard, the Board's proposals were intended to articulate a more 
precise standard that could be used as a baseline to determine when an 
institution may not be meeting the legal standard. Currently, there is 
little guidance on what that standard means. Moreover, the laws and 
regulations contain standards that are similar but not identical. 
Regulation P, which implements the financial privacy provisions of the 
Gramm-Leach-Bliley Act, articulates more precisely than the other 
consumer regulations the standard for providing clear and conspicuous 
disclosures that consumers will notice and understand. Accordingly, the 
standard and the compliance guidance in Regulation P was used as the 
model for the December 2003 proposal, which also included compliance 
guidance in the form of examples of how institutions could satisfy the 
standard.
    Although the Board's effort to establish a more uniform ``clear and 
conspicuous'' standard is supported by many commenters, almost all 
industry commenters strongly oppose the Board's proposal based on 
Regulation P. They assert that the revisions would establish more 
burdensome standards that would be costly to implement and expose them 
to litigation. For example, industry commenters stated that providing 
``conspicuous'' disclosures that are ``designed to call attention to 
the nature and significance of the information in the disclosure'' 
would not be workable for disclosures contained in credit card or 
deposit account agreements. These commenters asserted that the proposal 
could mandate fundamental changes in how institutions comply with the 
``clear and conspicuous'' standard.
    Consumer advocates generally support the proposals' goals, but they 
believe the proposals do not set a high enough standard. For example, 
some consumer advocates said that disclosures in a type size less than 
10-point should be deemed too small. Some believe that the proposed 
guidance is too broad and could be interpreted to allow institutions to 
include unrelated information amid disclosures that are currently 
required to be segregated.
    The proposed amendment to Regulation Z defining ``clear and 
conspicuous'' and the related guidance in the proposed staff commentary 
are not being adopted in final form in this rulemaking. Board staff is 
continuing to review the issues raised by the comment letters 
concerning the clear and conspicuous standard and is considering 
options to address the commenters' concerns.

Comments on Debt Cancellation and Debt Suspension Agreements

    In the December 2003 proposal, the Board requested information 
regarding debt cancellation 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. About 25 commenters, mostly 
creditors, insurance companies, consultants, and trade associations, 
responded to the Board's request for information and views about those 
products. They generally confirmed that the products are being made 
available by an increasing number of creditors in connection with many 
types of credit, on a wide and growing variety of terms.
    The Board expressly solicited comment on the need, if any, for 
additional guidance about the application of TILA and Regulation Z to 
the sale of debt cancellation and debt suspension products. Most 
industry commenters generally favored expanding the current rule that 
allows charges for certain types of optional coverage to be excluded 
from TILA's finance charge and APR, if certain disclosures are 
provided. These commenters stated that the exclusion in the current 
rule should encompass all types of debt cancellation and debt 
suspension agreements. In contrast, a consumer group favored repeal of 
the current rule.
    Most industry commenters requested that the Board adopt procedures 
for

[[Page 16771]]

creditors to follow when seeking to convert borrowers' credit insurance 
coverage to a debt cancellation or debt suspension agreement. Most 
commenters stated that creditors should be permitted to use the same 
procedures used by credit card issuers when notifying consumers of a 
change in the provider of credit insurance pursuant to Sec.  226.9(f). 
A few commenters asserted that other applicable laws make the adoption 
of additional conversion rules or guidance under TILA unnecessary for 
debt cancellation and debt suspension products.
    The Board solicited comment but did not propose any specific 
revisions to the regulation or commentary concerning debt cancellation 
or debt suspension agreements. Accordingly, today's final rule does not 
address these issues. Board staff will continue to gather information 
about debt cancellation and debt suspension products before determining 
whether to recommend proposing new rules or guidance.

II. Revisions

Subpart A--General

Section 226.2--Definitions and Rules of Construction

2(b) Rules of Construction

    The Board proposed adding an interpretative rule of construction in 
Sec.  226.2(b)(5) stating that, wherever the word ``amount'' is used in 
Regulation Z and the staff commentary to describe a disclosure 
requirement, it refers to a numerical amount. Examples illustrating how 
the interpretative rule of construction for ``amount'' applies to 
certain required disclosures were proposed in the staff commentary. The 
proposed interpretation addresses a recent court decision permitting 
narrative descriptions of amounts rather than numerical amounts to 
disclose the payments scheduled to repay a closed-end credit 
transaction. See Carmichael v. The Payment Center, Inc., 336 F. 3d 636 
(7th Cir. 2003); 5 U.S.C. 1638(a)(6); 12 CFR 226.18(g).
    A broad interpretation of the term ``amount,'' suggesting that 
narrative descriptions may replace numerical amounts, is contrary to 
TILA's mandate to provide consumers with clear and conspicuous credit 
disclosures. The Carmichael court's decision could lead to confusing 
disclosures that are not uniform.
    Commenters uniformly supported the proposed rule of construction. 
Consumer groups expressed concern, however, that the proposed guidance 
in the staff commentary did not state with sufficient precision when 
creditors are permitted to disclose a numerical amount other than a 
dollar amount.
    The Board's rule of construction is being adopted as proposed. To 
address commenters' concerns, comment 2(b)-2 has been revised for 
clarity. As adopted, comment 2(b)-2 provides that the numerical amount 
required to be disclosed must be expressed as a dollar amount unless 
the text of the regulation or commentary indicates otherwise. It also 
provides examples of when dollar amounts must be disclosed, and when 
percentages may be disclosed.

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 the consumer's principal dwelling secures an 
extension of credit, the consumer may rescind the transaction within 
three business days after becoming obligated on the debt (and for open-
end plans, after opening or increasing the credit limit on the plan), 
and in some cases has the right to rescind for up to three years. See 
15 U.S.C. 1635(a); 12 CFR 226.15(a)(1). The right of rescission allows 
consumers time to reexamine their credit contracts and cost disclosures 
and to reconsider whether to place a lien on their homes. A consumer 
exercises the right to rescind by notifying the creditor of the 
rescission by mail, telegram, or other written communication. Creditors 
must provide consumers with a form to use to exercise the right to 
rescind, which must include the name and address of the creditor or 
agent of the creditor to receive the written communication. See Sec.  
226.15(b). A consumer's notice is considered given when mailed, 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 creditors may designate an agent to 
receive the notification so long as the agent's name and address appear 
on the rescission form provided to the consumer. The Board proposed to 
revise the comment to address situations where a creditor fails to 
provide the required form or to designate an address for sending the 
notice. The proposal provided that, in such cases, if a consumer sent 
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 is effective if applicable law deems 
delivery to that person to be delivery to the creditor or assignee. The 
comment is being adopted with revisions in response to the public 
comments.
    Commenters generally favored guidance about delivery of a notice of 
rescission when a creditor has not provided the required form or an 
address for sending the notice. Consumer groups and industry 
representatives, including major trade associations, generally agreed 
that, in such cases, delivering the rescission notice to the loan 
servicer (the person to whom, or the address to which, payments are 
sent) should be deemed delivery to the creditor or assignee. In their 
view, in this circumstance reliance on state law is unnecessary to 
determine that the loan servicer is the creditor's or assignee's agent. 
Some industry commenters expressed concern about relying on state law 
to determine whether delivery to some entity other than the loan 
servicer might also constitute delivery to the creditor or assignee.
    In response to commenters' suggestions, comment 15(a)(2)-1 is being 
revised to state expressly that where the creditor fails to provide the 
consumer an address for sending the notification of rescission, the 
consumer's delivery of notification to the person or address to which 
the consumer has been directed to send payments constitutes delivery to 
the creditor or assignee. This bright-line guidance provides clarity 
for creditors and a practical outcome for consumers. As proposed, 
however, the comment recognizes the possibility that the creditor or 
assignee also may have allowed some other entity to serve as its agent 
for this purpose, which must be determined by the particular 
circumstances under the applicable state law. Reliance on state law is 
appropriate to avoid penalizing consumers who were not instructed to 
send the rescission notice to the loan servicer and who may send the 
notice to another party acting on behalf of the creditor (for example, 
an attorney representing the creditor).
    Some consumer representatives suggested that the comment be revised 
to clarify that rescission is effective if the creditor or assignee 
receives actual notice from any source, for example from legal 
pleadings. The suggested revision is beyond the scope of the proposal.

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

[[Page 16772]]

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. The creditor's tender triggers the consumer's 
duty to return any money or property that the creditor delivered to the 
consumer. A court may modify these tender procedures. See Sec.  
226.15(d)(2)-(4).
    Under the proposal, comment 15(d)(4)-1 was revised to state 
expressly that the sequence of procedures under Sec.  226.15(d)(2) and 
(3), or a modification of those procedures by a court, does not affect 
consumers substantive right to rescind. Thus, where the consumer's 
right to rescind is contested by the creditor, a court would normally 
determine whether the consumer has a right to rescind and determine the 
amounts owed before establishing the procedures for the parties to 
tender any money or property.
    Commenters generally supported the proposed revision. Nevertheless, 
a few industry representatives and consumer groups asked Board staff to 
address an issue not raised in the proposal. These industry 
representatives requested revisions to the commentary to support court 
decisions that affirmed the court's authority to impose equitable 
conditions to ensure that consumers meet their financial obligations 
before the creditor's security interest is declared void. Consumer 
groups requested revisions that would support other court decisions 
holding that the voiding of the security interest under TILA's 
rescission provision is automatic and independent of the consumer's 
ability to tender money or property.
    Comment 15(d)(4)-1 is adopted as proposed, with some modifications 
for clarity, and does not address the additional issue raised by the 
commenters. The comment clarifies only that the sequence of procedures 
under Sec.  226.15(d)(2) and (3), or a court's modification of those 
procedures under Sec.  226.15(d)(4), does not affect consumers' 
substantive right to rescind and to have the loan amount reduced, which 
may be necessary before the consumer is able to establish how the 
consumer 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 is 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 is 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 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 is revised to 
state expressly that the sequence of procedures under Sec.  
226.23(d)(2) and (3), or a modification of those procedures by a court 
under Sec.  226.23(d)(4), does not affect consumers' substantive right 
to rescind and to have the loan amount adjusted accordingly, which may 
be necessary before consumers are able to establish how they will 
refinance or otherwise repay the loan. (See supplementary information 
to 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 are made to comment 27-1, 
and comment 27-2 is 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 by 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 is made to comment 
32(a)(1)(ii)-1, to correct a dollar amount given in one of the 
examples. No substantive change is intended.

III. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act, 
the Board has reviewed the amendment to Regulation Z. The amendment 
adds an interpretative rule of construction to state that the word 
``amount'' represents a numerical amount throughout Regulation Z. In 
addition, revisions to the staff commentary provide guidance on 
consumers' exercise of the right to rescind certain home-secured loans. 
The amendment does not have any significant impact on small entities.

IV. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 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 TILA and 
Regulation Z. 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

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respective constituencies under this regulation.
    The revisions provide that the term ``amount'' represents a 
numerical amount throughout Regulation Z. The revisions to the staff 
commentary also provide guidance on consumers' exercise of rescission 
for certain home-secured loans. These revisions are not expected to 
increase the paperwork burden of creditors.
    With respect to state member banks, there are 1,312 respondents and 
recordkeepers. Current annual burden under Regulation Z 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.
    The Board has a continuing interest in the public's opinion of the 
Federal Reserve's collections of information. At any time, comments 
regarding the burden estimated, or any other aspect of this collection 
of information, including suggestions for reducing the burden estimate, 
may 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.

List of Subjects in 12 CFR Part 226

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


0
For the reasons set forth in the preamble, the Board amends Regulation 
Z, 12 CFR part 226, as set forth below:

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. Section 226.2 is revised by adding a new paragraph (b)(5) to read as 
follows:

Subpart A--General

* * * * *


Sec.  226.2  Definitions and rules of construction.

* * * * *
    (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.
* * * * *

0
3. In Supplement I to part 226:
0
a. Under Section 226.2 Definitions and Rules of Construction, under 
2(b) Rules of Construction, a new paragraph 2. is added.
0
b. 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.
0
c. Under Section 226.18 Content of Disclosures, under Paragraph 
18(c)(1)(iii), paragraph 1. is revised.
0
d. 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.
0
e. 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.
0
f. Under Section 226.27, the section title is revised, paragraph 1. is 
revised, and paragraph 2. is removed and reserved.
0
g. Under Section 226.32 Requirements for Certain Closed-End Home 
Mortgages, under Paragraph 32(a)(1)(ii), paragraph 1.ii. is revised.

Supplement I To Part 226--Official Staff Interpretations

* * * * *

Subpart A--General

* * * * *

Section 226.2--Definitions and Rules of Construction

* * * * *
    2(b) Rules of Construction.
* * * * *
    2. Amount. The numerical amount must be a dollar amount unless 
otherwise indicated. For example, in a closed-end transaction (Subpart 
C), the amount financed and the amount of any payment must be expressed 
as a dollar amount. In some cases, an amount should be expressed as a 
percentage. For example, in disclosures provided before the first 
transaction under an open-end plan (Subpart B), creditors are permitted 
to explain how the amount of any finance charge will be determined; 
where a cash advance fee (which is a finance charge) is a percentage of 
each cash advance, the amount of the finance charge for that fee is 
expressed as a percentage.
* * * * *

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, delivery of the notification to the person or address to 
which the consumer has been directed to send payments constitutes 
delivery to the creditor or assignee. State law determines whether 
delivery of the notification to a third party other than the person to 
whom payments are made is delivery to the creditor or assignee, in the 
case where the creditor fails to designate an address for sending the 
notification of rescission.
* * * * *
    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 sequence of procedures under Sec.  226.15(d)(2) and (3), or a 
court's modification of those procedures under Sec.  226.15(d)(4), does 
not affect a consumer's substantive right to rescind and to have the 
loan amount adjusted accordingly. Where the consumer's right to rescind 
is contested by the creditor, a court would normally determine whether 
the consumer has a right to rescind and determine the amounts owed 
before establishing the procedures for the parties to tender any money 
or property.
* * * * *

[[Page 16774]]

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 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 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.
* * * * *

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, delivering notification to the person or address to which 
the consumer has been directed to send, payments constitutes delivery 
to the creditor or assignee. State law determines whether delivery of 
the notification to a third party other than the person to whom 
payments are made is delivery to the creditor or assignee, in the case 
where the creditor fails to designate an address for sending the 
notification of rescission.
* * * * *
    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 sequence of procedures under Sec.  226.23(d)(2) and (3), or a 
court's modification of those procedures under Sec.  226.23(d)(4), does 
not affect a consumer's substantive right to rescind and to have the 
loan amount adjusted accordingly. Where the consumer's right to rescind 
is contested by the creditor, a court would normally determine whether 
the consumer has a right to rescind and determine the amounts owed 
before establishing the procedures for the parties to tender any money 
or property.
* * * * *

Subpart D--Miscellaneous

* * * * *

Section 226.27--Language of Disclosures

    1. Subsequent disclosures. If a creditor provides initial 
disclosures in a language other than English, subsequent disclosures 
need not be in 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 Mortgage

* * * * *
    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 Sec.  226.18(b), and deducting any cost listed 
in Sec.  226.32(b)(1)(iii) and Sec.  226.32(b)(1)(iv) that is both 
included as points and fees under Sec.  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

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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 Sec.  226.18(b). In this case, 
the amount financed is the same as the total loan amount: $9,600 
($10,000, less $400 in prepaid finance charges).
* * * * *

    By order of the Board of Governors of the Federal Reserve System 
regarding the rule of construction, and acting through the Director 
of the Division of Consumer and Community Affairs under delegated 
authority regarding the official staff interpretations, March 25, 
2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-7150 Filed 3-30-04; 8:45 am]
BILLING CODE 6210-01-P