[Federal Register Volume 74, Number 164 (Wednesday, August 26, 2009)]
[Proposed Rules]
[Pages 43428-43613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-18121]
[[Page 43427]]
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Part III
Federal Reserve System
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12 CFR Part 226
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Truth in Lending; Proposed Rule
Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 /
Proposed Rules
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1367]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend Regulation Z, which implements the
Truth in Lending Act (TILA), and the Official Staff Commentary to the
regulation, following a comprehensive review of TILA's rules for open-
end home-secured credit, or home-equity lines of credit (HELOCs).
The Board proposes changes to the format, timing, and content
requirements for the four main types of HELOC disclosures required by
Regulation Z: disclosures at application; disclosures at account
opening; periodic statements; and change-in-terms notices. The Board
proposes to replace disclosures required at the time that a consumer
applies for a HELOC with a one-page, Board-published summary of basic
information and risks regarding HELOCs. The Board also proposes to move
the timing of disclosures regarding a creditor's HELOC plan from the
time of application to within three business days after application,
and to require the disclosures to include significant transaction-
specific rates and terms.
The Board also proposes to provide additional guidance on when a
creditor may temporarily suspend advances on a HELOC or reduce the
credit limit, and what a creditor's obligations are concerning
reinstating such accounts. In addition, the proposal would limit the
ability of a creditor to terminate a HELOC for payment-related reasons;
a creditor could do so only if the consumer failed to make a required
minimum payment more than 30 days after the due date for that payment.
Changes to disclosure requirements related to suspension of HELOC
advances, reduction of the credit limit, and account terminations are
also proposed.
DATES: Comments must be received on or before December 24, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1367, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Lorna M. Neill, Attorney; John Wood or
Krista Ayoub, Counsel; or Jelena McWilliams, Attorney, Division of
Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, at (202) 452-3667 or 452-2412; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION: The Board proposes changes to the format,
timing, and content requirements for the four main types of home equity
line of credit (HELOC) disclosures required by Regulation Z: (1)
Disclosures at application; (2) disclosures at account opening; (3)
periodic statements; and (4) change-in-terms notices. The Board
proposes to replace disclosures required at the time that a consumer
applies for a HELOC with a one-page, Board-published summary of basic
information and risks regarding HELOCs. The Board also proposes to move
the timing of disclosures regarding a creditor's HELOC plan from the
time of application to within three business days after application,
and to require the disclosures to include significant transaction-
specific rates and terms. At the time of account opening, the creditor
would be required to provide a disclosure with formatting similar to
that provided within three business days after application, but with
certain changes such as additional information regarding fees.
Formatting and other changes are proposed for the periodic statement,
such as elimination of the requirement to disclose the effective annual
percentage rate (APR) and a requirement to disclose the total of
interest and fees for both the period and the year to date. HELOC
creditors would be required to give consumers notice of a change in a
HELOC term at least 45 days in advance of the effective date of the
change.
The Board also proposes to provide additional guidance on when a
creditor may temporarily suspend advances on a HELOC or reduce the
credit limit, and what a creditor's obligations are concerning
reinstating such accounts. In addition, the proposal would limit the
ability of a creditor to terminate a HELOC for payment-related reasons;
a creditor could do so only if the consumer failed to make a required
minimum payment more than 30 days after the due date for that payment.
Changes to disclosure requirements related to suspension of HELOC
advances, reduction of the credit limit, and account terminations are
also proposed.
I. Background
A. TILA and Regulation Z
Congress enacted TILA based on findings that economic stability
would be enhanced and competition among consumer credit providers
strengthened by the informed use of credit resulting from consumers'
awareness of the cost of credit. The purposes of TILA are (1) to
provide meaningful disclosure of credit terms to enable consumers to
compare credit terms available in the marketplace more readily and
avoid the uninformed use of credit; and (2) to protect consumers
against inaccurate and unfair credit billing.
TILA's disclosures differ depending on whether consumer credit is
an open-end (revolving) plan or a closed-end (installment) loan. TILA
also contains procedural and substantive protections for consumers.
TILA is implemented by the Board's Regulation Z. An Official Staff
Commentary interprets the requirements of Regulation Z. By statute,
creditors that follow in good faith Board or official staff
interpretations are insulated from civil liability, criminal penalties,
or administrative sanction.
B. TILA and Regulation Z Provisions on Open-end Credit Secured by a
Consumer's Dwelling
In 1989, the Board revised Regulation Z to implement the Home
Equity Loan Consumer Protection Act of 1988 (Home Equity Loan Act)
(Pub. L. 100-709, enacted on Nov. 23, 1988). See 15 U.S.C. 1637a, 1647,
implemented by 54 FR 24670 (June 9, 1989) (1989 HELOC Final
[[Page 43429]]
Rule). The 1989 revisions required creditors to disclose extensive
information about HELOCs to consumers at the time of application and
again when consumers open a HELOC plan. They also imposed substantive
limitations on HELOC creditors--principally by prohibiting changing the
interest rate and other terms except under very limited circumstances.
Since 1989, the Board has revised the HELOC provisions in the
regulation and staff commentary from time to time as necessary,
although the disclosure requirements and substantive limitations have
remained substantially the same. See, e.g., 56 FR 13751 (April 4,
1991); 60 FR 15463 (March 24, 1995); 63 FR 16669 (April 6, 1998); 66 FR
17329 (March 30, 2001); 72 FR 63462 (November 9, 2007).
In January 2009, the Board published final rules regarding open-end
(not home-secured) credit (74 FR 5244 (January 29, 2009)) (January 2009
Regulation Z Rule), which were the result of the Board's comprehensive
review of Regulation Z's open-end (not home-secured) credit rules. At
that time, the Board indicated that it was also reviewing open-end
home-secured credit rules. This proposal reflects the Board's review of
all aspects of Regulation Z and accompanying Official Staff Commentary
related to open-end home-secured credit, or HELOCs. The Board is not at
this time, however, specifically addressing issues related to
rescinding HELOCs, and requests comment in the proposal on any needed
changes to Regulation Z provisions and commentary regarding reverse
mortgages.
C. HELOC Market Trends
Board and other research has tracked a number of changes in the
HELOC market since 1989. One important trend is that HELOCs have become
much more popular with consumers: in 1988, 5.6% of homeowners had
HELOCs; \1\ in 1998, 10.6% of homeowners had HELOCs; and by 2007, the
percentage of homeowners with HELOCs had jumped to 18.4%.\2\ A number
of factors may have contributed to this trend, such as low interest
rates compared with other forms of consumer credit, appreciation in
home values, the deductibility of interest payments on mortgage debt,
and changes in mortgage practices.\3\ The uses of HELOCs have remained
relatively constant, with the highest uses in the areas of home
improvement and debt consolidation.\4\ Beginning in the late 1990s,
consumers increased their use of HELOCs for expenses such as vehicle
purchases, education, and vacations.\5\ Many HELOC consumers today, as
in the past, use their lines as an emergency source of funds.\6\
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\1\ Glenn Canner, Charles Luckett, and Thomas Durken, ``Home
Equity Lending,'' Federal Reserve Bulletin (May 1989).
\2\ Brian Bucks, Arthur Kennickell, Traci Mach, Kevin Moore,
``Changes in U.S. Family Finances from 2004 to 2007: Evidence from
the Survey of Consumer Finances,'' Federal Reserve Bulletin (Feb.
2009) and accompanying tables at http://www.federalreserve.gov/Pubs/OSS/oss2/2007/scf2007home.html.
\3\ Id.
\4\ Glenn Canner, Charles Luckett, and Thomas Durken, ``Recent
Developments in Home Equity Lending,'' Federal Reserve Bulletin
(April 1998); see also Brian Bucks, Arthur Kennickell, Traci Mach,
Kevin Moore, ``Changes in U.S. Family Finances from 2004 to 2007:
Evidence from the Survey of Consumer Finances,'' Federal Reserve
Bulletin (Feb. 2009) and accompanying tables at http://www.federalreserve.gov/Pubs/OSS/oss2/2007/scf2007home.html.
\5\ Id.
\6\ Supra note 2.
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As home prices rose in the past decade, more creditors entered the
HELOC market and creditors became more willing to extend HELOCs to
consumers with little equity in their homes.\7\ When the Board
published the 1989 HELOC Final Rule, it was commonly expected that most
HELOC borrowers would, at their maximum credit line limit, retain
around 20 percent of their home equity. See comment 5b(f)(3)(vi)-6. By
the mid-2000s, more creditors were willing to lend HELOCs at a combined
loan-to-value ratio of 100 percent or more, and, despite home value
appreciation, the overall percentage of equity remaining in homes was
appreciably lower than in earlier years.\8\ The Board's Survey of
Consumer Finances indicates that the average outstanding dollar amount
of a HELOC grew from $24,000 in 1998 to $39,000 in 2007.\9\
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\7\ Id.
\8\ Id.
\9\ Id.
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The recent economic downturn, a central component of which has been
declining property values, has dampened the availability of HELOCs and
reversed some of the overall trends in the HELOC market. The Board
believes, however, that a resurgence of these trends may occur once
property values stabilize. The Board expects that factors such as the
flexibility HELOC borrowers have to draw on a line as needed and the
tax deductibility of interest on home-secured debt should continue to
make HELOCs appealing to consumers over the long term.
Finally, in response to the economic challenges of the last few
years, creditors have relied more than in the past on provisions in
Regulation Z that allow them to terminate HELOC plans, suspend advances
on lines, and reduce the credit limit. As a result, many questions
regarding the requirements and limitations of these provisions have
been raised with the Board.
II. Summary of Major Proposed Changes
The Board proposes content, format, and timing changes to the four
main types of HELOC disclosures governed by Regulation Z: (1)
Disclosures at application; (2) disclosures at account opening; (3)
periodic statements; and (4) change-in-terms notices. The proposal also
provides additional guidance and protections, as well as revised
disclosure requirements, related to account terminations, line
suspensions and credit limit reductions, and reinstatement of accounts.
Disclosures at Application. Format, timing, and content changes are
proposed to make the disclosures currently required at application more
meaningful and easy for consumers to use. The proposed changes include:
Eliminating the requirement to provide a multiple-page
disclosure of generic rates and terms of the creditor's HELOC products,
as well as the requirement to provide the Board-published brochure
explaining HELOC products and risks entitled, ``What You Should Know
about Home Equity Lines of Credit.'' (HELOC brochure)
Requiring creditors to provide a new one-page Board
publication summarizing basic information and risks regarding HELOCs
entitled, ``Key Questions to Ask about Home Equity Lines of Credit.''
Replacing the application disclosure of generic rates and
terms with a transaction-specific disclosure that must be given within
three days after application. This disclosure would:
Provide information about rates and fees, payments, and
risks in a tabular format.
Highlight whether the consumer will be responsible for a
balloon payment.
Present payment examples based on both the current rate
available and the maximum possible rate for the HELOC.
Disclosures at Account Opening. The proposal would retain the
existing requirement to provide consumers with transaction-specific
information about rates, terms, payments, and risks at the time of
account opening. To facilitate comparison between terms provided within
three business days after application and terms available at account-
opening, the proposal would prescribe formatting for this information
similar to that of the proposed
[[Page 43430]]
disclosure to be provided within three business days after application.
Periodic Statements. To make disclosures on periodic statements
more understandable, the proposal would revise the format and content
of the periodic statement for HELOCs, largely conforming to the
periodic statement provisions finalized in the January 2009 Regulation
Z Rule for credit cards. The proposed changes include:
Eliminating the disclosure of the effective APR.
Grouping fees and interest charges separately, and
requiring disclosure of separate totals of interest and fees for both
the period and the year to date.
Change-in-Terms Notices. The proposal would revise the format and
content of the change-in-terms notice, largely conforming to the
change-in-terms provisions finalized in the January 2009 Regulation Z
Rule. To improve consumer protection, proposed changes include:
Expanding the circumstances under which advance written
notice of a rate change is required.
Increasing advance notice of a change in a HELOC term from
15 to 45 days in advance of the effective date of the change.
Account Terminations. The proposal would prohibit creditors from
terminating an account for payment-related reasons until the consumer
has failed to make a required minimum periodic payment more than 30
days after the due date for that payment. The Board is requesting
comment on whether a delinquency threshold of more than 30 days or some
other time period is appropriate.
Suspensions and Credit Limit Reductions. The proposal contains a
number of additional consumer protections related to temporary
suspensions of advances and credit limit reductions. The proposed
changes include:
Establishing a new safe harbor for suspending or reducing
a line of credit based on a ``significant'' decline in property value.
For HELOCs with a combined loan-to-value ratio at origination of 90
percent or higher, a five percent decline in the property value would
be ``significant.''
Providing additional guidance regarding the information on
which a creditor may rely to take action based on a material change in
the consumer's financial circumstances, such as the type of credit
report information that would be appropriate to consider.
Reinstatement of Accounts. The proposal contains additional
requirements regarding reinstating accounts that have been temporarily
suspended or reduced. The proposed changes include:
Requiring additional information in notices of suspension
or reduction about consumers' ongoing right to request reinstatement
and creditors' obligation to investigate this request.
Requiring creditors to complete an investigation of a
request for reinstatement within 30 days of receiving a request for
reinstatement and to give a notice of the investigation results to
consumers whose lines will not be reinstated.
III. The Board's Review of Open-End Credit Rules
A. Advance Notices of Proposed Rulemakings
December 2004 ANPR. The Board's current review of Regulation Z's
open-end credit rules was initiated in December 2004 with an advance
notice of proposed rulemaking.\10\ 69 FR 70925 (December 8, 2004). At
that time, the Board announced its intent to conduct its review of
Regulation Z in stages, focusing first on the rules for open-end
(revolving) credit accounts that are not home-secured, chiefly general-
purpose credit cards and retailer credit card plans. The December 2004
ANPR sought public comment on a variety of specific issues relating to
three broad categories: the format of open-end credit disclosures, the
content of those disclosures, and the substantive protections provided
for open-end credit under the regulation. The December 2004 ANPR
solicited comment on the scope of the Board's review, and also
requested commenters to identify other issues that the Board should
address in the review.
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\10\ The review was initiated pursuant to requirements of
section 303 of the Riegle Community Development and Regulatory
Improvement Act of 1994, section 610(c) of the Regulatory
Flexibility Act of 1980, and section 2222 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996. An announced notice of
proposed rulemaking is published to obtain preliminary information
prior to issuing a proposed rule or, in some cases, deciding whether
to issue a proposed rule.
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October 2005 ANPR. The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Public Law 109-8, enacted on April 20, 2005
(the Bankruptcy Act) primarily amended the federal bankruptcy code, but
also contained several provisions amending TILA. The Bankruptcy Act's
TILA amendments principally deal with open-end credit accounts and
require new disclosures on periodic statements, on credit card
applications and solicitations, and in advertisements.
In October 2005, the Board published a second ANPR to solicit
comment on implementing the Bankruptcy Act amendments (October 2005
ANPR). 70 FR 60235, October 17, 2005. In the October 2005 ANPR, the
Board stated its intent to implement the Bankruptcy Act amendments as
part of the Board's ongoing review of Regulation Z's open-end credit
rules.
B. Notices of Proposed Rulemakings
June 2007 Proposal. The Board published proposed amendments to
Regulation Z's rules for open-end plans that are not home-secured in
June 2007. 72 FR 32948 (June 14, 2007). The goal of the proposed
amendments was to improve the effectiveness of the disclosures that
creditors provide to consumers at application and throughout the life
of an open-end (not home-secured) account. In developing the proposal,
the Board conducted consumer research, in addition to considering
comments received on the two ANPRs. Specifically, the Board retained a
research and consulting firm (ICF Macro) to assist the Board in using
consumer testing to develop proposed model forms. The proposal would
have made changes to format, timing, and content requirements for the
five main types of open-end credit disclosures governed by Regulation
Z: (1) Credit and charge card application and solicitation disclosures;
(2) account-opening disclosures; (3) periodic statement disclosures;
(4) change-in-terms notices; and (5) advertising provisions.
May 2008 Proposal. In May 2008, the Board published revisions to
several disclosures in the June 2007 Proposal (May 2008 Proposal). 73
FR 28866 (May 19, 2008). In developing these revisions the Board
conducted additional consumer testing in consultation with ICF Macro.
In addition, the May 2008 Proposal contained proposed amendments to
Regulation Z that complemented a proposal published by the Board, along
with the Office of Thrift Supervision and the National Credit Union
Administration, to adopt rules prohibiting specific unfair acts or
practices regarding credit card accounts under their authority under
the Federal Trade Commission Act. See 15 U.S.C. 57a(f)(1). 73 FR 28904
(May 19, 2008).
May 2009 Proposal. In May 2009, the Board issued proposals to
clarify provisions of the January 2009 Final Rule (see below). 74 FR
20784 (May 5, 2009). Along with other federal banking agencies, the
Board also issued proposals to clarify provisions of the January 2009
UDAP Final Rule (see below). 74 FR 20804 (May 5, 2009).
[[Page 43431]]
C. Final Rulemakings
January 2009 Final Rule. In January 2009, the Board issued final
rules for open-end credit that is not home-secured (i.e., the January
2009 Regulation Z Rule). The goal of the amendments to Regulation Z was
to improve the effectiveness of the disclosures that creditors provide
to consumers at application and throughout the life of an open-end (not
home-secured) account. The Board adopted changes to format, timing, and
content requirements for the five main types of open-end credit
disclosures governed by Regulation Z: (1) Credit and charge card
application and solicitation disclosures; (2) account-opening
disclosures; (3) periodic statement disclosures; (4) change-in-terms
notices; and (5) advertising provisions. Certain additional protections
for consumers were adopted as well.
January 2009 UDAP Final Rule. In January 2009, the Board and other
federal banking agencies jointly issued rules to prohibit institutions
from engaging in certain acts or practices regarding consumer credit
card accounts. 74 FR 5498 (January 29, 2009).
D. Consumer Testing
A principal goal for the Regulation Z review is to produce revised
and improved disclosures that consumers will be more likely to
understand and use in their decisions, while at the same time not
creating undue burdens for creditors. Currently, Regulation Z requires
HELOC creditors to provide generic disclosures regarding various terms
and features of the creditor's HELOC plans at application, along with a
lengthy, Board-published brochure explaining HELOC products. The
creditor does not have to provide a transaction-specific disclosure for
HELOCs until the consumer opens the account. During the life of the
plan, the creditor is required to provide periodic statements and
change-in-terms notices as applicable.
In 2007, the Board retained ICF Macro, a research and consulting
firm that specializes in designing and testing documents to conduct
consumer testing to help the Board's review of Regulation Z's
disclosures. Beginning in the fall of 2008, ICF Macro worked closely
with the Board to conduct several tests on HELOC disclosures in
different cities throughout the United States. The HELOC testing
consisted of five rounds of one-on-one cognitive interviews. The goals
of these interviews were to learn more about what information consumers
read when they receive HELOC disclosures, to research how easily
consumers can find various pieces of information in these disclosures,
and to test consumers' understanding of certain HELOC-related words and
phrases.
Some of the key methods and findings of the consumer testing are
summarized below. ICF Macro also issued a report of the results of the
testing for HELOCs, which is available on the Board's public Web site:
http://www.federalreserve.gov.
Development and testing of Regulation Z disclosures. The Board
worked with ICF Macro to develop and test several types of disclosures,
including:
A Board publication to be provided at application,
entitled ``Key Questions to Ask about Home Equity Lines of Credit'';
A transaction-specific TILA disclosure to be provided
within three business days of application, but no later than at
account-opening; and
A transaction-specific TILA disclosure to be provided at
the time the consumer opens the account.
The Board revised two additional HELOC disclosures: a periodic
statement and a change-in-terms notice that must be provided after
account opening as applicable. The Board intends to test these two
disclosures during the comment period. In addition, the Board developed
model clauses for proposed notices required in connection with
terminating, suspending or reducing a HELOC, as well as reinstating
suspended or reduced HELOCS, and may test these clauses during the
comment period.
Testing. The primary goal of the Board's consumer testing was to
develop clear and conspicuous model HELOC disclosure forms that would
enable borrowers easily to identify material terms of the plan and to
compare such terms among various plans in order to make informed
decisions about HELOCs. The Board also wanted to gain a better
understanding of what information consumers need to receive early in
the process when shopping for HELOCs, when such information should be
provided, what form it should take, and how it can be integrated into
the overall shopping process to facilitate informed consumer decision-
making regarding HELOCs.
Beginning in the fall of 2008, five rounds of one-on-one cognitive
interviews with a total of 50 participants were conducted in different
cities throughout the United States. The consumer testing groups
comprised participants representing a range of ethnicities, ages,
educational levels, and levels of experience with home equity
borrowing. Each round of testing involved testing a set of model
disclosure forms, including currently required disclosures described
above. Interview participants were asked to review model forms and
provide their reactions, and were then asked a series of questions
designed to test their understanding of the content. Data were
collected on which elements and features of each form were most
successful in providing information clearly and effectively. The
findings from each round of interviews were incorporated in revisions
to the model forms for the following round of testing.
Cognitive interviews on existing disclosures. Participants in the
first two rounds of testing were shown an application disclosure based
on a sample disclosure conforming to the existing HELOC application
disclosure samples in Appendix G of Regulation Z and currently used by
a financial institution. This form provided required information in a
mostly narrative format. The goals of these interviews were to learn
more about what information consumers read when they receive current
disclosures; to research how easily consumers can find various pieces
of information in these disclosures; and to test consumers'
understanding of certain HELOC-related words and phrases.
Participants found this form difficult to read and understand, and
their responses to follow-up questions showed that it was also
difficult for them to identify information in the text. For example,
several participants in the first two rounds of testing became confused
when reviewing the application disclosure because they could not find
their interest rate, and were surprised when told that the rate was not
on the form. Other participants incorrectly assumed that one of the
rates shown in a payment example on the application disclosure was
being offered to them, when in fact that rate was used for illustrative
purposes. When the same information was presented in a tabular format,
participants commented that the information was easier to understand
and had more success answering comprehension questions. As a result,
after the second round of testing, the decision was made to use a
tabular format for all model disclosure forms.
1. Initial design of disclosures for testing. The results from the
first two rounds of testing, and similar findings from testing of
closed-end mortgage disclosures conducted by the Board at the same
time, called into question the usefulness of the current generic
application disclosures for consumers. As a result, three new types of
disclosure were developed and tested:
[[Page 43432]]
(1) A one-page disclosure developed by the Board entitled, ``Key
Questions to Ask about Home Equity Lines of Credit'' (``Key Questions''
document) that summarized the most important information in the HELOC
brochure in a shorter, question-and-answer format found effective with
consumers;
(2) A disclosure to be provided not later than three business days
after application that would include information about the terms and
features of the creditor's HELOC plans currently required at
application, but also transaction-specific information; and
(3) A similar form that would be provided when the consumer opens
the account. The content of the new transaction-specific HELOC
disclosure that would be provided three days after application would be
similar to that of the current application disclosure, except that it
would include information specific to the consumer based on initial
underwriting--most notably, the specific APR and credit limit. The
content of the account opening disclosure would be similar, except that
it would provide additional information about fees.
2. Additional cognitive interviews and revisions to disclosures.
The ``Key Questions'' document tested very well in subsequent rounds;
all participants indicated that they would find it useful, and most
found it very clear and easy-to-read. As a result, the Board is
proposing to require lenders to provide the ``Key Questions'' document
to prospective borrowers instead of the HELOC brochure.
Model forms for the transaction-specific HELOC disclosures to be
provided three days after application were first tested in the third
round and participants overwhelmingly indicated that they would prefer
to receive a transaction-specific disclosure soon after application,
even if it meant that they would not receive a disclosure of terms
before they applied. The remaining two rounds of testing focused on
developing, testing and refining the two transaction-specific
disclosures (i.e., that would be provided within three business days of
application and at account opening), rather than variations of the
generic application disclosure currently required.
Testing results. Specific findings from the consumer testing are
discussed in detail throughout the SUPPLEMENTARY INFORMATION where
relevant.\11\ This section highlights certain key findings.
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\11\ The report by ICF Macro summarizing the findings from the
consumer testing is available on the Board's Web site at http://www.federalreserve.gov.
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Consumer testing showed that consumers seldom contact more than one
loan originator when looking for a HELOC and generally go to their
current mortgage provider, a prior lender, or a bank with which they
have an existing banking relationship. Consumer testing indicated that
consumers generally do not comprehend how HELOCs work, especially the
draw and repayment periods. Consumer comprehension of the costs and
effects of various terms significantly increased when consumers
reviewed model forms developed by the Board and ICF Macro. Most
participants agreed that they would prefer to receive specific
information about the HELOC terms that would apply to them shortly
after application rather a generic disclosure currently provided to all
borrowers on or with the application. Consumer testing also showed that
consumers prefer to receive a detailed breakdown of fees required to
open the account early in the application process to help them
understand what costs to anticipate in obtaining a HELOC. Thus, the
Board is proposing to replace the generic program disclosure required
at application with disclosures that include key terms specific to the
consumer, such as the APR and credit limit, within three business days
after application.
Most consumers tested found the generic HELOC program disclosures
and HELOC brochure required at application too dense and difficult to
understand. When the same information was presented in plain language,
segregated in a tabular format, participants found the information
easier to understand and had more success answering comprehension
questions. Thus, under the proposal, the revised TILA disclosure would
explain more complicated terms in plain language and present them in a
tabular format.
A large number of participants erroneously concluded that the rate
and payment information shown in the currently required historical
example table showed their exact monthly payments when in fact it
showed how the interest rate and monthly payments fluctuated over the
preceding 15 years based on a $10,000 example. Most participants
identified the interest rate fluctuation as the most important
information in the historical payment example. For these reasons, the
proposed disclosures include a statement providing the high and low
interest rates for the preceding 15 years but do not include the table
showing the interest rate and corresponding monthly payments for each
year.
Creditors typically incorporate disclosures required at the time a
HELOC account is opened into the account agreement. Consumer testing
indicated, however, that consumers commonly do not review their account
agreements, which are often in small print and dense prose. When
consumers were presented with a revised account-opening disclosure
based on the tabular format of the revised early disclosure, their
comprehension of complex terms significantly increased. Thus, the
proposal would require creditors to provide a table summary of key
terms applicable to the account at account opening, with similar
formatting as the disclosure proposed to be provided within three days
after application. Consumer testing showed that setting apart the most
important terms in this way better ensures that consumers are apprised
of those terms. Moreover, the similarity in presentation and structure
of the early and account-opening disclosures enables consumers to focus
on and compare key terms at both stages of the process.
The Board did not test model periodic statement and change-in-terms
notices for HELOCs, but intends to do so during the comment period for
this proposal. The Board worked with ICF Macro, however, to develop
model periodic statements and change-in-terms notices for HELOCs
largely based on the results of consumer testing conducted for credit
cards for the Board's January 2009 Regulation Z rule. Many consumers
more easily noticed the number and amount of fees when the fees were
itemized and grouped together with interest charges. Consumers also
noticed fees and interest charges more readily when they were located
near the disclosure of the transactions on the account. Thus, under the
proposal, creditors would be required to group all charges together and
describe them in a manner consistent with consumers' general
understanding of costs (``interest charge'' or ``fee''), without regard
to whether the charges would be considered ``finance charges,'' ``other
charges'' or neither under the regulation.
Regarding change-in-terms notices, consumer testing for the Board's
January 2009 Regulation Z Rule on credit cards indicated that, much
like the account-opening disclosures, consumers may not typically read
such notices because they are often in small print and dense prose. To
enhance the effectiveness of change-in-terms notices, the proposed
rules would require the creditor to include a table summarizing any
changed terms. Consumer testing indicates that consumers may not
typically look at the notices if they are provided as separate inserts
given with periodic statements.
[[Page 43433]]
Thus, under the proposal, a table summarizing the change would have to
appear on the periodic statement, where consumers are more likely to
notice the changes.
Additional testing during and after comment period. During the
comment period, the Board will work with ICF Macro to conduct
additional testing of model disclosures. After receiving comments from
the public on the proposal and the proposed disclosure forms, the Board
will work with ICF Macro to further revise model disclosures based on
comments received, and to conduct additional rounds of cognitive
interviews to test the revised disclosures. After the cognitive
interviews, quantitative testing will be conducted. The goal of the
quantitative testing is to measure consumers' comprehension of the
newly-developed disclosures relative to existing disclosures and
formats.
E. Other Outreach and Research
Throughout the review process leading to this proposal, the Board
met or conducted conference calls with industry and consumer group
representatives, as well as consulted with other federal banking
agencies. The Board also reviewed HELOC disclosures currently used by
creditors, internal Board research on home equity lending, and surveys
on HELOC usage and trends.\12\
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\12\ Surveys reviewed include: Brian Bucks, Arthur Kennickell,
Traci Mach, Kevin Moore, ``Changes in U.S. Family Finances from 2004
to 2007: Evidence from the Survey of Consumer Finances,'' Federal
Reserve Bulletin (Feb. 2009); Alan Greenspan and James Kennedy,
``Sources and Uses of Equity Extracted from Homes,'' Finance and
Economics Discussion Series, Divisions of Research & Statistics and
Monetary Affairs, Federal Reserve Board (2007-20); Glenn Canner et
al., ``Recent Developments in Home Equity Lending,'' Federal Reserve
Bulletin (April 1998); Consumer Bankers Ass'n, ``Home Equity Loan
Study'' (2005, 2007); and American Bankers Ass'n, ``ABA Home Equity
Lending Survey Report'' (2005).
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F. Reviewing Regulation Z in Stages
Based on the comments received and its own analysis, the Board is
proceeding with a review of Regulation Z in stages. In January 2009,
the Board published final rules regarding open-end (not home-secured)
credit (74 FR 5244 (January 29, 2009) (January 2009 Regulation Z Rule),
which were the result of the Board's comprehensive review of Regulation
Z's open-end (not home-secured) credit rules. At that time, the Board
indicated that it was also reviewing open-end home-secured credit
rules. This proposal reflects the Board's review of all aspects of
Regulation Z and accompanying Official Staff Commentary related to
open-end home-secured credit. The Board is not at this time, however,
specifically addressing issues related to rescinding HELOCs, and
requests comment in the proposal on any needed changes to Regulation Z
provisions and commentary regarding reverse mortgages.
G. Implementation Period
The Board contemplates providing creditors sufficient time to
implement any revisions that may be adopted. The Board seeks comment on
an appropriate implementation period.
IV. The Board's Rulemaking Authority
TILA mandates that the Board prescribe regulations to carry out the
purposes of the act. TILA also specifically authorizes the Board, among
other things, to do the following:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
Require additional disclosures for HELOC plans. 15 U.S.C.
1637(a)(8), 1637a(a)(14).
In the course of developing the proposal, the Board has considered
information gathered from industry and consumer representatives during
outreach meetings and calls, consultations with other federal banking
agencies, the Board's experience in implementing and enforcing
Regulation Z, and the results obtained from testing various disclosure
options in controlled consumer tests. For the reasons discussed in this
proposal, the Board believes this proposal is appropriate pursuant to
the authorities noted above.
V. Discussion of Major Proposed Revisions
The goal of the proposed revisions is to improve the effectiveness
of the Regulation Z disclosures that must be provided to consumers for
open-end credit transactions secured by the consumer's dwelling, and to
strengthen substantive protections for HELOC consumers. To shop for and
understand the cost of credit, consumers must be able to identify and
understand the key terms of a HELOC, which can be very complex. The
proposed revisions to Regulation Z are intended to provide the most
essential information to consumers when the information would be most
useful to them, as clearly and conspicuously as possible. The proposed
revisions are expected to improve consumers' ability to make informed
credit decisions and enhance competition among HELOC originators. Many
of the changes are based on consumer testing for this proposal and the
Board's overall review of Regulation Z.
In considering the proposed revisions, the Board sought to ensure
that the proposal would not reduce access to credit, and sought to
balance the potential benefits for consumers with the compliance
burdens imposed on creditors. For example, the proposed revisions seek
to provide greater certainty to creditors in identifying what costs
must be disclosed for HELOCs, and how those costs must be disclosed.
More effective disclosures may also reduce confusion and
misunderstanding, which may ease creditors' costs relating to consumer
complaints and inquiries.
A. Disclosures at Application
Regulation Z requires creditors to provide to the consumer two
types of disclosures at the time of application: a set of disclosures
describing various features of a creditor's HELOC plans (the
``application disclosures'') and a home-equity brochure published by
the Board (the ``HELOC brochure''), which provides information about
how HELOCs work. Neither contains transaction-specific information
about the terms of the HELOC dependent on underwriting, such as the APR
or credit limit.
Summary of Proposed Revisions
The proposal would require a creditor to provide to consumers at
application a new one-page document published by the Board entitled,
``Key Questions to Ask about Home Equity Lines of Credit'' (the ``Key
Questions'' document). The Board proposes eliminating the requirement
for creditors to provide the HELOC brochure at application. In
addition, the proposal would replace the application disclosures with
transaction-specific HELOC disclosures (``early HELOC disclosures'')
that must be given within three business days after application (but no
later than account opening).
[[Page 43434]]
``Key Questions'' document. Currently, a creditor is required to
provide to a consumer the HELOC brochure or a suitable substitute at
the time an application for a HELOC is provided to the consumer. The
HELOC brochure is around 20 pages long and provides general information
about HELOCs and how they work, as well as a glossary of relevant terms
and a description of various features that can apply to HELOCs.
The proposal would eliminate the requirement for creditors to
provide to consumers the HELOC brochure with applications. The Board's
consumer testing on HELOC disclosures has shown that consumers are
unlikely to read the HELOC brochure because of its length. Instead, the
proposal would require a creditor to provide the new ``Key Questions''
document that would be published by the Board. This one-page document
is intended to be a simple, straightforward and concise disclosure
informing consumers about HELOC terms and risks that are important to
consider when selecting a home-equity product, including potentially
risky features such as variable rates and balloon payments. The ``Key
Questions'' document was designed based on consumers' preference for a
question-and-answer tabular format, and refined in several rounds of
consumer testing.
B. Disclosures Within Three Days After Application
Regulation Z currently requires the disclosures that must be
provided on or with an application to contain information about the
creditor's HELOC plans, including the length of the draw and repayment
periods, how the minimum required payment is calculated, whether a
balloon payment will be owed if a consumer only makes minimum required
payments, payment examples, and what fees are charged by the creditor
to open, use, or maintain the plan. These disclosures do not include
information dependent on a specific borrower's creditworthiness or the
value of the dwelling, such as a credit limit or the APRs offered to
the consumer, because the application disclosures are provided before
underwriting takes place.
Summary of Proposed Revisions
The Board's consumer testing on HELOC disclosures has shown that,
because the current application disclosures do not contain transaction-
specific information applicable to the consumer, these disclosures may
not provide meaningful information to consumers to enable them to
compare different HELOC products and to make informed decisions about
whether to open an HELOC plan. Thus, the proposal would replace the
application disclosures with transaction-specific ``early HELOC
disclosures'' that must be given within three business days after
application (but no later than account opening), and revise the format
and content of the disclosures to make them more clear and conspicuous.
Content of proposed early HELOC disclosures. The proposal would
require creditors to include several additional disclosures in the
early HELOC disclosures not currently required to be disclosed as part
of the application disclosures, such as (1) the APRs and credit limit
being offered; (2) a statement that the consumer has no obligation to
accept the terms disclosed in the early HELOC disclosures; and (3) if
the creditor has a provision for the consumer's signature, a statement
that a signature by the consumer only confirms receipt of the
disclosure statement. Based on consumer testing conducted by the Board
on HELOC disclosures, the Board believes that these new disclosures
would provide meaningful information to consumers in deciding whether
to open a HELOC plan.
The proposal would not require creditors to provide certain
disclosures currently required to be disclosed as part of the
application disclosures. For example, currently creditors must disclose
a 15-year historical payment example table, a statement that the APR
does not include costs other than interest, and a statement of the
earliest time the maximum rate could be reached. Based on consumer
testing, the Board believes that these disclosures do not provide
meaningful information to consumers in deciding whether to open a HELOC
plan. Other information that consumer testing demonstrated would be
helpful to consumers, however, would be required to be disclosed.
Moreover, the proposal would revise certain information currently
required to be disclosed in the application disclosures. For example,
the application disclosures currently must include several payment
examples based on a $10,000 outstanding balance. Under the proposal,
the Board would require in the early HELOC disclosures payment examples
based on the full credit line. Also, to prevent ``information
overload'' for consumers, the proposal would allow a creditor to
disclose information about only two payment plan options. Based on
consumer testing, the Board believes that the above revisions to the
payment examples, and other revisions to the existing application
disclosures, would effectively provide meaningful information to
consumers in deciding whether to open a HELOC plan.
Format requirements for the proposed early HELOC disclosures. The
proposal would impose stricter format requirements for the proposed
early HELOC disclosures than currently are required for the application
disclosures. The application disclosures may be provided in a narrative
form; under the proposal, the early HELOC disclosures must be provided
in the form of a table with headings, content, and format developed
through multiple rounds of consumer testing. In consumer testing,
participants found information in a structured, tabular format easier
to understand and had more success answering comprehension questions
than when these participants reviewed application disclosures in a
narrative form.
C. Disclosures at Account Opening
Regulation Z requires creditors to disclose costs and terms before
the first transaction is made for a HELOC. The disclosures must specify
the circumstances under which a ``finance charge'' may be imposed and
how it will be determined, including charges such as interest,
transaction charges, minimum charges, each periodic rate of interest
that may be applied to an outstanding balance (e.g., for purchases or
cash advances) as well as the corresponding APR. In addition, creditors
must disclose the amount of certain charges other than finance charges,
such as a late-payment charge. Currently, few format requirements apply
to account-opening disclosures; typically they are interspersed among
other contractual terms in the creditor's account agreement.
Summary of Proposed Revisions
The proposal would revise the account-opening disclosure
requirements in two significant ways. First, the proposal would require
a tabular summary of key terms. Second, the proposal would reform how
and when cost disclosures must be made.
Account-opening summary table. The proposal seeks to make the cost
disclosures provided at account opening more conspicuous and easier to
read. Accordingly, the proposal identifies specific costs and terms
that creditors would be required to summarize in a table. This account
opening table would be substantially similar to the early HELOC
disclosure table that would be provided within three business days
after application, with two major exceptions. First, the account-
opening
[[Page 43435]]
table would show only the payment plan chosen by the consumer, rather
than a maximum of two plans required in the early HELOC disclosures.
Second, the account-opening table would contain transaction fees and
penalty fees not required to be disclosed in the early HELOC disclosure
table. Despite these differences between the two tables, the Board
believes that consumers could use the new table provided at account
opening to compare the terms of their accounts to the early HELOC
disclosure table. Consumers would no longer be required to search for
the information in the credit agreement.
How charges are disclosed. Under the current rules, a creditor must
disclose any ``finance charge'' or ``other charge'' in the written
account-opening disclosures. In addition, the regulation identifies
fees that are not considered to be either ``finance charges'' or
``other charges'' and, therefore, need not be included in the account-
opening disclosures. The distinctions among finance charges, other
charges, and charges that do not fall into either category are not
always clear. Examples of included or excluded charges are in the
regulation and commentary, but these examples cannot provide definitive
guidance in all cases. This uncertainty can pose legal risks for
creditors that act in good faith to comply with the law. Creditors are
subject to civil liability and administrative enforcement for under-
disclosing the finance charge or otherwise making erroneous
disclosures, so the consequences of an error can be significant.
Furthermore, over-disclosure of rates and finance charges is not
permitted by Regulation Z for open-end credit.
The fee disclosure rules also have been criticized as being
outdated and impractical. These rules require creditors to provide fee
disclosures at account opening, which may be months, and possibly
years, before a particular disclosure is relevant to the consumer, such
as when the consumer calls the creditor to request a service for which
a fee is imposed. In addition, an account-related transaction may occur
by telephone, when a written disclosure is not feasible.
The proposed rule is intended to respond to these criticisms while
still giving full effect to TILA's requirement to disclose credit
charges before they are imposed. Accordingly, under the proposal, the
revised rules would (1) specify precisely the charges that creditors
must disclose in writing at account opening (e.g., interest, account-
opening fees, transaction fees, annual fees, and penalty fees such as
for paying late), which would be listed in the summary table, and; (2)
permit creditors to disclose certain optional charges orally or in
writing before the consumer agrees to or becomes obligated to pay the
charge. These proposed changes correspond to amendments adopted in the
January 2009 Regulation Z Rule applicable to open-end (not home-
secured) credit, but would not change current substantive restrictions
on permissible changes in HELOC terms.
D. Periodic Statements
Currently, Regulation Z requires creditors to provide periodic
statements reflecting the account activity for the billing cycle
(typically, one month). In addition to identifying each transaction on
the account, creditors must identify each ``finance charge'' using that
term, and each ``other charge'' assessed against the account during the
statement period. Creditors must disclose the periodic rate that
applies to an outstanding balance and its corresponding APR. Creditors
also must disclose an ``effective'' or ``historical'' APR for the
billing cycle, which includes not just interest but also finance
charges imposed in the form of fees.
Summary of Proposed Revisions
The proposal contains a number of significant revisions to periodic
statement disclosures. First, the Board recommends eliminating the
requirement to disclose the effective APR for HELOCs. Second, creditors
would no longer be required to characterize particular costs on the
periodic statement as ``finance charges.'' Instead, costs would be
described either as ``interest'' or as a ``fee.'' Third, interest
charges and fees imposed as part of the plan must be grouped together
and totals disclosed for the statement period and year to date. To
facilitate compliance, the proposal would include sample forms
illustrating the revisions.
The effective APR. The ``effective'' APR disclosed on periodic
statements reflects the cost of interest and certain other finance
charges imposed during the statement period. For example, for a cash
advance, the effective APR reflects both interest and any flat or
proportional fee assessed for the advance. For the reasons discussed
below, the Board recommends eliminating the requirement to disclose the
effective APR.
In general, creditors believe that the effective APR should be
eliminated. They believe that consumers do not understand the effective
APR, including how it differs from the corresponding (interest rate)
APR, why it is often ``high,'' and which fees the effective APR
reflects. Creditors say that they find it difficult, if not impossible,
to explain the effective APR to consumers who call them with questions
or concerns. They note that callers sometimes believe, erroneously,
that the effective APR signals a prospective increase in their interest
rate, and they may make uninformed decisions as a result. And,
creditors say, even if the consumer does understand the effective APR,
the disclosure does not provide any more information than a disclosure
of the total dollar costs for the billing cycle. Moreover, creditors
say the effective APR is arbitrary and inherently inaccurate,
principally because it amortizes the cost for credit over only one
month (billing cycle) even though the consumer may take several months
(or longer) to repay the debt.
Consumer groups acknowledge that the effective APR is not well
understood, but argue that it nonetheless serves a useful purpose by
showing the higher cost of some credit transactions. They contend the
effective APR helps consumers decide each month whether to continue
using the account, to shop for another credit product, or to use an
alternative means of payment such as a debit card. Consumer groups also
contend that reflecting costs, such as cash advance fees, in the
effective APR creates a ``sticker shock'' and alerts consumers that the
overall cost of a transaction for the cycle is high and exceeds the
advertised corresponding APR. This shock, they say, may persuade some
consumers not to use certain features on the account, such as cash
advances, in the future. In their view, the utility of the effective
APR would be maximized if it reflected all costs imposed during the
cycle (rather than only some costs as is currently the case).
As part of consumer testing conducted by the Board on credit cards
in relation to the January 2009 Regulation Z Rule, consumer awareness
and understanding of the effective APR was evaluated, as well as
whether changes to the presentation of the disclosure could increase
awareness and understanding. The overall results of this testing
demonstrated that most consumers do not correctly understand the
effective APR.
Based on this consumer testing and other factors, the Board
proposes to eliminate the requirement to disclose the effective APR.
Under this proposal, creditors offering HELOCs would be required to
disclose interest and fees in a manner that is more readily
understandable and comparable across
[[Page 43436]]
institutions. The Board believes that this approach can more
effectively further the goals of consumer protection and the informed
use of credit for HELOCs.
Fees and interest costs. Currently, creditors must identify on
periodic statements any ``finance charges'' that have been added to the
account during the billing cycle; creditors typically list these
charges with other transactions, such as purchases or cash advances,
chronologically on the statement. The finance charges must be itemized
by type. Thus, interest charges might be described as ``finance charges
due to periodic rates.'' Charges such as late-payment fees, which are
not ``finance charges,'' are typically disclosed individually and
interspersed among other transactions.
The Board drew on consumer testing for open-end (not home-secured)
credit, the results of which the Board believes apply equally to
HELOCs, to recommend a number of changes to the required HELOC
disclosures related to finance charges. As under rules adopted in the
January 2009 Regulation Z Rule for open-end (not home-secured) credit,
this proposal would require HELOC creditors to group all charges
together and describe them in a manner consistent with consumers'
general understanding of costs (``interest charge'' or ``fee''),
without regard to whether the charges would be considered ``finance
charges,'' ``other charges,'' or neither. If different periodic rates
apply to different types of transactions, creditors would be required
to itemize interest charges for the statement period by type of
transaction (for example, interest on cash advances) or group of
transactions subject to different periodic rates.
In addition, the proposal would require creditors to disclose the
(1) total fees and (2) total interest imposed for the cycle, as well as
year-to-date totals for interest charges and fees. The year-to-date
figures are intended to help consumers understand annualized costs and
the overall cost of their HELOC better than does the effective APR. The
Board intends to conduct consumer testing of periodic statement notices
for HELOCs during the comment period for this proposal.
E. Change-in-Terms Notices
Currently, Regulation Z requires creditors to send, in most cases,
notices 15 days before the effective date of certain changes in the
account terms. Advance notice is not required in all cases; for
example, if an interest rate increases due to a consumer's default or
delinquency, notice has been required, but not in advance of the rate
increase. In addition, no notice (either advance or contemporaneous)
has been required if the specific change is set forth in the account
agreement.
Summary of Proposed Revisions
The Board proposes to revise the change-in-terms rules for HELOCs
to parallel in most respects the revisions adopted for open-end (not
home-secured) credit in the January 2009 Regulation Z Rule, including
the content, timing, and format of such notices. The Proposed revisions
to change-in-terms notice requirements for HELOCs are intended to
improve consumers' awareness about changes to their account terms or
increased rates due to delinquency, default, or other reason disclosed
in the agreement, and to enhance consumers' ability to make alternative
financial choices if necessary.
There are three major components of the proposal regarding change-
in-terms notices. First, the proposal would expand the circumstances in
which consumers receive advance notice of changed terms, including
increased rates. Second, the proposal would provide consumers with
earlier notice--45 days in advance of the effective date of the change
rather than 15 days. Third, the proposal would introduce format
requirements to make the disclosures about changes in terms, including
increased rates, more effective.
Rate increases. Currently, a change-in-terms notice is not required
if the agreement between the consumer and the creditor specifically
sets forth the change and the specific triggering event. In the January
2009 Regulation Z Rule, the Board expressed concern that the imposition
of penalty rates might come as a costly surprise to consumers who are
not aware of, or do not understand, what behavior constitutes a default
under the credit agreement. The Board also stated that it believed that
consumers would be the most likely to notice and be motivated to act to
avoid the imposition of the penalty rate if they receive a specific
notice alerting them of an imminent rate increase, rather than a
general disclosure stating the circumstances when a rate might
increase.
The Board believes that the same reasoning applies in the case of
HELOCs, although the circumstances under which a penalty rate may be
imposed on a HELOC are more restricted than for credit cards. The HELOC
proposal would also require advance notice of any increased rates due
to a triggering event specified in the agreement, such as loss of an
employee preferred rate because the consumer leaves the creditor's
employ.
Timing. The Board proposes that the requirement for notice 15 days
in advance of the effective date of a change be changed to require
notice 45 days in advance, for the same reasons the Board adopted this
requirement for open-end (not home-secured) credit. As discussed in the
January 2009 Regulation Z Rule, shorter notice periods, such as 30 days
or one billing cycle, may not provide consumers with sufficient time to
shop for and possibly obtain alternative financing, or to make other
financial adjustments. The 45-day advance notice requirement refers to
when the change-in-terms notice must be sent, but it may take several
days for the consumer to receive the notice. As a result, the Board
believes that the 45-day advance notice requirement would give
consumers, in most cases, at least one calendar month after receiving a
change-in-terms notice to seek alternative financing or otherwise to
mitigate the impact of an unexpected change in terms.
The Board is soliciting comment on whether it may be more difficult
to seek alternative financing or otherwise mitigate the impact of a
change in terms for HELOCs than for credit cards. The Board is also
soliciting comment on whether, because changes in terms are more
narrowly restricted for HELOCs than for credit card accounts, the
impact on consumers of term changes for HELOCs is likely to be less
severe than for credit cards and thus whether the proposed time period
is likely adequate.
Format. Few format requirements apply to change-in-terms
disclosures. As with account-opening disclosures, creditors commonly
intersperse change-in-terms notices with other amendments to the
account agreement, and both are provided in pamphlets in small print
and dense prose. Consumer testing conducted for the January 2009
Regulation Z Rule suggests that consumers tend to set aside change-in-
terms notices when they are presented as a separate pamphlet inserted
in the periodic statement. Testing also revealed that consumers are
more likely to identify the changes to their account correctly if the
changes in terms are summarized in a tabular format.
The Board therefore proposes that if a changed term is one that
must be provided in the account-opening summary table, creditors must
also provide that change in a summary table to enhance the
effectiveness of the change-in-terms notice. Further, if a notice
enclosed with a periodic statement discusses a change to a term that
must be disclosed in the account-opening summary table, or announces
[[Page 43437]]
that a default rate will be imposed on the account, a table summarizing
the impending change would have to appear on the periodic statement.
The Board intends to conduct consumer testing of change-in-terms
notices with a tabular format during the comment period for this
proposal.
F. Additional Protections
Account Terminations. Regulation Z currently permits a creditor to
terminate a HELOC for several reasons, including when the consumer has
``fail[ed] to meet the repayment terms of the agreement for any
outstanding balance.'' The proposal would revise this provision to
provide that a creditor may not terminate a HELOC plan for payment-
related reasons unless the consumer has failed to make a required
minimum periodic payment more than 30 days after the due date for that
payment. The Board is requesting comment on whether a delinquency
threshold of more than 30 days is appropriate, or whether some other
time period would better achieve the purposes of TILA.
The proposal is principally intended to protect consumers from so-
called ``hair-trigger'' terminations based on minor payment
infractions. Overall, the proposal is intended to strike a more
equitable balance between creditors' authority to protect themselves
against risk (and, for depositories, to ensure their safety and
soundness) and effective protection of HELOC consumers from constraints
on their credit privileges that do not correspond with reasonable
expectations.
Suspensions and credit limit reductions based on a significant
decline in the property value. Regulation Z permits a creditor
temporarily to suspend advances or reduce a credit line on a HELOC if
``the value of the dwelling that secures the plan declines
significantly below the dwelling's appraised value for purposes of the
plan.'' The commentary provides a ``safe harbor'' standard for
determining whether a decline is significant: specifically, a decline
in value is significant if it results in the initial difference between
the credit limit and the available equity (the ``equity cushion'')
diminishing by 50 percent.
Concerns have been expressed to the Board that the existing safe
harbor may not be a viable standard for the higher combined loan-to-
value (CLTV) HELOCs made in recent years. For loans nearing or
exceeding 100 percent CLTV when originated, for example, a decline in
value of a few dollars could result in more than a 50 percent decline
in the creditor's equity cushion, because the equity cushion was zero
or close to zero at origination. For these higher CLTV loans in
particular, creditors have indicated uncertainty about how to determine
whether a decline in value is ``significant.'' For their part, consumer
advocates have expressed concerns that the lack of guidance on the
proper application of the safe harbor allows creditors to take action
based on nominal declines in value.
To address these concerns, the proposal would revise the staff
commentary to delineate two ``safe harbors'' on which creditors could
rely to determine whether a decline in property value is
``significant'':
First, for plans with a CLTV at origination of 90 percent
or higher, a five (5) percent reduction in the property value on which
the HELOC terms were based would constitute a significant decline in
value.
Second, for plans with a CLTV at origination of under 90
percent, the existing safe harbor would be retained, under which a
decline in the value of the property securing the plan is significant
if, as a result of the decline, the creditor's equity cushion is
reduced by 50 percent.
Suspensions and credit limit reductions based on a material change
in the consumer's financial circumstances. Regulation Z permits a
creditor to suspend advances or reduce the credit limit of a HELOC when
``the creditor reasonably believes that the consumer will be unable to
fulfill the repayment obligations of the plan because of a material
change in the consumer's financial circumstances.'' Some creditors
appear uncertain about when action is permissible under this provision,
and many have requested more detailed guidance. Consumer advocates have
expressed dissatisfaction with the guidance on this provision as well,
voicing concerns that the lack of clear guidance may enable some
creditors to take action when consumers are fully capable of meeting
their repayment obligations.
The proposal is intended to protect consumers by ensuring that
creditors exercise prudent judgment in relying on this provision.
Revised commentary would clarify that evidence of a material change in
financial circumstances may include credit report information showing
late payments or nonpayments on the part of the consumer, such as
delinquencies, defaults, or derogatory collections or public records
related to the consumer's failure to pay other obligations. The
proposed commentary would clarify that any payment failures relied on
to show a material change in the consumer's financial circumstances
would need to have occurred within a reasonable time from the date of
the creditor's review of the consumer's credit performance. A six-month
safe harbor for this ``reasonable time'' is proposed.
The proposed commentary would retain the existing commentary's
guidance stating that evidence supporting a creditor's reasonable
believe that a consumer is ``unable'' to meet the repayment terms may
include the consumer's nonpayment of debts other than the HELOC. Under
the proposal, these payment failures would have to have occurred within
a reasonable time from the date of the creditor's review of the
consumer's credit performance, with a proposed six-month safe harbor.
The Board is requesting comment on whether late payments of 30 days or
fewer would be adequate evidence of a failure to pay a debt for
purposes of this provision, and whether and under what circumstances
credit score declines alone might satisfy the requirements of this
provision.
Reinstatement of accounts. Regulation Z requires creditors to
reinstate credit privileges once no circumstances permitting a freeze
or credit limit reduction under the statute or regulation exist.
Recently, due to declining property values and for other reasons,
HELOCs have been suspended and credit limits reduced more often than in
the past. Consumer groups and other federal agencies have raised
concerns about whether consumers are properly informed about the
creditor's obligation to reinstate credit lines and consumers' rights
to request reinstatement, and the Board independently researched the
reinstatement practices of several creditors. As a result, the Board
has determined that additional guidance is appropriate. The proposed
changes are intended to ensure that consumers have a meaningful
opportunity to request reinstatement and to have this request
investigated. Major proposed revisions include the following:
Requiring additional information in notices of suspension
or reduction about consumers' ongoing right to request reinstatement
and creditors' obligation to investigate this request.
Requiring creditors to complete an investigation of a
request within 30 days of receiving the request and to provide notice
of the results to consumers whose credit privileges will not be
restored.
Requiring creditors to cover the costs associated with
investigating the first reinstatement request by the consumer.
VI. Section-by-Section Analysis
Other than in the section-by-section analysis of Sec. 226.5b,
unless otherwise
[[Page 43438]]
indicated, references to the ``current'' or ``existing'' regulation and
staff commentary refer to the version of Regulation Z and staff
commentary finalized in the January 2009 Regulation Z Rule. The
regulation text and commentary in the January 2009 Regulation Z Rule
will not go into effect until July 1, 2010, and certain changes to both
the substance and effective date of these have been made by the Credit
Card Accountability, Responsibility and Disclosure Act of 2009 (Credit
Card Act), Public Law 111-24, enacted on May 22, 2009. The Board
determined, however, that it is appropriate for this proposed
rulemaking to refer to rules that have been finalized and will go into
effect in the near future, rather than the version of Regulation Z and
the commentary now in effect but that will soon be obsolete. The
section-by-section analysis of Sec. 226.5b and references to Sec.
226.5b refer to the version of Regulation Z and accompanying staff
commentary currently in effect.
Section 226.2 Definitions and Rules of Construction
2(a)(6) Definition of Business Day
Currently, Sec. 226.2(a)(6) contains two definitions of ``business
day.'' Under the general definition, a ``business day'' is a day on
which the creditor's offices are open to the public for carrying on
substantially all of its business functions. However, for some purposes
a more precise definition applies; ``business day'' means all calendar
days except Sundays and specified federal legal public holidays for
purposes of determining when disclosures are received under Sec. Sec.
226.15(e), 226.19(a)(1)(ii), 226.23(a), and 226.31(c)(1) and (2). The
Board also recently adopted the more precise definition for purposes of
the presumption in Sec. 226.19(a)(2) that consumers receive corrected
disclosures three business days after they are mailed and for other
timing determinations. See 74 FR 23289 (May 19, 2009). As discussed
more fully below in the section-by-section analysis under proposed
Sec. Sec. 226.5b(e) and 226.9(j)(2), the Board is proposing to use the
more precise definition of business day in providing presumptions of
when consumers receive mailed disclosures required under proposed
Sec. Sec. 226.5b(b) and 226.9(j)(1).
Section 226.4 Finance Charge
Various provisions of TILA and Regulation Z specify how and when
the cost of consumer credit expressed as a dollar amount, the ``finance
charge,'' is to be disclosed. The rules for determining which charges
make up the finance charge are set forth in TILA Section 106 and
Regulation Z Sec. 226.4. 15 U.S.C. 1605. In the January 2009
Regulation Z Rule, the Board made several revisions to Sec. 226.4.
Some of the revisions, such as those relating to transaction charges
imposed by credit card issuers for obtaining cash advances from
automated teller machines (ATMs) or making purchases in foreign
currencies or foreign countries, affect all open-end credit, including
HELOCs as well as open-end (not home-secured) credit. Other revisions
made in the January 2009 rule affect only open-end (not home-secured)
credit.
Charges for Credit Insurance or Debt Cancellation or Suspension
Coverage
In the case of charges for credit insurance, debt cancellation
coverage, and debt suspension coverage, some of the revisions affect
all open-end credit, while others affect only open-end (not home-
secured) credit. The Board is now proposing to revise Sec. 226.4 as it
applies to HELOCs in a manner generally paralleling the latter category
of revisions, as discussed further below.
In addition to the proposed revisions to Sec. 226.4 discussed in
this HELOC proposal, the Board is separately proposing a number of
other revisions to Sec. 226.4 and other sections of Regulation Z,
regarding finance charge, credit insurance, and debt cancellation or
suspension coverage, in its proposal regarding closed-end mortgage
lending under Regulation Z, published today elsewhere in this Federal
Register. Some of these proposed revisions would affect HELOCs as well
as closed-end mortgage loans. These other proposals are discussed
below; for a detailed discussion, see the Board's separate Federal
Register notice. The proposed regulatory text and proposed staff
commentary for Sec. 226.4, as well as other affected sections, appear
in the Board's separate Federal Register notice.
Premiums or other charges for credit life, accident, health, or
loss-of-income insurance are finance charges if the insurance or
coverage is ``written in connection with'' a credit transaction. 15
U.S.C. 1605(b); Sec. 226.4(b)(7). Creditors may exclude from the
finance charge premiums for credit insurance if they disclose the cost
of the insurance and the fact that the insurance is not required to
obtain credit. In addition, the statute requires creditors to obtain an
affirmative written indication of the consumer's desire to obtain the
insurance, which, as implemented in Sec. 226.4(d)(1)(iii), requires
creditors to obtain the consumer's initials or signature. 15 U.S.C.
1605(b). In 1996, the Board expanded the scope of the rule to include
plans involving charges or premiums for debt cancellation coverage. See
Sec. 226.4(b)(10) and (d)(3). 61 FR 49237 (September 19, 1996.)
The January 2009 Regulation Z Rule amended the regulation to treat
debt suspension coverage in the same way as debt cancellation coverage.
Debt suspension is the creditor's agreement to suspend, on the
occurrence of a specified event, the consumer's obligation to make the
minimum payment(s) that would otherwise be due. During the suspension
period, interest may continue to accrue or it may be suspended as well,
depending on the plan. Thus, under Sec. 226.4(b)(10), charges for debt
suspension coverage written in connection with a credit transaction are
finance charges, unless excluded under Sec. 226.4(d)(3). However, to
exclude the cost of debt suspension coverage from the finance charge,
creditors are also required to inform consumers, as applicable, that
the obligation to pay loan principal and interest is only suspended,
and that interest will continue to accrue during the period of
suspension. These revisions apply to all open-end plans (both HELOCs
and open-end (not home-secured) credit), as well as to closed-end
credit transactions.
Insurance or coverage sold after opening of an account. One of the
revisions made in the January 2009 Regulation Z Rule affecting only
open-end (not home-secured) credit involves the meaning of the phrase
``written in connection with a credit transaction.'' Prior to the
January 2009 rule, credit insurance or debt cancellation or suspension
coverage sold after consummation of a closed-end credit transaction or
after the opening of an open-end plan and upon a consumer's request was
considered not to be ``written in connection with the credit
transaction,'' and, therefore, a charge for such insurance or coverage
was not a finance charge. See comment 4(b)(7) and (8)-2. The Board
stated in its 2007 proposal for open-end (not home-secured) credit (72
FR 32945 (June 14, 2007) (June 2007 Regulation Z Proposal) that it
believed this approach remained sound for closed-end transactions,
which typically consist of a single transaction with a single advance
of funds. However, in an open-end plan, where consumers can engage in
credit transactions after the opening of the plan, a creditor may have
a greater opportunity to influence a consumer's decision whether or not
to purchase credit insurance or debt cancellation or suspension
coverage than in the case of closed-end credit. Accordingly, the
[[Page 43439]]
disclosure and consent requirements are important in open-end plans,
even after the opening of the plan, to ensure that the consumer is
fully informed about the offer of insurance or coverage and that the
decision to purchase it is voluntary. Therefore, the Board adopted in
the January 2009 Regulation Z Rule amendments to comment 4(b)(7) and
(8)-2, to state that insurance purchased after an open-end (not home-
secured) plan is opened is considered to be written ``in connection
with a credit transaction.'' New comment 4(b)(10)-2 provides the same
treatment to purchases of debt cancellation or suspension coverage.
Therefore, purchases of voluntary insurance or debt cancellation or
suspension coverage after account opening trigger disclosure and
consent requirements. This amendment does not apply to HELOCs; the
Board stated that it intended to consider this issue when the home-
equity credit plan rules are reviewed in the future.
The Board proposes to apply the same rule to HELOCs. Thus, comments
4(b)(7) and (8)-2 and 4(b)(10)-2 would be amended to state that credit
insurance or debt cancellation or suspension coverage purchase after
any open-end plan is opened is considered to be written in connection
with a credit transaction, and therefore charges for such insurance or
coverage would be finance charges unless the disclosure and consent
requirements under Sec. 226.4(d)(1) and (3) are met. The Board
believes that the same reasons for extending the ``written in
connection with'' rule to insurance or coverage purchased after the
opening of an open-end (not home-secured) plan exist with regard to
insurance or coverage purchased after the opening of a HELOC. Although
the creditors' ability to terminate or restrict HELOC accounts is more
limited than in the case of open-end (not home-secured) accounts,
consumers may not be aware of this difference and therefore consumers'
decisions about whether to purchase insurance or coverage may be
influenced by concern about their continued access to credit, or about
possible adverse changes to the terms and conditions of the account.
Telephone sales of insurance or coverage. Another of the revisions
made in the January 2009 Regulation Z Rule affecting only open-end (not
home-secured) credit involves sales of credit insurance or debt
cancellation or suspension coverage by telephone. Under Sec.
226.4(d)(1) and (d)(3), creditors may exclude from the finance charge
credit insurance premiums and debt cancellation or suspension charges
if the consumer signs or initials an affirmative written request for
the insurance or coverage, after disclosure of the fact that the
insurance or coverage is optional and of the cost.
In the June 2007 Regulation Z Proposal the Board proposed, and in
the January 2009 Regulation Z Rule adopted, an exception to the
requirement to obtain a written signature or initials for telephone
purchases of credit insurance or debt cancellation and debt suspension
coverage on an open-end (not home-secured) plan. Under new Sec.
226.4(d)(4), for telephone purchases, the creditor is permitted to make
the disclosures orally and the consumer may affirmatively request the
insurance or coverage orally, provided that the creditor (1) maintains
evidence that demonstrates that the consumer, after being provided the
disclosures orally, affirmatively elected to purchase the insurance or
coverage; and (2) mailed the disclosures under Sec. 226.4(d)(1) or
(d)(3) within three business days after the telephone purchase. Comment
4(d)(4)-1 provides that a creditor does not satisfy the requirement to
obtain an affirmative request if the creditor uses a script with
leading questions or negative consent. This new rule is consistent with
rules published by the federal banking agencies to implement Section
305 of the Gramm-Leach-Bliley Act regarding the sale of insurance
products by depository institutions, as well as guidance published by
the Office of the Comptroller of the Currency regarding the sale of
debt cancellation and suspension products. See 12 CFR 208.81 et seq.
regarding insurance sales; 12 CFR part 37 regarding debt cancellation
and debt suspension products. HELOCs subject to Sec. 226.5b were not
affected by this revision.
The Board adopted this approach pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes the Board to
exempt any class of transactions from coverage under any part of TILA
if the Board determines that coverage under that part does not provide
a meaningful benefit to consumers in the form of useful information or
protection. 15 U.S.C. 1604(f)(1). Section 105(f) directs the Board to
make this determination in light of specific factors. 15 U.S.C.
1604(f)(2). These factors are (1) the amount of the loan and whether
the disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
The Board stated in the January 2009 Regulation Z Rule that it
considered each of these factors carefully, and based on that review,
believed it is appropriate to exempt, for open-end (not home-secured)
plans, telephone sales of credit insurance or debt cancellation or debt
suspension plans from the requirement to obtain a written signature or
initials from the consumer. Requiring a consumer's written signature or
initials is intended to evidence that the consumer is purchasing the
product voluntarily; the rule contains safeguards intended to insure
that oral purchases are voluntary. Under the rule, creditors must
maintain tapes or other evidence that the consumer received required
disclosures orally and affirmatively requested the product. Comment
4(d)(4)-1 indicates that a creditor does not satisfy the requirement to
obtain an affirmative request if the creditor uses a script with
leading questions or negative consent. In addition to oral disclosures,
under the proposal consumers will receive written disclosures shortly
after the transaction.
The Board proposes to extend the telephone sales rule for credit
insurance and debt cancellation or suspension coverage, as adopted in
the January 2009 Regulation Z Rule, to HELOCs. Section 226.4(d)(4)
would be amended to apply to all open-end credit, not only open-end
(not home-secured) credit. The Board proposes this approach pursuant to
its exception and exemption authorities under TILA Section 105, and has
considered the factors specified in Section 105(f) as discussed above.
The proposed rule contains safeguards to ensure that the purchase is
voluntary. In addition, other proposed safeguards regarding eligibility
restrictions and revised disclosures, discussed in the Board's separate
proposal regarding closed-end mortgage lending provisions of Regulation
Z and published today
[[Page 43440]]
elsewhere in the Federal Register, would apply to HELOCs as well as
closed-end mortgage loans.
The fee for the credit insurance or debt cancellation or debt
suspension coverage would also appear on the first monthly periodic
statement after the purchase, and, as applicable, thereafter. As
discussed in the section-by-section analysis under Sec. 226.7, under
the proposal fees, including insurance and debt cancellation or
suspension coverage charges, would be better highlighted on statements.
Consumers who are billed for insurance or coverage they did not
purchase may dispute the charge as a billing error. At the same time,
the proposed amendments should facilitate the convenience to both
consumers and creditors of conducting transactions by telephone. The
proposed amendments, therefore, have the potential to better inform
consumers and further the goals of consumer protection and the informed
use of credit.
Proposals Regarding Finance Charge and Credit Insurance, Debt
Cancellation Coverage, and Debt Suspension Coverage Published in
Separate Federal Register Notice
As noted above, in addition to the proposed amendments discussed
above, the Board is separately proposing a number of amendments to the
rules in Sec. 226.4 regarding finance charge, and to the rules in
Sec. 226.4 and other sections of Regulation Z regarding credit
insurance and debt cancellation or suspension coverage. These other
proposed amendments are discussed in detail in the Board's separate
Federal Register notice, published today and appearing elsewhere in
this Federal Register. Also, the regulatory and staff commentary text
for these proposed amendments appears in the Board's separate Federal
Register notice. A brief discussion of these other proposed amendments
follows.
``All-in'' finance charge. The Board is proposing to adopt, for
closed-end mortgage lending under Regulation Z only, an ``all-in''
finance charge concept, under which all fees payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or condition of the extension of credit
would be included in the finance charge. Thus, many of the exclusions
from the finance charge under Sec. 226.4(a), (c), (d), and (e) would
no longer apply to closed-end mortgage loans. For example, for closed-
end mortgage loans, charges for credit insurance and debt cancellation
or suspension coverage would be considered finance charges, whether or
not the insurance or coverage is optional and even though revised
disclosures would be required.
The Board is not proposing this ``all-in'' finance charge approach
for credit other than closed-end mortgage loans. Thus, the proposed
approach would not apply, for example, to closed-end non-mortgage
credit, or to HELOCs or other open-end credit. As discussed below in
the section-by-section analysis under Sec. Sec. 226.5 and 226.7,
disclosures for HELOCs would no longer be required to use the term
``finance charge,'' and would no longer be required to contain a
disclosure of the effective APR (i.e., an APR that includes not only
interest but also other fees that constitute finance charges). In the
January 2009 Regulation Z Rule, the Board adopted these changes for
open-end (not home-secured) credit. Therefore, the Board believes that
changing the definition of finance charge for HELOC accounts would not
have a material effect on the HELOC disclosures and accordingly is
unnecessary. However, the Board requests comment on whether there are
reasons why consideration should be given to changing the definition of
finance charge for HELOCs. For a detailed discussion of the Board's
proposals regarding the ``all-in'' finance charge for closed-end
mortgage loans, see the Board's separate Federal Register notice
published today.
Age or employment eligibility criteria. The Board is proposing to
add new Sec. 226.4(d)(1)(iv) and (d)(3)(v) to permit creditors to
exclude a credit insurance premium or debt cancellation or suspension
charge from the finance charge only if the creditor determines at the
time of enrollment that the consumer meets any applicable age or
employment eligibility criteria for the insurance or coverage. These
provisions would apply to all open-end credit, including HELOCs, as
well as to closed-end (non-real-property) credit. The Board is
proposing these new provisions because some creditors offer credit
insurance or debt cancellation or suspension products with eligibility
restrictions, but may not evaluate whether applicants actually meet the
criteria at the time the applicants request the product. As a result,
many consumers may not discover until they file a claim that they were
paying for a product for which they were not eligible. For a detailed
discussion of this proposal, see the Board's separate Federal Register
notice published today. Note that, for HELOCs and other open-end credit
in which the telephone purchase rule under Sec. 226.4(d)(4) could be
used, the new conditions under proposed Sec. 226.4(d)(1)(iv) and
(d)(3)(v) would still apply.
Revised disclosures for insurance or coverage. The Board is
proposing to add model clauses that would provide clearer information
to consumers about the optional nature and costs of credit insurance or
debt cancellation or suspension coverage. The model clauses would apply
to open-end as well as closed-end credit transactions, and appear in
Appendix G-16(C) for open-end credit and Appendix H-17(C) for closed-
end credit. The disclosure language is based on consumer testing
conducted by the Board to determine whether consumers understood the
optional nature and costs of credit insurance or debt cancellation or
suspension coverage. In addition, the disclosures would contain
language about eligibility restrictions and a reference to the Board's
Web site to learn more about the product. These model clauses would be
in addition to the Debt Suspension Model Clause found at Appendix G-
16(A) for open-end credit and Appendix H-17(A) for closed-end credit.
For a detailed discussion of this proposal, see the Board's separate
Federal Register notice published today.
Section 226.5 General Disclosure Requirements
Section 226.5 contains the general requirements for open-end credit
disclosures under Regulation Z, both for credit cards and other open-
end (not home-secured) credit and for HELOCs subject to Sec. 226.5b.
Section 226.5 addresses, among other requirements, that disclosures be
clear and conspicuous, in writing, and in a form the consumer can keep,
as well as requirements concerning terminology, formats for
disclosures, and timing of disclosures. In the January 2009 Regulation
Z Rule, the Board adopted a number of changes to the general disclosure
requirements for open-end (not home-secured) credit, but did not change
the requirements applicable to HELOCs. The Board is now proposing to
revise the format and other disclosure requirements for HELOCs in a
manner generally paralleling the revisions in the requirements for
open-end (not home-secured) credit.
In addition to the proposed changes to the specific rules for
disclosures, the Board proposes to adopt a new comment 5-1 that would
provide guidance in situations where a creditor is uncertain whether an
open-end credit plan is covered by the Sec. 226.5b rules for HELOCs or
the rules for open-end (not home-secured) credit. The Board understands
that there is uncertainty for
[[Page 43441]]
creditors that offer open-end credit secured by real property, where it
is unclear whether that property is, or remains, the consumer's
dwelling. Such creditors may be uncertain how they should comply with
the January 2009 Regulation Z Rule. The Board solicited comment on this
issue in the May 2009 proposal regarding technical revisions and other
changes to open-end (not home-secured) credit rules. 74 FR 20784 (May
5, 2009) (May 2009 Regulation Z Proposal). The comment period ended on
June 4, 2009. Financial institutions commenters suggested that
creditors be permitted to treat all open-end credit secured by
residential property as covered by Sec. 226.5b, rather than the rules
for open-end (not home-secured) credit, regardless of whether the
property is the consumer's dwelling. Consumer group commenters did not
address this issue.
Proposed comment 5-1 generally permits creditors to assume that the
property securing the line of credit is the principal residence or a
second or vacation home of the consumer and, therefore, that the line
of credit is covered by the HELOC rules. (The HELOC rules cover not
only credit secured by consumer's principal residence, but also credit
secured by vacation and second homes, assuming the credit is for
personal, family, or household purposes.) However, creditors are also
permitted to investigate the actual use of the property. If the
creditor ascertains that the property is not the consumer's principal
residence or a second or vacation home, the creditor may comply with
the rules applicable to open-end (not home-secured) credit under
Regulation Z. In this case, if the credit plan is accessible by credit
card, the creditor must comply with, in addition to the rules
applicable to open-end credit generally, the rules for open-end (not
home-secured) credit card plans under Sec. 226.5a and associated
sections in the regulation. The Board requests comment on whether the
proposed comment provides useful and appropriate guidance.
5(a) Form of Disclosures
5(a)(1) General
Paragraph 5(a)(1)(i)
Section 226.5(a)(1)(i) requires that disclosures required under the
regulation be clear and conspicuous. Comment 5(a)(1)-1 states that the
``clear and conspicuous'' standard generally requires that disclosures
be in a reasonably understandable form. The comment further states that
disclosures for credit card applications and solicitations under Sec.
226.5a, and related disclosures such as those required to be in a
tabular format under Sec. 226.6(b)(1), must also be readily noticeable
to the consumer. Comment 5(a)(1)-3 explains that the disclosures
subject to the readily noticeable standard must be given in a minimum
of 10-point font and cross-references the rule that the APR for
purchases in an open-end (not home-secured) plan under Sec. Sec.
226.5a(b)(1) and 226.6(b)(2)(i) must be in a minimum 16-point font.
The Board proposes to revise comments 5(a)(1)-1 and -3 to apply the
same standards to home-equity plan disclosures as those applicable to
the comparable disclosures for credit cards and other open-end (not
home-secured) credit. Specifically, the Board proposes to revise
comments 5(a)(1)-1 and -3 to require that the following home-equity
disclosures be readily noticeable to the consumer, meaning that they
must be provided in a minimum font size of 10-point: disclosures
required to be given in a tabular format within three business days
after application (Sec. 226.5b(b)); disclosures required to be given
in a tabular format at account opening (Sec. 226.6(a)(1)); change-in-
terms disclosures required to be given in a tabular format (Sec.
226.9(c)(1)(iii)(B)); and disclosures required to be given in a tabular
format when a rate is increased due to delinquency or default under
Sec. 226.5b(f)(2) (Sec. 226.9(i)(4)). The proposal also adds a cross-
reference to the 16-point minimum font size requirement for the APR in
a home-equity plan under proposed Sec. Sec. 226.5b(c)(10) and
226.6(a)(2)(vi).
The Board believes that the same reasoning underlying the minimum
font size requirements for open-end (not home-secured) plan disclosures
applies to the comparable home-equity plan disclosures. In the June
2007 Regulation Z Proposal, the Board stated its belief that special
formatting requirements, such as a tabular format and font size
requirements, are needed to highlight for consumers the importance and
significance of certain disclosures required at application or
solicitation for a credit card, and at the opening of a credit card
account. Similarly, for disclosures that may appear on periodic
statements, such as the change-in-terms disclosures under Sec.
226.9(c)(2)(iii)(B) and disclosures when a rate is increased due to
delinquency, default or as a penalty under Sec. 226.9(g)(3)(ii), the
Board stated that highlighting these disclosures by using a minimum 10-
point font size is important because consumers do not expect to see
these disclosures each billing cycle and because the changes may have a
significant impact on the consumer.
Consumer comments on the June 2007 Regulation Z Proposal noted that
credit card disclosures are in fine print and argued that disclosures
should be given in a larger font. Many consumer and consumer group
commenters suggested that the regulation require a minimum 12-point
font for disclosures. In consumer testing conducted by the Board in the
open-end (not home-secured) credit review demonstrated that
participants were able to read and notice information in a 10-point
font. Consumer testing conducted by the Board in the home-equity credit
review showed the same result. Accordingly, the Board proposes to
require that the HELOC disclosures discussed above must be provided in
a minimum 10-point font size.
Paragraph 5(a)(1)(ii)
Paragraph 5(a)(1)(ii)(A)
Section 226.5(a)(1)(ii) requires that disclosures required by the
regulation be given in writing and in a form that the consumer may
keep. Section 226.5(a)(1)(ii)(A) specifies several exceptions to the
requirement that disclosures be in writing, including account-opening
disclosures of charges imposed as part of an open-end (not home-
secured) plan that are not required to be disclosed in a tabular format
under Sec. 226.6(b)(2) and related change-in-terms disclosures under
Sec. 226.9(c)(2)(ii)(B), when such charges change. The Board proposes
to add a parallel exception, applicable to home-equity plans, for
disclosures of certain charges not required to be given in tabular
format at the time of account opening and for related change-in-terms
disclosures.
The Board believes that the same reasoning underlying the exception
to the written disclosure requirement for certain open-end (not home-
secured) plan disclosures applies to home-equity plan disclosures. As
discussed in the January 2009 Regulation Z Rule, in permitting certain
charges in open-end (not home-secured) credit to be disclosed either
orally or in writing (and after account opening, as discussed further
under Sec. 226.5(b)(1)(ii) below), the Board's goal was to better
ensure that consumers receive disclosures at a time and in a manner in
which they would be likely to notice them. At account opening, both for
open-end (not home-secured) plans and for HELOCs, written disclosure
has obvious merit because account opening is a time when a consumer
must assimilate information that may influence major decisions by
[[Page 43442]]
the consumer about how, or even whether, to use the account. During the
life of an account, however, a consumer may sometimes need to decide
whether to purchase a single service from the creditor that may not be
central to the consumer's use of the account, such as an expedited
telephone payment service. The consumer may have become accustomed to
purchasing similar services by telephone for other financial products,
such as credit cards, and expect to receive an oral disclosure of the
charge for the service during the same telephone call. Permitting oral
disclosure of charges that are not central to the consumer's use of the
account would be consistent with consumer expectations and with the
business practices of creditors.
Accordingly, the Board proposes to exempt from the written
disclosure requirement the following HELOC disclosures: charges not
required to be in given in tabular format at account opening under
Sec. 226.6(a)(2) (i.e., charges that are not the most significant
charges related to the plan) and related change-in-terms notices under
Sec. 226.9(c)(1)(ii)(B). A creditor would not be permitted to increase
the APR (assuming a rate increase were permissible at all) without
providing written notice, because the APR is a disclosure required to
be given in tabular format. Of course, any change in terms in a HELOC
subject to Sec. 226.5b would have to be permissible under Sec.
226.5b(f). For example, the charge for an expedited telephone payment
service would not be permitted to be increased; however, the charge
could be decreased, or a new optional telephone payment service, with
its associated charge, could be introduced, because these would be
beneficial changes permitted under Sec. 226.5b(f).
The most significant charges would not be covered by the proposed
exemption and would continue to have to be disclosed in writing at
account opening, because these charges would be required to be shown in
the tabular account-opening disclosures. For example, the annual fee,
early termination fee, penalty fees such as late payment and over-the-
credit-limit fees, and fees to use the account such as transaction fees
would have to be disclosed in writing at account opening in the tabular
disclosure. Further, any changes in these charges (assuming a change
were permissible at all, which in most cases it would not be) would be
required to be disclosed in a written change-in-terms notice under
Sec. 226.9(c).
Paragraph 5(a)(1)(ii)(B)
Application disclosures. Section 226.5(a)(1)(ii)(B) lists several
exceptions to the requirement that disclosures be in a form that the
consumer may keep, including the disclosures required to be given at
the time of application for a HELOC under Sec. 226.5b(d) (to be
redesignated Sec. 226.5b(c) under the proposal). The Board proposes to
eliminate this exception because, as discussed in greater detail below
in this section-by-section analysis under Sec. Sec. 226.5(b)(4) and
226.5b(b), the Board is proposing to change the timing and content of
HELOC disclosures under Sec. 226.5b(c). Under the proposal, these
disclosures would be required to show the terms and conditions that
would apply to the particular consumer, rather than only describing the
creditor's plans in general terms. In addition, Sec. 226.5b(c)
disclosures would be given within three business days after application
rather than at the time of application.
The purpose of the existing exception to the retainability
requirement was to avoid requiring creditors to give consumers a
separate disclosure document, in addition to the application form
itself. When proposing and adopting in final form the amendments to
Regulation Z implementing the 1988 Home Equity Loan Act (cited above),
the Board noted that the exception from the retainability requirement
would permit the creditor to place the disclosures on the application
form that the consumer would return to the creditor to apply for the
plan. 54 FR 3063 (January 23, 1989); 54 FR 24670 (June 9, 1989). This
purpose for the exception from the retainability requirement would not
apply under the proposal because the relevant disclosures would be not
be provided at the time of application, but instead within three
business days later.
Home-equity brochure. The current regulation does not exempt the
home-equity brochure required under Sec. 226.5b(e) from the
retainability requirement under the current regulation, even though the
brochure is required to be provided to a consumer at the time of
application. One reason is that the brochure is not easily incorporated
into the application form itself. As discussed under Sec. 226.5b(a)
below, the Board is proposing to replace the brochure with a shorter
disclosure serving the same purpose of informing consumers generally
about home-equity plan features and risks (``Key Questions to Ask about
Home Equity Lines of Credit'' or ``Key Questions'' document). The
retainability requirement would continue to apply to this disclosure;
it would be a form developed and specifically prescribed by the Board,
and therefore would not necessarily be readily incorporated into the
application form itself.
Paragraph 5(a)(1)(iii)
Under Sec. 226.5(a)(1)(iii), a creditor may give a consumer open-
end credit disclosures in electronic form, as long as the creditor
complies with the consumer notice and consent procedures and other
applicable provisions of the Electronic Signatures in Global and
National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). Under
certain circumstances, however, the disclosures required at application
for a home-equity plan under Sec. 226.5b (as well as the application
and solicitation disclosures for credit cards under Sec. 226.5a and
disclosures in open-end credit advertising under Sec. 226.16) may be
provided to a consumer in electronic form without regard to the
requirements of the E-Sign Act. Section 226.5b(a)(3) (proposed to be
redesignated Sec. 226.5b(a)(2)), in turn, requires that for the Sec.
226.5b disclosures to be provided in electronic form, the application
must be accessed by the consumer in electronic form and the disclosures
must be provided on or with the application. The Board proposes to
continue to apply this exception from the E-Sign consumer notice and
consent requirements to the disclosure that would be provided to a
consumer at application under proposed Sec. 226.5b(a) (i.e., ``Key
Questions'' document).
The purpose of these exceptions from the E-Sign Act's notice and
consent requirements is to facilitate credit shopping. When proposing
these exceptions, the Board stated its belief that the exceptions would
eliminate a potentially significant burden on electronic commerce
without increasing the risk of harm to consumers: requiring consumers
to follow the notice and consent procedures of the E-Sign Act to access
an online application, solicitation, or advertisement is potentially
burdensome and could discourage consumers from shopping for credit
online; at the same time, there appears to be little, if any, risk that
the consumer will be unable to view the disclosures online when they
are already able to view the application, solicitation, or
advertisement online. 72 FR 63462 (November 9, 2007).
This exception would not be extended to the disclosures that would
be provided within three business days after application under proposed
Sec. 226.5b(b). The credit shopping process takes place primarily when
a consumer reviews applications and associated disclosures and decides
whether to
[[Page 43443]]
submit an application. Three business days after the consumer has
submitted an application, the consumer may have completed the credit
shopping process. Requiring compliance with the E-Sign Act's notice and
consent procedures for disclosures at this point would not likely
hinder credit shopping, and would ensure that the consumer is able and
willing to receive disclosures in electronic form. In addition,
compliance with the E-Sign Act for disclosures provided within three
business days after application should not be unduly burdensome,
because the time between application and three days later should be
sufficient for the creditor to carry out the E-Sign Act notice and
consent procedures.
5(a)(2) Terminology
Paragraph 5(a)(2)(ii)
``Finance charge'' and ``annual percentage rate.'' Section
226.5(a)(2) relates to terminology used in disclosures. Section
226.5(a)(2)(ii) requires that for HELOCs subject to Sec. 226.5b, the
terms ``finance charge'' and ``annual percentage rate,'' when required
to be disclosed with a corresponding amount or percentage rate, must be
more conspicuous than any other required disclosure, with some
exceptions. This regulatory provision implements section 122(a) of
TILA; 15 U.S.C. 1632(a).
In the January 2009 Regulation Z Rule, the Board eliminated the
``more conspicuous'' rule for open-end (not home-secured) credit, using
the Board's authority under TILA Section 105(a) to make ``such
adjustments and exceptions for any class of transactions, as in the
judgment of the Board are necessary or proper to effectuate the
purposes of this title, to prevent circumvention or evasion thereof, or
to facilitate compliance therewith.'' 15 U.S.C. 1604(a). The Board
concluded that requiring the terms ``annual percentage rate'' and
``finance charge'' to be more conspicuous than other disclosures was
unnecessary, because creditors would be required to emphasize APRs and
certain other finance charges by disclosing them in a tabular format
with a minimum 10-point font size (or 16-point font size as required
for the APR for purchases). Furthermore, the Board noted that the use
of the term ``finance charge'' in disclosures for open-end (not home-
secured) plans is no longer required; as a result, creditors would in
many cases not use the term ``finance charge'' at all.
The Board believes that the same reasoning applies to the terms
``finance charge'' and ``annual percentage rate'' when disclosed for
home-equity plans. As for open-end (not home-secured) credit, for
HELOCs subject to Sec. 226.5b the Board is proposing to require
creditors to disclose the APR and certain other finance charges in a
tabular format with a minimum 10-point font size (or 16-point font size
for the APR the first time it appears in the table). The Board is also
proposing to eliminate the requirement that creditors use the term
``finance charge'' in disclosures for HELOCs subject to Sec. 226.5b
(see discussion in this section-by-section analysis under Sec. 226.7).
Accordingly, under the Board's authority in TILA Section 105(a)
discussed above, the Board proposes to revise Sec. 226.5(a)(2)(ii) to
eliminate the ``more conspicuous'' rule for the terms ``finance
charge'' and ``annual percentage rate'' for home-equity plans. Comments
5(a)(2)-1, -2, and -3, providing guidance on the ``more conspicuous''
rule, would be deleted, and comment 5(a)(2)-4 would be renumbered as
5(a)(2)-1.
``Borrowing period,'' ``repayment period,'' and ``balloon
payment.'' The Board also proposes to revise Sec. 226.5(a)(2)(ii) to
require the use of the terms ``borrowing period,'' ``repayment
period,'' and ``balloon payment'' in disclosures required to be given
in tabular format in HELOCs subject to Sec. 226.5b, as applicable. In
consumer testing conducted by the Board to develop the proposed revised
home-equity plan disclosures, consumers understood these terms. In
particular, consumers overall understood that the term ``borrowing
period'' referred to the part of a HELOC term during which consumers
could obtain funds, whereas they did not clearly understand the
alternative term ``draw period,'' which is used in the existing
regulation's home-equity sample disclosures (Appendices G-14A and G-
14B).
``Required'' for required credit insurance or debt cancellation or
suspension coverage. Section 226.5(a)(2)(ii) would also be revised to
require that, if credit insurance or debt cancellation or suspension
coverage is required as part of the plan, the term ``required'' must be
used and the program must be identified by its name. This would be
parallel to the requirement adopted in the January 2009 Regulation Z
Rule for open-end (not home-secured) credit under Sec.
226.5(a)(2)(iii) discussed below.
Paragraph 5(a)(2)(iii)
Section 226.5(a)(2)(iii) contains three terminology requirements
adopted in the January 2009 Regulation Z Rule for open-end (not home-
secured) credit. First, if credit insurance or debt cancellation or
suspension coverage is required as part of the plan, the term
``required'' must be used and the program must be identified by its
name. This requirement is proposed to apply to HELOCs subject to Sec.
226.5b as well (under proposed Sec. 226.5(a)(2)(ii), as discussed
above).
Second, Sec. 226.5(a)(2)(iii) requires a creditor to use the term
``penalty APR'' as applicable. Third, Sec. 226.5(a)(2)(iii) prohibits
a creditor from using the term ``fixed'' to describe a rate unless the
creditor also specifies a time period during which the rate will be
fixed and the rate will not increase during that period, or, if the
creditor does not disclose a time period during which the rate will be
fixed, the rate will not increase while the plan is open.
These latter two rules would not be applied to HELOCs subject to
Sec. 226.5b; accordingly, Sec. 226.5(a)(2)(iii) would be revised to
exclude home-equity plans from the terminology requirements relating to
the terms ``penalty APR'' and ``fixed.'' Regarding the ``penalty APR''
requirement, the Board's review of home-equity plans and HELOC creditor
practices indicates that most HELOCs do not have penalty rates. Even if
a penalty rate could apply, under Sec. 226.5b(f) such a rate could
apply to balances (both outstanding and future) only if an event
permitting termination and acceleration of the plan, such as a
significant payment default (more than 30 days late), has occurred. See
proposed Sec. 226.5b(f)(2)(ii) and comment 5b(f)(2)(ii)-1. In general,
rate increases of any kind, including application of penalty rates, are
much more restricted for HELOCs subject to Sec. 226.5b than for credit
card accounts, in which penalty rates can be applied even for minor
defaults (although only on future transactions). For these reasons, the
disclosures required for HELOCs, unlike those for credit card accounts,
do not include penalty rates; see the discussion of this issue under
Sec. Sec. 226.5b and 226.6, below. Therefore, a terminology
requirement relating to penalty rates is inapplicable.
Regarding using the term ``fixed'' to describe a rate, the Board
believes that the reason for the prohibition applicable to credit card
accounts does not exist for HELOCs. Credit card accounts have been
marketed as having ``fixed'' rates even though rates could be increased
at any time and for any reason. The rates of HELOCs subject to Sec.
226.5b generally may only be changed in accordance with a publicly
available index not under the control of the creditor or due to a
circumstance permitting termination and acceleration. Thus,
[[Page 43444]]
HELOC rates are generally variable, and would not be marketed as
``fixed.''
5(a)(3) Specific Formats
Section 226.5(a)(3) contains formatting requirements applicable to
credit card and other open-end (not home-secured) credit, including
tabular format requirements for applications and solicitations under
Sec. 226.5a, account-opening disclosures under Sec. 226.6(b),
disclosures accompanying checks that access a credit card account under
Sec. 226.9(b)(3), change-in-terms notices under Sec. 226.9(c)(2), and
notices of application of a penalty rate under Sec. 226.9(g). Section
226.5(a)(3) also includes formatting requirements for periodic
statements under Sec. 226.7(b)(6) and (b)(13). In addition, this
provision sets forth formatting requirements for HELOC disclosures at
application under Sec. 226.5b(b), but does not require use of a
tabular format for these or any other HELOC disclosures.
The Board proposes to adopt tabular format requirements for HELOC
disclosures, paralleling requirements adopted for credit card and other
open-end (not home-secured) credit in the January 2009 Regulation Z
Rule. Section 226.5(a)(3)(ii) would be revised to require a tabular
format for HELOC disclosures currently required to be provided at the
time of application. (The timing of these disclosures would be changed
from at application to within three business days after application.
See the discussion in this section-by-section analysis under Sec. Sec.
226.5(b)(4) and 226.5b(b) below.) The tabular format requirement is
discussed in detail under Sec. 226.5b(b)(2)) below. The proposal would
also revise Sec. 226.5(a)(3) to eliminate the requirement that certain
disclosures must precede other disclosures, as discussed below under
Sec. 226.5b(b)(2). Similarly, Sec. 226.5(a)(3)(iii), (iv), (vi), and
(vii) would be revised to impose formatting requirements comparable to
those applicable to credit card and other open-end (not home-secured)
credit for home-equity plan account-opening disclosures (Sec.
226.6(a)(1)), periodic statements (Sec. 226.7(a)(6)), change-in-terms
notices (Sec. 226.9(c)(1)(iii)(B)), and notices of application of a
penalty rate (Sec. 226.9(i)(4)), as discussed in this section-by-
section analysis below under those disclosure provisions.
5(b) Time of Disclosures
5(b)(1) Account-Opening Disclosures
5(b)(1)(ii) Charges Imposed as Part of an Open-End Plan
In the January 2009 Regulation Z Rule, the Board adopted new Sec.
226.5(b)(1)(ii) to provide, for open-end (not home-secured) credit, an
exception to the requirement to provide account-opening disclosures
before the first transaction under the plan. The exception applies to
charges that are imposed as part of an open-end (not home-secured)
credit plan but that are not required to be disclosed in a tabular
format in the account-opening disclosures under Sec. 226.6(b)(2).
Under Sec. 226.5(a)(1)(ii), these disclosures do not have to be
provided in writing. Thus, a creditor may disclose these charges orally
or in writing, after account opening but before the consumer agrees to
pay or becomes obligated to pay for the charge, as long as the creditor
discloses them at a time and in a manner such that a consumer would be
likely to notice them.
As discussed above, the Board is proposing to revise Sec.
226.5(a)(1)(ii) to apply the same exception to the written disclosure
requirement to HELOCs subject to Sec. 226.5b. For the reasons
discussed above under Sec. 226.5(a)(1)(ii), the Board also proposes to
revise Sec. 226.5(b)(1)(ii) to except the same charges from the
general timing requirements. These are charges that are not required to
be provided in a tabular format in the account-opening disclosures in a
home-equity plan, and therefore would be expected to be less
significant. Further, as discussed above, disclosure of these charges
at the time a consumer agrees to pay the charge may be more useful to
the consumer, because the disclosure would come at a time when the
consumer would be more likely to notice the disclosure.
Comment 5(b)(1)(ii)-1, which provides guidance on compliance with
the provisions of Sec. 226.5(b)(1)(ii), would be revised to apply to
HELOCs as well as open-end (not home-secured) plans. New comment
5(b)(1)(ii)-2 would be added to explain the relationship of the
provisions of Sec. 226.5(b)(1)(ii) to the restrictions on changes in
terms of HELOCs under Sec. 226.5b(f). The comment states that even if
certain charges may be disclosed at a time later than account opening,
the creditor would not be permitted to impose a charge for a feature or
service previously available under the plan for no charge, or to
increase a fee for a service previously available under the plan for a
lower charge.
5(b)(1)(iv) Membership Fees
Section 226.5(b)(1)(iv)(A) provides that in general, a creditor may
not collect any fee before account-opening disclosures are given.
However, this provision allows creditors to collect a membership fee at
an earlier time, as long as the consumer may, after receiving the
disclosures, reject the plan and have the fee refunded. Section
226.5(b)(1)(iv)(B) provides that this provision does not apply to
HELOCs, because separate rules about collection and refunds of fees
apply under Sec. Sec. 226.5b(g) and (h) and 226.15, which would cover
membership fee reimbursements. Section 226.5b(g) requires that a
creditor refund all fees paid if a term changes after application and
the consumer decides not to open a HELOC account; Sec. 226.5b(h)
requires a refund of all fees upon the consumer's request within three
business days after receipt of the application disclosures. (Under the
proposal, Sec. 226.5b(g) and (h) would be redesignated Sec. 226.5b(d)
and (e), respectively.) Section 226.5(b)(1)(iv)(B) would be revised by
adding a cross-reference to Sec. Sec. 226.5b(d) and (e) and 226.15, to
ensure that users of the regulation are aware that even though the fee
refundability rules of Sec. 226.5(b)(1)(iv)(A) do not apply, home-
equity plans are subject to other rules regarding refunds of fees.
5(b)(1)(v) Application Fees
Section 226.5(b)(1)(v) provides that application fees excludable
from the finance charge under Sec. 226.4(c)(1) are subject to the same
rules regarding collection and refundability as other membership fees
under Sec. 226.5(b)(1)(iv). To clarify that HELOCs are not subject to
these rules, but instead are subject to the separate rules about
collection and refunds of fees under Sec. Sec. 226.5b(d) and (e) and
226.15, Sec. 226.5(b)(1)(v) would be redesignated Sec.
226.5(b)(1)(v)(A), and a new Sec. 226.5(b)(1)(v)(B) would be added,
parallel to Sec. 226.5(b)(1)(iv)(B).
5(b)(2) Periodic Statements
Paragraph 5(b)(2)(ii)
Section 226.5(b)(2)(ii) requires that the creditor mail or deliver
a periodic statement at least 14 days before the end of any period
allowing the consumer to pay to avoid the imposition of finance or
other charges. Section 106(b) of the 2009 Credit Card Act (cited
above), amends TILA Section 163 (15 U.S.C. 1666b) to require that the
period between the mailing of the statement and the due date to avoid
finance or other charges must be at least 21 days. On July 15, 2009,
the Board published an interim final rule amending Sec.
226.5(b)(2)(ii) to implement this provision of the Credit Card Act,
which under the legislation becomes effective 90 days after enactment.
Accordingly, no proposed amendments to Sec. 226.5(b)(2)(ii) are in
this proposal. When this proposal is adopted into a
[[Page 43445]]
final rule, Sec. 226.5(b)(2)(ii) will reflect the amendments made to
implement the Credit Card Act.
5(b)(4) Home-Equity Plan Application and Three Days After Application
Disclosures
Section 226.5(b)(4) states that the disclosures required at the
time of an application for a home-equity plan must be provided in
accordance with the timing requirements of Sec. 226.5b. As discussed
under Sec. 226.5b below, the Board is proposing to change the timing
requirements for home-equity plan disclosures; some disclosures would
be required at the time of application, and additional disclosures
would be required three business days after application. Accordingly,
Sec. 226.5(b)(4) would be revised to reflect the new timing
requirements for the disclosures under Sec. 226.5b, and to correct the
cross-reference to the applicable paragraphs in that section. See the
discussion of the proposed changes in the disclosure timing
requirements under Sec. 226.5b below.
Section 226.5b Requirements for Home-Equity Plans
Summary of Proposed Disclosure Requirements
Current Sec. 226.5b, which implements TILA Section 127A, generally
requires creditors to provide to the consumer two types of disclosures
at the time an application for a HELOC is provided: ``application
disclosures'' and a home-equity brochure published by the Board (the
``HELOC brochure''). 15 U.S.C. 1637a. The application disclosures and
HELOC brochure provide information about the creditor's HELOC plans and
how HELOCs work; neither contains transaction-specific information
about the terms of the HELOC offered by a creditor to a consumer, such
as the credit limit or APR.
Application disclosures. The application disclosures that a
creditor generally must provide to a consumer on or with an application
for a HELOC plan must contain details about the creditor's HELOC plan,
including the length of the draw and repayment periods, how the minimum
required payment is calculated, whether a balloon payment will be owed
if a consumer only makes minimum required payments, payment examples,
and what fees are charged by the creditor to open, use, or maintain the
plan. Again, they do not include information that is dependent on the
value of the dwelling or a borrower's creditworthiness, such as a
credit limit or the APRs offered to the consumer, because the
application disclosures are provided before underwriting takes place.
The Board proposes to replace the application disclosures with
transaction-specific HELOC disclosures (``early HELOC disclosures'')
that must be given within three business days after application (but no
later than account opening). Under the proposal, the information
required to be disclosed in the early HELOC disclosures would differ
from the information required to be disclosed as part of the current
application disclosures. For example, the Board proposes to require
creditors to include several additional disclosures in the early HELOC
disclosures that are not currently required to be disclosed as part of
the application disclosures, such as the credit limit and the APRs
being offered to the consumer. In addition, the Board proposes not to
require creditors to provide certain disclosures in the early HELOC
disclosures that are currently required to be disclosed as part of the
application disclosures. For example, creditors generally would not be
required to disclose as part of the early HELOC disclosures certain
information related to variable rates currently required in the
application disclosures under Sec. 226.5b(d)(12), such as the
historical payment example table. Moreover, the Board proposes to
revise the disclosure requirements for other information currently
required to be disclosed in the application disclosures and included in
the proposed early HELOC disclosures. For example, the application
disclosures currently must include several payment examples based on a
$10,000 outstanding balance. Under the proposal, the Board would
require payment examples in the early HELOC disclosures, but would
revise the payment examples to assume the consumer borrowed the full
credit line offered to the consumer (as disclosed in the early HELOC
disclosures) at the beginning of the draw period and drew no additional
advances.
Moreover, the Board proposes stricter format requirements for the
proposed early HELOC disclosures than currently are required for the
application disclosures. Currently, the application disclosures may be
provided in a narrative form, as shown in the current model forms for
the application disclosures (see current Home-equity Samples G-14A and
G-14B of Appendix G). Under the proposal, the early HELOC disclosures
generally must be provided in the form of a table with headings,
content, and format substantially similar to any of the applicable
tables found in proposed G-14 in Appendix G.
HELOC brochure. Currently, a creditor is required to provide to a
consumer the HELOC brochure or a suitable substitute at the time an
application for a HELOC is provided to the consumer. The HELOC brochure
is around 20 pages long and provides general information about HELOCs
and how they work, as well as a glossary of relevant terms and a
description of various features that can apply to HELOCs. The Board
proposes to eliminate the requirement for creditors to provide to
consumers the HELOC brochure with applications for HELOCs. Instead, the
Board proposes to require that a creditor must provide a new document
published by the Board entitled, ``Key Questions to Ask about Home
Equity Lines of Credit'' (the ``Key Questions'' document) to a consumer
when a HELOC application is given to the consumer. This ``Key
Questions'' document would be a one-page document that is designed to
contain simple, straightforward and concise information about HELOCs,
including potentially risky features.
Current Comments 5b-2 and 5b-3
Current comments 5b-2 and 5b-3 provide transaction rules that were
included in the commentary when Sec. 226.5b was added to Regulation Z
in 1989. Specifically current 5b-2 provides that the notice rules of
Sec. 226.9(c) apply if, by written agreement under Sec.
226.5b(f)(3)(iii), a creditor changes the terms of a HELOC plan entered
into on or after November 7, 1989 at or before the plan's scheduled
expiration (for example, by renewing the plan on different terms). A
new plan results, however, if the plan is renewed (with or without
changes to the terms) after the scheduled expiration. The new plan is
subject to all open-end credit rules, including Sec. Sec. 226.5b,
226.6, and 226.15.
The Board proposes a technical revision to this comment to delete
the reference to November 7, 1989, as obsolete. Thus, this proposed
comment provides that the notice rules of Sec. 226.9(c) applies if, by
written agreement under Sec. 226.5b(f)(3)(iii), a creditor changes the
terms of a HELOC plan at or before its scheduled expiration (for
example, by renewing the plan on different terms). A new plan would
result, however, if the plan is renewed (with or without changes to the
terms) after the scheduled expiration. The new plan would be subject to
all open-end credit rules, including Sec. Sec. 226.5b, 226.6, and
226.15.
Current comment 5b-3 provides that the requirements of Sec. 226.5b
do not apply to HELOC plans entered into before November 7, 1989. The
requirements of Sec. 226.5b also do not
[[Page 43446]]
apply if the original consumer, on or after November 7, 1989, renews a
plan entered into prior to that date (with or without changes to the
terms). If, on or after November 7, 1989, a security interest in the
consumer's dwelling is added to a line of credit entered into before
that date, the substantive restrictions of Sec. 226.5b apply for the
remainder of the plan, but no new disclosures are required under Sec.
226.5b. The Board proposes to delete this comment as obsolete.
5b(a) Home-Equity Document Provided on or With the Application
5b(a)(1) General
Current Sec. 226.5b(b) and (e), which implement TILA Section
127A(b)(1)(A) and (e), require a creditor to provide the HELOC brochure
published by the Board, or a suitable substitute, to a consumer when a
HELOC application is given to the consumer. 15 U.S.C. 1637a(b)(1)(A)
and (e). Pursuant to Section 4 of the Home Equity Loan Act cited
earlier, the Board's HELOC brochure must contain (1) a general
description of HELOC plans and the terms and conditions on which such
plans are generally extended; and (2) a discussion of the potential
advantages and disadvantages of such plans. As discussed above, the
current HELOC brochure is around 20 pages long and provides general
information about HELOCs and how they work, as well as a glossary of
relevant terms, and a description of various features that can apply to
HELOCs.
``Key Questions'' document. The Board proposes to eliminate the
requirement in current Sec. 226.5b(b) and (e) for creditors to provide
to consumers the HELOC brochure on or with applications for HELOCs.
Instead, the Board proposes in new Sec. 226.5b(a)(1) to require a
creditor to provide a new document published by the Board entitled
``Key Questions to Ask about Home Equity Lines of Credit'' (the ``Key
Questions'' document) to a consumer when a HELOC application is given
to the consumer. The Board proposes this rule pursuant to its authority
in TILA Section 105(a) to make adjustments and exceptions to the
requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). TILA also gives the Board authority to require a
brochure with content ``substantially similar'' to that required in
Section 4 of the Home Equity Loan Act. 15 U.S.C. 1637(e)(2). In
consumer testing conducted by the Board on HELOC disclosures, the Board
asked participants to review the HELOC brochure, and indicate whether
the brochure provides useful information and whether they would be
likely to read the brochure if it were given to them with a HELOC
application. In this consumer testing, some participants found the
HELOC brochure useful, particularly if they had little experience with
HELOCs or home-equity products in general. However, a significant
number of participants indicated that the HELOC brochure is too long,
and, as a result, they would be unlikely to read it. In the consumer
testing, most participants had obtained a HELOC in the past, but none
of the participants recalled reading the HELOC brochure when they
applied for a HELOC. Some participants recommended that a shorter, more
concise version of the HELOC brochure would be more useful and easier
to read and comprehend.
In many respects, the ``Key Questions'' document (included in this
SUPPLEMENTARY INFORMATION as Attachment A) satisfies the statutory
requirements for the HELOC brochure, which, as noted, must include a
general description of HELOC plans and the terms and conditions on
which such plans are generally extended; and a discussion of the
potential advantages and disadvantages of such plans. This one-page
document would inform consumers about certain HELOC terms that are
important for consumers to consider when selecting a home-equity
product, including potentially risky features such as variable rates
and balloon payments. As shown in Attachment A, the ``Key Questions''
document would contain answers to the following questions: ``Can my
interest rate increase?,'' ``Can my minimum payment increase?,'' ``When
can I borrow money?,'' ``How soon do I have to pay off my balance?,''
``Will I owe a balloon payment?'', ``Do I have to pay any fees?,'' and
``Should I get a home equity loan instead of a line of credit?'' The
``Key Questions'' document also would provide a link to the Board's Web
site for further information, which currently contains an electronic
version of the HELOC brochure. The ``Key Questions'' document was
designed based on consumers' preference for a question-and-answer
tabular format, and refined in several rounds of consumer testing. In
the consumer testing, the ``Key Questions'' document tested well with
participants: all indicated that they would find it useful, most found
it very clear and easy to read, and the majority indicated that they
would read a one-page disclosure, such as the ``Key Questions''
document, when considering a HELOC.
As a result, proposed Sec. 226.5b(a)(1) requires a creditor to
provide the Board's ``Key Questions'' document to a consumer at the
time an application is provided to the consumer. Proposed Sec.
226.5b(a)(1) requires creditors to provide this document ``as
published.'' Proposed comment 5b(a)(1)-9 clarifies that a creditor may
not revise the ``Key Questions'' document. The Board believes that
requiring creditors to provide the ``Key Questions'' document without
revision would benefit consumers. Consumers would receive consistent
information about certain HELOC terms that are important to consider
when selecting a home-equity product; this information would be
provided in a question-and-answer format using language proven to be
useful to consumers through consumer testing.
HELOC applications contained in magazines or other publications, or
when the application is received by telephone or through an
intermediary agent or broker. Under footnote 10a, which implements TILA
Section 127A(b)(1)(A), the application disclosures and HELOC brochure
may be delivered or placed in the mail not later than three business
days following receipt of a consumer's application that was in a
magazine or other publication, or when the application is received by
telephone or through an intermediary agent or broker. 15 U.S.C.
1637a(b)(1)(A). Current comment 5b(b)-6 provides a cross reference to
comment 19(b)-3 for guidance on determining whether or not an
application involves an ``intermediary agent or broker.'' Current
comment 19(b)-3 provides that an example of an ``intermediary agent or
broker'' is a broker who (1) customarily within a brief time after
receiving an application inquires about the credit terms of several
creditors with whom the broker does business and submits the
application to one of them; and (2) is responsible for only a small
percentage of the applications received by that creditor. During the
time the broker has the application, the broker might request a credit
report and an appraisal (or even prepare an entire loan package if
customary in that particular area). (In the proposal issued by the
Board on closed-end mortgages published elsewhere in today's Federal
Register, the Board proposes to move current comment 19(b)-3 to
proposed comment 19(d)(3)-3.)
The Board proposes to revise and move the contents of footnote 10a
related to telephone applications and applications received through
[[Page 43447]]
intermediary agents and brokers to proposed Sec. 226.5b(a)(1)(ii).
Specifically, proposed Sec. 226.5b(a)(1)(ii) provides that for
telephone applications and applications received through an
intermediary agent or broker, the ``Key Questions'' document must be
delivered or mailed within three business days following receipt of a
consumer's application by the creditor (but no later than account
opening). In these cases, the ``Key Questions'' document must be
provided along with the early HELOC disclosures (which are discussed in
more detail in the section-by-section analysis to proposed Sec.
226.5b(b)(1)). In addition, current comment 5b(b)-6 (that provides a
cross reference to current comment 19(b)-3 for guidance on determining
whether an application involves an ``intermediary agent or broker'')
would be moved to proposed comment 5b(a)(1)-7 with technical revisions.
The Board also proposes to add new comment 5b(a)(1)-8 to cross
reference the definition of ``business day'' contained in Sec.
226.2(a)(6).
The Board proposes, however, to delete the contents of footnote 10a
related to applications contained in magazines or other publications.
Specifically, current footnote 10a permits a creditor not to provide
application disclosures and the HELOC brochure with applications that a
creditor makes available to consumers in magazine or other
publications. Instead, the creditor may provide these disclosures
within three business days following receipt of a consumer's
application. The rationale for this approach was that requiring a
creditor to provide the application disclosures and HELOC brochure with
applications available to consumers in magazines or other publications
would overly burden creditors because these disclosures would take up
many pages in a magazine or other publication.
Nonetheless, the Board proposes under new Sec. 226.5b(a)(1) to
require a creditor to provide the ``Key Questions'' document with
applications that the creditor makes available to consumers in
magazines or other publications, rather than providing the pamphlet
within three days of application as required by TILA 127A(b)(1)(A). 15
U.S.C. 1637a(b)(1)(A). The Board proposes this rule pursuant to its
authority in TILA Section 105(a) to make adjustments and exceptions to
the requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). Unlike the application disclosures and the HELOC
brochure that could take up multiple pages in a magazine or other
publication, the ``Key Questions'' document would be one page. Thus,
the Board believes that requiring the ``Key Questions'' document to be
disclosed with applications in magazines or other publications would
not place undue burdens on creditors. In addition, requiring the ``Key
Questions'' document to be given with applications in magazines or
other publications would benefit consumers by providing with the
application, information about HELOC terms that are important for
consumers to consider when selecting a home-equity product. The Board
solicits comments on this approach.
Mail applications. Current comment 5b(b)-1 provides that if a
creditor sends an application through the mail, the application
disclosures and the HELOC brochure must accompany the application. In
addition, as discussed above, if an application is taken over the
telephone, the application disclosures and HELOC brochure may be
delivered or mailed within three business days of taking the
application. If an application is mailed to the consumer following a
telephone request, however, the creditor also must send the application
disclosures and a HELOC brochure along with the application. The Board
proposes to move this comment to proposed comment 5b(a)(1)-1 and to
apply this comment to disclosure of the ``Key Questions'' document.
Specifically, proposed comment 5b(a)(1)-1 provides that if the creditor
sends an application through the mail, the ``Key Questions'' document
must accompany the application. In addition, proposed comment 5b(a)(1)-
1 provides that if an application is taken over the telephone, the
``Key Questions'' document must be delivered or mailed within three
business days of taking the application (but not later than account
opening). If an application is mailed to the consumer following a
telephone request, however, the creditor would be required to send the
``Key Questions'' document along with the application.
General purpose applications. Current comment 5b(b)-2 provides that
the application disclosures and the HELOC brochure need not be provided
when a general purpose application is given to a consumer unless (1)
the application or materials accompanying it indicate that it can be
used to apply for a HELOC plan, or (2) the application is provided in
response to a consumer's specific inquiry about a HELOC plan. If a
general purpose application is provided in response to a consumer's
specific inquiry only about credit other than a HELOC plan, the
application disclosures and HELOC brochure need not be provided even if
the application indicates it can be used for a HELOC plan, unless it is
accompanied by promotional information about HELOC plans.
The Board proposes to move this comment to proposed comment
5b(a)(1)-2 and to apply this comment to disclosure of the ``Key
Questions'' document. Specifically, proposed comment 5b(a)(1)-2
provides that the ``Key Questions'' document need not be provided when
a general purpose application is given to a consumer unless (1) the
application or materials accompanying it indicate that it can be used
to apply for a HELOC plan or (2) the application is provided in
response to a consumer's specific inquiry about a HELOC plan. Proposed
comment 5b(a)(1)-2 also provides that if a general purpose application
is provided in response to a consumer's specific inquiry only about
credit other than a HELOC plan, the ``Key Questions'' document need not
be provided even if the application indicates it can be used for a
HELOC, unless it is accompanied by promotional information about HELOC
plans.
Publicly-available applications. Current comment 5b(b)-3 addresses
applications for HELOCs that are available without the need for a
consumer to request them, such as so-called ``take-one forms''. This
comment provides that these applications must be accompanied by the
application disclosures and the HELOC brochure, such as by attaching
the application disclosures and the HELOC brochure to the application
form. The Board proposes to move this comment to proposed comment
5b(a)(1)-3 and to apply this comment to disclosure of the ``Key
Questions'' document. Specifically, proposed comment 5b(a)(1)-3
provides that a creditor must include the ``Key Questions'' document
with applications that are available without the need for a consumer to
request them, such as take-ones, and that a creditor may provide this
document by attaching it to the application.
Response cards. Current comment 5b(b)-4 states that sometimes a
creditor may solicit consumers for its HELOC plan by mailing a response
card which the consumer returns to the creditor to indicate interest in
the plan. If the only action taken by the creditor upon receipt of the
response card is to send the consumer an application form or to
telephone the consumer to discuss the plan, the creditor need not send
the application disclosures and the HELOC brochure with the response
card. The
[[Page 43448]]
Board proposes to move this comment to proposed comment 5b(a)(1)-4 and
to apply this comment to disclosure of the ``Key Questions'' document.
Specifically, proposed comment 5b(a)(1)-4 provides that a creditor is
not required to send the ``Key Questions'' document with a response
card if the only action taken by the creditor upon receipt of the
response card is to send the consumer an application form or to
telephone the consumer to discuss the plan. If the creditor sends the
consumer an application form in response to receiving a response card,
proposed comment 5b(a)(1)-1 provides that a creditor must provide the
``Key Questions'' document with the application form. In addition, if a
creditor calls the consumer in response to receiving a response card
and an application is taken over the phone, proposed comment 5b(a)(1)-1
provides that the ``Key Questions'' document must be delivered or
mailed within three business days of taking the application (but not
later than account opening).
Denial or withdrawal of application. Current comment 5b(b)-5
provides that in situations where current footnote 10a permits the
creditor a three-day delay in providing application disclosures and the
HELOC brochure, if the creditor determines within that period that an
application will not be approved, the creditor need not provide the
consumer with the application disclosures or HELOC brochure. Similarly,
if the consumer withdraws the application within this three-day period,
the creditor need not provide the application disclosures or the HELOC
brochure. The Board proposes to move this comment to proposed comment
5b(a)(1)-5 and to apply this comment to the ``Key Questions'' document.
Specifically, proposed comment 5b(a)(1)-5 provides that in situations
where proposed Sec. 226.5b(a)(1)(ii) allows a creditor to delay
providing the ``Key Questions'' document until three business days
following receipt of a consumer's application--namely, for telephone
applications and applications received through an intermediary agent or
broker--if the creditor determines within that three-day period that an
application will not be approved, the creditor would not need to
provide the ``Key Questions'' document. Similarly, under this proposed
comment, if a consumer withdraws the application within this three-day
period, the creditor would not need to provide the ``Key Questions''
document.
Prominent location. Current Sec. 226.5b provides that the
application disclosures and the HELOC brochure must be provided on or
with the application. See current Sec. 226.5b(a)(1), (b) and (e).
Current comment 5b(a)(1)-5 contains guidance on providing the
application disclosures and the HELOC brochure on or with a blank
application that is made available to the consumer in electronic form,
such as on a creditor's Internet Web site. Current comment 5a(a)(1)-5
provides creditors with flexibility in satisfying the requirement to
provide the application disclosures and the HELOC brochure on or with a
blank application that is made available to the consumer in electronic
form. Methods creditors could use to satisfy the requirement include,
but are not limited to, the following examples. First, the application
disclosures and HELOC brochure could automatically appear on the screen
when the application appears. Second, the application disclosures and
the HELOC brochure could be located on the same Web page as the
application (whether or not they appear on the initial screen), if the
application contains a clear and conspicuous reference to the location
of the application disclosures and the HELOC brochure and indicates
that the application disclosures contain rate, fee, and other cost
information, as applicable. Third, creditors could provide a link to
the electronic application disclosures and HELOC brochure on or with
the application as long as consumers cannot bypass the application
disclosures and HELOC brochure before submitting the application. The
link would take the consumer to the application disclosures and HELOC
brochure, but the consumer need not be required to scroll completely
through the application disclosures or HELOC brochure. Fourth, the
application disclosures and HELOC brochure could be located on the same
Web page as the application without necessarily appearing on the
initial screen, immediately preceding the button that the consumer will
click to submit the application. Whatever method is used, a creditor
need not confirm that the consumer has read the application disclosures
and HELOC brochure.
Under proposed Sec. 226.5b(a)(1), creditors would be required to
provide the ``Key Questions'' document in a prominent location on or
with the application. Proposed comment 5b(a)(1)-6 provides guidance to
creditors for how to comply with the prominent location requirement
when the document is given in either paper or electronic form. Proposed
comment 5b(a)(1)-6.i provides that when the ``Key Questions'' document
is provided in paper form, the document is prominently located, for
example, if the document is on the same page as an application. If the
document appears elsewhere, it is deemed to be prominently located if
the application contains a clear and conspicuous reference to the
location of the document and indicates that the document provides
information about HELOCs.
With respect to disclosure of the ``Key Questions'' document in
electronic form, the Board proposes to move current comment 5b(a)(1)-5,
which provides guidance on providing the application disclosures and
the HELOC brochure on or with a blank application that is made
available to the consumer in electronic form, to proposed comment
5b(a)(1)-6.ii and to apply this guidance to the ``Key Questions''
document. In particular, proposed comment 5b(a)(1)-6.ii provides that
generally, creditors must provide the ``Key Questions'' document in a
prominent location on or with a blank application that is made
available to the consumer in electronic form, such as on a creditor's
Internet Web site. Creditors would have flexibility in satisfying this
requirement. Under proposed comment 5b(a)(1)-6, methods creditors could
use to satisfy the requirement include, but are not limited to, the
following examples. First, the ``Key Questions'' document could
automatically appear on the screen when the application appears.
Second, the ``Key Questions'' document could be located on the same Web
page as the application (whether or not they appear on the initial
screen), if the application contains a clear and conspicuous reference
to the location of the document and indicates the document includes
information about HELOCs. Third, creditors could provide a link to the
electronic ``Key Questions'' document on or with the application as
long as consumers cannot bypass the document before submitting the
application. The link would take the consumer to the document, but the
consumer need not be required to scroll completely through the
document. Fourth, the ``Key Questions'' document could be located on
the same Web page as the application without necessarily appearing on
the initial screen, immediately preceding the button that the consumer
will click to submit the application. Whatever method is used, a
creditor would not need to confirm that the consumer has read the ``Key
Questions'' document.
5b(a)(2) Electronic Disclosures
Current Sec. 226.5b(a)(3) provides that for an application
accessed by the
[[Page 43449]]
consumer in electronic form, the application disclosures and HELOC
brochure may be provided to the consumer in electronic form on or with
the application. Current comment 5b(a)(3)-1 provides guidance on when
the application disclosures and HELOC brochure must be in electronic
form. Specifically, current comment 5b(a)(3)-1 provides that if a
consumer accesses a HELOC application electronically (other than as
described below), such as online at a home computer, the creditor must
provide the application disclosures and HELOC brochure in electronic
form (such as with the application form on its Web site) in order to
meet the requirement to provide disclosures in a timely manner on or
with the application. If the creditor instead mailed paper disclosures
to the consumer, this requirement would not be met. In contrast, if a
consumer is physically present in the creditor's office, and accesses a
HELOC application electronically, such as via a terminal or kiosk (or
if the consumer uses a terminal or kiosk located on the premises of an
affiliate or third party that has arranged with the creditor to provide
applications to consumers), the creditor may provide the application
disclosures and HELOC brochure in either electronic or paper form,
provided the creditor complies with the timing, delivery, and
retainability requirements of the regulation.
The Board proposes to move current Sec. 226.5b(a)(3) and current
comment 5b(a)(3)-1 to proposed Sec. 226.5b(a)(2) and proposed comment
5b(a)(2)-1, respectively, and to apply these provisions to the ``Key
Questions'' document. Specifically, proposed Sec. 226.5b(a)(2)
provides that for an application accessed by the consumer in electronic
form, the ``Key Questions'' document may be provided to the consumer in
electronic form on or with the application. In addition, proposed
comment 5b(a)(2)-1 provides guidance on when the ``Key Questions''
document must be in electronic form. Specifically, proposed comment
5b(a)(2)-1 provides that if a consumer accesses a HELOC application
electronically (other than as described below), such as online at a
home computer, the creditor must provide the ``Key Questions'' document
in electronic form (such as with the application form on its Web site)
in order to meet the requirement to provide the document in a timely
manner on or with the application. If the creditor instead mailed the
``Key Questions'' document in paper form to the consumer, the
requirement that the ``Key Questions'' document be provided on or with
the application would not be met. In contrast, if a consumer is
physically present in the creditor's office, and accesses a HELOC
application electronically, such as via a terminal or kiosk (or if the
consumer uses a terminal or kiosk located on the premises of an
affiliate or third party that has arranged with the creditor to provide
applications to consumers), the creditor may provide the ``Key
Questions'' document in either electronic or paper form, provided the
creditor complies with the timing, delivery, and retainability
requirements of the regulation.
5b(a)(3) Duties of Third Parties
Current Sec. 226.5b(c), which implements TILA Section 127A(c),
provides that persons other than the creditor who provide applications
to consumers for HELOC plans generally must provide the HELOC brochure
at the time an application is provided. 15 U.S.C. 1637a(c). If such
persons have the application disclosures for a creditor's HELOC plan,
they also must provide the disclosures at the time an application is
provided. Current comment 5b(c)-1 clarifies that although third parties
who give applications to consumers for HELOC plans must provide the
HELOC brochure in all cases, such persons are required to provide the
application disclosures only in certain instances. A third party has no
duty to obtain application disclosures about a creditor's HELOC plan or
to create a set of disclosures based on what it knows about a
creditor's plan. If, however, a creditor provides the third party with
application disclosures along with its application form, the third
party must give the disclosures to the consumer with the application
form. Current comment 5b(c)-1 also provides that the duties under
current Sec. 226.5b(c) are those of the third party; the creditor is
not responsible for ensuring that a third party complies with those
obligations. Current comment 5b(c)-1 further provides that if an
intermediary agent or broker takes an application over the telephone or
receives an application contained in a magazine or other publication,
current footnote 10a permits that person to mail the application
disclosures and the HELOC brochure within three business days of
receipt of the application. In addition, current comment 5b(e)-2
provides that if a creditor determines that third party has provided a
consumer with the required HELOC brochure, the creditor need not give
the consumer a second brochure.
The Board proposes to delete current Sec. 226.5b(c) and current
5b(c)-1 as obsolete. As discussed above and in more detail in the
section-by-section analysis to proposed Sec. 226.5b(b)(1), the Board
proposes to delete the requirement that the application disclosures and
HELOC brochure be provided on or with an application for a HELOC plan.
Regarding obligations on third parties to provide disclosures on or
with HELOC applications, the Board proposes in new Sec. 226.5b(a)(3)
to require persons other than the creditor who provide applications to
consumers for HELOC plans to provide the ``Key Questions'' document on
or with HELOC applications (except for telephone applications,
discussed below). This proposed requirement on third parties generally
to provide the ``Key Questions'' document on or with HELOC applications
is consistent with the requirement in current Sec. 226.5b(c) that
third parties must provide the HELOC brochure on or with HELOC
applications.
Nonetheless, unlike current Sec. 226.5b(c), which does not require
a third party to provide the HELOC brochure with applications the third
party makes available in magazines and other publications, proposed
Sec. 226.5b(a)(3) requires third parties to provide the ``Key
Questions'' document with these HELOC applications. As discussed above
regarding a creditor's duty to provide the ``Key Questions'' document
with HELOC applications in magazines or other publications, the Board
believes that requiring the ``Key Questions'' document to be disclosed
with applications in magazines or other publications would not place
undue burdens on third parties because the ``Key Questions'' document
is a single page. In addition, requiring the ``Key Questions'' document
to be given with applications in magazines or other publications would
benefit consumers by providing with the application information about
HELOC terms that are important for consumers to consider when selecting
a home-equity product. The Board solicits comments on this approach.
Under proposed Sec. 226.5b(a)(3), third parties would not be
required to provide the ``Key Questions'' document with respect to
telephone applications. Proposed comment 5b(a)(3)-3 clarifies that for
telephone applications taken by a third party, the creditor would have
the duty to provide the ``Key Questions'' document within three days
following receipt of the consumer's application by the creditor (but
not later than account opening). The Board believes that imposing a
separate duty on a third
[[Page 43450]]
party to provide the ``Key Questions'' document for telephone
applications is unnecessary, because the creditor would be required
under proposed Sec. 226.5b(a)(1) to provide the ``Key Questions''
document and the early HELOC disclosures (as discussed in more detail
in the section-by-section analysis to proposed Sec. 226.5b(b)(1))
within three days after the application has been received by the
creditor (but not later than account opening).
Proposed comment 5b(a)(3)-1 provides that the duties to provide the
``Key Questions'' document under proposed Sec. 226.5b(a)(3) are those
of the third party; the creditor would not responsible for ensuring
that a third party complies with those obligations. This proposed
comment is consistent with current guidance in current comment 5b(c)-1.
Proposed comment 5b(a)(3)-2 provides that if a creditor determines that
a third party has provided a consumer with the ``Key Questions''
document, the creditor need not give the consumer a second copy of the
document. This proposed comment is consistent with current guidance in
comment 5b(e)-2 regarding disclosure of the HELOC brochure.
5b(b) Home-Equity Disclosures Provided No Later Than Account-Opening or
Three Business Days After Application, Whichever Is Earlier
5b(b)(1) Timing
Current Sec. 226.5b(b), which implements TILA Section
127A(b)(1)(A), generally requires creditors to provide to the consumer
two types of disclosures at the time an application for a HELOC is
provided: Application disclosures and the HELOC brochure. 15 U.S.C.
1637a(b)(1)(A). The Board proposes to delete current Sec. 226.5b(b).
As discussed in more detail above in the section-by-section analysis to
proposed Sec. 226.5b(a), the Board proposes no longer to require
creditors to disclose the HELOC brochure to consumers on or with HELOC
applications. In addition, as discussed below, the Board proposes to
replace the application disclosures with transaction-specific HELOC
disclosures (the ``early HELOC disclosures'') that must be given within
three business days after application (but no later than account
opening). See proposed Sec. 226.5b(b)(1).
The application disclosures that a creditor generally must provide
to a consumer on or with an application for a HELOC plan must contain
details about the creditor's HELOC plan, including the length of the
draw and repayment periods, how the minimum required payment is
calculated, whether a balloon payment will be owed if a consumer only
makes minimum required payments, payment examples, and what fees are
charged by the creditor to open, use, or maintain the plan. The
application disclosures do not include information dependent on the
value of the dwelling or a borrower's creditworthiness, such as a
credit limit or the APRs offered to the consumer, because the
application disclosures are provided before underwriting takes place.
In the proposed rule implementing the Mortgage Disclosure
Improvement Act of 2008 (contained in Sections 2501-2503 of the Housing
and Economic Recovery Act of 2008, Pub. L. 110-289, enacted on July 30,
2008, as amended by the Emergency Economic Stabilization Act of 2008,
Pub. L. 110-343, enacted on October 3, 2008) (MDIA), the Board
solicited comment on the timing of HELOC disclosures. 73 FR 74989
(December 10, 2008). MDIA, which applies only to closed-end mortgage
transactions, requires that early mortgage disclosures be provided no
later than three business days after application and seven business
days before consummation of the loan. The Board noted that the timing
of HELOC application disclosures is not affected by MDIA, but solicited
comment on whether it would be necessary or appropriate to change the
timing of the HELOC application disclosures and, if so, what changes
should be made. The Board asked whether transaction-specific
disclosures (such as the APR, an itemization of fees, and potential
payment amounts) should be required after application and earlier than
account opening, at least in some circumstances. The Board noted that
many consumers take a major draw on the account immediately upon
opening it, to fund a home purchase, for example, or pay for an
immediate large expense such as a college tuition bill. The Board asked
commenters to address whether a requirement to disclose the final HELOC
terms, including the APR and fees, three days before account opening
would substantially benefit consumers who plan to take a draw
immediately. The Board also requested comment on whether the potential
costs of such a requirement would outweigh the potential benefits.
Financial institution commenters opposed requiring disclosures
based on the amount of an initial draw on the line of credit to be
given in advance of account opening. Commenters contended that it would
be impracticable to provide disclosures based on the amount of an
initial draw, because the creditor, at the time disclosures would be
required, would have no way of knowing the amount of the draw, or even
whether the consumer planned to take a draw immediately upon account
opening. Commenters argued that it would be difficult for creditors to
discern the consumer's intent prior to account opening. The consumer
might not have plans at the time of the disclosures regarding the
initial draw; thus, even if the creditor asked the consumer, the
creditor might still be unable to obtain this information. Commenters
also contended that consumers might need funds soon and that in such
cases the enforced three-day waiting period would be more
disadvantageous than beneficial to consumers.
Another commenter discussed the possibility of two separate timing
requirements--one for cases in which the amount of the initial draw is
known, and another in which this amount is not known--but argued that
such a rule would be difficult for creditors to manage correctly. Other
commenters argued generally that existing disclosures provide adequate
information for consumers and that imposing the suggested timing
requirement would impose undue burdens and costs on creditors.
Consumer group commenters argued that HELOCs are widely used by
creditors in place of closed-end second mortgages, and that some
creditors use HELOCs for first mortgages as well, to avoid having to
provide closed-end TILA disclosures. Accordingly, these commenters
argued that HELOC creditors should be required to disclose the expected
total of payments, finance charge, and payment schedule. One consumer
group commenter stated that the differences in content and timing
between closed-end mortgage disclosures and HELOC disclosures makes it
difficult for consumers effectively to comparison shop between these
two types of credit, and thus difficult to make meaningful choices. The
commenter also argued that since creditors must revise their systems to
comply with MDIA for closed-end mortgage loans, complying with the same
rules for HELOCs would cause little additional expense.
The Board believes that providing disclosures that would be
transaction-specific, based on the amount of an initial draw, or on
expected amounts of draws and payments over the life of the plan, would
not be practicable. In addition, the Board believes that requiring the
account-opening HELOC disclosures to be provided some period, such as
three or seven business days, in
[[Page 43451]]
advance of account opening could unnecessarily delay the process of
opening a HELOC in some cases and thus could disadvantage some
consumers.\13\
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\13\ An American Bankers Association (ABA) survey reported that
the average business days between application and closing for HELOCs
and home equity loans ranged from 8 days for larger institutions to
10 days for smaller institutions. American Bankers Ass'n, ``ABA Home
Equity Lending Survey Report'' (2005), pp. 18 and 71.
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The Board nevertheless believes that consumers could benefit from
receiving early HELOC disclosures that are more transaction-specific
than the application disclosures provided under the current regulation.
Therefore, the proposal provides for early HELOC disclosures to be
given within three business days after application or no later than
account opening, whichever is earlier. The Board anticipates that in
most cases account opening will not occur prior to three business days
after application, and the early HELOC disclosures will be given at
least some days in advance of account opening. Further, as discussed in
more detail in the section-by-section analysis to proposed Sec.
226.5b(c), the proposal requires early HELOC disclosures to be based on
(1) the actual APR for which the consumer qualifies (unlike the
application disclosures, which do not include a consumer-specific APR)
and (2) the amount of the credit limit for which the consumer likely
qualifies (unlike the current application disclosures, which include
disclosures based on a hypothetical draw of $10,000). The Board
proposes this rule pursuant to its authority in TILA Section 105(a) to
make adjustments and exceptions to the requirements in TILA to
effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a). The Board
believes that to assure a meaningful disclosure of the credit terms of
a HELOC, so that consumers can fully understand the terms offered on
the HELOC, it is necessary and proper to adjust the timing of the HELOC
disclosures from at-application to within three business days after
application (but no later than account opening).
Consumer testing conducted by the Board on HELOC disclosures
supports this proposed approach. In the first two rounds of testing,
some participants reviewing a disclosure based on the current
requirements for the application disclosures either tried to find an
interest rate applicable to their plan and were surprised to learn that
such a rate is not contained in the disclosure, or incorrectly assumed
that one of the rates shown in the disclosure (which are hypothetical,
not actual, rates) was the rate that was being offered to them. In
subsequent testing of a disclosure form with more transaction-specific
information (including the APR and credit limit for which the consumer
qualified), participants indicated they would prefer to receive a
transaction-specific disclosure, as opposed to a more generic
disclosure at application (such as the one provided under the current
regulation), even if this choice meant that the consumer would not
receive any disclosure of HELOC plan terms at the time of application.
Participants indicated that the APR and the credit limit offered on a
HELOC plan are two of the most important pieces of information that
they want to know in deciding whether to open a HELOC. The participants
said that they would still prefer to receive transaction-specific
disclosures soon after application rather than generic disclosures at
application even if they were required to pay an application fee before
receiving the later, more transaction-specific disclosure.\14\ These
findings are consistent with the findings in the Board's testing of
closed-end mortgage disclosures, as discussed in the proposal issued by
the Board on closed-end mortgages published elsewhere in today's
Federal Register.
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\14\ The rules regarding refundability of fees, discussed in
more detail in the section-by-section analysis to Sec. Sec.
226.5b(d) and (e) below, would permit consumers to obtain a refund
of such fees in some cases; however, most participants were not
aware of this fact when they expressed their preference for the more
transaction-specific disclosure.
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The proposal regarding the early HELOC disclosures is also
supported by the legislative history of the Home Equity Loan Act. The
chief sponsor of the Act, Representative David Price, explained that
the disclosure provisions of the bill (H.R. 3011) were enacted to
address concerns about the then-current law on HELOC disclosures, under
which ``a consumer may never be advised about the essential features of
his or her home-equity loan until it's time to sign the full
agreement.'' \15\ It appears that the intent of the legislation was to
provide the consumer information about the consumer's particular HELOC,
based on the belief that transaction-specific information could be
given at the time of application. Because transaction-specific
information is not available until after application, the Board
believes that the proposed approach of requiring disclosures to contain
more transaction-specific information, and to be given within three
business days after application, is in accord with the congressional
intent.
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\15\ Remarks of Rep. Price on H.R. 3011, the Home Equity Loan
Consumer Protection Act of 1988, Pub. L., 100-709, enacted on Nov.
23, 1988, Congr. Rec., H4472 (June 20, 1988).
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The Board notes that delaying the early HELOC disclosures until
three days after application would not result in added cost to a
consumer, because as noted above, and as further discussed in the
section-by-section analysis to proposed Sec. 226.5b(d) and (e), the
consumer has the right to a refund of any fees paid in connection with
the HELOC for three business days after the consumer receives the
disclosures. In addition, if the disclosed terms change after the early
HELOC disclosures are provided but before the plan is opened, the
consumer has the right to a refund of any fees at any time before
account opening.
Substitution of account-opening disclosures for early HELOC
disclosures. Proposed Sec. 226.5b(b)(1) provides that the early HELOC
disclosures must be provided within three business days after
application, but no later than account opening. Account opening might
be unlikely to occur sooner than three business days after application,
but this situation could arise. In that event, under the proposal, a
creditor would be required to provide both the early HELOC disclosures
under proposed Sec. 226.5b(b)(1) and account-opening disclosures under
proposed Sec. 226.6. As discussed in more detail in the section-by-
section analysis to proposed Sec. 226.6, the Board proposes that
certain account-opening disclosures must be disclosed in a tabular
format. Under the proposal, the account-opening summary table would not
be identical to the table containing the early HELOC disclosures. For
example, the table containing the early HELOC disclosures would show
and compare two payment options offered on the HELOC (unless a creditor
offers only one), while the account-opening summary table would show
only the payment plan chosen by the consumer. In addition, the table
containing the early HELOC disclosures contains a summary of fees,
while the account-opening summary table shows fees in greater detail.
The Board solicits comment on whether, and if so in what
circumstances, creditors should be permitted to substitute the account-
opening summary table for the table containing the early HELOC
disclosures in situations where the early HELOC disclosures are
required to be given at the time the account is opened (because
[[Page 43452]]
account opening occurs within three business days after application).
For example, the regulation could provide that, because the account-
opening summary table shows only one HELOC payment plan, the account-
opening summary table would be permitted to be used in place of the
early HELOC disclosures only if the creditor offers only one payment
plan or the consumer had already chosen a plan before account opening.
The Board also requests comment on how frequently account opening for
HELOCs occurs within three business days after application.
Denial or withdrawal of application. Current footnote 10a provides
that the application disclosures and HELOC brochure may be delivered or
placed in the mail not later than three business days following receipt
of a consumer's application for applications in magazines or other
publications, or when the application is received by telephone or
through an intermediary agent or broker. Current comment 5b(b)-5
provides that in situations where current footnote 10a permits the
creditor a three-day delay in providing application disclosures and the
HELOC brochure, if the creditor determines within that period that an
application will not be approved, the creditor need not provide the
consumer with the application disclosures or HELOC brochure. Similarly,
if the consumer withdraws the application within this three-day period,
the creditor need not provide the application disclosures or the HELOC
brochure.
The Board proposes to move this comment to proposed comment
5b(b)(1)-1 and apply this comment to disclosure of the early HELOC
disclosures. As discussed above, Sec. 226.5b(b)(1) provides that
creditors must deliver or mail the early HELOC disclosures to a
consumer not later than account opening or three business days
following receipt of a consumer's application by the creditor,
whichever is earlier. The Board also proposes to add new comment
5b(b)(1)-2 to cross reference the definition of ``business day''
contained in Sec. 226.2(a)(6). Proposed comment 5b(b)(1)-1 provides
that if the creditor determines within this three-day period that an
application will not be approved, the creditor would not need to
provide the early HELOC disclosures. Similarly, under this proposed
comment, if a consumer withdraws the application within this three-day
period, the creditor would not need to provide the early HELOC
disclosures.
5b(b)(2) Form of Disclosures; Tabular Format
Tabular format. Current Sec. 226.5b(a)(1), which implements TILA
Section 127A(b)(2)(B), provides that the application disclosures must
be made clearly and conspicuously and generally must be grouped
together and segregated from all unrelated information. 15 U.S.C.
1637a(b)(2)(B). Nonetheless, several application disclosures are not
required to be grouped together with other application disclosures.
Specifically, current Sec. 226.5b(a)(1), which in part implements TILA
Section 127A(b)(2)(D), provides that disclosures about variable rates
offered on an HELOC plan that are required to be disclosed as part of
the application disclosures may be grouped together with the other
application disclosures, or may be provided separately from the other
application disclosures. 15 U.S.C. 1637a(b)(2)(D). In addition, under
current Sec. 226.5b(a)(1), a disclosure of conditions under which a
creditor can take certain actions under the plan, such as terminating
the plan, described in current Sec. 226.5b(d)(4)(iii), and an
itemization of fees imposed by third parties to open the HELOC plan
described in current Sec. 226.5b(d)(8) also may be grouped together
with the other application disclosures or may be disclosed separately.
Current comment 5b(a)(1)-3 provides that while most of the
application disclosures must be grouped together and segregated from
all unrelated information, a creditor is permitted to include with the
application disclosures information that explains or expands on the
required disclosures. This comment also provides guidance on what types
of information explain or expand on the required disclosures.
Although the application disclosures generally must be grouped
together and segregated from all unrelated information, current Sec.
226.5b(a)(1) does not require the application disclosures to be
disclosed in a tabular format. Currently, creditors generally provide
the application disclosures in a narrative form, consistent with the
current sample forms for the application disclosures set forth in
current G-14A and G-14B of Appendix G.
Proposal. The Board proposes to delete current Sec. 226.5b(a)(1)
and current 5b(a)(1)-3. As described above, the Board proposes to
delete the requirement that creditors must provide the application
disclosures required under current Sec. 226.5b. Instead, the Board
proposes to require creditors to provide early HELOC disclosures within
three business days following receipt of the consumer's application by
the creditor (but not later than account opening). In addition, the
Board proposes stricter format requirements for the proposed early
HELOC disclosures than currently are required for the application
disclosures. Specifically, proposed Sec. 226.5b(b)(2)(i) requires that
the early HELOC disclosures generally must be provided in the form of a
table with headings, content, and format substantially similar to any
of the applicable tables found in proposed G-14 in Appendix G. Proposed
comment 5b(b)(2)-1 clarifies that proposed Sec. 226.5b(b)(2)(i)
generally requires that the headings, content and format of the tabular
disclosures be substantially similar, but need not be identical, to the
applicable tables in proposed G-14 to Appendix G. Under the proposal,
creditors would not be allowed to include in the table information that
is not specifically required or permitted to be disclosed in the table,
as set forth in proposed Sec. 226.5b(c)(4)(ii) through (c)(19).
Creditors would be required to place certain information, such as the
name and address of the borrower, directly above the table, in a format
substantially similar to any of the applicable tables found in proposed
G-14 in Appendix G. See proposed Sec. 226.5b(b)(2)(iii). Creditors
would be required to place certain information, such as a statement
that the consumer is not required to accept the disclosed terms,
directly below the table, in a format substantially similar to any of
the applicable tables found in proposed G-14 in Appendix G. See
proposed Sec. 226.5b(b)(2)(iv). Creditors could include other
information outside the table. See proposed Sec. 226.5b(b)(2)(v). The
Board proposes this rule pursuant to its authority in TILA Section
105(a) to make adjustments and exceptions to the requirements in TILA
to effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uninformed use of credit. See 15 U.S.C. 1601(a), 1604(a). The
proposed requirements that the early HELOC disclosures must be provided
in a table (or directly above or below the table) and no other
information may be disclosed in the table is consistent with TILA
Section 127A(b)(2)(B), which generally requires the application
disclosures to be segregated from all unrelated information.
As discussed above, creditors typically provide the application
disclosures in a narrative form, consistent with the model forms for
the
[[Page 43453]]
application disclosures set forth in current Home-equity Samples G-14A
and G-14B of Appendix G. In the consumer testing conducted by the Board
on HELOC disclosures, the Board tested application disclosures in a
narrative form, designed to simulate those currently in use.
Participants in consumer testing found this form difficult to read and
understand, and their responses to follow-up questions showed that they
also had difficulty identifying specific information in the text.
Participants who saw forms that were structured in a tabular format, on
the other hand, commented that the information was easier to understand
and had more success answering comprehension questions. These results
regarding the benefit of disclosing information in a tabular format are
consistent with the results of research that the Board conducted on
credit card disclosures in relation to the January 2009 Regulation Z
Rule. (See Sec. Sec. 226.5a(a)(2), 226.6(b)(1), 226.9(b)(3),
226.9(c)(2)(iii)(B) and 226.9(g)(3)(iii) for certain disclosures
applicable to open-end (not home-secured) credit that must be disclosed
in a tabular format.) For these reasons, the Board proposes to require
that the early HELOC disclosures generally must be provided in the form
of a table with headings, content, and format substantially similar to
any of the applicable tables found in proposed G-14 in Appendix G.
Unlike with current Sec. 226.5b(a)(1), under the proposal,
creditors would not be allowed to disclose information about variable
rates pursuant to proposed Sec. 226.5b(c)(10) separately from the
other early HELOC disclosures. See proposed Sec. 226.5b(b)(2)(i) and
(c)(10). The Board proposes to require the variable-rate information to
be disclosed in the table with the other early HELOC disclosures. The
Board proposes this rule pursuant to its authority in TILA Section
105(a) to make adjustments and exceptions to the requirements in TILA
to effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a). In the
consumer testing conducted by the Board on HELOC disclosures,
participants indicated that information about the current rate on the
plan (based on the current value of the index and margin) was one of
the most important pieces of information that the participants wanted
to know as part of the early HELOC disclosures. Requiring creditors to
disclose the current rate offered on the plan, along with other
variable-rate information, in the table, as proposed, would better
ensure that consumers are aware of and understand those terms. As
discussed above, in the consumer testing on HELOC disclosures,
participants were more likely to notice and understand information when
it was presented in a tabular format, than when it was presented in a
narrative form. In addition, as discussed in more detail below in the
section-by-section analysis to proposed Sec. 226.5b(c)(9)(iii),
information about sample payments is required to be disclosed in the
table, and these sample payments are calculated using the rates
applicable to the HELOC plan. Requiring information about rates and
certain other variable-rate information to be disclosed in the table
would allow consumers to understand how the sample payments relate to
the rates offered on the plan.
In addition, unlike current Sec. 226.5b(a)(1), the Board proposes
to require that information about one-time fees imposed by third
parties to open the HELOC plan must be disclosed in the table provided
as part of the early HELOC disclosures. See proposed Sec.
226.5b(b)(2)(i) and (c)(11). Again, participants in the consumer
testing conducted by the Board on HELOC disclosures indicated that
information about fees to open the HELOC account was important
information that they want to know as part of the early HELOC
disclosures. Requiring creditors to disclose information about one-time
fees imposed by third parties to open the HELOC plan in the table would
better ensure that consumers are aware of these fees. In addition, as
discussed in more detail below in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), under the proposal, creditors would be
required to disclose in the table one-time fees imposed by the creditor
to open the HELOC plan. Requiring creditors to disclose all one-time
fees to open the HELOC plan in the table, regardless of whether they
are charged by the creditor or by a third party, would enable consumers
to understand better the total fees that they would be required to pay
to open the HELOC plan. In addition, the Board believes that
highlighting all one-time fees to open the HELOC plan in the table may
facilitate consumer shopping for HELOC plans, by helping consumers to
compare easily these fees from one HELOC plan to another.
As discussed above, current Sec. 226.5b(a)(1) provides that a
disclosure of the conditions under which a creditor may take certain
actions under the plan, such as terminating the plan, described in
current Sec. 226.5b(d)(4)(iii) may be disclosed with the application
disclosures that must be segregated or disclosed separately from the
segregated application disclosures. As discussed in more detail in the
section-by-section analysis to proposed Sec. 226.5b(c)(7), under the
proposal, a creditor would not be allowed to include in the table a
disclosure of the conditions under which a creditor can take certain
actions under the plan, such as terminating the plan, as described in
proposed Sec. 226.5b(c)(7) (although the fact that the creditor may
take these actions under certain circumstances must be disclosed in the
table under proposed Sec. 226.5b(c)(7)). The Board believes that
including a disclosure of the conditions in the table could lead to
``information overload'' for consumers and could distract from other
information in the table. The conditions under which a creditor may
take certain actions, such as terminating the HELOC plan, will likely
not change from creditor to creditor, and thus this information may not
be useful to consumers in comparing one HELOC plan to another. A
creditor would be permitted to include this information with the early
HELOC disclosures table, as long as it is outside the table. See
proposed Sec. 226.5b(b)(2)(v).
Precedence of certain disclosures. Current Sec. 226.5b(a)(2), in
implementing TILA Section 127A(b)(2)(C), provides that the following
application disclosures must precede all other required application
disclosures: (1) A statement that the consumer should make or otherwise
retain a copy of the application disclosures; (2) a statement of the
time by which the consumer must submit an application to obtain
specific terms disclosed, an identification of any disclosed term that
is subject to change prior to opening the plan, and an explanation of
the right to refund of all fees paid in connection with the application
if a disclosed term changes prior to opening the plan and the consumer
therefore elects not to open the plan; (3) a statement that the
creditor will acquire a security interest in the consumer's dwelling
and that loss of the dwelling may occur in the event of default; and
(4) a statement that, under certain conditions, the creditor may
terminate the plan and require payment of the outstanding balance in
full in a single payment and impose fees upon termination; prohibit
additional extensions of credit or reduce the credit limit; and, as
specified in the initial agreement, implement certain changes in the
plan, and a statement that the consumer may receive, upon request,
information about the conditions under which such actions may occur.
[[Page 43454]]
The Board proposes no longer to require the above statutorily
required disclosures to precede other information provided as part of
the proposed early HELOC disclosures. The Board proposes this rule
pursuant to its authority in TILA Section 105(a) to make adjustments
and exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
See 15 U.S.C. 1601(a), 1604(a). As discussed below, based on consumer
testing, the Board believes that this information is more effectively
presented when grouped together with related information. As discussed
in more detail below in the section-by-section analysis to proposed
Sec. 226.5b(c), the Board also proposes to delete the statement that
the consumer should make or otherwise retain a copy of the disclosures
because under the proposal, the early HELOC disclosures must be given
in a retainable form. In addition, as discussed in more detail in the
section-by-section analysis to proposed Sec. 226.5b(c)(4), the
statement of the time by which the consumer must submit an application
to obtain specific terms disclosed also would be deleted as unnecessary
because the early HELOC disclosures would be given after the
application has been submitted.
1. Disclosure of which terms in the table are subject to change
prior to the consumer opening the plan: Under the proposal, a creditor
would be required to disclose which terms in the table, if any, are
subject to change prior to the consumer opening the plan. Under the
proposal, this information must be provided directly below the table
with other general information that a consumer may want to consider
when deciding whether to open the HELOC plan being offered (in contrast
to information in the table that provides specific information about
the terms being offered on the HELOC plan). Specifically, this
disclosure must be grouped with the following disclosures: (1) A
disclosure informing the consumer that he or she is not required to
accept the terms described in the table; (2) a statement that the
consumer may be entitled to a refund of all fees paid if the consumer
decides not to open the plan, (3) a cross reference to the disclosure
in the table of a consumer's right to a refund of fees paid by the
consumer if the consumer decides not to open the HELOC plan for any
reason within three business days of receiving the early HELOC
disclosures, or any time before the plan is opened if any of the
disclosed terms change (except for the APR), (4) a statement that if
the consumer does not understand any disclosure shown in the table in
the consumer should ask questions; and (5) a statement that the
consumer may obtain additional information at the Web site of the
Board, and a reference to the Board's Web site. To help ensure that the
statement about which terms in the table may change prior to account
opening is noticeable to consumers, the Board proposes to require that
this statement be disclosed in bold text, as discussed in more detail
below.
2. Disclosure of right to a refund of fees if terms change before
account opening: Under the proposal, the explanation of the right to a
refund of fees if terms change before account opening and the consumer
decides not to open the plan would be grouped together with information
about another right of a consumer to receive a refund of fees if the
consumer notifies the creditor that he or she does not want to open the
HELOC account within three business days of receiving the early HELOC
disclosures. Under the proposal, these explanations about the two
rights to a refund of fees would be placed in the ``Fees'' section of
the table. In the consumer testing conducted by the Board on HELOC
disclosures, the Board tested a version of the early HELOC disclosures
where the explanations of the two rights to a refund of fees were
located directly above the table near the top of the early HELOC
disclosures. The Board also tested a version of the early HELOC
disclosures where the explanation was disclosed in the table in the
``Fees'' section. Participants were more likely to notice and
understand information about the refundability of fees when it was
provided in the table in the ``Fees'' section, rather than directly
above the table near the top of the early HELOC disclosures.
3. Statement about risk of loss of home and statement about certain
actions that a creditor may take with respect to the plan: Under the
proposal, the information about risk of loss of the home in case of
default and the information about certain actions that a creditor may
take with respect to the plan, such as terminating the plan, are
identified as ``risks'' to the consumer and are grouped together under
the heading ``Risks,'' along with information about the deductibility
of interest for tax purposes. In consumer testing conducted by the
Board on HELOC disclosures, the Board tested versions of the
application disclosures (in a narrative format) where the information
about risk of loss of the home in case of default and the information
about certain actions that a creditor may take with respect to the
plan, such as terminating the plan, were placed near the top of the
application disclosures, but were not grouped together under a common
heading. The Board also tested versions of the application disclosures
and the early HELOC disclosures (in a tabular format) where the
information was grouped in the ``Risks'' section as discussed above.
Grouping these disclosures in a single ``Risks'' section made them more
noticeable to participants, and made it easier for participants to
review the information quickly and efficiently.
Under the proposal, the ``Risks'' section would be placed at the
bottom of the table on the second page of the early HELOC disclosures.
In consumer testing by the Board on HELOC disclosures, the Board tested
several different locations for the ``Risks'' section in the table,
namely, (1) at the top of the table on the first page of the early
HELOC disclosures, (2) in the middle of the table at the bottom of the
first page of the early HELOC disclosures, and (3) at or near the
bottom of the table on the second page of the early HELOC disclosures.
In each round of the consumer testing, participants were asked
questions to determine whether they noticed and understood the
information about risk of the loss of the home if a consumer defaulted
on the plan, and about the creditors' right to terminate the plan in
certain circumstances. In several rounds of the consumer testing,
participants also were asked their views on the placement of the
``Risks'' section in the table. While some participants indicated that
they preferred to have the ``Risks'' section displayed at the top of
the table on the first page because of the importance of the
information, other participants preferred to have the ``Risks'' section
lower down in the table or at the bottom of the table on the second
page because they were more interested in the specific terms of their
line of credit, such as the APRs and the credit limit offered on the
plan. Regardless of the placement of the ``Risks'' section in the
table, most participants noticed and understood the disclosure about
the risk of loss of the home in case of default and the disclosure
about a creditor's right to terminate the plan in certain
circumstances.
The Board proposes to place the ``Risks'' section at the bottom of
the table on page two of the early HELOC disclosures. The information
contained in the ``Risks'' section may not be as useful to the
consumers as other information contained in the table for
[[Page 43455]]
comparing one HELOC to another, such as the APRs and credit limit
offered on the plan, because the information about risks is likely to
be the same among all creditors. The Board seeks comment on this aspect
of the proposal.
Highlighting of certain disclosures. Proposed Sec.
226.5b(b)(2)(vi) would require that certain early HELOC disclosures
must be disclosed in bold text. The Board proposes this rule pursuant
to its authority in TILA Section 105(a) to make adjustments and
exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
See 15 U.S.C. 1601(a), 1604(a).
Under the proposal, certain disclosures must be disclosed below the
table because they provide general information that a consumer may want
to consider when deciding whether to open the HELOC plan being offered
(in contrast to information in the table that provides specific
information about the terms being offered on the HELOC plan). To help
consumers notice the statements that are below the table, the Board
proposes that the following statements must be disclosed in bold text:
(1) A statement that the consumer is not required to accept the terms
disclosed in the table, as required under proposed Sec. 226.5b(c)(2);
(2) if the creditor has a provision for the consumer's signature, a
statement that a signature by the consumer only confirms receipt of the
disclosure statement, as required under proposed Sec. 226.5b(c)(2);
(3) a statement identifying any disclosed term that is subject to
change prior to opening the plan, as required under proposed Sec.
226.5b(c)(4)(i); (4) a statement that if the consumer does not
understand any disclosure required by this section the consumer should
ask questions, as required under proposed Sec. 226.5b(c)(20); (5) a
statement that the consumer may obtain additional information at the
Web site of the Board, and a reference to the Board's Web site, as
required under proposed Sec. 226.5b(c)(21); and (6) a statement that
the consumer may be entitled to a refund of all fees paid if the
consumer decides not to open the plan, as required under proposed Sec.
226.5b(c)(22)(i).
In addition, proposed Sec. 226.5b(c) generally requires that
certain information about rates, fees, the credit limit, and certain
limitations or requirements on transactions, such as any minimum
outstanding balance or minimum draw requirements, applicable to the
HELOC plan must be disclosed to the consumer as part of the early HELOC
disclosures. This information includes not only the percentage or
dollar amounts that will apply, but also explanatory information that
gives context to these figures. The Board seeks to enable consumers to
identify easily the rates, fees, the credit limit and the dollar
amounts related to any limitations or requirements on transactions
disclosed in the table. Thus, the Board generally proposes to require
the percentage or dollar amounts related to those disclosures to be
disclosed in bold text.
Nonetheless, the Board proposes several exceptions to the general
rule that fees disclosed in the early HELOC disclosures table must be
disclosed in bold text. First, while the total amount of account-
opening fees disclosed under proposed Sec. 226.5b(c)(11) would be
required to be disclosed in bold text, the itemization of those fees
also required to be disclosed under proposed Sec. 226.5b(c)(11) must
not be disclosed in bold text. See proposed comment 5b(b)(2)-5 provides
that a creditor would be deemed to provide the itemization of the
account-opening fees clearly and conspicuously if the creditor provides
this information in a bullet format as shown in proposed Samples G-
14(C), G-14(D) and G-14(E) in Appendix G. The Board believes that the
bullet format properly highlights the itemization of the account-
opening fees, and that requiring these fees also to be disclosed in
bold text would detract from the total amount of account-opening fees
that is disclosed in bold text in the same row.
Second, under the proposal, periodic fees imposed by the creditor
for availability of the plan pursuant to proposed Sec. 226.5b(b)(12)
that are not an annualized amount must not be disclosed in bold.
Proposed comment 5b(b)(2)-3.ii provides guidance on this exception for
periodic fees. For example, if a creditor imposes a $10 monthly
maintenance fee for a HELOC plan, the creditor would be required to
disclose in the table that there is a $10 monthly maintenance fee, and
that the fee is $120 on an annual basis. In this example, under the
proposal, the $10 fee disclosure must not be disclosed in bold, but the
$120 annualized amount must be disclosed in bold. Under the proposal,
the periodic fee would be disclosed in the same row as the annualized
amount of the fee. The Board believes that requiring the periodic fee
to be in bold text would detract from the annualized amount of the fee
that is disclosed in bold text in the same row. The Board proposes to
highlight in the table the annualized amount of a periodic fee (rather
than the amount of the periodic fees) because the Board believes this
annualized amount will be more useful to consumers in understanding the
costs of the HELOC plan and deciding whether to open the HELOC plan
offered by the creditor.
Proposed Sec. 226.5b(b)(2)(vi)(E) provides that when a creditor is
required to disclose certain payment terms under proposed Sec.
226.5b(c)(9) in a format substantially similar to the format used in
any of the applicable tables found in proposed Samples G-14(C), G-14(D)
and G-14(E) in Appendix G, the creditor must provide in bold text any
terms and phrases that are shown in bold text for that disclosure in
the applicable tables. Proposed comment 5b(b)(2)-3.iii provides
guidance on this requirement. For example, proposed Sec. 226.5b(c)(9)
provides that a creditor must distinguish payment terms applicable to
the draw period and payment terms applicable to the repayment period by
using the heading ``Borrowing Period'' for the draw period and
``Repayment Period'' for the repayment period in a format substantially
similar to the format used in any of the applicable tables found in
proposed Samples G-14C) and G-14(E) in Appendix G. See the section-by-
section analysis to proposed Sec. 226.5b(c)(9). The tables found in
proposed Samples G-14(C) and G-14(E) in Appendix G show the headings
``Borrowing Period'' and ``Repayment Period'' in bold text, thus, a
creditor must disclose these headings in bold text in providing the
table.
In addition, proposed Sec. 226.5b(c)(9)(i) provides that when the
length of the plan is definite, a creditor must disclose the length of
the plan, the length of the draw period and the length of the repayment
period, if any, in a format substantially similar to the format used in
any of the applicable tables found in proposed Samples G-14(C) and G-
14(D) in Appendix G. The length of the draw period and any repayment
period are shown in bold text in the applicable tables; thus, a
creditor would be required to provide these disclosures in bold text.
Moreover, proposed Sec. 226.5b(c)(9)(iii)(D) requires a creditor to
provide the sample payments and related information required to be
disclosed under proposed Sec. 226.5b(c)(9)(iii) in a format
substantially similar to the format used in any of the applicable
tables found in proposed Samples G-14(C), G-14(D) and G-14(E) in
Appendix G. Certain information related to these sample payments is
shown in bold text in the applicable table; thus, a creditor would
[[Page 43456]]
be required to disclose this same information in bold text in providing
the table.
As discussed in more detail below in the section-by-section
analysis to proposed Sec. 226.5b(c)(9), in the consumer testing
conducted by the Board on HELOC disclosures, the Board found that
certain formats set forth in the tables in proposed Samples G-14(C), G-
14(D) and G-14(E) to Appendix G, such as headings to distinguish
payment terms applicable to the draw period and the repayment period,
were effective in helping participants identify and understand the
payment terms offered on the plan. Thus, the Board proposes to require
the use of these formats, and to require the bold text that is used in
the formats.
Terminology. As discussed in the section-by-section analysis to
proposed Sec. 226.5(a)(2), the Board proposes that creditors offering
HELOCs subject to Sec. 226.5b must use certain terminology when
disclosing the draw period, any repayment period, and certain other
terms in the early HELOC disclosures table. See proposed
226.5(a)(2)(ii). Proposed comment 5b(b)(2)-1 provides a cross reference
to the terminology requirements set forth in proposed Sec.
226.5(a)(2).
Clear and conspicuous standard. As discussed in the section-by-
section analysis to proposed Sec. 226.5(a)(1), the Board proposes a
clear and conspicuous standard applicable to Sec. 226.5b disclosures.
Proposed comment 5b(b)(2)-4 provides a cross reference to the clear and
conspicuous standard applicable to the disclosures in proposed Sec.
226.5b(b), as set forth in proposed comment 5(a)(1)-1.
Other format requirements. Generally, the format requirements
applicable to the early HELOC disclosures would be set forth in
proposed Sec. 226.5b(b)(2). Nonetheless, proposed Sec. 226.5b(c)(9)
contains formatting requirements applicable to certain payment terms
that must be disclosed in the early HELOC disclosures table. See
section-by-section analysis to proposed Sec. 226.5b(c)(9). In
addition, proposed Sec. 226.5b(c)(10)(i)(A)(1) contains formatting
requirements applicable to disclosure of variable rates in the early
HELOC disclosures table. Proposed comment 5b(b)(2)-2 provides a cross
reference to the formatting requirements set forth in proposed Sec.
226.5b(c)(9) and (c)(10). In addition, this proposed comment cross
references proposed formatting requirements that would be applicable to
information that a creditor would be required to provide to a consumer
upon his or her request prior to account opening, as described in more
detail in the section-by-section analysis to proposed Sec.
226.5b(c)(7), (c)(9), (c)(14), and (c)(18).
Electronic disclosures. Current Sec. 226.5b(a)(3) provides that
for an application accessed by the consumer in electronic form, the
application disclosures and HELOC brochure may be provided to the
consumer in electronic form on or with the application. Guidance on
providing the required disclosures on or with an application accessed
by the consumer in electronic form is found in current comments
5b(a)(1)-5 and 5b(a)(3)-1. As discussed in the section-by-section
analysis to proposed Sec. 226.5b(a)(2), the Board proposes to move the
provisions in current Sec. 226.5b(a)(3) and current comments 5b(a)(1)-
5 and 5b(a)(3)-1 to proposed Sec. 226.5b(a)(2) and proposed comments
5b(a)(1)-6.ii and 5b(a)(2)-1, respectively, and to make revisions to
those provisions. Under the proposal, the provisions related to
electronic disclosures would only apply to the disclosure of the ``Key
Questions'' document published by the Board that a creditor generally
is required to provide with an application under proposed Sec.
226.5b(a). As discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5(a)(1)(iii), the Board is not proposing
specific provisions on providing the early HELOC disclosures required
under proposed Sec. 226.5b(b) in electronic form. Thus, creditors
would be required to obtain the consumer's consent, in accordance with
the E-Sign Act, to provide the early HELOC disclosures in electronic
form, or else provide written disclosures. This proposal not to provide
specific provisions for providing the early HELOC disclosures required
under proposed Sec. 226.5b(b) in electronic form is consistent with
the Board's prior decisions on electronic disclosures of early mortgage
disclosures that are given after application but before consummation of
the loan under Sec. 226.19(a). In particular, in its rulemaking on
electronic disclosures issued in November 2007, the Board did not
include specific provisions for providing these early mortgage
disclosures in electronic form, and thus, creditors are required to
obtain the consumer's consent, in accordance with the E-Sign Act, to
provide the early mortgage disclosures in electronic form, or else
provide written disclosures. 72 FR 63462 (November 9, 2007); 72 FR
71058 (December 14, 2007).
Retainable form. Current comment 5b(a)(1)-1 provides that the
current application disclosures must be clear and conspicuous and in
writing, but need not be in a form the consumer can keep. As discussed
in the section-by-section analysis to Sec. 226.5(a)(1), the Board
proposes to require that the early HELOC disclosures must be provided
in a retainable form. See proposed Sec. 226.5(a)(1)(ii)(B). Thus, the
Board proposes to delete current comment 5b(a)(1)-1 as obsolete.
Disclosure of APR--more conspicuous requirement. Current comment
5b(a)(1)-2 provides a cross reference to current Sec. 226.5(a)(2),
which provides that when the term ``annual percentage rate'' is
required to be disclosed with a number in the application disclosures,
the term ``annual percentage rate'' must be more conspicuous than other
required disclosures. As discussed in the section-by-section to
proposed Sec. 226.5(a)(2), the Board proposes to delete the
requirement that the term ``annual percentage rate'' be more
conspicuous than other required disclosures when disclosed with a
number. Thus, the Board proposes to delete current comment 5b(a)(1)-2
as obsolete.
Method of providing disclosures. Current comment 5b(a)(1)-4
provides that in providing the application disclosures, a creditor may
provide a single disclosure form for all of its HELOC plans, as long as
the disclosure describes all aspects of the plans. For example, if the
creditor offers several payment options, all payment options must be
disclosed. Alternatively, a creditor has the option of providing
separate disclosure forms for multiple options or variations in
features. For example, a creditor that offers two payment options for
the draw period may prepare separate disclosure forms for the two
payment options.
The Board proposes to delete current comment 5b(a)(1)-4 as
obsolete. As discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5b(c)(9), under the proposal, creditors
would not be allowed to disclose all aspects of the plan in the table.
For example, proposed Sec. 226.5b(c) provides that in making the early
HELOC disclosures, a creditor generally must not disclose terms
applicable to a fixed-rate and -term payment feature offered during the
draw period of the plan, unless that payment feature is the only
payment plan offered during the draw period of the plan.
In addition, as discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5b(c)(9)(ii), a creditor would not be
allowed to provide separate early HELOC disclosures for each payment
option offered on the HELOC. Specifically, if a creditor offers two or
more payment plans on the HELOC plan (excluding the fixed-rate
[[Page 43457]]
and -term payment plans described above unless those are the only
payment plans offered during the draw period), a creditor may not
provide separate early HELOC disclosures for each payment plan, but
instead must disclose only two payment plans in the table, in
accordance with the requirements in proposed Sec. 226.5b(c)(9)(ii)(B).
(Under the proposal, a creditor would be required to disclose to a
consumer other payment plans offered by the creditor upon request of
the consumer. See proposed comments 5b(c)(9)(ii)-5 and 5b(c)(18)-2.)
5b(b)(3) Disclosures Based on a Percentage
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), current Sec. 226.5b(d)(7) requires a
creditor to provide in the application disclosures an itemization of
certain fees imposed by the creditor to open, use, or maintain the
plan, and these fees may be stated as a dollar amount or percentage of
another amount (such as disclosing the amount of a fee as ``2% of the
credit limit''). In addition, current Sec. 226.5b(d)(10) requires a
creditor to disclose in the application disclosures any limitations on
the number of extensions of credit and the amount of credit that may be
obtained during any time period, as well as any minimum outstanding
balance and minimum draw requirements, stated as dollar amounts or
percentages. In contrast, current Sec. 226.5b(d)(8) requires a
creditor to disclose in the application disclosures a good-faith
estimate of the total amount of fees that may be imposed by third
parties to open a plan and the creditor must disclose that total as
either a single dollar amount or range.
Under the proposal, except for disclosing one-time fees imposed to
open the plan, if the amount of any fee required to be disclosed in the
table is determined on the basis of a percentage of another amount, the
percentage used and the identification of the amount against which the
percentage is applied may be disclosed instead of the amount of the
fee. In addition, any limitations on the number of extensions of credit
and the amount of credit that may be obtained during any time period,
as well as any minimum outstanding balance and minimum draw
requirements, required to be disclosed under proposed Sec.
226.5b(c)(16) may be disclosed as dollar amounts or percentages. See
proposed Sec. 226.5b(b)(3).
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), a creditor would be required to disclose
in the table as part of the early HELOC disclosures a total of one-time
fees to open the account, and this total must include fees imposed by
the creditor and any third party. In addition, a creditor would be
required to disclose an itemization of all one-time fees to open the
account, regardless of whether those fees are imposed by a creditor or
a third party. Both the total of one-time fees to open the account and
the itemization of the fees must be disclosed as a dollar amount (or a
range of dollar amounts) and may not be disclosed as a percentage of
another amount. See proposed Sec. 226.5b(b)(3) and (c)(11). The Board
believes that requiring the one-time fees that are imposed to open the
account to be disclosed as dollar amounts, instead of a percentage of
another amount, would aid consumers' understanding of the account-
opening fees and may aid consumers in comparison shopping for HELOC
plans. In consumer testing conducted on credit card disclosures in
relation to the January 2009 Regulation Z Rule, the Board found that
consumers generally understand dollar amounts better than percentages.
As a result, the Board believes that requiring account opening fees to
be disclosed as dollar amounts instead of percentages of another amount
would better enable consumers to understand the start up costs of
opening the HELOC plan. In addition, consumers could more easily
compare the dollar amount of one-time account-opening fees on different
HELOC plans if all HELOC plans are required to disclose the dollar
amount. Otherwise, consumers would need to calculate the dollar amount
themselves for some HELOC plans if the account-opening fees were
presented as a percentage of another amount.
Consistent with current Sec. 226.5b(d)(7), however, under the
proposal, if the amount of other fees that a creditor must disclose in
the table--namely, fees imposed by the creditor for the availability of
the plan, fees imposed by the creditor for early termination of the
plan by the consumer and fees imposed for required insurance, debt
cancellation or suspension coverage--are determined on the basis of a
percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee. Similarly,
consistent with current Sec. 226.5b(d)(10), the proposal would permit
a creditor to disclose the amount of any limitations on the number of
extensions of credit, the amount of credit that may be obtained during
any time period, any minimum outstanding balance and minimum draw
requirements, required to be disclosed under proposed Sec.
226.5b(c)(16) as either a dollar amount or percentage. The Board
believes that allowing these fees and transaction requirements to be
disclosed as a percentage of another amount is appropriate because
these fees or transaction requirements generally would be imposed
during the life of the plan, and thus, it may be difficult for a
creditor to estimate a dollar amount for these fees or transaction
requirements at the time that the early HELOC disclosures are made.
5b(c) Content of Disclosures
Currently, Sec. 226.5b(d) sets forth the content for the
application disclosures that a creditor must provide on or with the
application. As explained above, other than the ``Key Questions''
document required under proposed Sec. 226.5b(a), the Board proposes to
delete the requirement that creditors provide disclosures to consumers
on or with HELOC applications. Instead, the Board proposes that a
creditor must provide the early HELOC disclosures (generally in the
form of a table) to a consumer within three business days following
receipt of the consumer's application by the creditor (but not later
than at account opening). Under the proposal, proposed Sec. 226.5b(c)
sets forth the content for the early HELOC disclosures.
Fixed-rate and -term feature during draw period. HELOC plans
typically offer the ability to obtain advances that must be repaid
based on a variable interest rate that applies to all outstanding
balances. Some HELOC plans, however, also offer a fixed-rate and -term
payment feature, where a consumer is permitted to repay all or part of
the balance during the draw period at a fixed rate (rather than a
variable rate) and over a specified time period. The Board understands
that for most HELOC plans, consumers must take active steps to access
the fixed-rate and -term payment feature; this feature is not
automatically accessed when a consumer obtains advances from the HELOC
plan.
Current comment 5b(d)(5)(ii)-2, which implements TILA Section
127A(a)(1), (a)(2), (a)(3), and (a)(8), provides that a creditor
generally must disclose in the application disclosures terms that apply
to the fixed-rate and -term payment feature, including the period
during which the feature can be selected, the length of time over which
repayment can occur, any fees imposed for the feature, and the specific
rate or a description of the index and margin that will apply upon
exercise of the
[[Page 43458]]
feature. 15 U.S.C. 1637a(a)(1), (a)(2), (a)(3), and (a)(8).
The Board proposes to delete current comment 5b(d)(5)(ii)-2. The
Board proposes that if a HELOC plan offers a variable-rate feature and
a fixed-rate and -term feature during the draw period, a creditor
generally must not disclose in the table the terms applicable to the
fixed-rate and -term feature, except as discussed below. See proposed
Sec. 226.5b(c) and proposed comment 5b(c)-4. Instead, a creditor may
disclose detailed information relating to the fixed-rate and -term
feature outside of the table. See proposed Sec. 226.5b(b)(2)(v).
However, if a HELOC plan does not offer a variable-rate feature during
the draw period, but only offers a fixed-rate and -term feature during
that period, a creditor must disclose in the table information related
to the fixed-rate and -term feature when making the disclosures
required by proposed Sec. 226.5b(c). The Board proposes this rule
pursuant to its authority in TILA Section 105(a) to make adjustments
and exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
See 15 U.S.C. 1601(a), 1604(a).
The Board believes that including information about the variable-
rate feature and the fixed-rate and -term feature in the table would
create ``information overload'' for consumers. The terms that apply to
the fixed-rate and -term features often differ significantly from the
terms that apply to the variable-rate feature. For example, different
APRs, fees, length of repayment periods, limitations on the number of
transactions, and minimum transactions amounts may apply to the fixed-
rate and -term feature than the variable-rate feature. In addition,
creditors often provide consumers with several options related to the
fixed-rate and -term feature, such as providing several lengths of
repayment period (e.g., 3, 5, or 7 years) from which a consumer may
choose for a particular advance under the fixed-rate and -term feature.
The Board believes that requiring a creditor to provide all of these
details about the fixed-rate and -term feature in the table would add
to the length and complexity of the table, and would create
``information overload'' for consumers.
Instead of requiring that all the details of the fixed-rate and -
term feature be disclosed in the table, the Board proposes to require a
creditor offering this payment feature (in addition to a variable-rate
feature) to disclose in the table the following: (1) A statement that
the consumer has the option during the draw period to borrow at a fixed
interest rate; (2) the amount of the credit line that the consumer may
borrow at a fixed interest rate for a fixed term; and (3) as
applicable, either a statement that the consumer may receive, upon
request, further details about the fixed-rate and -term payment
feature, or, if information about the fixed-rate and -term payment
feature is provided with the table, a reference to the location of the
information. See proposed Sec. 226.5b(c)(18). Thus, under the
proposal, a consumer would be notified in the table about the fixed-
rate and -term payment feature, and could request additional
information about this payment feature (if a creditor chose not to
provide additional information about this feature outside of the
table).
In responding to a consumer's request, prior to account opening,
for additional information about the fixed-rate and -term feature, a
creditor would be required to provide this additional information as
soon as reasonably possible after the request. See proposed comment
5b(c)-2. Additional information disclosed about the fixed-rate and -
term payment feature upon request (or outside the early HELOC
disclosures table) would have to include in the form of a table, (1)
information about the APRs and payment terms applicable to the fixed-
rate and -term payment feature, and (2) any fees imposed related to the
use of the fixed-rate and -term payment feature, such as fees to
exercise the fixed-rate and -term payment option or to convert a
balance under a fixed-rate and -term payment feature to a variable-rate
feature under the plan. See proposed comment 5b(c)(18)-2. The Board
believes that the above approach to providing information to consumers
about the fixed-rate and -term feature enables consumers interested in
this feature to obtain additional information about this optional
feature easily and quickly, but does not contribute to ``information
overload'' for consumers in general.
Duty to respond to requests for information. Current comment 5b(d)-
2 provides that if the consumer, prior to opening a plan, requests
information as described in the application disclosures, such as the
current index value or margin, the creditor must provide this
information as soon as reasonably possible after the request. The Board
proposes to move this comment to proposed comment 5b(c)-2 and apply it
to requests for additional information described in the early HELOC
disclosures, namely requests for additional information about the
following: (1) Fees applicable to the plan under proposed Sec.
226.5b(c)(14); (2) the conditions under which a creditor may take
certain actions under the plan, such as terminating the plan, under
proposed Sec. 226.5b(c)(7); (3) payment plans offered on the plan not
described as part of the early HELOC disclosures (other than fixed-rate
and -term payment plans unless those are the only payment plans offered
during the draw period) required under proposed Sec. 226.5b(c)(9)(ii);
and (4) fixed-rate and -term payment plans under proposed Sec.
226.5b(c)(18). The Board proposes to revise this comment to update the
examples of information that a consumer may receive upon request (such
as additional information on fees applicable to the plan or the
conditions under which the creditor may take certain actions on the
plan) and to provide a cross reference to comments that specifically
discuss a consumer's right to request the four types of additional
information listed above.
Disclosure of repayment phase--applicability of requirements. Some
HELOC plans provide in the initial agreement for a repayment period
during which no further draws may be taken and repayment of the amount
borrowed is required. Current comment 5b-4 provides that a creditor
must disclose information relating to the repayment period, as well as
the draw period, when providing the application disclosures. Thus, for
example, a creditor must provide payment information about any
repayment phase as well as about the draw period in the application
disclosures, as required by current Sec. 226.5b(d)(5). The Board
proposes to move the relevant part of this comment to proposed 5b(c)-3,
and to make technical revisions to the comment. Under the proposal, a
creditor would be required to disclose in the table as part of the
early HELOC disclosures information relating to any repayment period,
as well as the draw period.
Disclosures given as applicable. Current comment 5b(d)-1 provides
that a creditor may provide the application disclosures described in
current Sec. 226.5b(d) as applicable. For example, if negative
amortization cannot occur in a HELOC plan, a reference to it need not
be made under current Sec. 226.5b(d)(9). The Board proposes to move
this comment to proposed 5b(c)-1 and revise the comment to refer to the
following proposed exceptions to the general rule that a creditor is
only required to include a disclosure required under proposed Sec.
226.5b(c) as applicable: specifically, proposed 5b(c)-1 cross
references proposed
[[Page 43459]]
Sec. 226.5b(c)(9)(ii)(B)(3) and (c)(9)(iii)(C)(4), which provide that
a creditor in certain circumstances must state that a balloon payment
will not result for plans in which no balloon payment would occur; in
addition, proposed comment 5b(c)-1 cross references proposed Sec.
226.5b(c)(10)(i)(A)(5), which provides that if there are no annual or
other periodic limitations on changes in the APR, a creditor must state
that no annual limitation exists.
5b(c)(1) Identification Information
Currently, a creditor is not required to disclose identification
information about the creditor and the borrower as part of the
application disclosures. Pursuant to the Board's authority in TILA
Section 127A(a)(14) to require additional disclosures for HELOC plans,
the Board proposes to require that a creditor disclose as part of the
early HELOC disclosures the following identification information: (1)
The consumer's name and address; (2) the identity of the creditor
making the disclosure; (3) the date the disclosure was prepared; and
(4) the loan originator's unique identifier, as defined by the Secure
and Fair Enforcement for Mortgage Licensing Act of 2008 (``SAFE Act'')
Sections 1503(3) and (12), 12 U.S.C. 5102(3) and (12). 15 U.S.C.
1637a(a)(14). Under the proposal, these disclosures must be placed
directly above the table provided as part of the early HELOC
disclosures, in a format substantially similar to any of the applicable
tables found in G-14(C), G-14(D) and G-14(E) in Appendix G. See
proposed Sec. 226.5b(b)(2)(iii). Proposed comment 5b(c)(1)-1 clarifies
that in identifying the creditor making the disclosure, use of the
creditor's name would be sufficient, but the creditor may also include
an address and/or telephone number. In transactions with multiple
creditors, any one of them would be allowed to make the disclosures;
the one doing so must be identified in the early HELOC disclosures. The
Board solicits comment on whether the creditor making the disclosures
should be required to disclose its contact information, such as its
address and/or telephone number.
The Board believes that this identification information would
provide context for the disclosures provided in the table. For example,
the date the disclosure was prepared would provide consumers
information about the date on which the terms in the table were
accurate. In addition, the Board believes it is important to disclose
the creditor's identity so that consumers can easily identify the
appropriate entity.
Loan originator's unique identifier. On July 30, 2008, the SAFE
Act, 12 U.S.C. 5101-5116, was enacted to create a Nationwide Mortgage
Licensing System and Registry of loan originators to increase
uniformity, reduce fraud and regulatory burden, and enhance consumer
protection. 12 U.S.C. 5102. Under the SAFE Act, a ``loan originator''
is defined as ``an individual who (i) takes a residential mortgage loan
application; and (ii) offers or negotiates terms of a residential
mortgage loan for compensation or gain.'' 12 U.S.C. 5102(3)(A)(i). Each
loan originator is required to obtain a unique identifier through the
Nationwide Mortgage Licensing System and Registry. 12 U.S.C.
5103(a)(2). The term ``unique identifier'' is defined as ``a number or
other identifier that (i) permanently identifies a loan originator;
(ii) is assigned by protocols established by the Nationwide Mortgage
Licensing System and Registry and the Federal banking agencies to
facilitate electronic tracking of loan originators and uniform
identification of, and public access to, the employment history of and
the publicly adjudicated disciplinary and enforcement actions against
loan originators; and (iii) shall not be used for purposes other than
those set forth under this title.'' 15 U.S.C. 5102(12)(A). The system
is intended to provide consumers with easily accessible information to
research a loan originator's history of employment and any disciplinary
or enforcement actions against him or her. 12 U.S.C. 5101(7).
To facilitate the use of the Nationwide Mortgage Licensing System
and Registry and promote the informed use of credit, pursuant to the
Board's authority under TILA Section 127A(a)(14) to require additional
disclosures for HELOC plans, the Board proposes in new Sec.
226.5b(c)(1) to require that a loan originator to disclose as part of
the early HELOC disclosures his or her unique identifier, as defined by
the SAFE Act. 15 U.S.C. 1637a(a)(14). Proposed comment 5b(c)(1)-2
clarifies that in transactions with multiple loan originators, each
loan originator's unique identifier must be listed on the early HELOC
disclosures. For example, in a transaction where a mortgage broker
meets the SAFE Act definition of loan originator, the identifiers for
the broker and for its employee loan originator meeting that definition
would need to be listed on the early HELOC disclosures.
The Board notes that the Board, FDIC, OCC, OTS, NCUA, and Farm
Credit Administration have published a proposed rule to implement the
SAFE Act. See 74 FR 27386 (June 9, 2009). In this proposed rule, the
federal banking agencies have requested comment on whether there are
mortgage loans for which there may be no mortgage loan originator. For
example, the agencies query whether there are situations where a
consumer applies for and is offered a loan through an automated process
without contact with a mortgage loan originator. See id. at 27397. The
Board solicits comments on the scope of this problem and its impact on
the requirements of proposed Sec. 226.5b(c)(1).
Statement About Retaining a Copy of the Disclosures
The Board proposes to delete current Sec. 226.5b(d)(1), which
implements TILA Section 127A(a)(6)(C), and current comment 5b(d)(1)-1
as obsolete. Current Sec. 226.5b(d)(1) provides that a creditor must
disclose as part of the application disclosures a statement that the
consumer should make or otherwise retain a copy of the application
disclosures. Current comment 5b(d)(1)-1 provides that a creditor need
not disclose that the consumer should make or otherwise retain a copy
of the disclosures if they are retainable--for example, if the
disclosures are not part of an application that must be returned to the
creditor to apply for the plan. As discussed in more detail in the
section-by-section analysis to Sec. 226.5(a)(1), however, the Board
proposes to require a creditor to provide the early HELOC disclosures
in a retainable form.
5b(c)(2) No Obligation Statement
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(2) to require a creditor to disclose as part of the
early HELOC disclosures a statement that the consumer has no obligation
to accept the terms disclosed in the table. 15 U.S.C. 1637a(a)(14). In
addition, under proposed Sec. 226.5b(c)(2), if a creditor provides
space for the consumer to sign or initial the early HELOC disclosures,
the creditor would be required to include a statement that a signature
by the consumer only confirms receipt of the disclosure statement. A
creditor would be required to provide these proposed disclosures
directly below the table provided as part of the early HELOC
disclosures, in a format substantially similar to any of the applicable
tables found in proposed Samples G-14(C), G-14(D) and G-15(E) in
Appendix G. See proposed Sec. 226.5b(b)(2)(iv).
As discussed in the proposal issued by the Board on closed-end
mortgages published elsewhere in today's Federal
[[Page 43460]]
Register, in consumer testing conducted by the Board on closed-end
mortgage products, participants reviewed mock ups of mortgage
disclosures that would be given within three business days after a
consumer's application has been received by the creditor for a mortgage
loan. These participants were asked whether they would be obligated to
accept the loan terms described in the disclosures because they had
submitted an application for a mortgage. Most participants initially
understood in reviewing the tested mortgage disclosures that they would
not be required to accept the loan terms described in the disclosures.
However, some participants later believed they would be obligated to
accept the loan upon signing or initialing the disclosure. Based on
this consumer testing, the Board is concerned that although consumers
may initially understand they are not obligated to accept the terms of
the HELOC plan, this belief may be diminished if a creditor requires a
consumer to sign or initial receipt of the early HELOC disclosures.
This may further discourage negotiation and shopping among HELOC
products and creditors. Thus, the Board proposes to require a creditor
to disclose as part of the early HELOC disclosures a statement that the
consumer has no obligation to accept the terms disclosed in the table.
In addition, if a creditor provides space for the consumer to sign or
initial the early HELOC disclosures, the creditor would be required to
include a statement that a signature by the consumer only confirms
receipt of the disclosure statement.
5b(c)(3) Identification of Plan as a Home-Equity Line of Credit
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures with respect to HELOC plans, the Board
proposes in new Sec. 226.5b(c)(3) to require that creditors as part of
the early HELOC disclosures disclose above the table a statement that
the consumer has applied for a home-equity line of credit. 15 U.S.C.
1637a(a)(14).
In consumer testing the Board conducted on HELOCs disclosures, most
participants had obtained a HELOC in the past, but some participants
were also recruited who had considered obtaining a HELOC but opted
instead for a home-equity loan. A few participants had never obtained a
home-equity loan or HELOC, but had considered opening a HELOC in the
past five years. In the consumer testing, during the initial portion of
the interview, several participants appeared not to understand the
difference between a home-equity loan and a HELOC. For example, one
person initially indicated that she had a home-equity loan, but after
the difference was explained to her she realized that she actually had
a HELOC.
Based on this consumer testing, the Board proposes to take several
steps to address potential confusion by consumers about the differences
between these two types of home-equity products. First, as discussed in
the section-by-section analysis to Sec. 226.5b(a), the ``Key
Questions'' document that would be required to be given with
applications for HELOCs (except for telephone applications where this
document must be given with the early HELOC disclosures) includes
information describing the relative advantages and disadvantages of a
HELOC and a home-equity loan. Second, as noted, under proposed Sec.
226.5b(c)(3) creditors would be required as part of the early HELOC
disclosures to disclose above the table that the consumer has applied
for a home-equity line of credit. This statement will identify clearly
for the consumer that he or she has applied for a HELOC, and may help a
consumer who mistakenly thought he or she was applying for a home-
equity loan.
5b(c)(4) Conditions for Disclosed Terms
Current Sec. 226.5b(d)(2)(i), which implements TILA Section
127A(a)(6)(A), provides that creditors must disclose as part of the
application disclosures a statement of the time by which the consumer
must submit an application to obtain specific terms disclosed in the
application disclosures and an identification of any disclosed term
that is subject to change prior to opening the plan. 15 U.S.C.
1637a(a)(6)(A). Current comment 5b(d)(2)(i)-1 provides that the
requirement that a creditor disclose the time by which an application
must be submitted to obtain the disclosed terms does not require the
creditor to guarantee any terms. If a creditor chooses not to guarantee
any terms, it must disclose that all of the terms are subject to change
prior to opening the plan. The creditor also is permitted to guarantee
some terms and not others, but must indicate which terms are subject to
change. Current comment 5b(d)(2)(i)-2 provides that if a creditor
chooses to guarantee terms disclosed in the application disclosures, a
creditor may disclose either a specific date or a time period for
obtaining the guaranteed terms. If the creditor discloses a time
period, the consumer must be able to determine from the disclosure the
specific date by which an application must submitted to obtain any
guaranteed terms.
Under current Sec. 226.5b(d)(2)(ii), which implements TILA Section
127A(a)(6)(B), a creditor also must provide as part of the application
disclosures a statement that if a disclosed term changes (other than a
change due to fluctuations in the index in a variable-rate plan) prior
to opening the plan and the consumer therefore elects not to open the
plan the consumer may receive a refund of all fees paid in connection
with the application. 15 U.S.C. 1637a(a)(6)(B). Current comment
5b(d)(2)(ii)-1 provides that a creditor should consult the rules in
current Sec. 226.5b(g) regarding refund of fees when terms change.
Proposal. The Board proposes to move the provisions in current
Sec. 226.5b(d)(2) to proposed Sec. 226.5b(c)(4) and to revise those
provisions. Specifically, because the early HELOC disclosures would be
given after the application has been submitted by the consumer, the
Board proposes to delete as obsolete (1) the requirement in current
Sec. 226.5b(d)(2), which implements TILA Section 127A(a)(6)(A), that a
creditor provide a statement of the time by which the consumer must
submit an application to obtain specific terms disclosed in the
application disclosures, and (2) guidance for providing that statement
in current comment 5b(d)(2)(i)-2. 15 U.S.C. 1637a(a)(6)(A). The Board
proposes this rule pursuant to its authority in TILA Section 105(a) to
make adjustments and exceptions to the requirements in TILA to
effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a).
Consistent with current Sec. 226.5b(d)(2)(i), the Board proposes
in new Sec. 226.5b(c)(4)(i) to require that a creditor disclose
directly below the table as part of the early HELOC disclosures an
identification of any disclosed term that is subject to change prior to
opening the plan. The Board also proposes to move the provisions in
current comment 5b(d)(2)(i)-1 that relate to this disclosure to
proposed comment 5b(c)(4)(i)-1. Specifically, proposed comment
5b(c)(4)(i)-1 provides that if a creditor chooses not to guarantee any
terms, it must disclose that all of the terms are subject to change
prior to opening the plan. The creditor also would be permitted to
guarantee some terms and not others, but would be required to indicate
which terms are subject to change.
[[Page 43461]]
The Board proposes in new Sec. 226.5b(c)(4)(ii) to require that a
creditor disclose in the table as part of the early HELOC disclosures a
statement that, if a disclosed term changes (other than a change due to
fluctuations in the index in a variable-rate plan) prior to opening the
plan and the consumer elects not to open the plan, the consumer may
receive a refund of all fees paid. The language in new Sec.
226.5b(c)(4)(ii) differs from current Sec. 226.5b(d)(2)(ii), to
reflect proposed changes in proposed Sec. 226.5b(d). Currently Sec.
226.5b(g) contains the substantive right of a consumer to receive a
refund if terms change and the consumer decides not to open the HELOC
plan. As discussed in more detail in proposed Sec. 226.5b(d), the
Board proposes to move the substantive right to a refund of fees if
terms change from current Sec. 226.5b(g) to proposed Sec. 226.5b(d)
and to revise those provisions. The language in proposed Sec.
226.5b(c)(4)(ii) reflects the proposed changes in Sec. 226.5b(d).
In addition, the Board proposes to move guidance on disclosing the
statement about refundability of fees if terms change from current
comment 5b(d)(2)(ii)-1 to proposed comment 5b(c)(4)(ii)-1, and to make
technical revisions to the proposed comment.
5b(c)(5) Statement Regarding Refund of Fees Under Proposed Sec.
226.5b(e)
Current Sec. 226.5b(h) provides that neither a creditor nor any
other person may impose a nonrefundable fee in connection with an
application until three business days after the consumer receives the
application disclosures and the HELOC brochure. Current comment 5(h)-1
provides that if a creditor collects a fee after the consumer receives
the application disclosures and the HELOC brochure and before the
expiration of the three days, the creditor must notify the consumer
that the fee is refundable for three days. The notice must be clear and
conspicuous and in writing, and may be included with the application
disclosures or as an attachment to them.
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(e), the Board proposes to move current Sec.
226.5b(h) to proposed Sec. 226.5b(e) and revise it. The Board proposes
to add new Sec. 226.5b(c)(5) to require a creditor to disclose in the
table as part of the early HELOC disclosures a statement that the
consumer may receive a refund of all fees paid, if the consumer
notifies the creditor within three business days of receiving the early
HELOC disclosures that the consumer does not want to open the plan. The
proposed disclosure would be required if a creditor will impose fees on
the HELOC plan prior to the expiration of the three-day period.
Proposed comment 5(c)(5)-1 provides that creditors should consult the
rules in Sec. 226.5b(e) regarding refund of fees if the consumer
rejects the plan within three business days of receiving the early
HELOC disclosures.
5b(c)(6) Security Interest and Risk to Home
Current Sec. 226.5b(d)(3), which implements TILA Section
127A(a)(5), provides that a creditor must disclose as part of the
application disclosures a statement that the creditor will acquire a
security interest in the consumer's dwelling and that loss of the
dwelling may occur in the event of default. 15 U.S.C. 1637a(a)(5). The
Board proposes to move this disclosure requirement from current Sec.
226.5b(d)(3) to proposed Sec. 226.5b(c)(6). Thus, under the proposal,
a creditor would be required to disclose this statement in the table as
part of the early HELOC disclosures.
5b(c)(7) Possible Actions by Creditor
Current Sec. 226.5b(d)(4)(i), which implements TILA Section
127A(a)(7)(A), provides that a creditor must disclose as part of the
application disclosures a statement that, under certain conditions, the
creditor may terminate the plan and require payment of the outstanding
balance in full in a single payment and impose fees upon termination;
prohibit additional extensions of credit or reduce the credit limit;
and, as specified in the initial agreement, implement certain changes
in the plan.\16\
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\16\ TILA Section 127A(a)(7) does not specifically require that
a creditor disclose as part of the application disclosures a
statement that under certain conditions the creditor may impose fees
upon termination or may implement certain changes in the plans as
specified in the initial agreement. The Board included these
disclosures in current Sec. 226.5b(d)(4)(i) pursuant to its
authority in TILA Section 127A(a)(14) to required additional
disclosures for HELOC plans.
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The Board proposes to move the provisions in current Sec.
226.5b(d)(4)(i) to proposed Sec. 226.5b(c)(7)(i) and to revise those
provisions. Specifically, proposed Sec. 226.5b(c)(7)(i) provides that
a creditor must disclose in the table as part of the early HELOC
disclosures a statement that, under certain conditions, the creditor
may terminate the plan and require payment of the outstanding balance
in full in a single payment and impose fees upon termination; prohibit
additional extensions of credit or reduce the credit limit; and make
other changes in the plan. Current comment 5b(d)(4)(i)-1 provides
guidance on when a creditor must provide the statement that a creditor
under certain conditions may impose fees upon termination of the plan.
This comment would be moved to proposed comment 5b(c)(7)(i)-1.
The circumstances in which a creditor must provide the disclosure
regarding implementing ``changes in the plan'' would be broader under
proposed Sec. 226.5b(c)(7)(i) than under current Sec.
226.5b(d)(4)(i). As explained in current comment 5b(d)(4)(i)-2, a
creditor must provide the disclosure regarding implementing changes in
the plan under current Sec. 226.5b(d)(4)(i) only if the initial
agreement contains specific changes that may be made in the plan if
specific events take place (see Sec. 226.5b(f)(3)(i)), such as
provisions in the initial agreement that the APR will increase a
specified amount if the consumer leaves the creditor's employment. If
no specific changes are set forth in the initial agreement pursuant to
Sec. 226.5b(f)(3)(i), but the creditor may make changes in the plan
under Sec. 226.5b(f)(3)(ii) through (v), such as making a change that
will unequivocally benefit the consumer under Sec. 226.5b(f)(3)(iv), a
creditor is not required under current Sec. 226.5b(d)(4)(i) to
disclose that the creditor in certain circumstances may make certain
changes in the plan.
As explained in proposed comment 5b(c)(7)(i)-2, under proposed
Sec. 226.5b(c)(7)(i), a creditor would be required to disclose in the
table as part of the early HELOC disclosures a statement that the
creditor under certain conditions may make changes in the plan, if the
creditor may make any changes in the plan under Sec. 226.5b(f)(3)(i)-
(v), including making a change that will unequivocally benefit the
consumer under Sec. 226.5b(f)(3)(iv), even if the creditor does not
set forth specific changes in the plan for specific events in the
initial agreement under Sec. 226.5b(f)(3)(i). The Board believes that
if a creditor may make any changes to the plan, consumers should be
informed generally of this fact.
Under current Sec. 226.5b(d)(4)(ii), which implements TILA Section
127a(a)(7)(B), a creditor must disclose as part of the application
disclosures a statement that the consumer may receive, upon request,
information about the conditions under which a creditor may take
certain actions, such as terminating the plan, as discussed above. 15
U.S.C. 1637a(a)(7)(B). Current Sec. 226.5b(d)(4)(iii) provides a
creditor may provide a disclosure of the conditions in lieu of the
statement that
[[Page 43462]]
a consumer may receive that information upon request.\17\
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\17\ TILA Section 127A(a)(7) does not specifically allow a
creditor to disclose a statement of the conditions in lieu of the
statement that a consumer may receive that information upon request.
The Board provided this alternative in current Sec. 226.5b(d)(4)
pursuant to the Board authority in TILA Section 105(a) to make
adjustments to the requirements in TILA that are necessary to
effectuate the purposes of TILA.
---------------------------------------------------------------------------
The Board proposes to move the provisions in current Sec.
226.5b(d)(4)(ii) and (iii) to proposed Sec. 226.5b(c)(7)(ii) and
revise those provisions. In particular, under proposed Sec.
226.5b(c)(7)(ii), a creditor may either provide a statement that the
consumer may receive, upon request, information about the conditions
under which a creditor may take certain actions such as terminating the
plan or disclose those conditions with the early HELOC disclosures
(outside the table). If a creditor chooses to provide as part of the
early HELOC disclosures a statement that the consumer may receive, upon
request, information about the conditions, this statement must be
disclosed in the table. If a creditor chooses to provide a disclosure
of the conditions with the early HELOC disclosures, the disclosure of
the conditions must not be disclosed in the table. The disclosure of
the conditions must be provided outside the table, and a creditor must
disclose in the table a reference to the location of the disclosure.
Current comment 5b(d)(4)(iii)-2 provides if a creditor chooses to
disclose the conditions in lieu of providing that information upon
request, the creditor may provide the disclosure of the conditions with
the other application disclosures or apart from them. If the creditor
elects to provide the disclosure of the conditions with the application
disclosures, this disclosure need not comply with the precedence rule
in current Sec. 226.5b(a)(2). Under the proposal, current comment
5b(d)(4)(iii)-2 would be deleted. As discussed above, under the
proposal, a creditor would not be allowed to include the disclosure of
conditions under which a creditor may take certain actions, as
discussed above, in the table. See proposed Sec. 226.5b(c)(7)(ii) and
(b)(2)(v). The Board believes that including a disclosure of the
conditions in the table could lead to ``information overload'' for
consumers, distracting consumers from other important information in
the table. The conditions under which a creditor may take certain
actions, such as terminating the HELOC plan, will likely not change
from creditor to creditor, and thus this information may not be useful
to consumers in comparing one HELOC plan to another.
Current comment 5b(d)(4)(iii)-1 provides guidance on how a creditor
may provide the disclosure of the conditions if a creditor is providing
this information with the application disclosures. The Board proposes
to move the provisions in current comment Sec. 226.5b(d)(4)(iii)-1 to
proposed comment Sec. 226.5b(c)(7)(ii)-1 and make revisions to the
provisions. In particular, proposed comment 5b(c)(7)(ii)-1 would
provide guidance on how a creditor may provide the disclosures of the
conditions, either upon the request of the consumer prior to account
opening or with the early HELOC disclosures (outside the table).
5b(c)(8) Tax Implications
Current Sec. 226.5b(d)(11), which implements TILA Section
127A(a)(13)(A), provides that a creditor must disclose as part of the
application disclosures a statement that the consumer should consult a
tax advisor regarding the deductibility of interest and charges under
the plan. 15 U.S.C. 1637a(a)(13)(A). The Board proposes to move current
Sec. 226.5b(d)(11) to proposed Sec. 226.5b(c)(8) and make technical
revisions. In addition, to implement Section 1302 of the Bankruptcy Act
(cited above), which requires disclosure of the tax implications for
home-secured credit that may exceed the dwelling's fair-market value,
the Board proposes in new Sec. 226.5b(c)(8) to require a creditor as
part of the early HELOC disclosures to disclose a statement that the
interest on the portion of the credit extension that is greater than
the fair market value of the dwelling may not be tax deductible for
Federal income tax purposes and that the consumer should consult a tax
advisor for further information on tax deductibility. 15 U.S.C.
1637a(a)(13)(B).
The Board stated its intent to implement the Bankruptcy Act
amendments in an ANPR published in October 2005 as part of the Board's
ongoing review of Regulation Z (October 2005 ANPR). 70 FR 60235
(October 17, 2005). The Board received approximately 50 comment
letters: forty-five letters were submitted by financial institutions
and their trade groups, and five letters were submitted by consumer
groups. In general, creditors asked for flexibility in providing the
disclosure regarding the tax implications for home-secured credit that
may exceed the dwelling's fair-market value, either by permitting the
notice to be provided to all applicants, or to be provided later in the
approval process after creditors have determined whether the disclosure
is triggered. Creditor commenters asked for guidance on loan-to-value
calculations and safe harbors for how creditors should determine
property values. Consumer advocates favored triggering the disclosure
when the possibility of negative amortization could occur. A number of
commenters stated that in order for the disclosure to be effective and
useful to the borrower, it should be given when the new extension of
credit, combined with existing credit secured by the dwelling (if any),
may exceed the fair market value of the dwelling. A few industry
comments took the opposite view that the disclosure should be limited
only to when a new extension of credit itself exceeds fair market
value, citing the difficulty of determining how much debt is already
secured by the dwelling at the time of application.
The Board implemented Section 1302 with regard to advertisements in
its July 2008 HOEPA final rule. See 73 FR 44522 (July 30, 2008). In the
Supplementary Information to that rule, the Board stated its intent to
implement the application disclosure portion of the Bankruptcy Act
during its forthcoming review of closed-end and HELOC disclosures under
TILA.
Proposed Sec. 226.5b(c)(8) would implement provisions of the
Bankruptcy Act by requiring creditors to include in the table required
under proposed Sec. 226.5b(b) as part of the early HELOC disclosures
(1) a statement that the interest on the portion of the credit
extension that is greater than the fair market value of the dwelling
may not be tax deductible for Federal income tax purposes and (2) a
statement that the consumer should consult a tax advisor for further
information on tax deductibility.
The Board proposes to require creditors offering HELOCs to provide
this disclosure to all HELOC applicants as part of the early HELOC
disclosures, even if the particular HELOC plan offered to the consumer
is not designed to allow the consumer to take extensions of credit that
exceed the fair market value of the dwelling. The Board recognizes that
HELOCs by their very nature carry a possibility that subsequent draws
may exceed the fair market value of the dwelling. First, the market
value of a dwelling may decline during the term of a HELOC plan,
leaving less equity available. Second, quite often, consumers who apply
for HELOCs already have first-lien mortgages; the amount of equity that
a consumer may be able to utilize is limited, in part, by how much the
consumer owes on the first mortgage.
[[Page 43463]]
For these reasons, the likelihood is higher with HELOCs than closed-end
home-equity loans that the consumer may exceed the fair market value of
the dwelling with subsequent draws.
5b(c)(9) Payment Terms
Current Sec. 226.5b(d)(5), which implements TILA Section
127A(a)(8), provides that a creditor must disclose as part of the
application disclosures the payment terms applicable to the plan, and
sets forth specific information that must be included in this
disclosure. As discussed below, the Board proposes to move the
provisions in current Sec. 226.5b(d)(5) to proposed Sec. 226.5b(c)(9)
and to revise them.
Format for identifying payment terms applicable to the draw period
and the repayment period. Current comment 5b-4 provides that a creditor
must disclose information relating to the repayment period, as well as
the draw period, when providing the application disclosures. Thus, for
example, a creditor must provide payment information about any
repayment phase as well as about the draw period in the application
disclosures, as required by current Sec. 226.5b(d)(5). The Board
proposes to move the relevant part of this comment to proposed 5b(c)-3,
and to make technical edits to the comment. Under the proposal, a
creditor would be required to disclose in the table as part of the
early HELOC disclosures information relating to any repayment period,
as well as the draw period.
In addition, the Board proposes to require that when disclosing
payment terms in the table, a creditor must distinguish payment terms
applicable to the draw period from payment terms applicable to the
repayment period, by using the heading ``Borrowing Period'' for the
draw period and ``Repayment Period'' for the repayment period, in a
format substantially similar to the format used in any of the
applicable tables in proposed Samples G-14(C) and G-14(E) in Appendix
G. 15 U.S.C. 1604(a); see proposed Sec. 226.5b(c)(9). Thus, under the
proposal, a creditor would be required to include the heading
``Borrowing Period'' each place payment information about the draw
period is included in the table, and the heading ``Repayment Period''
each place payment information about the repayment period is included
in the table, in a format substantially similar to the format used in
any of the applicable tables found in G-14(C) and G-14(E) in Appendix
G. The Board proposes this rule pursuant to its authority in TILA
Section 105(a) to make adjustments and exceptions to the requirements
in TILA to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uniformed use of credit. See 15 U.S.C. 1601(a),
1604(a).
In consumer testing conducted by the Board on HELOC disclosures,
the Board tested application disclosures in a narrative form, designed
to simulate those currently in use. When reviewing these application
disclosures, many participants had difficulty understanding how the
draw period differs from the repayment period, and what impact these
distinctions have on required monthly payments. In the consumer
testing, the Board tested versions of the early HELOC disclosures where
the heading ``Borrowing Period'' was included each place payment
information about the draw period was presented in the table and the
heading ``Repayment Period'' was included each place payment
information about the repayment period was presented in the table. In
reviewing these versions of the early HELOC disclosures, participants
were better able to understand the differences between the draw period
and the repayment period, and the impact these differences have on
required monthly payments. Thus, the Board proposes to require that a
creditor use the headings ``Borrowing Period'' and ``Repayment Period''
in the table to distinguish payment terms applicable to the draw period
from payment terms applicable to the repayment period, respectively, in
a format substantially similar to the format used in any of the
applicable tables in proposed Samples G-14(C) and 14(E) in Appendix G.
Paragraph 5b(c)(9)(i)
Current Sec. 226.5b(d)(5)(i), which implements TILA Section
127A(a)(8)(B), requires a creditor to disclose as part of the
application disclosures the length of the draw period and the length of
any repayment period. 15 U.S.C. 1637a(a)(8)(B). Current comment
5b(d)(5)(i)-1 provides that the combined length of the draw period and
any repayment period need not be disclosed in the application
disclosures.
For the reasons described below, pursuant to its authority in TILA
Section 127A(a)(14) to require additional disclosures for HELOC plans,
the Board proposes in new Sec. 226.5b(c)(9)(i) to require that a
creditor disclose in the table as part of the early HELOC disclosures
the length of the plan, as well as the length of the draw period and
the length of any repayment period. 15 U.S.C. 1637a(a)(14). In
addition, under the proposal, if there is no repayment period on the
HELOC plan, a creditor would be required to disclose in the table as
part of the early HELOC disclosures a statement that after the draw
period ends, the consumer must repay the remaining balance in full.
Length of the HELOC plan is definite. Proposed Sec.
226.5b(c)(9)(i) would require that when the length of the plan is
definite, a creditor, when disclosing the length of the plan, the
length of the draw period and the length of any repayment period in the
table, must make those disclosures using a format substantially similar
to the format used in any of the applicable tables found in proposed
Samples G-14(C) and G-14(D) in Appendix G. Proposed comment
5b(c)(9)(i)-1.i would provide that if a maturity date is set forth for
the HELOC plan, the length of the plan, the length of the draw period
and the length of any repayment period are definite. This proposed
comment also states that the length of the plan must be based on the
maturity date of the plan, regardless of whether the outstanding
balance may be paid off before or after the maturity date. For example,
assume that a plan has a draw period of 10 years and a maturity date of
20 years. If the outstanding balance on the plan is not paid off by the
maturity date, the creditor could extend the maturity date of the plan
and require the consumer to make minimum payments until the outstanding
balance is repaid. In this example, the proposed comment clarifies that
the creditor must disclose the length of the HELOC plan as 20 years,
the length of the draw period as 10 years and the length of the
repayment period as 10 years.
In consumer testing conducted by the Board on HELOC disclosures,
the Board tested application disclosures in a narrative form, designed
to simulate application disclosures currently in use. In these versions
of the application disclosures, the length of the draw period and the
length of the repayment period were disclosed, but the total length of
the plan was not disclosed. When reviewing these application
disclosures, many participants had difficulty understanding the timing
of the draw and repayment periods. For example, several participants
incorrectly thought that the two periods ran concurrently, or that the
repayment period began as soon as money was borrowed.
In the consumer testing, the Board also tested versions of the
early HELOC disclosures developed by the Board where the length of the
plan was 20 years, and the length of the draw and repayment periods was
10 years each. In these tested versions of the early HELOC disclosures,
the length of the plan was disclosed as 20 years, along with a
[[Page 43464]]
statement indicating that this period is divided into two periods. The
length of the draw period was then disclosed as ``Years (1-10)'' and
the length of the repayment period was disclosed as ``Years (11-20),''
to indicate that those periods would run consecutively and not
concurrently. In addition, the length of the draw period and the length
of the repayment period were included as part of the headings
``Borrowing Period'' (for the draw period) and ``Repayment Period''
(for the repayment period), respectively, each time those headings were
used. In the consumer testing, the Board found that including the
length of the plan in the table and using the above format for
presenting the length of the plan, the length of the draw period and
the length of the repayment period effectively helped participants
understand the timing of the two periods.
Thus, the Board proposes to require creditors to disclose the
length of the plan in the table, along with the length of the draw
period and the length of any repayment period. In addition, as
explained in proposed comment 5b(c)(9)(i)-3, the Board proposes to
require that creditors use the above format in presenting the length of
the plan, the length of the draw period and the length of the repayment
period in the table for HELOC plans that have a definite length and
have a draw period and a repayment period, as shown in proposed Sample
G-14(C) in Appendix G. Proposed comment 5b(c)(9)(i)-3 also specifies
that proposed Sample G-14(D) in Appendix G shows the format a creditor
must use to disclose the length of the plan and the length of the draw
period for HELOC plans that have a definite length and have a draw
period but no repayment period.
Length of plan and length of repayment period cannot be determined
at the time the early HELOC disclosures must be given. Current comment
5b(d)(5)(i)-1 provides that if the length of the repayment period
cannot be determined because, for example, it depends on the balance
outstanding at the beginning of the repayment period, the creditor must
disclose in the application disclosures that the length of the
repayment period is determined by the size of the balance. The Board
proposes to move this provision in current comment 5b(d)(5)(i)-1 to
proposed comment 5b(c)(9)(i)-1.ii, and to revise it.
Specifically, proposed comment 5b(c)(9)(i)-1.ii addresses HELOC
plans that do not have a maturity date, and for which the length of the
plan and the length of the repayment period cannot be determined at the
time the early HELOC disclosures must be given because the repayment
period depends on the balance outstanding at the beginning of the
repayment period or the balance at the time of the last advance during
the draw period. For these plans, the creditor would be required to
state that the length of the plan and the length of the repayment
period are determined by the size of the balance outstanding at the
beginning of the repayment period or the balance at the time of the
last advance during the draw period, as applicable.
Proposed comment 5b(c)(9)(i)-1.ii provides two illustrations of
this rule. The first would assume that the plan has no maturity date,
the draw period is 10 years, and the minimum payment during the
repayment period is 1.5 percent of the outstanding balance at the time
of the last advance during the draw period. Under proposed comment
5b(c)(9)(i)-1.ii.A, a creditor must disclose that the length of the
plan and the length of the repayment period are determined by the size
of the outstanding balance at the time of the last advance during the
draw period.
The second illustration would assume that the length of the draw
period is 10 years and the length of the repayment period will be 15
years if the balance at the beginning of the repayment period is less
than $20,000, and 30 years if the balance is $20,000 or more. Under
proposed comment 5b(c)(9)(i)-1.ii.B, a creditor must disclose that the
length of the plan will be 25 or 40 years depending on the outstanding
balance at the beginning of the repayment period. In addition, the
creditor must disclose that the repayment period will be 15 years if
the balance is less than $20,000, and 30 years if the balance is
$20,000 or more. This proposed comment provides that a creditor must
not simply disclose that the repayment period is determined by the size
of the balance. Guidance on how to disclose the information in this
illustration is found in proposed Sample G-14(E) in Appendix G.
The Board requests comment on whether additional guidance is needed
on how to disclose the length of the HELOC plan and the length of the
repayment period in the table where the plan does not have a maturity
date and the length of the repayment period cannot be determined at the
time the early HELOC disclosures must be given.
Length of draw period is indefinite. Current comment 5b(d)(5)(i)-1
provides that if the length of the plan is indefinite (for example,
because there is no time limit on the period during which the consumer
can take advances), the creditor must state that fact in the
application disclosures when disclosing the length of the draw period.
The Board proposes to move this provision from current comment
5b(d)(5)(i)-1 to proposed comment 5b(d)(9)(i)-1.iii. Thus, under the
proposal, a creditor would be required to make this disclosure in the
table as part of the early HELOC disclosures, to satisfy the
requirement in proposed Sec. 226.5b(c)(9)(i) to disclose the length of
the plan and the length of the draw period. The Board requests comment
on whether additional guidance is needed on how to disclose the length
of the plan and the length of draw period in the table when the length
of the draw period is indefinite.
Length of the plan and length of the draw period are the same. For
some HELOC plans, the length of the plan and the length of the draw
period are the same because the HELOC plan does not have a repayment
period. For example, some HELOC plans offer a payment plan where a
consumer would only be required to pay interest during the draw period.
At the end of the draw period, the consumer would be required to pay
the principal balance as a balloon payment. Proposed comment
5b(c)(9)(i)-4 provides that if the length of the plan and the length of
the draw period are the same, a creditor will be deemed to satisfy the
requirement to disclose the length of plan by disclosing the length of
the draw period.
No repayment period on the HELOC plan. Under proposed Sec.
226.5b(c)(9)(i), if there is no repayment period on the HELOC plan, a
creditor would be required to include a statement in the table as part
of the early HELOC disclosures that after the draw period ends, the
consumer must repay the remaining balance in full. Pursuant to its
authority under TILA Section 127A(a)(14) to require additional
disclosures for HELOC plans, the Board proposes to add this disclosure
to make more clear to consumers that there is no repayment period on
the HELOC being offered. 15 U.S.C. 1637a(a)(14).
Draw period renewal provisions. Current comment 5b(d)(5)(i)-2
provides that if, under the credit agreement, a creditor retains the
right to review a line at the end of the draw period and determine
whether to renew or extend the draw period of the plan, the possibility
of renewal or extension--regardless of its likelihood--should be
ignored for the application disclosures. For example, if an agreement
provides that the draw period is five years and that the creditor may
renew the draw period for an additional five years, the possibility of
renewal should be ignored and the draw period should be
[[Page 43465]]
considered five years. The Board proposes to move this comment to
proposed comment 5b(c)(9)(i)-2, and apply it to the early HELOC
disclosures.
Paragraphs 5b(c)(9)(ii) and (c)(9)(iii)
Current Sec. 226.5b(d)(5)(ii), which implements TILA Section
127A(a)(8)(C) and (a)(10), provides that a creditor must disclose as
part of the application disclosures an explanation of how the minimum
periodic payments will be determined and the timing of the payments
(such as whether the payments will be due monthly, quarterly or on some
other periodic basis). 15 U.S.C. 1637a(a)(8)(C) and (a)(10). In
addition, current Sec. 226.5b(d)(5)(ii) provides that if paying only
the minimum periodic payments may not repay any of the principal or may
repay less than the outstanding balance, the creditor must disclose a
statement of this fact, as well as a statement that a balloon payment
may result. Footnote 10b explains that a balloon payment results if
paying the minimum periodic payments does not fully amortize the
outstanding balance by a specified date or time, and the consumer must
repay the entire outstanding balance at that time.
Under current Sec. 226.5b(d)(5)(iii), which implements TILA
Section 127A(a)(9), a creditor must disclose as part of the application
disclosures an example, based on a $10,000 outstanding balance and a
recent APR, of the minimum periodic payments, the amount of any balloon
payment, and the time it would take to repay the $10,000 outstanding
balance if the consumer made only those payments and obtained no
additional extensions of credit. 15 U.S.C. 1637a(a)(9). In addition,
current Sec. 226.5b(d)(12)(x), which implements TILA Section
127A(a)(2)(H), provides that for each payment option offered on a
variable-rate HELOC plan, a creditor must disclose the minimum periodic
payments that would be required if the maximum APR were in effect for a
$10,000 outstanding balance. 15 U.S.C. 1637a(a)(2)(H).
As discussed in more detail below, the Board proposes to move the
provisions in Sec. 226.5b(d)(5)(ii) to proposed Sec. 226.5b(c)(9)(ii)
and to revise them. The Board also proposes to move the provisions in
Sec. 226.5b(d)(5)(iii) and (d)(12)(x) to proposed Sec.
226.5b(c)(9)(iii) and to revise them. In addition, the Board proposes
to move the contents of footnote 10b to proposed comment 5b(c)(9)-1.
Multiple payment plans. In some cases, creditors may offer more
than one payment option on a HELOC plan. For example, a creditor may
provide the following two payment options during the draw period: (1)
minimum monthly payments during the draw period will cover only
interest that accrues each month and will not pay down any of the
principal balance; or (2) minimum monthly payments during the draw
period will cover interest that accrues each month plus 1.5 percent of
the principle balance each month. The Board understands that creditors
typically do not require a consumer to choose the payment plan he or
she wants when applying for a HELOC plan, but instead require the
consumer to choose a payment plan either prior to or at account
opening.
Under current comment 5b(a)(1)-4, a creditor may provide a single
application disclosure form for all of its HELOC plans, as long as the
disclosure describes all aspects of the plans. For example, if the
creditor offers several payment options, all such options generally
must be disclosed, including fixed-rate and -term payment features, as
discussed in more detail above in the section-by-section analysis to
Sec. 226.5b(c). See also current comment 5b(d)(5)(ii)-2.
Alternatively, a creditor has the option of providing separate
disclosure forms for multiple options or variations in features. For
example, a creditor that offers two payment options for the draw period
may prepare separate disclosure forms for the two payment options. A
creditor using this alternative, however, must include a statement on
each application disclosure form that the consumer should ask about the
creditor's other HELOC programs. A creditor that receives a request for
information about other available programs prior to account opening
must provide the additional disclosures as soon as reasonably possible.
As discussed in the section-by-section analysis to proposed Sec.
226.5b(b)(2), the Board proposes to delete current comment 5b(a)(1)-4
as obsolete. Under the proposal, a creditor would not be allowed to
disclose more than two payment options offered on the HELOC in the
table. Specifically, under proposed Sec. 226.5b(c)(9)(ii)(B), if a
creditor only offers two payment plans (excluding fixed-rate and -term
payment plans unless these are the only payment plans offered during
the draw period), the creditor would be required to disclose both of
those payment plans in the table. If a creditor offers more than two
payment plans (excluding fixed-rate and -term payment plans unless
these are the only payment plans offered during the draw period), the
creditor would be allowed to disclose only two of the payment plans in
the table. See proposed comment 5b(c)(9)(ii)-2. Proposed comment
5b(c)(9)(ii)-2 clarifies that the following would be considered two
payment plans: The draw period is 10 years and the consumer has the
choice between two repayment periods--10 and 20 years. The two payment
plans would be (1) a 10 year draw period and a 10 year repayment
period, and (2) a 10 year draw period and a 20 year repayment period.
The Board believes that the proposed approach of allowing only two
payment plans to be disclosed in the table would benefit consumers by
preventing ``information overload'' that might result if more than two
payment options were disclosed in the table. In addition, the Board
believes that requiring a creditor to disclose two payment plans in the
table, instead of allowing the creditor to disclose each payment plan
separately to the consumer, would benefit consumers by enabling
consumers more easily to compare the two payment plans. As discussed in
more detail below, under proposed Sec. 226.5b(c)(9)(iii), a creditor
would be required to disclose sample payments for each payment plan
disclosed in the table based on the assumption that the consumer
borrows the full credit line at account opening, and does not obtain
any additional extensions of credit. Under the proposal, if a creditor
is disclosing two payment plans in the table, the creditor would be
required to disclose in the table which plan results in the least
amount of interest, and which plan results in the most amount of
interest, based on the assumptions used to calculate the sample
payments. See proposed Sec. 226.5b(c)(9)(iii)(C)(3). In addition,
under the proposal, a creditor disclosing two payment plans in the
table, one in which a balloon payment would occur and one in which it
would not, must disclose that a balloon payment will result for the
plan in which a balloon payment would occur and that a balloon payment
will not result for the plan in which no balloon payment would occur.
See proposed Sec. 226.5b(c)(9)(iii)(C)(4). In consumer testing
conducted by the Board on HELOC disclosures, the Board tested the above
disclosures explicitly comparing two payment plans; most participants
responding to questions about this information indicated that they
found this information useful.
Proposed Sec. 226.5b(c)(9)(ii)(B) also provides that if a creditor
offers one or more payment plans (excluding fixed-rate and -term
payment plans unless those are the only payment plans offered during
the draw period) where a consumer would repay all of the
[[Page 43466]]
principal by the end of the plan if the consumer makes only the minimum
payments due during that period, the creditor would be required to
describe one of these payment plans in the table. For example, if a
creditor offers two payment plans where a balloon payment will result
and one payment plan (excluding fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw period)
where a balloon payment will not result, the creditor would be required
to disclose in the table two payments plans, one of which must be the
plan where a balloon payment will not result.
In consumer testing conducted by the Board on HELOC disclosures,
the Board tested versions of early HELOC disclosures where two payment
plans were shown in the table--one payment plan that would result in a
balloon payment and one payment plan that would not result in a balloon
payment. In this consumer testing, participants were asked which of
these payment plans they would be likely to choose if they were opening
the HELOC plan. Most of the participants indicated that they would
choose the payment plan without the balloon payment because, in part,
they did not want to owe a balloon payment at the end of the plan.
Thus, the Board believes that requiring a creditor to disclose in the
table a payment plan where a balloon will not result (if such a plan is
offered by the creditor) would benefit consumers by informing them that
the creditor offers such a payment plan.
Proposed Sec. 226.5b(c)(9)(ii)(B) also requires a creditor to
include a statement in the table indicating that the table shows how
the creditor determines minimum required payments for two plans offered
by the creditor. If the creditor offers more than the two payment plans
described in the table (other than fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw
period), the creditor would be required to disclose that other payment
plans are available, and that the consumer should ask the creditor for
additional details about these other payment plans. Proposed comment
5b(c)(9)(ii)-3 clarifies that this statement about additional payment
plans would be required only if the creditor offers additional payment
plans available to the consumer. If the only other payment plans
available are employee preferred-rate plans, for example, the creditor
would be required to provide this statement only if the consumer would
qualify for the employee preferred-rate plan.
Proposed comment 5b(c)(9)(ii)-5 provides guidance on how a creditor
must provide additional information on other payment plans to a
consumer upon the consumer's request prior to account opening. This
proposed comment provides that if a creditor offers a payment plan
other than the two payment plans disclosed in the table as part of the
early HELOC disclosures (except for fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw
period), and a consumer requests additional information about the other
plan, the creditor must disclose an additional table under Sec.
226.5b(b) to the consumer with the terms of the other payment plan
described in the table. See proposed comment 5(c)(18)-2 for disclosure
of additional information about fixed-rate and -term payment plans upon
a consumer's request. If the creditor offers multiple payment plans
that were not disclosed in the table as part of the early HELOC
disclosures, the creditor would be allowed to disclose only one payment
plan on each additional table given to the consumer. Under the
proposal, for example, if a creditor offers two payment plans (other
than fixed-rate and -term payment plans unless those are the only
payment plans offered during the draw period) that were not disclosed
in the table given as part of the early HELOC disclosures, the creditor
would be required to provide the consumer, upon request, two additional
tables--one table for each payment plan. A creditor that receives a
request for information about other available payment plans prior to
account opening would be required to provide the additional information
as soon as reasonably possible after the request. See proposed comment
5b(c)-2.
The Board believes that this proposed approach of only allowing two
payment plans to be disclosed in the table, and allowing the consumer
easily and quickly to receive information about additional payment
plans upon request, strikes the proper balance between ensuring that
consumers are adequately informed about the payment plans that are
offered on the HELOC plan and preventing ``information overload'' that
might result if all payment plans were disclosed in the table. The
Board solicits comment on the proposed approach.
Minimum payment requirements. As discussed above, current Sec.
226.5b(d)(5)(ii) provides that a creditor must disclose as part of the
application disclosures an explanation of how the minimum periodic
payment will be determined and the timing of the payments (such as
whether the payments will be due monthly, quarterly or on some other
periodic basis). The Board proposes to move the provisions in Sec.
226.5b(d)(5)(ii) to proposed Sec. 226.5b(c)(9)(ii) and to revise them.
Specifically, proposed Sec. 226.5b(c)(9)(ii)(A) provides that if a
creditor offers to the consumer only one payment plan (except for
fixed-rate and -term payment plans unless those are the only payment
plans offered during the draw period), the creditor must disclose in
the table an explanation of how the minimum periodic payment will be
determined and the timing of the payments. Proposed Sec.
226.5b(c)(9)(ii)(B) provides that a creditor disclosing two payment
plans in the table would be required to provide an explanation of how
the minimum payment will be determined for both payment plans and the
timing of the payments.
Current comment 5b(d)(5)(ii)-1 provides that the disclosure of how
the minimum periodic payment is determined need describe only the
principal and interest components of the payment. A creditor, at its
option, may disclose other charges that may be a part of the payment,
as well as the balance computation method. The Board proposes to move
this comment to proposed comment 5b(c)(9)(ii)-1 and revise it.
Specifically, proposed comment 5b(c)(9)(ii)-1 provides that the
disclosure of how the minimum periodic payment is determined in the
early HELOC disclosures table must describe only the principal and
interest components of the payment.
Unlike current comment 5b(d)(5)(ii)-1, however, proposed comment
5b(c)(9)(ii)-1 would not allow a creditor to disclose in the table
other charges that may be a part of the payment or the balance
computation method. In addition, under proposed comment 5b(c)(9)(ii)-1,
a creditor would not be allowed to disclose in the table a description
of any floor payment amount, where the payment will not go below that
amount. The Board believes that allowing charges that may be part of
the payment (other than principal and interest components), the balance
computation method, and any payment floor amount to be disclosed in the
table might create ``information overload'' for consumers. The Board
believes that the proposed approach to allow creditors to disclose
information only about the principle and interest components of the
payment in the table strikes the proper balance between informing
consumers about how minimum periodic payments will be determined, and
preventing the ``information overload'' that may result if other
details were included. The concern about ``information overload'' here
is that
[[Page 43467]]
consumers will either not read the disclosure or not understand or
retain the information they do read.
Payment examples. Current Sec. 226.5b(d)(5)(iii) provides that a
creditor must disclose as part of the application disclosures an
example, based on a $10,000 outstanding balance and a recent APR,
showing the minimum periodic payments, the amount of any balloon
payment, and the time it would take to repay the $10,000 outstanding
balance if the consumer made only those payments and obtained no
additional extensions of credit. 15 U.S.C. 1637a(a)(9). To fulfill this
disclosure requirement, a creditor must disclose the number and amount
of the minimum periodic payments and the amount of any balloon payment,
assuming the consumer borrows $10,000 at the beginning of the draw
period at a recent APR and the outstanding balance is reduced according
to the terms of the plan. A creditor must assume no additional advances
are taken at any time, including at the beginning of any repayment
period. See current comment 5b(d)(5)(iii)-3.
A creditor must disclose separate hypothetical payments (or ranges
of payments) for the draw period and the repayment period, if minimum
periodic payments are calculated differently for the two periods. See
current comment 5b(d)(5)(iii)-3. In this case, the highest payment in
the range of payments for the draw period would be based on a $10,000
balance. The highest payment in the range of payment for the repayment
period would be based on the outstanding balance at the beginning of
the repayment period, which is calculated on the assumptions that the
consumer borrows $10,000 at the beginning of the draw period, the
consumer makes only minimum payments during the draw period, and the
APR does not change during the draw period. Footnote 10c and comment
5b(d)(5)(iii)-1 provide guidance on selecting a recent APR to calculate
the hypothetical payment schedule under current Sec.
226.5b(d)(5)(iii). In disclosing the hypothetical payment schedule, if
the amount of the hypothetical payments may vary within the draw
period, or any repayment period, a creditor may disclose the
hypothetical payments as a range of payments. See current Home Equity
Samples G-14A and G-14B in Appendix G.
Under current comment 5b(d)(5)(iii)-2, a creditor may show a
hypothetical payment schedule either for each payment plan disclosed in
the application disclosures, or for representative payment plans. This
comment also provides guidance how a creditor should choose
representative payment plans. Current Home Equity Samples G-14A and G-
14B, and Home Equity Model Clauses G-15 in Appendix G provide model
language for how to disclose the hypothetical payment schedule required
by current Sec. 226.5b(d)(5)(iii).
Current Sec. 226.5b(d)(12)(x) provides that for variable-rate
HELOC plans, a creditor must disclose, as part of the application
disclosures for each payment option offered on the HELOC, the minimum
periodic payment that would be required if the maximum APR were in
effect for a $10,000 outstanding balance. 15 U.S.C. Unlike the payment
examples required under current Sec. 226.5b(d)(5)(iii) for a recent
rate, the payment examples required under current Sec.
226.5b(d)(12)(x) for the maximum rate do not require the creditor to
disclose a hypothetical payment schedule based on the maximum APR.
Instead, under current Sec. 226.5b(d)(12)(x), a creditor is required
only to show the minimum required payments if the consumer had a
$10,000 balance during the draw period at the maximum APR, and the
minimum required payments if the consumer had a $10,000 balance at the
beginning of the repayment period at the maximum APR, assuming the
minimum required payments are calculated differently in the two
periods. (If minimum required payments are calculated the same in the
two periods, only one payment example need be shown.) See comment
5b(d)(12)(x)-1. Even if a consumer might owe a balloon payment at the
end of the HELOC, a creditor would not need to disclose the amount of
the balloon payment based on the maximum APR. As with the payment
examples required under current Sec. 226.5b(d)(5)(iii) that are based
on a recent APR, a creditor may provide the hypothetical payments based
on the maximum APR either for each payment plan disclosed in the
application disclosures, or for representative payment plans. See
current comment 5b(d)(12)(x)-1. Current Home Equity Samples G-14A and
G-14B and Home Equity Model Clauses G-15 in Appendix G provide model
language for how to disclose the payment examples required by current
Sec. 226.5b(d)(12)(x).
The Board proposes to move the provisions on payment examples in
Sec. 226.5b(d)(5)(iii) and (d)(12)(x) to proposed Sec.
226.5b(c)(9)(iii) and to revise them. The Board proposes to streamline
the payment examples for the current APR and the maximum APR so they
are calculated in a consistent manner. The Board proposes this rule
pursuant to its authority in TILA Section 105(a) to make adjustments
and exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
See 15 U.S.C. 1601(a), 1604(a). Under proposed Sec.
226.5b(c)(9)(iii)(B), a creditor would be required to provide payment
examples for the current and maximum APR for each payment plan
disclosed in the table. These payment examples would show the first
minimum periodic payment for the draw period and the first minimum
periodic payment for any repayment period, and the balance outstanding
at the beginning of any repayment period, based on the following
assumptions: (1) The consumer borrows the maximum credit line available
(as disclosed in the early HELOC disclosures) at account opening, and
does not obtain any additional extensions of credit; (2) the consumer
makes only minimum periodic payments during the draw period and any
repayment period; and (3) the APRs used to calculate the sample
payments remain the same during the draw period and any repayment
period. Unlike the payment examples in current Sec. 226.5b(d)(5)(iii),
which must be based on a recent APR, proposed Sec. 226.5b(c)(9)(iii)
would require payment examples based on the maximum APR possible for
the plan, as well as the current APR offered to the consumer on the
HELOC plan. Under the proposal, if an introductory APR applies, a
creditor would be required to use the APR that would otherwise apply to
the plan after the introductory APR expires, as described in proposed
Sec. 226.5b(c)(10)(ii). Thus, the Board proposes to delete the
contents of footnote 10c and guidance in current 5b(d)(5)(iii)-1 that
relate to selecting a recent APR.
Proposed Sec. 226.5b(c)(9)(iii) also requires additional
disclosures as part of the proposed payment examples. Specifically, a
creditor would be required to disclose the following information: (1) A
statement that the payment examples show the first periodic payments at
the current and maximum APRs if the consumer borrows the maximum credit
available when the account is opened and does not borrow any more
money; (2) a statement that the payment examples are not the consumer's
actual payments and that the actual payments each period will depend on
the amount that the consumer has borrowed and the interest rate that
period; (3) if a creditor is disclosing two payment plans in the
[[Page 43468]]
table, the creditor must identify which plan results in the least
amount of interest, and which plan results in the most amount of
interest, based on the assumptions used to calculate the payment
examples described above; and (4) if a consumer may pay a balloon
payment under a payment plan disclosed in the table, the creditor must
disclose that fact, and the amount of the balloon payment based on the
assumptions used to calculate the payment examples described above. If
a creditor is disclosing two payment plans in the table, one in which a
balloon payment would occur and one in which it would not, a creditor
must disclose that a balloon payment will not result for the plan in
which no balloon payment would occur. The Board also proposes in new
Sec. 226.5b(c)(9)(iii)(D) to require a creditor to provide the new
payment examples and the other related information in a tabular format
substantially similar to the format used in any of the applicable
tables found in Samples G-14(C), G-14(D) and G-14(E) in Appendix G.
As noted, the proposed payment examples for the current and the
maximum APRs would be based on the assumption that the consumer borrows
the maximum credit available (as disclosed in the early HELOC
disclosures) at account opening, and does not obtain any additional
extensions of credit. The Board proposes not to use $10,000 as the
hypothetical balance for calculating the payment examples because of
concerns that using that balance makes the sample payments
unrealistically low for most consumers. 15 U.S.C. 1604(a). Consumers
typically may borrow more than $10,000 on their HELOC plans. To
illustrate, the Board's 2007 Survey of Consumer Finances data indicates
that the median outstanding balance on HELOCs (for families that had a
balance at the time of the interview) was $24,000.\18\
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\18\ Brian Bucks, et al., Changes in U.S. Family Finances from
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal
Reserve Bulletin (February 2009).
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The Board believes that the proposed payment examples based on the
maximum credit available for the current and maximum APRs will provide
more useful information to consumers than the existing $10,000 example.
Disclosing the first required minimum payment for the draw period if
the consumer borrows the maximum credit available at the current APR
would provide the consumer with an estimate of the actual current
payment if the consumer borrows the maximum credit available at account
opening. Disclosing the first required minimum payment for the draw
period if the consumer borrowers the maximum credit available at the
maximum APR would show the consumer a ``worst case scenario'' payment.
In consumer testing conducted by the Board on HELOC disclosures, the
Board tested versions of the early HELOC disclosures that based the
payment examples on a $10,000 hypothetical balance, and other versions
of the disclosures that based the payment examples on the maximum
credit line. In this testing, a number of participants preferred
payment examples based on the maximum credit line, indicating that they
would like to know what would be the highest payment they would have to
make if they borrowed the entire credit limit.
The proposed payment examples also would show the first minimum
periodic payment during the repayment period for both the current and
maximum APRs. These payment examples would be based on the balance
outstanding at the beginning of the repayment period, assuming that the
consumer borrows the full credit line at the beginning of draw period,
the consumer makes only minimum required payments during the draw
period and borrows no additional money, and the APR does change during
the draw period. Under the proposal, the amount of the balance used to
calculate the first minimum periodic payment during the repayment
period would be disclosed in the table. The Board recognizes that the
first payments during the repayment period may be less useful to the
consumer than the first payments during the draw period, given that the
first payments during the repayment periods are based on the
assumptions that the consumer will not take any additional advances
during the draw period and the APR will not change during the draw
period. Nonetheless, for some plans the required minimum periodic
payments in the repayment period may be considerably larger than the
required minimum periodic payments during the draw period. For example,
some HELOCs offer a payment plan in which the minimum periodic payments
during the draw period cover only interest and do not pay down any of
the principal during the draw period, but during the repayment period,
minimum periodic payments cover interest and at least some of the
principal balance. In these plans, the required minimum periodic
payments during the repayment period could be considerably larger than
the minimum periodic payments during the draw period. The Board
believes that showing the first required minimum periodic payment for
the repayment period will better protect consumers by putting them on
notice that their payments for the repayment period may be much larger
than the minimum periodic payments for the draw period.
Unlike current Sec. 226.5b(d)(5)(iii), proposed Sec.
226.5b(c)(9)(iii) would not require a creditor to disclose a full
hypothetical payment schedule in the early HELOC disclosures. Instead,
proposed Sec. 226.5b(c)(9)(iii) requires a creditor to disclose only
the first minimum periodic payment during the draw period and the first
minimum periodic payment during any repayment period. The Board
proposes to delete the requirement to provide the number of
hypothetical payments and the range of those payments during the draw
period and any repayment period because of concerns that including that
information in the table may confuse consumers and detract from other
important information. In the consumer testing conducted by the Board
on HELOC disclosures, the Board tested versions of the early HELOC
disclosures that showed a range of payments for the draw period and the
repayment period. In this testing, many participants did not understand
why the payments during the draw period and the repayment period were
shown as a range. In addition, participants spent considerable time
attempting to understand the range of payments at the expense of not
focusing on other pertinent information on the disclosure forms.
In addition, the Board believes that showing only the first
payments for the draw period and the repayment period sufficiently
informs consumers about how large the payments could be under the
payment plans. If the range of payments were shown for the draw period,
the first payment for the draw period would be the highest payment in
that range. Likewise, if a range of payments were shown for the
repayment period, the first payment for the repayment period would be
the highest payment in the range.
Current Sec. 226.5(d)(5)(iii) also requires that a creditor
disclose the time it would take to repay a $10,000 advance that is
taken at the beginning of the draw period at a recent rate and is
reduced according to the terms of the plan. The Board proposes not to
include the ``time to repay'' disclosure in the early HELOC
disclosures. The Board proposes this rule pursuant to its authority in
TILA Section 105(a) to make adjustments and exceptions to the
requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers'
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ability to compare credit terms and helping consumers avoid the
uninformed use of credit. See 15 U.S.C. 1601(a), 1604(a). In consumer
testing conducted by the Board on HELOC disclosures, the Board tested
versions of the early HELOC disclosures that contained two payment
options. In disclosing the payment examples for each payment option,
the forms contained a disclosure of the time it would take to repay the
hypothetical balance if the consumer only made minimum periodic
payments. Although a few participants cited the ``time to repay'' as a
reason to choose one payment plan over another, the Board is concerned
that if a creditor discloses two payment options in the table, the time
to repay each plan would not always be an accurate measure of which
payment plan is better for consumers. The Board believes requiring the
``time to repay'' disclosure in the table may distract consumers from
considering other information in the table that may be more useful in
comparing the two payment plans--namely the disclosures of which
payment plan results in the least amount of interest and whether a plan
has a balloon payment.
In addition, the Board understands that most HELOCs have a maturity
date and a definite length for the plan. For these HELOCs, the time to
repay the balance will be the same as the length of the plan (which
must be disclosed in the early HELOC disclosures, see proposed Sec.
226.5b(c)(9)(i)), unless the HELOC plan has a floor payment amount
(which may cause the principal to be paid off earlier than the maturity
date). Even if the plan has a floor payment amount, the length of the
plan will inform consumers of the ``worst case scenario'' of how long
it will take to repay the debt if only minimum periodic payments are
made.
Under current comments 5b(d)(5)(iii)-2 and 5b(d)(12)(x)-1, a
creditor may show the hypothetical payment examples required to be
disclosed under current Sec. 226.5b(d)(5)(iii) and (d)(12)(x) either
for each payment plan disclosed in the application disclosures, or for
representative payment plans. The Board proposes to delete these
comments. Under proposed Sec. 226.5b(c)(9)(iii), a creditor would be
required to disclose the proposed payment examples (as described above)
for each payment plan disclosed in the table.
The current model clauses for disclosing the payment examples under
current Sec. 226.5b(d)(5)(iii) and (d)(12)(x) are contained in current
G-15 in Appendix G. These model clauses provide this information in a
narrative format. The Board proposes in new Sec. 226.5b(c)(9)(iii)(D)
to require a creditor to provide the proposed payment examples and the
other related information in a tabular format that is substantially
similar to the format used in any of the applicable tables found in
proposed Samples G-14(C), G-14(D) and G-14(E) in Appendix G. In the
consumer testing conducted by the Board on HELOC disclosures, the Board
tested versions of the early HELOC disclosures where the proposed
payment examples and related information were presented in the tabular
format shown in proposed Samples G-14(C), G-14(D) and G-14(E) in
Appendix G. This testing showed that presenting this information in a
tabular format more effectively communicated payment information to
participants than the current narrative format.
Current comment 5b(d)(5)(iii)-1 provides guidance to creditors on
how to calculate the hypothetical payment schedule required to be
disclosed under current Sec. 226.5b(d)(5)(iii). Specifically, current
comment 5b(d)(5)(iii)-1 provides that the creditor may assume that the
credit limit as well as the outstanding balance is $10,000. (If the
creditor only offers lines of credit for less than $10,000, however,
the creditor may assume an outstanding balance of $5,000 instead of
$10,000 in making this disclosure.) The example should reflect the
payment comprised only of principal and interest. Creditors may provide
an additional example reflecting other charges that may be included in
the payment, such as credit insurance premiums. Creditors may assume
that all months have an equal number of days, that payments are
collected in whole cents, and that payments will fall on a business day
even though they may be due on a non-business day. For variable-rate
plans, the example must be based on the last rate in the historical
example table required in current Sec. 226.5b(d)(12)(xi), or a more
recent rate. Where the last rate shown in the historical example table
is different from the index value and margin (for example, due to a
rate cap), creditors should calculate the rate by using the index value
and margin. A discounted rate may not be considered a more recent rate
in calculating this payment example for either variable- or fixed-rate
plans.
The Board proposes to move this comment to proposed comment
5b(c)(9)(iii)-1 and revise it. Current guidance in comment
5b(d)(5)(iii)-1 related to the hypothetical $10,000 balance and
selecting a recent APR would be deleted as obsolete. Unlike current
comment 5b(d)(5)(iii)-1, proposed comment 5b(d)(9)(iii)-1 would not
allow a creditor to provide additional payment examples reflecting
other charges that may be included in the payment, such as credit
insurance premiums, because of concerns that allowing these additional
payment examples would be more information than many consumers can
effectively process and may discourage consumers from reviewing the
payment examples at all.
The Board also proposes to include in proposed comment
5b(c)(9)(iii)-1 additional guidance for calculating and disclosing the
proposed payment examples in Sec. 226.5b(c)(9)(iii). Specifically,
proposed comment 5b(c)(9)(iii)-1 provides that in calculating the
payment examples, a creditor must account for any significant terms
related to each payment plan, such as payment caps or payment floor
amounts. A creditor must take payment floor amounts into account when
calculating the payment examples even though the creditor is not
permitted to disclose that payment floor in the table when describing
how minimum payments will be calculated. See proposed comment
5b(c)(9)(ii)-1. For example, assume that under a payment plan, the
monthly payment for the draw period will be calculated as the interest
accrued during that month, or $50, whichever is greater. In the early
HELOC disclosures table, a creditor would be required to disclose that
the minimum monthly payment during the draw period only covers
interest. The creditor would not be allowed to disclose the payment
floor of $50 in the table as part of the early HELOC disclosures.
Nonetheless, the creditor would be required to take into account this
$50 payment floor in calculating the disclosures shown as part of the
payment examples.
In disclosing the payment examples, a creditor would be required to
assume that the consumer borrows the full credit line (as disclosed in
the early HELOC disclosures) at the beginning of the draw period and
that this advance is reduced according to the terms of the plan. The
proposed comment provides that a creditor must not assume that an
additional advance is taken at any time, including at the beginning of
any repayment period. The examples also would be required to reflect
the payment comprised only of principal and interest. The proposed
sample payments in the table showing the first minimum periodic payment
for the draw period and any repayment period, as well as the balance
outstanding at the beginning of any repayment period, must be rounded
to the nearest whole
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dollar. The proposed comment provides that creditors may assume that
all months have an equal number of days, that payments are collected in
whole cents, and that payments will fall on a business day even though
they may be due on a non-business day. A creditor would be required to
assume that the APR used to calculate each payment example required by
Sec. 226.5b(c)(9)(iii) would remain the same during the draw period
and any repayment period as specified in proposed Sec.
226.5b(c)(9)(iii)(A)(3) even if that APR is a variable rate under the
plan.
Balloon payments. Currently, if a balloon payment may be paid by
the consumer under a payment plan, creditors are required to make two
disclosures relating to the balloon payment.
First, current Sec. 226.5b(d)(5)(ii), which implements TILA
Section 127A(a)(10), provides that if paying only the minimum periodic
payments may not repay any of the principal or may repay less than the
outstanding balance, the creditor must disclose as part of the
application disclosures a statement of this fact, as well as a
statement that a balloon payment may result. 15 U.S.C. 1637a(a)(10).
Footnote 10b explains that a balloon payment results if paying the
minimum periodic payments does not fully amortize the outstanding
balance by a specified date or time, and the consumer must repay the
entire outstanding balance at such time. Current comment 5b(d)(5)(ii)-3
provides guidance about disclosing balloon payments in the application
disclosures. This comment provides that in programs where the
occurrence of a balloon payment is possible, a creditor must disclose
the possibility of a balloon payment even if such a payment is
uncertain or unlikely. This comment also provides that in programs
where a balloon payment will occur, such as programs with interest-only
payments during the draw period and no repayment period, the
disclosures must state that a balloon payment will result. Current
comment 5b(d)(5)(ii)-3 clarifies that in making the disclosure about a
balloon payment as required by Sec. 226.5b(d)(5)(ii), a creditor is
not required to use the term ``balloon payment'' and is not required to
disclose the amount of the balloon payment. In addition, this comment
clarifies that the balloon payment disclosure as described in Sec.
226.5b(d)(5)(ii) does not apply in cases where repayment of the entire
outstanding balance would occur only as a result of termination and
acceleration, or if the final payment could not be more than twice the
amount of other minimum payments under the plan.
Second, as discussed above, current Sec. 226.5b(d)(5)(iii)
requires disclosure of a hypothetical payment schedule, based on a
$10,000 outstanding balance and a recent APR, showing the minimum
periodic payments, the amount of any balloon payment, and the time it
would take to repay the $10,000 outstanding balance if the consumer
made only those payments and obtained no additional extensions of
credit.
1. Disclosure of balloon payments when one payment plan is
disclosed in the early HELOC disclosures. Under the proposal, if a
creditor is only disclosing one payment plan in the early HELOC
disclosures and under that payment plan the consumer may pay a balloon
payment, a creditor would be required to disclose information about the
balloon payment twice in the table as part of the early HELOC
disclosures: At the beginning of the information about payment terms,
and as part of the payment examples. The Board proposes to move the
provisions on disclosing a balloon payment in Sec. 226.5b(d)(5)(ii) to
proposed Sec. 226.5b(c)(9)(ii)(A). Specifically, proposed Sec.
226.5b(c)(9)(ii)(A) provides that if a creditor offers to the consumer
only one payment plan (except for fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw period)
and paying only the minimum periodic payments may not repay any of the
principal or may repay less than the outstanding balance by the end of
the HELOC plan, the creditor must disclose a statement of this fact, as
well as a statement that a balloon payment may result. Proposed comment
5b(c)(9)-2 explains that the row ``Balloon Payment'' in the ``Borrowing
and Repayment Terms'' section of proposed Sample G-14(D) in Appendix G
provides guidance on how to comply with the requirements in proposed
Sec. 226.5b(c)(9)(ii)(A). Proposed Sec. 226.5b(c)(9)(ii)(A) also
specifies that if a balloon payment will not result under the payment
plan, a creditor must not disclose in the early HELOC disclosures the
fact that a balloon payment will not result for the plan. The Board
believes that allowing a creditor to disclose in the early HELOC
disclosures table that a balloon payment will not result for the plan
might create ``information overload'' for consumers and distract
consumers from more important information in the table because
consumers are not likely to understand a statement that ``a balloon
payment will not apply'' without additional language defining what a
balloon payment is, which would add complexity to the table.
In addition, as discussed above, the Board proposes to move the
payment examples in current Sec. 226.5b(d)(5)(iii) to proposed Sec.
226.5b(c)(9)(iii) and revise them. Regarding disclosure of the amount
of the balloon payment in the proposed payment examples, proposed Sec.
226.5b(c)(9)(iii)(C)(4) provides that if a consumer may pay a balloon
payment under a payment plan disclosed in the table, a creditor would
be required to disclose that fact when disclosing the proposed payment
examples, as well as disclose the amount of the balloon payment based
on the assumptions used the calculate the payment examples as described
in proposed Sec. 226.5b(c)(9)(iii). Proposed comment 5b(c)(9)-2
explains that the first paragraph of the ``Sample Payments'' section of
proposed Sample G-14(D) in Appendix G provides guidance on how to
comply with the requirements in Sec. 226.5b(c)(9)(iii)(C)(4).
Consistent with proposed Sec. 226.5b(c)(9)(ii)(A), proposed Sec.
226.5b(c)(9)(iii)(C)(4) also specifies that if a creditor is disclosing
only one payment plan in early HELOC disclosures, and a balloon payment
will not occur for that plan, the creditor must not disclose as part of
the payment examples that a balloon payment will not result for the
plan.
The Board proposes to move current comment 5b(d)(5)(ii)-3 and
current footnote 10b, which provide guidance on disclosing balloon
payments, to proposed comment 5b(c)(9)-1 and to revise these
provisions. Like current footnote 10b, proposed comment 5b(c)(9)-1
specifies that a balloon payment results if paying the minimum periodic
payments does not fully amortize the outstanding balance by a specified
date or time, and the consumer must repay the entire outstanding
balance at such time. A creditor also would not need to make a
disclosure about balloon payments if the final payment could not be
more than twice the amount of other minimum payments under the plan.
Consistent with current comment 5b(d)(5)(ii)-3, proposed comment
5b(c)(9)-1 specifies that the balloon payment disclosures in proposed
Sec. 226.5b(c)(9)(ii) and (iii) do not apply where repayment of the
entire outstanding balance would occur only as a result of termination
and acceleration.
Finally, consistent with current comment 5b(d)(5)(ii)-3, proposed
comment 5b(c)(9)-1 specifies that, in disclosing a balloon payment
under Sec. 226.5b(c)(9)(ii) and (iii), a creditor must disclose that a
balloon payment ``may'' result if a balloon payment under
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a payment plan is possible, even if such a payment is uncertain or
unlikely; a creditor must disclose a balloon payment ``will'' result if
a balloon payment will occur under a payment plan, such as a payment
plan with interest-only payments during the draw period and no
repayment period.
2. Disclosure of balloon payments when two payment plans are
disclosed in the early HELOC disclosures. Under the proposal, a
creditor that discloses two payment plans in the table as part of the
early HELOC disclosures and under at least one of the plans a consumer
may pay a balloon payment, the creditor must disclose information about
the balloon payment three times in the table: (1) At the beginning of
information about the payment terms on the HELOC plan; (2) with a
discussion of how the minimum periodic payments are determined for each
plan; and (3) with the payment examples.
First, proposed Sec. 226.5b(c)(9)(ii)(B)(1) provides that if a
creditor is disclosing two payment options in the table and under at
least one of the payment plans, paying only the minimum periodic
payments may not repay any of the principal or may repay less than the
outstanding balance by the end of the plan, a creditor must disclose in
the table as part of the early HELOC disclosures a statement of this
fact, as well as a statement that a balloon payment may result. If a
balloon payment would result under one payment plan but not both
payment plans, the creditor must disclose that a balloon payment may
result depending on the terms of the payment plan. If a balloon payment
would result under both payment plans, the creditor must disclose that
a balloon payment will result. If a balloon payment would not result
under both payment plans, a creditor must not disclose in the early
HELOC disclosures the fact that a balloon payment will not result for
both plans. As noted above with respect to proposed Sec.
226.5b(c)(9)(ii)(A), the Board believes that allowing a creditor to
disclose in the early HELOC disclosures table that a balloon payment
will not result for the both payment plans might create ``information
overload'' for consumers and distract consumers from more important
information in the table. Proposed comment 5b(c)(9)-3 explains that the
row ``Balloon Payment'' in the ``Borrowing and Repayment Terms''
section of proposed Sample G-14(C) in Appendix G provides guidance on
how to comply with the requirements in Sec. 226.5b(c)(9)(ii)(B)(1).
Second, under proposed Sec. 226.5b(c)(9)(ii)(B)(3), for each
payment plan described in the early HELOC disclosures for which a
balloon payment may result (or will result as applicable), a creditor
would be required to disclose that a balloon payment may result or will
result, as applicable, for that plan. For example, assume a creditor
describes two payment plans--Plan A and Plan B--in the early HELOC
disclosures, and a balloon payment will result for both plans. Under
the proposal, a creditor would be required to disclose that a balloon
payment will result for Plan A and disclose that a balloon payment will
result for Plan B. These two statements would be disclosed along with
the information about how minimum payments would be calculated for each
plan required under proposed Sec. 226.5b(c)(9)(ii)(B)(2). See the rows
``Plan A'' and ``Plan B'' in the ``Payment Plans'' section of proposed
Sample G-14(C) in Appendix G.
If one of the plans has a balloon payment and the other does not,
proposed Sec. 226.5b(c)(9)(ii)(B)(3) requires a creditor to disclose
that a balloon payment will result for the plan in which a balloon
payment will occur and that a balloon payment will not result for the
plan in which no balloon payment would occur. If under Plan A, a
consumer would pay a balloon payment while under Plan B a consumer
would not pay a balloon payment, the creditor would be required to
state that a balloon payment will result for Plan A and a statement
that a balloon payment will not result for Plan B. Again, these two
statements would be disclosed along with the information about how
minimum payments would be calculated for each plan required under
proposed Sec. 226.5b(c)(9)(ii)(B)(2). Consistent with proposed Sec.
226.5b(c)(9)(ii)(B)(1), proposed Sec. 226.5b(c)(9)(ii)(B)(3) also
specifies that if neither payment plan has a balloon payment, a
creditor must not disclose the fact that a balloon payment will not
result for the each plan.
Third, proposed Sec. 226.5b(c)(9)(iii)(C)(4) provides that if a
consumer may pay a balloon payment under a payment plan disclosed in
the table, a creditor would be required to disclose that fact when
disclosing the proposed payment examples, and disclose the amount of
the balloon payment based on the assumptions used the calculate the
payment examples as described in proposed Sec. 226.5b(c)(9)(iii). If
under both Plan A and Plan B a consumer would owe a balloon payment,
proposed Sec. 226.5b(c)(9)(ii)(B)(4) requires a creditor to disclose
that a balloon payment will result for Plan A and disclose the amount
of the balloon payment based on the assumptions used to calculate the
payment examples described in proposed Sec. 226.5b(c)(9)(iii). In
addition, a creditor would be required to disclose a balloon payment
will result for Plan B and the amount of the balloon payment. These two
statements would be disclosed along with the payment examples in
proposed Sec. 226.5b(c)(9)(iii). See the ``Plan A vs. Plan B'' part of
the ``Plan Comparison'' section of proposed Sample G-14(C) in Appendix
G.
If one of the plans has a balloon payment and the other does not,
proposed Sec. 226.5b(c)(9)(iii)(C)(4) requires a creditor to disclose
that a balloon payment will not result for the plan in which no balloon
payment would occur. In other words, if under Plan A, a consumer would
pay a balloon payment while under Plan B a consumer would not pay a
balloon payment, the creditor would be required to disclose a statement
that a balloon payment will result for Plan A and the amount of the
balloon payment. In addition, a creditor would be required to disclose
a statement that a balloon payment will not result for Plan B. These
two statements would be disclosed along with the payment examples in
proposed Sec. 226.5b(c)(9)(iii). Consistent with proposed Sec.
226.5b(c)(9)(ii)(B)(1), proposed Sec. 226.5b(c)(9)(iii)(C)(4) also
specifies that if neither payment plan has a balloon payment, a
creditor must not disclose the fact that a balloon payment will not
result for the each plan. Thus, if under both Plan A and Plan B a
consumer would not owe a balloon payment, a creditor must not disclose
in the early HELOC disclosures that a balloon payment would not be paid
under either plan.
The Board believes that the above approach of disclosing
information about balloon payments three places in the table as part of
the early HELOC disclosures would help consumer better understand that
a balloon payment may be owed by the consumer at the end of HELOC plan
if the consumer only makes minimum required payments, and reinforces
for the consumer which payments plans carry the possibility of a
balloon payment.
Reverse mortgages. Current comment 5b(d)(5)(iii)-4 provides
guidance on disclosing terms of reverse mortgages, also known as
reverse annuity or home-equity conversion mortgages, as part of the
application disclosures. The Board proposes to move current comment
5b(d)(5)(iii)-4 to proposed comment 5b(d)(9)(ii)-6, and to make
technical revisions to conform this guidance to proposed revisions in
proposed
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Sec. 226.5b(c). The Board requests comment on whether additional
guidance is needed by creditors offering reverse mortgages on how to
meet the disclosure requirements in proposed Sec. 226.5b(c).
Paragraph 5b(c)(9)(iv)
Pursuant to its authority under TILA Section 127A(a)(14) to require
additional disclosures with respect to HELOC plans, the Board proposes
in new Sec. 226.5b(c)(9)(iv) to require a creditor to disclose in the
table as part of the early HELOC disclosures a statement that the
consumer can borrow money during the draw period. 15 U.S.C.
1637a(a)(14). In addition, if a repayment period is provided, the
creditor would also be required to disclose in the table a statement
that the consumer cannot borrow money during the repayment period.
Although creditors are not specifically required to include the above
information as part of the application disclosures, creditors typically
include this information in the application disclosures. The Board
believes that consumers should be informed about when during the HELOC
plan they can make withdrawals and when they are no longer able to
borrow money under the plan.
Paragraph 5b(c)(9)(v)
As discussed above, current Sec. 226.5b(d)(5)(ii) provides that a
creditor must disclose as part of the application disclosures an
explanation of how the minimum periodic payments will be determined and
the timing of the payments (such as whether the payments will be due
monthly, quarterly or on some other periodic basis). As discussed
above, the Board proposes to move current Sec. 226.5b(d)(5)(ii) to
proposed Sec. 226.5b(c)(9)(ii) and make revisions. Nonetheless,
consistent with current Sec. 226.5b(d)(5)(ii), the Board proposes in
new Sec. 226.5b(c)(9)(ii) to require that a creditor disclose in the
table as part of the early HELOC disclosures the timing of the payments
(such as whether the payments will be due monthly, quarterly or on some
other periodic basis.) In addition, the Board proposes in new Sec.
226.5b(c)(9)(v) to require a creditor to disclose in the table as part
of the early HELOC disclosures a statement indicating whether minimum
payments are due in the draw period and any repayment period. In
consumer testing conducted by the Board on HELOC disclosures, the Board
tested application disclosures in a narrative form, designed to
simulate those currently in use. When reviewing these application
disclosures, many participants had difficulty understanding how the
draw period differs from the repayment period, and what impact these
distinctions have on required monthly payments. The Board believes that
requiring a creditor to state explicitly whether minimum payments are
due in the draw period and any repayment period will help consumers
better understand when minimum payments will be due under the HELOC.
5b(c)(10) Annual Percentage Rate
TILA Section 127A(a)(1) provides that a creditor must disclose as
part of the application disclosures each APR imposed in connection with
the HELOC plan. 15 U.S.C. 1637a(a)(1). Regulation Z currently
interprets TILA Section 127A(a)(1) to mean that for fixed-rate payment
plans, a creditor must disclose as part of the application disclosures
a recent APR imposed under the plan. See current Sec. 226.5b(d)(6).
Current footnote 10c provides that a recent APR for fixed-rate plans is
a rate that has been in effect under the plan within the 12 months
preceding the date that disclosures are provided to the consumer. For
variable rate plans, current Sec. 226.5b(d)(12), which implements TILA
Section 127A(a)(2), requires a creditor to disclose the index that will
be used to determine the variable rate. 15 U.S.C. 1637a(a)(2). In
addition, current Sec. 226.5b(d)(12) sets forth a number of other
disclosures about variable rates that must be included as part of the
application disclosures, such as a statement that the consumer should
ask about the current index value, margin, discount or premium, and
APR. A creditor is not required to disclose in the application
disclosures the current APRs that are offered to the consumer on the
HELOC plan.
The Board proposes to require that a creditor disclose in the table
as part of the early HELOC disclosures the current APRs that are
offered to the consumer on the payment plans described in the early
HELOC disclosures table. Specifically, proposed Sec. 226.5b(c)(10)
requires that a creditor must disclose in the table each APR applicable
to any payment plan disclosed in the early HELOC disclosures. The
proposal to require a creditor to disclose in the table the APRs
applicable to the payment plans disclosed in the table is consistent
with TILA Section 127A(a)(1), which provides that a creditor must
disclose ``each annual percentage rate imposed in connection with
extensions of credit under the plan. * * *'' 15 U.S.C. 127A(a)(1). In
addition, as discussed in more detail above in the section-by-section
analysis to proposed Sec. 226.5b(b), consumer testing on HELOC
disclosures shows that the current APRs on the HELOC plan are some of
the most important pieces of information that consumers want to know in
deciding whether to open a HELOC plan. Participants in the consumer
testing overwhelmingly indicated that they would prefer to receive
transaction-specific disclosures, including the current APRs offered to
the consumer on the HELOC plan, soon after application even if it meant
that they would not receive disclosure of general terms before they
applied. The Board proposes to delete as obsolete current Sec.
226.5b(d)(6) and the contents of footnote 10c, which require the
consumer to disclose for fixed-rate plans a recent rate that has been
in effect within the 12 months preceding the date that disclosures are
provided to the consumer. In addition, the Board proposes to move the
provisions in current Sec. 226.5b(d)(12) relating to variable-rate
plans to proposed Sec. 226.5b(c)(10) and to make revisions to those
provisions.
Rates applicable to payment plans disclosed. Proposed comment
5b(c)(10)-3 clarifies that under proposed Sec. 226.5b(c)(10), a
creditor would only be required to disclose in the table as part of the
early HELOC disclosures the APRs applicable to the payment plans that
are disclosed in the table under proposed Sec. 226.5b(c)(9). As
discussed in more detail in the section-by-section analysis to proposed
Sec. 226.5b(c), for HELOC plans that are variable-rate plans but also
offer fixed-rate and -term payment options during the draw period, a
creditor may only disclose in the table information applicable to the
variable-rate plan, including the applicable APRs. In this case, a
creditor may not disclose in the table the APRs applicable to any
fixed-rate and -term payment plans offered during the draw period.
However, if a HELOC plan does not offer a variable-rate feature during
the draw period, but only offers fixed-rate and -term features during
that period, a creditor must disclose in the table information related
to the fixed-rate and -term features when making the disclosures
required by proposed Sec. 226.5b(c), including the APRs applicable to
these features. The Board believes that requiring disclosure of all the
APRs applicable to the HELOC plan in the table, even those APRs that
relate to payment plans that are not disclosed in the table, would be
confusing to consumers.
Nonetheless, under the proposal, a creditor would be required to
disclose the APRs applicable to other payment plans when disclosing
those payment plans to a consumer upon request prior
[[Page 43473]]
to account opening. In particular, proposed comment 5b(c)(9)(ii)-5
provides guidance on how a creditor must provide additional information
on payment plans that are not disclosed in the table as part of the
early HELOC disclosures (other than fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw period)
to a consumer upon the consumer's request. This proposed comment
provides that if a creditor offers a payment plan other than the two
payment plans disclosed in the table as part of the early HELOC
disclosures (except for fixed-rate and -term payment plans unless those
are the only payment plans offered during the draw period), and a
consumer requests additional information about the other plan, the
creditor must disclose an additional table under Sec. 226.5b(b) to the
consumer with the terms of the other payment plan described in the
table. Proposed comment 5b(c)(10)-3 makes clear that this additional
table must include the APRs applicable to that other payment plan.
In addition, as discussed in more detail in the section-by-section
analysis to proposed Sec. 226.5b(c)(18), proposed comment 5b(c)(18)-2
provides guidance on how a creditor must provide additional information
about fixed-rate and -term payment plans to a consumer upon the
consumer's request prior to account opening. This proposed comment
provides that in disclosing additional information about the fixed-rate
and -term payment plan upon a consumer's request, a creditor must
disclose in the form of a table (1) the information described by
proposed Sec. 226.5b(c) applicable to the fixed-rate and -term payment
plan (including the APRs applicable to the fixed-rate and -term payment
plan) and (2) any fees imposed related to the use of the fixed-rate and
-term payment plan, such as fees to exercise the fixed-rate and -term
payment plan or to convert a balance under a fixed-rate and -term
payment feature to a variable-rate feature under the plan.
Rates changes set forth in initial agreement. Current comments
5b(d)(6)-1 and 5b(d)(12)(viii)-1 provide that a creditor must disclose
in the application disclosures a disclosure of preferred-rate
provisions, where the rate will increase upon the occurrence of some
event, such as the borrower-employee leaving the creditor's employ or
the consumer closing an existing deposit account with the creditor. The
Board proposes to move these comments to proposed comment 5b(c)(10)-2
and revise them. Specifically, proposed comment 5b(c)(10)-2 clarifies
that proposed Sec. 226.5b(c)(10) requires disclosure of any rate
changes set forth in the initial agreement (as discussed in Sec.
226.5b(f)(3)(i)) applicable to the payment plans disclosed in the table
pursuant to proposed Sec. 226.5b(c)(9). For example, a creditor would
be required to disclose under proposed Sec. 226.5b(c)(10) preferred-
rate provisions, where the rate will increase upon the occurrence of
some event, such as the borrower-employee leaving the creditor's employ
or the consumer closing an existing deposit account with the creditor.
The creditor would be required to disclose the preferred rate that
applies to the plan, and the rate that would apply if the event is
triggered, such as the borrower-employee leaving the creditor's employ
or the consumer closing an existing deposit account with the creditor.
Under this proposed comment, if the preferred rate and the rate that
would apply if the event is triggered are variable rates, the creditor
would be required to disclose those rates based on the applicable index
or formula, and disclose other information required by proposed Sec.
226.5b(c)(10)(i).
Penalty APRs. Although under the proposal creditors generally would
be required to disclose in the table as part of the early HELOC
disclosures the APRs applicable to the payment plans disclosed in the
table, proposed Sec. 226.5b(c)(10) provides that a creditor must not
disclose in the table any penalty rate set forth in the initial
agreement that may be imposed in lieu of termination of the plan. As
discussed in more detail in the section-by-section analysis to Sec.
226.5b(f), the Board proposes to restrict creditors offering HELOCs
subject to Sec. 226.5b from imposing a penalty rate or penalty fees
(except for a contractual late-payment fee) on the account for a
consumer's failure to pay the account when due, unless the consumer is
more than 30 days late in paying the account. Based on Board outreach,
the Board understands that HELOC creditors generally do not impose a
penalty rate, regardless of how late the payment is. For this reason,
as well as due to the very limited circumstances in which a penalty
rate may be imposed under the proposal, the Board believes that
information about the penalty rate would not be useful to consumers in
deciding whether to open a HELOC plan and that including it in the
table may distract consumers from noticing information that is more
likely to impact them in choosing and using a HELOC.
Periodic rates. Proposed comment 5b(c)(10)-1 would clarify that a
creditor would be allowed to disclose only APRs in the table as part of
the early HELOC disclosures. Periodic rates would not be allowed to be
disclosed in the table as part of the early HELOC disclosures. For
example, assume a monthly periodic rate of 1.5 percent applies to
transactions on a HELOC account. The corresponding APR to this periodic
rate would be 18 percent. Under the proposal, creditors would be
required to disclose the 18 percent corresponding APR in the early
HELOC disclosures table, but may not disclose the 1.5 percent periodic
rate in the table. The Board believes information about periodic rates
that apply to the HELOC would not be useful to consumers in deciding
whether to open a HELOC plan, and including this information in the
table may distract consumers from noticing more important information.
16-point font. Proposed Sec. 226.5b(c)(10) requires that a
creditor must provide the APRs disclosed in the table as part of the
early HELOC disclosures in at least 16-point type, except for the
following: any minimum or maximum APRs that may apply; and any
disclosure of rate changes set forth in the initial agreement, except
for rates that would apply after the expiration of an introductory
rate. As discussed above, in consumer testing conducted by the Board on
HELOC disclosures, participants indicated that the APRs offered to the
consumer on the HELOC plans were some of the most important pieces of
information in deciding whether to open a HELOC plan. Thus, the Board
proposes generally to highlight the APRs in the table. Given that the
Board proposes to require a minimum of 10-point font for the
disclosures of other terms in the table, the Board believes that a 16-
point font size for the APRs would be effective in highlighting the
APRs in the table.
Proposed Sec. 226.5b(c)(10) requires that the current APR that
will apply to the account be disclosed in 16-point font. If an
introductory rate is offered, a creditor would be required to disclose
the introductory rate and the rate that would otherwise apply after the
introductory rate expires in 16-point font. Under the proposal, the 16-
point font requirement would not apply to any minimum or maximum APRs
disclosed in the table. In addition, the 16-point font requirement
would not apply to any disclosure of rate changes set forth in the
initial agreement except for rates that would apply after the
expiration of an introductory rate. For example, the 16-point font
requirement would not apply to any disclosure of the rate that would
apply if any preferred rate is terminated. The Board believes that
limiting the 16-point font requirement generally to the current
[[Page 43474]]
APRs on the account (or an introductory rate and the rate that would
otherwise apply after the introductory rate expires) would highlight
for consumers the rates that will be most relevant for them at account
opening. The Board believes that requiring all of the APRs disclosed in
the table to be in 16-point font could create ``information overload''
for consumers.
5b(c)(10)(i) Disclosures for Variable-Rate Plans
Current Sec. 226.5b(d)(12), which implements TILA Section
127A(a)(2), provides that if a variable-rate feature is offered on a
HELOC plan, the creditor must disclose as part of the application
disclosures the following information about the variable-rate feature:
(1) The fact that the APRs, payment, or other terms may change due to
the variable-rate feature; (2) the index used in making rate
adjustments and a source of information about the index; (3) an
explanation of how the APR will be determined, including an explanation
of how the index is adjusted, such as by the addition of the margin;
(4) the frequency of changes in the APR: (5) any rules relating to
changes in the index value and the APR and resulting changes in the
payment amount, including, for example, an explanation of payment
limitations and rate carryover; (6) a statement of any annual or more
frequent periodic limitations on changes in the APR (or a statement
that no annual limitation exists), as well as a statement of the
maximum APR that may be imposed under each payment option; (7) an
historical example, based on a $10,000 extension of credit,
illustrating how APRs and payments would have been affected by index
value changes implemented according to the terms of the plan
(``historical example table''). The historical example table must be
based on the most recent 15 years of index values (selected for the
same time period each year) and must reflect all significant plan
terms, such as negative amortization, rate carryover, rate discounts,
and rate and payment limitations, that would have been affected by the
index movement during the period; (8) the minimum periodic payment
required when the maximum APR for each payment option is in effect for
a $10,000 outstanding balance, and a statement of the earliest date or
time the maximum rate may be imposed; (9) a statement that the APR does
not include costs other than interest; (10) a statement that the
consumer should ask about the current index value, margin, discount or
premium, and APR; (11) a statement that rate information will be
provided on or with each periodic statement; and (12) as applicable, a
statement that the initial APR is not based on the index and margin
used to make later rate adjustments, and the period of time such
initial rate will be in effect. As discussed in more detail below, the
Board proposes to move current Sec. 226.5b(d)(12) to proposed Sec.
226.5b(c)(10) and revise it.
Current comment 5b(d)(12)-1 provides that sample forms in current
Appendix G-14 provide illustrative guidance on the variable-rate rules.
The Board proposes to move this comment to proposed comment
5b(c)(10)(i)-6 and to make technical revisions. Current comment 5b-4
provides that if a creditor uses an index to determine the rate that
will apply at the time of conversion to the repayment phase--even if
the rate will thereafter be fixed--the creditor must provide the
variable-rate information in current Sec. 226.5b(d)(12), as
applicable. The Board proposes to move this provision in current
comment 5b-4 to proposed comment 5b(c)(10)(i)-3 and to make technical
revisions.
In addition, the Board proposes to add new comment 5b(c)(10)(i)-1,
which would clarify that a variable-rate account exists when rate
changes are part of the plan and are tied to an index or formula. This
proposed comment also provides a cross reference to comment
6(a)(4)(ii)-1 for examples of variable-rate plans.
Disclosure that APR may change due to the variable-rate feature.
Current Sec. 226.5b(d)(12)(i) provides that a creditor must include as
part of the application disclosures a statement that the APRs, payment,
or other terms may change due to the variable-rate feature. Consistent
with current Sec. 226.5b(d)(12)(i), proposed Sec.
226.5b(c)(9)(i)(A)(1) provides that a creditor must disclose in the
table as part of the early HELOC disclosures the fact that the APR may
change due to the variable-rate feature. The Board believes that it is
important to highlight for consumers that the APR is a variable rate.
Thus, under the proposal, the Board would require a creditor in
disclosing the variable-rate APR to use the term ``variable rate'' in
underlined text as shown in any of the applicable tables found in
proposed Samples G-14(C), G-14(D) and G-14(E) in Appendix G. Unlike
current Sec. 226.5b(d)(12)(i), under the proposal, a creditor would
not be required to disclose explicitly the fact that the payment or
other terms may change due to the variable-rate feature. The Board
believes that the proposed payment examples that would be included in
the early HELOC disclosures communicate effectively to consumers that
the payments would change when the APR changes. In consumer testing
conducted by the Board on HELOC disclosures, participants were asked
whether the payments on the HELOC plan could vary. Most participants
understood from the payment examples contained in the tested forms that
the payments on the HELOC plan would increase if the APR increased.
Explanation of how APR will be determined. Current Sec.
226.5b(d)(12)(iii), which implements TILA Section 127A(a)(2)(B),
provides that a creditor must include as part of the application
disclosures the index used in making rate adjustments to the variable
APR and a source of information about the index. 15 U.S.C.
1637a(a)(2)(B). Current Sec. 226.5b(d)(12)(iv) provides that a
creditor also must include as part of the application disclosures an
explanation of how the variable APR will be determined, including an
explanation of how the index is adjusted, such as by the addition of a
margin. Current comment 5b(d)(12)(iv)-1 provides that if a creditor
adjusts its index through the addition of a margin, the disclosure
might read, ``Your annual percentage rate is based on the index plus a
margin.'' The creditor is not required to disclose a specific value for
the margin.
Consistent with current Sec. 226.5b(d)(12)(iii) and (iv), proposed
Sec. 226.5b(c)(9)(i)(A)(2) requires a creditor to disclose in the
table as part of the early HELOC disclosures an explanation of how the
APR will be determined. Consistent with current Sec.
226.5b(d)(12)(iii), under the proposal, a creditor would be required to
disclose in the table the type of index used in making rate adjustments
to the variable APR, such as indicating the current APR is based on the
``prime rate.'' Unlike current Sec. 226.5b(d)(12)(iv), under the
proposal, a creditor also would be required to disclose in the table
the value of the margin. In consumer testing conducted on HELOC
disclosures, the Board tested some versions of the early HELOC
disclosures that did not contain the current value of the margin, but
instead included only a statement that the APR ``would vary monthly
with the Prime Rate.'' The Board also tested other versions of the
early HELOC disclosures that included the value of the margin, such as
by stating that the APR will be ``a variable rate that will change
monthly based on the Prime Rate plus 1.00%.'' Participants in consumer
testing consistently indicated that they preferred to be shown the
value of the margin, so that they would have detailed information about
how their APR would be determined over time.
[[Page 43475]]
Thus, under proposed Sec. 226.5b(10)(i)(A)(2), a creditor would be
required to disclose in the table the type of index used in making rate
adjustments (such as the prime rate) and the value of the margin.
Current comment 5b(d)(12)(iv)-1 would be deleted as obsolete. Under the
proposal, Samples G-14(C), G-14(D) and G-14(E) would provide guidance
to creditors on how to disclose the fact that the applicable rate
varies and how it is determined. See proposed comment 5b(c)(10)(i)-2.
Under the proposal, in providing an explanation of how the APR will
be determined, a creditor would not be allowed to disclose in the table
as part of the early HELOC disclosures the current value of the index,
such that the prime rate is currently 4 percent. See proposed comment
5b(c)(10)(i)-2. The Board has concerns that requiring the current value
of the index in the table could create ``information overload'' for
consumers and could distract consumers from noticing more important
information. As described above, the current APR (i.e., the current
value of the index plus the margin) and the value of the margin would
be disclosed in the table, so a consumer who is interested in knowing
the current value of the index could calculate the current value of the
index from those figures. At the creditor's option, the creditor would
be allowed under the proposal to disclose the current value of the
index outside the table. See proposed Sec. 226.5b(b)(2)(v).
Unlike current Sec. 226.5b(d)(12)(iii), which implements TILA
Section 127A(a)(2)(B), under the proposal, a creditor would not be
allowed to disclose in the table as part of the early HELOC disclosures
a source of information about the index used in the making rate
adjustments, such as indicating that the prime rate is published in the
Wall Street Journal. 15 U.S.C. 1637(a)(2)(B); see proposed comment
5b(c)(10)(i)-2. The Board proposes no longer to require a creditor to
provide the source of information about the index, pursuant to the
Board's exception and exemption authorities under TILA Section 105.
Section 105(a) authorizes the Board to make adjustments and exceptions
to the requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any
class of transactions from coverage under any part of TILA if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
See 15 U.S.C. 1604(f)(1). The Board must make this determination in
light of specific factors. See 15 U.S.C. 1604(f)(2).
These factors are (1) the amount of the loan and whether the
disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes that the proposed exemption is appropriate.
The Board proposes not to require a creditor to include information
about the source of the index because of concerns of ``information
overload'' to consumers. In consumer testing conducted by the Board on
HELOC disclosures, the Board asked participants whether information
about the source of the index was important information for them to
know in deciding whether to open a HELOC plan. Most participants
indicated that this information was not useful information and would
not affect their decision about whether to open a HELOC plan. At a
creditor's option, the creditor would be allowed under the proposal to
disclose information about the source of the index outside of the
table. See proposed Sec. 226.5b(b)(2)(v).
Frequency of changes in the APR. Current Sec. 226.5b(d)(12)(vii),
which implements TILA Section 127A(a)(2)(B), requires a creditor to
disclose as part of the application disclosures the frequency of
changes in the variable-rate APR, such as disclosing that the variable
rate may change on a monthly basis. Consistent with current Sec.
226.5b(d)(12)(vii), under proposed Sec. 226.5b(c)(10)(i)(A)(3), a
creditor would be required to disclose in the table as part of the
early HELOC disclosures the frequency of changes in the variable-rate
APR.
Rules relating to changes in the index value and the APR and
resulting changes in the payment amount. Current Sec.
226.5b(d)(12)(viii), which implements TILA Section 127(a)(2)(B),
provides that a creditor must disclose as part of the application
disclosures any rules relating to changes in the index value and the
APR and resulting changes in the payment amount, including, for
example, an explanation of payment limitations and rate carryover. 15
U.S.C. 127(a)(2)(B). Current comment 5b(d)(12)(viii)-1 clarifies that
current Sec. 226.5b(d)(12)(viii) requires a creditor to disclose as
part of the application disclosures any preferred-rate provisions,
where the rate will increase upon the occurrence of some event, such as
the borrower-employee leaving the creditor's employ or the consumer
closing an existing deposit account with the creditor. Current comment
5b(d)(12)(viii)-2 provides a cross reference to current comment
5b(d)(5)(ii)-2, which discusses the disclosure requirement for options
permitting the consumer to convert from a variable rate to a fixed
rate.
Consistent with current Sec. 226.5b(d)(12)(viii), proposed Sec.
226.5b(c)(10)(i)(A)(4) requires a creditor to disclose in the table as
part of the early HELOC disclosures any rules relating to changes in
the index value and the APR and resulting changes in the payment
amount, including, for example, an explanation of payment limitations
and rate carryover. As discussed above, current comment
5b(d)(12)(viii)-1 dealing with preferred-rate provisions would be moved
to proposed comment 5b(c)(10)-2.
The Board proposes to delete as obsolete current comment
5b(d)(12)(viii)-2, which deals with disclosure of options permitting
the consumer to convert from a variable rate to a fixed rate. As
discussed in the section-by-section analysis to proposed Sec.
226.5b(c) and (c)(18), under the proposal, a creditor generally would
not be permitted to disclose in the table as part of the early HELOC
disclosures information related to fixed-rate and -term payment
features, including information about how the rates that apply to those
features are determined.
Limitations on changes in rates. Current Sec. 226.5b(d)(12)(ix),
which implements TILA Section 127A(a)(2)(E) and (F), provides that a
creditor must disclose as part of the application disclosures a
statement of any annual or more frequent periodic limitations on
changes in the APR (or a statement that no annual limitation exists),
as well as a statement of the maximum APR that may be imposed under
each payment option. 15 U.S.C. 1637a(a)(2)(E) and (F). Under current
Sec. 226.5b(d)(12)(ix), a creditor is not required to disclose any
periodic limitations on changes in the
[[Page 43476]]
APR that are longer than a year--such as rate caps that would apply
every two years.
Proposed Sec. 226.5b(c)(10)(i)(A)(5) requires a creditor to
disclose in the table as part of the early HELOC disclosures a
statement of any limitations on changes in the APR, including the
minimum and maximum APRs that may be imposed under each payment option
disclosed in the table. In addition, under the proposal, if no annual
or other periodic limitations apply to changes in the APR, a creditor
would be required in the table to include a statement that no annual
limitation exists. Thus, consistent with current Sec.
226.5b(d)(12)(ix), under the proposal, a creditor would be required to
disclose in the table any annual or more frequent periodic limitations
on changes in the APR and to disclose the maximum APR that may be
imposed under each payment option disclosed in the table.
Unlike current Sec. 226.5b(d)(12)(ix), however, under the
proposal, a creditor must disclose in the table any periodic
limitations on changes in the APR that are longer than a year--such as
rate caps that would apply every two years. In addition, unlike current
Sec. 226.5b(d)(12)(ix), a creditor also would be required to disclose
in the table any minimum rate that would apply to the payment plans
disclosed in the table, such as a rate floor. The Board proposes to add
these disclosures pursuant to its authority under TILA Section
127A(a)(14) to require additional disclosures with respect to HELOC
plans. 15 U.S.C. 1637a(a)(14). The Board believes that consumers should
be informed of all rate caps, and rate floors, as consumer testing has
shown that rate information is among the most important information to
a consumer in deciding whether to open a HELOC plan.
Current comment 5b(d)(12)(ix)-1 clarifies that if a creditor bases
its rate limitation on 12 monthly billing cycles, this limitation
should be treated as an annual cap. Rate limitations imposed on less
than an annual basis must be stated in terms of a specific amount of
time. For example, if the creditor imposes rate limitations on only a
semiannual basis, this must be expressed as a rate limitation for a
six-month time period. If the creditor does not impose periodic
limitations (annual or shorter) on rate increases, the fact that there
are no annual rate limitations must be stated.
The Board proposes to move this comment to proposed comment
5b(c)(10)(i)-4 and to revise it. Specifically, proposed comment
5b(c)(10)(i)-4 clarifies that under proposed Sec.
226.5b(c)(10)(i)(A)(5), a creditor would be required to disclose any
rate limitations that occur, including rate limitations that occur in a
time period of more than one year, annually or less than annually. If
the creditor bases its rate limitation on 12 monthly billing cycles,
this limitation would be treated as an annual cap. A creditor would be
required to state rate limitations imposed on more or less than an
annual basis in terms of a specific amount of time. For example, if the
creditor imposes rate limitations on only a semiannual basis, a
creditor would be required to express this limitation as a rate
limitation for a six-month time period. If a creditor does not impose
annual or other periodic limitations on rate increases, the creditor
would be required to state this fact in the table as part of the early
HELOC disclosures.
Regarding disclosure of the maximum APR that may be imposed over
the term of the plan, current comment 5b(d)(12)(ix)-2 provides that a
creditor may disclose this rate as a specific number (for example, 18
percent) or as a specific amount above the initial rate. If the
creditor states the maximum rate as a specific amount above the initial
rate, the creditor must include a statement that the consumer should
inquire about the rate limitations that are currently available. If an
initial discount is not taken into account in applying maximum rate
limitations, that fact must be disclosed. If separate overall
limitations apply to rate increases resulting from events such as the
exercise of a fixed-rate conversion option or leaving the creditor's
employ, those limitations also must be stated. The current comment
provides that a creditor is not required to disclose in the application
disclosures any legal limits in the nature of usury or rate ceilings
under state or federal statutes or regulations.
The Board proposes to move current comment 5b(d)(12)(ix)-2 to
proposed comment 5b(c)(10)(i)-5 and revise it. Specifically, proposed
comment 5b(c)(10)(i)-5 provides that the maximum APR that may be
imposed under each payment option disclosed in the table over the term
of the plan (including the draw period and any repayment period
provided for in the initial agreement) must be provided. If separate
overall limitations apply to rate increases resulting from events such
as leaving the creditor's employ, those limitations also must be
stated. Limitations would not include legal limits in the nature of
usury or rate ceilings under state or federal statutes or regulations.
The Board would delete as obsolete the guidance in current
5b(d)(12)(ix)-2 related to disclosing the maximum APR as a specific
amount above the initial rate. Under proposed Sec. 226.5b(c)(10), a
creditor must disclose the maximum APR as a specific number.
Current comment 5b(d)(12)(ix)-3 provides that a creditor need not
disclose each periodic or maximum rate limitation that is currently
available. Instead, the creditor may disclose the range of the lowest
and highest periodic and maximum rate limitations that may apply to the
creditor's HELOC plans. Creditors using this alternative must include a
statement that the consumer should inquire about the rate limitations
that are currently available. The Board proposes to delete this comment
as obsolete. Under proposed Sec. 226.5b(c)(10), a creditor would be
required to disclose the periodic limitations and maximum APRs that may
be imposed under each payment option disclosed in the table as part of
the early HELOC disclosures.
Disclosure of the lowest and highest value of the index in the past
15 years. Current Sec. 226.5b(d)(12)(xi), which implements TILA
Section 127A(a)(2)(G), requires a creditor to provide as part of the
application disclosures a historical example, based on a $10,000
extension of credit, illustrating how APRs and payments would have been
affected by index value changes implemented according to the terms of
the plan. 15 U.S.C. 1637a(a)(2)(G). The historical example must be
based on the most recent 15 years of index values (selected for the
same time period each year) and must reflect all significant plan
terms, such as negative amortization, rate carryover, rate discounts,
and rate and payment limitations that would have been affected by the
index movement during the period. For ease of reference, this
SUPPLEMENTARY INFORMATION will refer to this disclosure as the
``historical example table.'' Current comments 5b(d)(12)(xi)-1 through
-10 provide guidance to creditors on how to provide the historical
example table.
For the reasons discussed below, the Board proposes not to require
that a creditor disclose as part of the early HELOC disclosures the
historical example table. Thus, the Board proposes to delete current
Sec. 226.5b(d)(12)(xi) and current comments 5b(d)(12)(xi)-1 through -
10. Instead of requiring a creditor to disclose the historical example
table, the Board proposes to require that a creditor disclose in the
table as part of the early HELOC disclosures the lowest and highest
values of the index used to determine
[[Page 43477]]
the variable rate on the HELOC plan in the past 15 years.
The Board proposes no longer to require a creditor to provide the
historical example table, pursuant to the Board's exception and
exemption authorities under TILA Section 105(a) and 105(f), as
discussed above. The Board's consumer testing of HELOC disclosures
shows that this disclosure may be confusing to consumers, and may not
provide meaningful information to consumers. In consumer testing
conducted by the Board on HELOC disclosures, the Board tested versions
of the application disclosures and the early HELOC disclosures that
contained a historical example table. Many participants misunderstood
the information provided in the historical example table. A large group
of participants did not understand that the information in this table
was based on the actual historical behavior of interest rates; they
instead assumed that the data shown was a hypothetical example of how
interest rates and payments might fluctuate in the future. More
significantly, an even larger group of participants mistakenly thought
that the rate and payment information shown in the historical example
table would apply to the HELOC plan going forward, and that the table
contained information on the exact monthly payments that the
participant would be required to make in the future under the HELOC
plan.
Even after the meaning of the table was explained to participants,
many participants indicated that, because the rates and payment
information in the table were based on what had happened to the
interest rate in the past 15 years, the table did not contain valuable
information that would inform their decision about the HELOC for which
they were applying. These participants did not believe that knowing how
the index had behaved in the past would provide them useful information
to predict how the index might behave in the future. A few participants
indicated that the table did not offer any new information that was not
already communicated in the disclosure, namely that the APR and
payments may vary.
Based on this consumer testing, the Board proposes not to require
that creditors provide the historical example table as part of the
early HELOC disclosures. However, pursuant to the Board's authority
under TILA Section 127A(a)(14) to require additional disclosures for
HELOC plans, the Board proposes to require a creditor to provide in the
table as part of the early HELOC disclosures the range of the value of
the index over a 15-year historical period. 15 U.S.C. 1637a(a)(14).
Although many participants in the consumer testing indicated that the
historical example table did not provide useful information about how
interest rates and payment may change in the future, some participants
did indicate that they found it helpful to know how the index had
behaved in the past, so that they would have some sense about how it
might change in the future. In addition, some participants found the
range of the index useful in determining the likelihood of the APR
reaching the maximum APR allowed under the plan. The Board believes
that the proposed disclosure providing the range of the value of the
index over a 15-year historical period will provide the most important
information from the historical example table in a simple and efficient
way.
The Board solicits comment on the appropriateness of this proposal.
The Board also solicits comment on whether the new proposed disclosure
should show the range of the APR that would have applied to the HELOC
plan over the past 15 years, calculated based on the range of the index
value plus the margin that is currently offered to the consumer, or as
proposed, simply show the index range. For example, assume the index on
the HELOC account is the prime rate and the prime rate varied between
4.25 percent and 10 percent over the last 15 years. In addition, assume
the APR offered to the consumer is calculated as the prime rate plus
1.00 percent. Under the new proposed disclosure in proposed Sec.
226.5b(c)(10)(i)(A)(6), a creditor would be required to disclose that
over the past 15 years, the prime rate had varied between 4.25 percent
and 10 percent. The Board solicits comment on whether the Board should
instead require that a creditor disclose, based on the example above,
that over the past 15 years, the APR on the HELOC plan offered to the
consumer would have varied between 5.25 percent and 11 percent.
Maximum rate payment example. Current Sec. 226.5b(d)(12)(x), which
implements TILA Section 127A(a)(2)(H), provides that a creditor must
provide as part of the application disclosures the minimum periodic
payment required when the maximum APR for each payment option is in
effect for a $10,000 outstanding balance, and a statement of the
earliest date or time the maximum rate may be imposed. 15 U.S.C.
1637a(a)(2)(H). Current comment 5b(d)(12)(x)-1 provides guidance for
creditors on how to provide the maximum rate payment example. Current
comment 5b(d)(12)(x)-2 provides guidance on how a creditor should
calculate the earliest date or time the maximum rate may be imposed. As
discussed above in the section-by-section analysis to proposed Sec.
226.5b(c)(9), the Board proposes to move current Sec. 226.5b(d)(12)(x)
to proposed Sec. 226.5b(c)(9)(iii), and to delete comment
5b(d)(12)(x)-1 as obsolete.
In addition, the Board proposes not to require a creditor to
disclose in the table as part of the early HELOC disclosures a
statement of the earliest date or time the maximum rate may be imposed,
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and 105(f), as discussed above. Based on consumer
testing, the Board believes that this disclosure may not provide
meaningful information to consumers, and that including it in the table
as part of the early HELOC disclosures may distract consumers from more
important information. The Board tested versions of the early HELOC
disclosures which indicated that the maximum rate could be reached as
early as the first month, based on the Board's understanding that this
statement reflects the terms of most HELOC accounts regarding when the
maximum rate could be reached. Participants were asked whether they
found this information useful in deciding whether to open the HELOC
plan being offered. Many participants did not find this statement
useful because they believed it was extremely unlikely that the rate
would actually increase that quickly. The Board also understands that
while theoretically the maximum rate may be imposed during the first
month of the HELOC plan, in practice this has rarely if ever occurred.
Statement that the APR does not include costs other than interest.
Current Sec. 226.5b(d)(12)(ii), which implements TILA Section
127A(a)(2)(A) and (C), provides that a creditor must disclose as part
of the application disclosures that the variable APR does not include
costs other than interest. 15 U.S.C. 1637a(a)(2)(A) and (C). (A
creditor also must make this disclosure with respect to disclosure of
any fixed-rate APR in the application disclosures. See current Sec.
226.5b(d)(6).)
The Board proposes not to require a creditor to disclose in the
table as part of the early HELOC disclosures a statement that the APRs
applicable to the HELOC plan do not include costs other than interest,
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and 105(f), as discussed above. Based on consumer
testing, the Board believes that this disclosure may not provide
meaningful information to consumers,
[[Page 43478]]
and that including it in the table as part of the early HELOC
disclosures may distract consumers from more important information. The
Board tested versions of the early HELOC disclosures indicating that
the APRs included in the table do not include costs other than
interest. The purpose of this requirement is to make clear to consumers
that an APR on a HELOC cannot be directly compared to an APR on a
closed-end loan, which includes most fees. However, several
participants misunderstood this sentence; for example, some incorrectly
thought that they would not be charged any fees. Just as important, no
participants understood the purpose of this statement, or how they
could use the information when applying for a home-equity product.
Different versions of this statement were tested in several rounds to
give it proper context for maximum comprehension, but all attempts were
unsuccessful in communicating to consumer the statement's intended
purpose.
Statement that the consumer should ask about the current index
value, margin, discount or premium, and APR. Current Sec.
226.5b(d)(12)(v), which implements TILA Section 127A(a)(2)(D), provides
that a creditor must disclose as part of the application disclosures a
statement that the consumer should ask about the current index value,
margin, discount or premium, and APR. 15 U.S.C. 127A(a)(2)(D). The
Board proposes not to require a creditor to include this statement in
the table as part of the early HELOC disclosures, pursuant to the
Board's exception and exemption authorities under TILA Section 105(a)
and 105(f), as discussed above. This statement is obsolete for the
early HELOC disclosures. As discussed above, a creditor would be
required to disclose in the table as part of the early HELOC
disclosures the current APRs offered to the consumer (i.e., the current
value of the index plus the margin) as well as the margin, including
any introductory APR (as discussed below). A creditor would not be
allowed to disclose in the table as part of the early HELOC disclosures
the current value of the index, such that the prime rate is currently 4
percent.
Statement that rate information will be provided on or with each
periodic statement. Current Sec. 226.5b(d)(12)(xii), which implements
TILA Section 127A(a)(2)(I), provides that a creditor must disclose as
part of the application disclosures a statement that rate information
will be provided on or with each periodic statement. 15 U.S.C.
1637a(a)(2)(I). The Board proposes not to require a creditor to include
this statement in the table as part of the early HELOC disclosures,
pursuant to the Board's exception and exemption authorities under TILA
Section 105(a) and 105(f), as discussed above. Based on consumer
testing, the Board believes that this disclosure may not provide
meaningful information to consumers, and that including it in the table
as part of the early HELOC disclosures may distract consumers from more
important information. The Board tested versions of the early HELOC
disclosures indicating that monthly statements for the HELOC plan would
tell the consumer each time the rate changes on the plan. Participants
were asked whether they found this information useful in deciding
whether to open the HELOC plan offered. Many participants did not find
this information useful because even in the absence of this statement
they would assume that they would be notified of rate changes on their
monthly statements.
Accuracy of variable rates. Proposed Sec. 226.5b(c)(10)(i)(B)
provides that a variable rate disclosed in the table as part of the
early HELOC disclosures would be considered accurate if it is a rate as
of a specified date and this rate was in effect within the last 30 days
before the disclosures are provided. The Board believes 30 days would
provide sufficient flexibility to creditors and reasonably current
information to consumers.
5b(c)(10)(ii) Introductory Initial Rate
Current Sec. 226.5b(d)(12)(vi), which implements TILA Section
127A(a)(2)(C), provides that if a creditor offers a variable rate on a
HELOC account, a creditor must disclose as part of the application
disclosures, as applicable, a statement that the initial APR is not
based on the index and margin used to make later rate adjustments, and
the period of time the initial rate will be in effect. 15 U.S.C.
1637a(a)(2)(C). The Board proposes to move Sec. 226.5b(d)(12)(vi) to
proposed Sec. 226.5b(c)(10)(ii) and revise it.
Specifically, proposed Sec. 226.5b(c)(10)(ii) provides that if the
initial rate is an introductory rate, a creditor would be required to
disclose in the table as part of the early HELOC disclosures the
introductory rate, and would be required to use the term
``introductory'' or ``intro'' in immediate proximity to the
introductory rate. The creditor also would be required to disclose in
the table the time period during which the introductory rate will
remain in effect. In addition, a creditor would be required to disclose
in the table the rate that would otherwise apply to the plan. Where the
rate that would otherwise apply is variable, the creditor would be
required to disclose the rate based on the applicable index or formula,
and disclose the other variable-rate disclosures required under
proposed Sec. 226.5b(c)(10)(i). See also proposed comment
5b(c)(10)(ii)-3. The Board believes that clearly labeling the
introductory rate as such and disclosing when the introductory rate
will expire will benefit consumers by helping them understand the
temporary nature of this rate.
Proposed comment 5b(c)(10)(ii)-1 clarifies that if a creditor
offers a preferred rate that will increase a specified amount upon the
occurrence of a specified event other than the expiration of a specific
time period, such as the borrower-employee leaving the creditor's
employ, the preferred rate would not be an introductory rate under
proposed Sec. 226.5b(c)(10)(ii), but must be disclosed in accordance
with proposed Sec. 226.5b(c)(10).
Proposed comment 5b(c)(10)(ii)-2 provides guidance on providing the
term ``introductory'' or ``into'' in immediate proximity to the
introductory rate. Specifically, this proposed comment provides that if
the term ``introductory'' is in the same phrase as the introductory
rate, it will be deemed to be in immediate proximity of the listing.
For example, a creditor that uses the phrase ``introductory APR X
percent'' would be deemed to have used the word ``introductory'' within
the same phrase as the rate. In addition, this proposed comment also
provides that if more than one introductory rate may apply to a
particular balance in succeeding periods, the term ``introductory''
need only be used to describe the first introductory rate. For example,
if a creditor offers an introductory rate of 8.99 percent on the plan
for six months, and an introductory rate of 10.99 percent for the
following six months, the term ``introductory'' need only be used to
describe the 8.99 percent rate. This proposed comment also provides a
cross reference to proposed Samples G-14(C) and G-14(E) in Appendix G,
which provides guidance on how to disclose clearly and conspicuously
the expiration date of the introductory rate and the rate that will
apply after the introductory rate expires, if an introductory rate is
disclosed in the table.
5b(c)(11) Fees Imposed by the Creditor and Third Parties To Open the
Plan
Current Sec. 226.5b(d)(7), which implements TILA Section
127A(a)(3), provides that a creditor must disclose as part of the
application disclosures an itemization of any fees imposed by the
[[Page 43479]]
creditor to open, use, or maintain the plan, stated as a dollar amount
or percentage, and when such fees are payable. 15 U.S.C. 1637a(a)(3).
Current Sec. 226.5b(d)(8), which implements TILA Section 127A(a)(4),
provides that a creditor must disclose as part of the application
disclosures a good faith estimate, stated as a single dollar amount or
range, of any fees that may be imposed by persons other than the
creditor to open the plan, as well as a statement that the consumer may
receive, upon request, a good faith itemization of such fees. 15 U.S.C.
1637a(a)(4). In lieu of the statement, the itemization of such fees may
be provided.
Fees imposed by a creditor to maintain and use the plan. As
described above, current Sec. 226.5b(d)(7) requires a creditor to
disclose as part of the application disclosures any fees imposed by the
creditor to maintain and use the HELOC plan. As discussed in more
detail in the section-by-section analysis to proposed Sec.
226.5b(c)(13), the Board proposes to move this part of current Sec.
226.5b(d)(7) to proposed Sec. 226.5b(c)(13) and to revise it.
One-time account-opening fees. As discussed above, with respect to
account-opening fees, current Sec. 226.5b(d)(7) requires a creditor to
disclose in the application disclosures an itemization of any fees
imposed by the creditor to open the HELOC plan, stated as a dollar
amount or percentage. Current Sec. 226.5b(d)(7) does not require a
creditor to disclose the total of one-time fees imposed by the creditor
to open the HELOC plan. Under current Sec. 226.5b(d)(8), however, a
creditor must disclose in the application disclosures a good faith
estimate of the total of fees imposed by third parties to open the
HELOC plan. Under current Sec. 226.5b(d)(8), at a creditor's option,
the creditor may disclose an itemization of third party fees to open a
HELOC plan. Current comment 5b(d)(8)-2 provides guidance to creditors
on how to disclose the total of third party fees and an itemization of
those fees. As discussed in more detail below, the Board proposes to
move these provisions in current Sec. 226.5b(d)(7) and (d)(8) to
proposed Sec. 226.5b(c)(11) and revise them. Current comment 5b(d)(8)-
2 would be deleted as obsolete.
The Board proposes in new Sec. 226.5b(c)(11) to require a creditor
to disclose in the table as part of the early HELOC disclosures the
total of all one-time fees imposed by the creditor and any third
parties to open the plan, stated as a dollar amount. 15 U.S.C. 1604(a).
In addition, under proposed Sec. 226.5b(c)(11), a creditor would be
required to itemize in the table all one-time fees imposed by the
creditor and any third parties to open the plan, stated as a dollar
amount, and when these fees are payable. Proposed comment 5b(c)(11)-5
provides that a creditor would be deemed to have itemized the account-
opening fees clearly and conspicuously if the creditor provides this
information in a bullet format as shown in proposed Samples G-14(C), G-
14(D), and G-14(E) in Appendix G. The Board proposes this rule pursuant
to its authority in TILA Section 105(a) to make adjustments and
exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit,
and pursuant to its authority in TILA Section 127A(a)(14) to require
additional disclosures for HELOC plans. See 15 U.S.C. 1601(a), 1604(a),
and 1637a(a)(14).
The Board believes that requiring a creditor to disclose in the
table the total dollar amount for all one-time fees imposed to open the
HELOC plan and an itemization of those costs, regardless of whether
those fees are charged by the creditor or a third party, will help
consumers better understand the costs of opening a HELOC plan. In the
consumer testing conducted by the Board on HELOC disclosures, all of
the application and early HELOC disclosure forms that participants were
shown included a range of the total of one-time fees that the borrower
would be charged for opening the account. Some forms also provided an
itemization of the one-time fees that would be charged for opening the
account. (The one-time fees shown on the disclosure forms were a loan
origination fee, a loan discount fee, an underwriting fee, and an
appraisal fee). In this consumer testing, participants consistently
said that they preferred to see both the total of one-time account-
opening fees and the itemization of these fees to help them understand
what fees they would be paying to open the HELOC plan.
Current comment 5b(d)(7)-2 provides that charges imposed by the
creditor to open a HELOC plan may be stated as an estimated dollar
amount for each fee, or as a percentage of a typical or representative
amount of credit. Current 5b(d)(8)-3 provides that a creditor in
disclosing the total of account-opening fees imposed by third parties
may provide, based on a typical or representative amount of credit, a
range for such fees or state the dollar amount of such fees. Fees may
be expressed on a unit cost basis, for example, $5 per $1,000 of
credit. The Board proposes to move these comments to Sec.
226.5b(c)(11) and revise them.
Specifically, under proposed Sec. 226.5b(c)(11), a creditor would
be required to disclose the dollar amount of fees that will be imposed
by the creditor or by third parties to open the plan. Concerning the
requirement to itemize the one-time account-opening fees, proposed
Sec. 226.5b(c)(11) allows a creditor to provide a range of these fees,
if the dollar amount of a fee is not known at the time the early HELOC
disclosures are delivered or mailed. Proposed comment 5b(c)(11)-2
provides that if a range is shown, a creditor would be required to
assume, in calculating the highest amount of the fee that the consumer
will borrow the full credit line at account opening. In disclosing the
lowest amount of the fee in the range, a creditor would be required to
disclose the lowest amount of the fee that may be imposed. Regarding
disclosure of the total of one-time account-opening fees, proposed
Sec. 226.5b(c)(11) provides that if the exact total of one-time fees
for account opening is not known at the time the early HELOC
disclosures are delivered or mailed, a creditor must disclose in the
table the highest total of one-time account opening fees possible for
the plan terms with an indication that the one-time account opening
costs may be ``up to'' that amount.
The Board believes that requiring the one-time fees that are
imposed to open the account to be disclosed as a dollar amount, instead
of a percentage of another amount, would aid consumers' understanding
of the account-opening fees and may aid consumers in comparison
shopping for HELOC plans. In consumer testing conducted on credit card
disclosures in relation to the January 2009 Regulation Z Rule, the
Board found that consumers generally understand dollar amounts better
than percentages. As a result, the Board believes that requiring
account opening fees to be disclosed as dollar amounts instead of
percentages of another amount would better enable consumers to
understand the start up-costs of opening a HELOC plan. In addition,
consumers could more easily compare the dollar amount of one-time
account-opening fees on different HELOC plans if all HELOC plans are
required to disclose the dollar amount. If the account-opening fees
were presented as a percentage of another amount, consumers would need
to calculate the dollar amount themselves.
Current comment 5b(d)(7)-1 provides guidance on what types of fees
would be considered fees imposed by the creditor to open the plan
required to be
[[Page 43480]]
disclosed under current Sec. 226.5b(d)(7). Current comment 5b(d)(8)-1
provides guidance on what types of fees would be considered account-
opening fees imposed by third parties required to be disclosed under
current Sec. 226.5b(d)(8). The Board proposes to move these provisions
in current comments 5b(d)(7)-1 and 5b(d)(8)-1 to proposed comment
5b(c)(11)-1 and revise them. Specifically, proposed comment 5b(c)(11)-1
clarifies that proposed Sec. 226.5b(c)(11) only applies to one-time
fees imposed by the creditor or third parties to open the plan. The
fees referred to in proposed Sec. 226.5b(c)(11) would include items
such as application fees, points, appraisal or other property valuation
fees, credit report fees, government agency fees, and attorneys' fees.
This proposed comment makes clear that annual fees or other periodic
fees that may be imposed for the availability of the plan would not be
disclosed under proposed Sec. 226.5b(c)(11), but would be disclosed
under proposed Sec. 226.5b(c)(12).
Current comments 5b(d)(7)-4 and 5b(d)(8)-4 provide that if closing
costs are imposed by the creditor and third parties they must be
disclosed, regardless of whether such costs may be rebated later (for
example, rebated to the extent of any interest paid during the first
year of the plan). The Board proposes to move these comments to
proposed comment 5b(c)(11)-4 and to make technical revisions.
Current comment 5b(d)(8)-1 provides that in cases where property
insurance is required by the creditor, the creditor may disclose as
part of the application disclosures either the amount of the premium or
a statement that property insurance is required. The Board proposes to
delete this comment as obsolete. Under the proposal, proposed Sec.
226.5b(c)(11) provides that a creditor must not disclose in the table
as part of the early HELOC the amount of any property insurance
premiums, even if the creditor requires property insurance. The Board
believes that disclosure of the amount of any required property
insurance premiums is not needed in the table as part of the early
HELOC disclosures. Consumers are likely to have property insurance on
the home prior to obtaining a HELOC account. For example, most
consumers obtaining a HELOC will already have a first mortgage on their
home and will be carrying property insurance on the home as required by
the first mortgage. The Board solicits comment on this aspect of the
proposal.
Current comment 5b(d)(7)-5 provides that a creditor need not use
the terms ``finance charge'' or ``other charge'' in describing the fees
imposed by the creditor under current Sec. 226.5b(d)(7) or those
imposed by third parties under current Sec. 226.5b(d)(8). Under
current Sec. 226.7, a creditor is required to distinguish costs that
are finance charges from other charges on the periodic statement by
requiring finance charges to be labeled as such. Current comment
5b(d)(7)-5 makes clear that a creditor is not required to use these
labels in describing fees disclosed under current Sec. 226.5b(d)(7)
and (d)(8). The Board proposes to delete this comment as obsolete,
because under the proposal, a creditor would no longer be required to
distinguish finance charges from other charges in disclosing costs on
the periodic statement. See the section-by-section analysis to proposed
Sec. 226.7.
5b(c)(12) Fees Imposed by the Creditor for Availability of the Plan
As discussed above, current Sec. 226.5b(d)(7) provides that a
creditor must disclose as part of the application disclosures any fees
imposed by the creditor to maintain or use the HELOC plans. Current
comment 5b(d)(7)-1 provides that fees imposed by the creditor to
maintain or use the HELOC plan include annual fees, transaction fees,
fees to obtain checks to access the plan, and fees imposed for
converting to a repayment phase that is provided for in the original
agreement. Current comment 5b(d)(7)-3 provides that fees not imposed to
use or maintain a plan, such as fees for researching an account,
photocopying, paying late, stopping payment, having a check returned,
exceeding the credit limit, or closing out an account, do not have to
be disclosed under current Sec. 226.5b(d)(7). In addition, credit
report and appraisal fees imposed to investigate whether a condition
permitting a freeze continues to exist--as discussed in the commentary
to current Sec. 226.5b(f)(3)(vi)--are not required to be disclosed
under current Sec. 226.5b(d)(7). The Board proposes to move the
provisions in current Sec. 226.5b(d)(7) relating to disclosing fees
imposed by the creditor to maintain and use the HELOC plan to proposed
Sec. 226.5b(c)(12) and to revise them.. Specifically, proposed Sec.
226.5b(c)(12) requires a creditor to disclose in the early HELOC
disclosures table any annual or other periodic fees that may be imposed
by the creditor for the availability of the plan, including any fee
based on account activity or inactivity; how frequently the fee will be
imposed; and the annualized amount of the fee.
The Board proposes not to require a creditor to disclose in the
table as part of the early HELOC disclosures fees imposed by the
creditor to maintain and use the HELOC plan, except for fees for the
availability of the plan. The Board proposes this rule pursuant to its
authority in TILA Section 105(a) to make adjustments and exceptions to
the requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). The Board believes that requiring a creditor to
disclose in the early HELOC disclosures all fees imposed by the
creditor to maintain and use the HELOC plan, such as transaction fees,
could contribute to ``information overload'' for consumers. In the
consumer testing conducted by the Board on HELOC disclosures,
participants were shown versions of a disclosure table that itemized
account-opening fees, penalty fees and transaction fees. Participants
were asked which of these fees was most important for them to know when
deciding whether to open a HELOC plan. Most participants indicated that
it was most important for them to be provided an itemization of the
account-opening fees in the early HELOC disclosures, so that they could
better understand the costs of opening the HELOC plan.
As noted, the Board also proposes in new Sec. 226.5b(c)(12) to
require a creditor to disclose in the table as part of the early HELOC
disclosures any fees for the availability of the plan. The Board
believes that it is important for consumers to be informed in the early
HELOC disclosures of fees for the availability of the plan, so that
consumers will be aware of these fees as they decide whether to open a
HELOC plan. As discussed in the Background section to this
SUPPLEMENTARY INFORMATION, board research indicates that many HELOC
consumers do not plan to take advances at account opening, but instead
plan to use that HELOC account in emergency cases. The on-going costs
of maintaining the HELOC plan may be of particular importance to these
consumers in deciding whether to open a HELOC plan for these purposes.
Other fees to maintain or use the plan that would currently be
disclosed in the application disclosures under current Sec.
226.5b(d)(7), such as transactions fees, would not be required to be
disclosed in the table as part of the early HELOC disclosures under the
proposal. Nonetheless, as discussed in more detail in the section-by-
section analysis to proposed Sec. 226.5b(c)(14), a creditor would be
required to disclose in the table a statement that that other fees will
[[Page 43481]]
apply and a reference to penalty fees and transaction fees as examples
of those fees, as applicable. In addition, a creditor would be required
to disclose in the table either (1) a statement that the consumer may
receive, upon request, additional information about fees applicable to
the plan, or (2) if the additional information about fees is provided
with the table, a reference where that information is located outside
the table. The Board believes that this approach of highlighting in the
table the fees on the HELOC plan that would be most important to
consumers in deciding whether to open a HELOC plan and allowing
consumers to receive information about additional fees upon request
appropriately informs consumers about important fees applicable to the
HELOC plan in the early HELOC disclosures, without creating
``information overload'' that discourages consumers from reading
disclosures at all, distract them from key information, or prevent
retention and understanding of information.
Current comment 5b(d)(7)-1 provides that a creditor would be
required to disclose in the application disclosures any fees imposed by
the creditor to use or maintain the plan, whether the fees are kept by
the creditor or a third party. For example, if a creditor requires an
annual credit report on the consumer and requires the consumer to pay
this fee to the creditor or directly to the third party, the fee must
be specifically stated in the application disclosures. The Board
proposes to move this comment to proposed comment 5b(c)(12)-2 and
revise it. Specifically, proposed comment 5b(c)(12)-2 clarifies that a
creditor would be required to disclose all fees imposed by the creditor
for the availability of the plan in the table as part of the early
HELOC disclosures, regardless of whether those fees are kept by the
creditor or a third party. For example, if a creditor requires an
annual credit report on the consumer and requires the consumer to pay
this fee to the creditor or directly to the third party, the fee must
be disclosed in the table under.
The Board also proposes to add new comment 5b(c)(12)-1, which would
clarify that fees for the availability of credit required to be
disclosed under proposed Sec. 226.5b(c)(12) would include any fees to
obtain access devices, such as fees to obtain checks or credit cards to
access the plan. For example, a fee to obtain checks or a credit card
on the account would be required to be disclosed in the table as a fee
for issuance or availability under Sec. 226.5b(c)(12). This fee would
be required to be disclosed even if the fee is optional; that is, if
the fee is charged only if the consumer requests checks or a credit
card.
In addition, the Board proposes to add new comment 5b(c)(12)-3 to
clarify that if fees required to be disclosed under proposed Sec.
226.5b(c)(12) are waived or reduced for a limited time, a creditor
would be allowed to disclose, in addition to the required fees, the
introductory fees or the fact of fee waivers in the table as part of
the early HELOC disclosures if the creditor also discloses how long the
reduced fees or waivers will remain in effect.
5b(c)(13) Fees Imposed by the Creditor for Early Termination of the
Plan by the Consumer
Currently, a creditor is not required to disclose in the
application disclosures any fee imposed by the creditor for early
termination of the plan by the consumer. See current comment 5b(d)(7)-
3. Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes to
add new Sec. 226.5b(c)(13) to required a creditor to disclose in the
table as part of the early HELOC disclosures any fee that may be
imposed by the creditor if a consumer terminates the plan prior to its
scheduled maturity. 15 U.S.C. 127a(a)(14). The Board believes that it
is important for consumers to be informed as they decide whether to
open a HELOC plan of early termination fees. This information may be
especially important for consumers who may want to have the option of
refinancing or cancelling the plan at any time. HELOC consumers may
particularly value these options, as most HELOCs are subject to a
variable interest rate.
The Board proposes to add new comment 5b(c)(13)-1 to clarify the
types of fees that would be required to be disclosed under proposed
Sec. 226.5b(c)(13). This proposed comment clarifies that fees such as
penalty or prepayment fees that the creditor imposes if the consumer
terminates the plan prior to its scheduled maturity would be required
to be disclosed under Sec. 226.5b(c)(13). These fees also would
include waived account-opening fees for the plan, if the creditor will
impose those costs on the consumer if the consumer terminates the plan
within a certain amount of time after account opening. In addition, the
proposed comment clarifies that fees that the creditor may impose in
lieu of termination under comment 5b(f)(2)-2 would not be required to
be disclosed under proposed Sec. 226.5b(c)(13). However, fees that are
imposed when the plan expires in accordance with the agreement or that
are associated with collection of the debt if the creditor terminates
the plan, such as attorneys' fees and court costs, would not be
required to be disclosed under proposed Sec. 226.5b(c)(13).
5b(c)(14) Statement About Other Fees
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(11), and (c)(12), the Board proposes not to
require a creditor to disclose in the early HELOC disclosures table all
of the fees that may be imposed on the HELOC plan. Instead, a creditor
would be required to disclose in the table only the following fees: (1)
Fees imposed by the creditor and third parties to open the HELOC plan;
(2) fees imposed by the creditor for availability of the plan; (3) fees
imposed by the creditor if a consumer terminates the plan prior to its
scheduled maturity; and (4) fees imposed by the creditor for required
insurance or debt cancellation or debt suspension coverage. See
proposed Sec. 226.5b(c)(11), (c)(12), (c)(13) and (c)(19).
Nonetheless, pursuant to the Board's authority in TILA Section
127A(a)(14) to require additional disclosures for HELOC plans, the
Board proposes to require a creditor to disclose in the table a
statement that other fees will apply and a reference to penalty fees
and transaction fees as examples of those fees, as applicable. 15
U.S.C. 1637a(a)(14). In addition, a creditor would be required to
disclose in the table either (1) a statement that the consumer may
receive, upon request, additional information about fees applicable to
the plan, or (ii) if the additional information about fees is provided
with the table, a reference to where that information is located
outside the table.
Not all fees applicable to a HELOC plan will be disclosed in the
table as part of the early HELOC disclosures. Thus, to ensure consumer
understanding of fees the Board believes that it is important to notify
consumers that additional fees will apply to the plan, and that
consumers may receive information about certain additional fees upon
request prior to account opening. In consumer testing conducted by the
Board on HELOC disclosures, the Board tested versions of the early
HELOC disclosures that contained a statement notifying consumers of
additional fees and versions of the disclosures forms that did not
contain this statement. Many participants that saw the disclosure forms
that did not contain the statement that other fees may apply
incorrectly assumed that no other fees would be charged.
[[Page 43482]]
The Board proposes to add new comment 5b(c)(14)-1 to require a
creditor in providing additional information about fees to a consumer
upon the consumer's request prior to account opening (or along with the
early HELOC disclosures) to disclose the penalty fees and transaction
fees that are required to be disclosed in the account-opening summary
table under proposed Sec. 226.6(a)(2)(x) through (a)(2)(xiv) and a
statement that other fees may apply. A creditor must use a tabular
format to disclose the additional information about fees that is
provided upon request or provided outside the early HELOC disclosures
table. Under proposed comment 5b(c)-2, a creditor would be required to
provide this additional information about fees as soon as reasonably
possible after the request.
The Board believes that fees applicable to the HELOC plan that
would be most important to consumers in deciding whether to open a
HELOC plan should be emphasized by being placed in the table. In
addition, under the proposal, consumers would be able to obtain quickly
and easily additional information about other fees upon request. The
Board believes that this proposed approach appropriately informs
consumers about important fees applicable to the HELOC plan in the
early HELOC disclosures, without creating ``information overload'' that
can discourage consumers from reading disclosures at all, distract them
from key information, or prevent retention and understanding of
information.
5b(c)(15) Negative Amortization
Current Sec. 226.5b(d)(9), which implements TILA Section
127A(a)(11), provides that if applicable, a creditor must provide as
part of the application disclosures a statement that negative
amortization may occur and that negative amortization increases the
principal balance and reduces the consumer's equity in the dwelling. 15
U.S.C. 1637a(a)(11). The Board proposes to move current Sec.
226.5b(d)(9) to proposed Sec. 226.5b(c)(15) and to make technical
revisions.
Current comment 5b(d)(9)-1 provides that in transactions where the
minimum payment will not or may not be sufficient to cover the interest
that accrues on the outstanding balance, the creditor must disclose
that negative amortization will or may occur. This disclosure is
required whether or not the unpaid interest is added to the outstanding
balance upon which interest is computed. A disclosure is not required
merely because a loan calls for non-amortizing or partially amortizing
payments. The Board proposes to move this comment to proposed comment
5b(c)(15)-1 and revise it. Specifically, proposed comment 5b(c)(15)-1
contains the guidance discussed above. In addition, proposed comment
5b(c)(15)-1 provides that a creditor would be deemed to meet the
requirements of proposed Sec. 226.5b(c)(15) if the creditor provides
the following disclosure, as applicable: ``Your minimum payment may
cover/covers only part of the interest you owe each month and none of
the principal. The unpaid interest will be added to your loan amount,
which over time will increase the total amount you are borrowing and
cause you to lose equity in your home.'' This proposed language
describing negative amortization was developed by the Board through its
consumer testing on closed-end mortgage loans, as discussed in the
proposal issued by the Board on closed-end mortgages published
elsewhere in today's Federal Register. The Board believes that this
proposed language effectively communicates the risks of negative
amortization pursuant to the statutory requirements.
5b(c)(16) Transaction Requirements
Current Sec. 226.5b(d)(10) provides that a creditor must disclose
as part of the application disclosures any limitations on the number of
extensions of credit and the amount of credit that may be obtained
during any time period, as well as any minimum outstanding balance and
minimum draw requirements, stated as dollar amounts or percentages. The
Board proposes to move current Sec. 226.5b(d)(10) to proposed Sec.
226.5b(c)(16) and revise it. Specifically, proposed Sec. 226.5b(c)(16)
provides that a creditor must disclose in the table as part of the
early HELOC disclosures any limitations on the number of extensions of
credit and the amount of credit that may be obtained during any time
period, as well as any minimum outstanding balance and minimum draw
requirements. In addition, consistent with current Sec. 226.5b(d)(10),
proposed Sec. 226.5b(b)(3) provides that the transaction requirements
disclosed under proposed Sec. 226.5b(c)(16) may be disclosed as dollar
amounts or as percentages.
Current comment 5b(d)(10)-1 provides that a limitation on automated
teller machine usage need not be disclosed in the application
disclosures under current Sec. 226.5b(d)(10) unless that is the only
means by which the consumer can obtain funds. The Board proposes to
move this comment to proposed comment 5b(c)(16)-1 without any
revisions.
5b(c)(17) Credit Limit
Currently, a creditor is not required to disclose in the
application disclosures the credit limit that is being offered to the
consumer. Pursuant to the Board's authority in TILA Section 127A(a)(14)
to require additional disclosures for HELOC plans, the Board proposes
in new Sec. 226.5b(c)(17) to require a creditor to disclose in the
table as part of the early HELOC disclosures the creditor limit
applicable to the plan. 15 U.S.C. 1637a(a)(14). As discussed in more
detail in the section-by-section analysis to proposed Sec.
226.5b(b)(1), participants in consumer testing conducted by the Board
on HELOC disclosures indicated that the credit limit was one of the
most important pieces of information that they wanted to know in
deciding whether to open a HELOC plan.
5b(c)(18) Statements About Fixed-Rate and -Term Payment Plans
Current comment 5b(d)(5)(ii)-2 provides that a creditor generally
must disclose in the application disclosures terms that apply to the
fixed-rate and -term payment feature, include the period during which
the feature can be selected, the length of time over which repayment
can occur, any fees imposed for the feature, and the specific rate or a
description of the index and margin that will apply upon exercise of
the feature.
For the reasons discussed in the section-by-section analysis to
proposed Sec. 226.5b(c), the Board proposes that if a HELOC plan
offers both a variable-rate feature and a fixed-rate and -term feature
during the draw period, a creditor generally must not disclose in the
table all the terms applicable to the fixed-rate and -term feature. See
proposed Sec. 226.5b(c). Instead, the Board proposes to require a
creditor offering this payment feature (in addition to a variable-rate
feature) to disclose in the table the following: (1) A statement that
the consumer has the option during the draw period to borrow at a fixed
interest rate; (2) the amount of the credit line that the consumer may
borrow at a fixed interest rate for a fixed term; and (3) as
applicable, either a statement that the consumer may receive, upon
request, further details about the fixed-rate and -term payment
feature, or, if information about the fixed-rate and -term payment
feature is provided with the table, a reference to the location of the
information. See proposed Sec. 226.5b(c)(18). Thus, under the
proposal, a consumer would be notified in the table about the fixed-
rate and -term payment feature, and could request additional
information about
[[Page 43483]]
this payment feature (if a creditor chose not to provide additional
information about this feature outside of the table).
In responding to a consumer's request prior to account opening for
additional information about the fixed-rate and -term feature, a
creditor would be required to provide this additional information as
soon as reasonably possible after the request. See proposed comment
5b(c)-2. The following additional information disclosed about the
fixed-rate and -term payment feature upon request (or outside the early
HELOC disclosures table) would have to include in the form of a table:
(1) information about the APRs and payment terms applicable to the
fixed-rate and -term payment feature, and (2) any fees imposed related
to the use of the fixed-rate and -term payment feature, such as fees to
exercise the fixed-rate and -term payment option or to convert a
balance under a fixed-rate and -term payment feature to a variable-rate
feature under the plan. See proposed comment 5b(c)(18)-2. The Board
believes that the above approach to providing information to consumers
about the fixed-rate and -term feature enables consumers interested in
this feature to obtain additional information about this optional
feature easily and quickly, but does not contribute to ``information
overload'' for consumers in general.
5b(c)(19) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
Currently, creditors are not required to provide any information
about the insurance or debt cancellation or suspension coverage,
whether optional or required, in the application disclosures. If a
creditor requires insurance or debt cancellation or debt suspension
coverage (to the extent permitted by state or other applicable law),
the Board proposes new Sec. 226.5b(c)(19) that would require a
creditor to disclose in the table as part of the early HELOC
disclosures any fee for this coverage. In addition, proposed Sec.
226.5a(b)(19) requires that a creditor also disclose in the table a
cross reference to where the consumer may find more information about
the insurance or debt cancellation or debt suspension coverage, if
additional information is included outside the early HELOC disclosures
table. The Board proposes this rule pursuant to the Board's authority
in TILA Section 127A(a)(14) to require additional disclosures for HELOC
plan. 15 U.S.C. 1637a(a)(14). Proposed Samples G-14(D) and G-14(E)
provide guidance on how to provide the fee information and the cross
reference in the table. If insurance or debt cancellation or suspension
coverage is required to obtain a HELOC, the Board believes that any
fees required for this coverage should be emphasized by being placed in
the table; consumers need to be aware of these fees when deciding
whether to open a HELOC plan, because they will be required to pay the
fee for this coverage every month in order to have the plan.
5b(c)(20) Statement About Asking Questions
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(20) to require a creditor to disclose as part of
the early HELOC disclosures a statement that if the consumer does not
understand any disclosure in the table the consumer should ask
questions. 15 U.S.C. 1637a(a)(14). Under the proposal, a creditor would
be required to provide this disclosure directly below the table
provided as part of the early HELOC disclosures, in a format
substantially similar to any of the applicable tables found in proposed
Samples G-14(C), G-14(D), and G-14(E) in Appendix G. See proposed Sec.
226.5b(b)(2)(iv).
Consumer testing on HELOC and closed-end mortgage disclosures
conducted by the Board showed that many participants educated
themselves about the HELOC and mortgage process through informal
networking with family, friends, and colleagues, while others relied on
the Internet for information. To improve consumers' ability to make
informed decisions about credit, the Board proposes to require a
creditor to disclose that if the consumer does not understand the
disclosures contained in the table as part of the early HELOC
disclosures, the consumer should ask questions.
5b(c)(21) Statement About Board's Web Site
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(21) to require a creditor to provide as part of the
early HELOC disclosures a statement that the consumer may obtain
additional information at the Web site of the Federal Reserve Board,
and a reference to this Web site. Currently, an electronic copy of the
HELOC brochure is available at the Board's Web site at http://www.federalreserve.gov/pubs/equity/homeequity.pdf. The Board plans to
enhance its Web site to further assist consumers in shopping for a
HELOC. Although it is hard to predict how many consumers might use the
Board's Web site, and recognizing that not all consumers have access to
the Internet, the Board believes that this Web site may be helpful to
some consumers as they decide whether to open a HELOC plan. The Board
seeks comment on the content for the Web site.
5b(c)(22) Statement About Refundability of Fees
Pursuant to the Board's authority in TILA Section 127A(a)(14) to
require additional disclosures for HELOC plans, the Board proposes in
new Sec. 226.5b(c)(22) to require a creditor to disclose as part of
the early HELOC disclosures a statement that the consumer may be
entitled to a refund of all fees paid if the consumer decides not to
open the plan and a cross reference to the ``Fees'' section in the
table. Under the proposal, a creditor would be required to disclose
these statements directly below the table, in a format substantially
similar to any of the applicable tables found in proposed G-14(C), G-
14(D) and G-14(E) in Appendix G. See proposed Sec. 226.5b(b)(2)(iv).
As discussed in the section-by-section analysis to proposed Sec.
226.5b(c)(4) and (c)(5), under the proposal, a creditor would be
required to disclose in the early HELOC disclosures table circumstances
in which a consumer could receive a refund of all fees paid if the
consumer decides not open the HELOC plan offered to the consumer. In
particular, a creditor must disclose in the table that a consumer has
the right to receive a refund of all fees paid if the consumer notifies
the creditor that the consumer does not want to open the HELOC plan (1)
for any reasons within three business days after the consumer receives
the early HELOC disclosures; and (2) any time before the HELOC account
is opened if any terms disclosed in the early HELOC disclosures change
(except for the APR). In addition, under the proposal, a creditor would
be required to disclose an indication of which terms disclosed in the
early HELOC disclosures table are subject to change prior to account
opening.
As discussed in the section-by-section to proposed Sec.
226.5b(b)(2), the Board tested with consumers versions of the early
HELOC disclosures with the right to a refund of fees disclosures
located near a statement that terms disclosed in the early HELOC
disclosures are subject to change prior to account opening as one of
the rights to a refund of fees relates to changes in terms offered on
the HELOC prior to account opening.
[[Page 43484]]
The Board also tested other versions of the early HELOC disclosures
with these disclosures in the ``Fees'' section of the table. These
tested disclosure forms also included next to the statement about which
terms in the table may change prior to account opening, a statement
that the consumer may be entitled to a refund of all fees paid if the
consumer decides not to open the plan and a cross reference to the
``Fees'' section in the table provided as part of the early HELOC
disclosures.
The Board found through this testing that participants were more
likely to notice and understand information about the refundability of
fees when it was included in the ``Fees'' section of the table. Thus,
under the proposal, the Board proposes to require that the information
about the refundability of fees be disclosed in the ``Fees'' section of
the table. In addition, the Board proposes in new Sec. 226.5b(c)(22)
to require a creditor to disclose as part of the early HELOC
disclosures a statement that the consumer may be entitled to a refund
of all fees paid if the consumer decides not to open the plan and a
cross reference to the ``Fees'' section in the table provided as part
of the early HELOC disclosures. This statement and cross reference
would be disclosed below the table, grouped together with other global
statements that generally relate to the terms being disclosed in the
table such as an indication of which terms disclosed in the table may
change prior to account opening.
5b(d) Refund of Fees
The proposal would redesignate paragraph 5b(g) as paragraph 5b(d)
and comments 5b(g)-1, -2, -3, -4 as comments 5b(d)-1, -2, -3, and -4,
and revise these provisions. Current paragraph 5b(g), which implements
TILA Section 137(d), requires a creditor to refund fees paid ``in
connection with an application'' if any term required to be disclosed
under current section 226.5b(d) changes (other than a change due to
fluctuations in the index in a variable-rate plan) before the plan is
opened and, as a result of the change, the consumer elects not to open
the plan. See 15 U.S.C. 1647(d). Comment 5b(g)-1 explains that all fees
paid must be refunded, including credit-report fees and appraisal fees,
whether they are paid to the creditor or directly to third parties.
Comment 5b(g)-3 specifies that when a term is changed that was
disclosed as a range (as permitted under Sec. 226.5b(d)) and the
resulting term falls within the disclosed range, the consumer is not
entitled to a refund of fees. Similarly, if the creditor discloses a
third-party fee as an estimate (as permitted under Sec. 226.5b(d)) and
those fees change, the consumer is not entitled to a refund of fees.
Under the proposal, the phrase ``in connection with the
application'' would be deleted from both new Sec. 226.5b(d) and
comment 5b(d)-1. The Board views this phrase as unnecessary to describe
the fees that must be refunded under this paragraph. As indicated in
current comment 5b(g)-1, the Board has long interpreted this phrase,
when modifying the term ``fees'' in both the statute and regulation, to
mean any fees that the consumer has paid to the creditor or a third
party related in any way to obtaining a HELOC with the creditor.
The proposal also would eliminate from the provisions in new Sec.
226.5b(d) and accompanying commentary any references to the consumer's
being entitled to a refund of fees only if the consumer decides not to
obtain a HELOC because of a change in terms. The proposal would instead
provide that a refund is required if a disclosed term changes before
account opening and the consumer decides not to enter into the plan.
Pursuant to the Board's authority in TILA Section 105(a) to make
adjustments to the requirements in TILA necessary to effectuate the
purposes of TILA, the Board proposes to eliminate the requirement that
the consumer's reason for deciding not to enter into the plan must be
that a term has changed. The Board believes that requiring consumers to
prove their intent for deciding not to enter a plan, the initially
disclosed terms of which have changed, and requiring creditors to
discern consumer intent, are not practicable. In addition, the Board
believes that when terms change, most consumers who decide not to enter
into the plan will decide not to do so because of the changed term.
Comment 5b(d)-3 would be revised to reflect that under the
proposal, disclosing a range for the maximum rate would no longer be
permitted in the early HELOC disclosure table, nor would disclosing an
estimate for a third-party account-opening fee, in contrast to the
current rule on third-party fees reflected in current comment 5b(g)-3.
See proposed Sec. 226.5b(c)(10). Disclosing an account-opening fee as
a range, however, would be permitted if the dollar amount of the fee is
not known at the time the disclosures under Sec. 226.5b(b) are
delivered or mailed. See proposed Sec. 226.5b(c)(11).
The proposal also would make conforming changes to reflect re-
numbered provisions in the proposal.
5b(e) Imposition of Nonrefundable Fees
The proposal would redesignate paragraph 5b(h) as paragraph 5b(e)
and comments 5b(h)-1, -2, and -3 as comments 5b(e)-1, -2, and -3, and
would revise these provisions. Current paragraph 5b(h), which
implements TILA Section 137(e), obligates a creditor to refund any fee
imposed within three business days of the consumer receiving the
application disclosures and brochure required under existing Sec.
226.5b if, within that time period, the consumer decides not to enter
into the HELOC agreement. See 15 U.S.C. 1647(e). Comment 5b(h)-1
provides that if the creditor collects a fee after the consumer
receives the application disclosures and the HELOC brochure and before
the expiration of three business days, the creditor must notify the
consumer--clearly and conspicuously and in writing--that the fee is
refundable for three business days. This comment also provides that if
disclosures are mailed to the consumer, a nonrefundable fee may not be
imposed until six business days after mailing, because footnote 10d to
the regulation provides that if the disclosures are mailed to the
consumer, the consumer is considered to have received them three
business days after they are mailed.
Proposed comment 5b(e)-1 retains these requirements, but with
technical changes, including changes to reflect that, under the
proposal, notice of the consumer's right to receive a refund must be
included in the early HELOC disclosure table required under proposed
Sec. 226.5b(b), and may not be provided as an attachment to the early
HELOC disclosures. Further discussion of this requirement is in the
section-by-section analysis of Sec. 226.5b(c)(5). In addition,
footnote 10d is moved into the main text of Sec. 226.5b(e).
Proposed comment 5b(e)-4 provides that, for purposes of Sec.
226.5b(e), the term ``business day'' has the more precise definition
used for rescission and for other purposes, meaning all calendar days
except Sundays and the federal holidays referred to in Sec.
226.2(a)(6). For example, if the creditor were to place the disclosures
in the mail on Thursday, June 4, the disclosures would be considered
received on Monday, June 8. The Board proposes to use the more precise
definition of ``business day'' for determining receipt of disclosures
for purposes of Sec. 226.5b(e) to conform to the Board's rules for
determining receipt of disclosures for other dwelling-secured
transactions under Sec. Sec. 226.19(a)(1)(ii) and 226.31(c), as well
[[Page 43485]]
as to the Board's recently adopted rules under Sec. 226.19(a)(2). See
74 FR 23289 (May 19, 2009).
Under the proposal, the phrase ``in connection with the
application'' would be deleted from new Sec. 226.5b(e). The Board
views this phrase as unnecessary to describe the fees that must be
refunded under this paragraph. As indicated in current comment 5b(g)-1,
the Board has long interpreted this phrase, when modifying the term
``fees'' in both the statute and regulation, to mean any fees that the
consumer has paid to the creditor or a third party related in any way
to obtaining a HELOC with the creditor.
The proposal also would make conforming changes to reflect proposed
disclosure requirements and re-numbered provisions, and to indicate
that ``three days'' means, as indicated in the corresponding regulation
text, ``three business days.''
5b(f) Limitations on Home-Equity Plans
TILA Section 137, implemented in Sec. 226.5b(f), limits the
changes that creditors may make to HELOCs subject to Sec. 226.5b. The
proposal would amend and clarify these limitations by revising Sec.
226.5b and accompanying Official Staff Commentary, and adding a new
Sec. 226.5b(g).
The proposal includes a number of significant changes to the rules
restricting changes that creditors may make to HELOCs subject to Sec.
226.5b. First, the proposal would amend Sec. 226.5b(f)(2)(ii), which
permits creditors to terminate and accelerate a HELOC if ``the consumer
fails to meet the repayment terms of the agreement,'' to prohibit
creditors from terminating and accelerating an account or taking lesser
action permitted under comment 5b(f)(2)-2, unless the consumer has
failed to make a required minimum periodic payment within a specified
time period after the due date for that payment. As discussed in more
detail below, the Board is specifically proposing that account action
under Sec. 226.5b(f)(2)(ii) be prohibited unless the consumer has
failed to make a required minimum periodic payment within 30 days of
the due date. The Board is requesting comment on the appropriateness of
this timeframe, or whether some other time period is more appropriate.
Second, the proposal would amend Sec. 226.5b(f)(2)(iv) to permit
creditors to terminate and accelerate a home-equity plan if a federal
law requires the creditor to do so. Similarly, the proposal would add a
new Sec. 226.5b(f)(3)(vi)(G) to permit creditors to suspend advances
or reduce the credit limit if a federal law requires the creditor to do
so.
Third, in a new comment 5b(f)(3)-3, the proposal would clarify that
Regulation Z's general limitation on changing terms does not prohibit a
creditor from passing on to consumers bona fide and reasonable costs
incurred by the creditor for collection activity after default, to
protect the creditor's interest in the property securing the plan, or
to foreclose on the securing property.
Fourth, the proposal would add to comment 5b(f)(3)(v)-2 an example
of a change that would be considered insignificant under this
provision: a creditor may eliminate a method of accessing a HELOC, such
as by credit card, as long as at least one means of access that was
available at account opening remains available to the consumer on the
original terms.
Finally, the proposal would provide additional guidance and amend
the rules in three major areas related to when a creditor may
temporarily suspend advances on a home-equity plan or reduce the credit
limit: (1) Rules regarding when a creditor may suspend or reduce an
account based on a significant decline in the property value (Sec.
226.5b(f)(3)(vi)(A) and existing comment 5b(f)(3)(vi)-6); (2) rules
regarding when a creditor may suspend or reduce an account based on a
material change in the consumer's financial circumstances (Sec.
226.5b(f)(3)(vi)(B) and existing comment 5b(f)(3)(vi)-7); and (3) rules
regarding reinstatement of accounts that have been suspended or reduced
(proposed Sec. 226.5b(g) and existing comments 5b(f)(3)(vi)-2, -3, and
-4).
5b(f)(2)(ii) Limitations on Action Taken for Failure To Meet the
Repayment Terms
Background
Section 226.5b(f)(2)(ii) permits a creditor to terminate a HELOC
and accelerate the balance if the consumer has ``fail[ed] to meet the
repayment terms of the agreement for any outstanding balance.'' The
corresponding statutory provision reads similarly: ``A creditor may not
unilaterally terminate any account * * * except in the case of * * *
(2) failure by the consumer to meet the repayment terms of the
agreement for any outstanding balance.'' 15 U.S.C. 1647(b)(2). Comment
5b(f)(2)(ii)-1 clarifies that a creditor may terminate and accelerate a
plan under this provision ``only if the consumer actually fails to make
payments.'' Thus, an account may not be terminated for a minor payment
infraction, such as when a consumer sends a payment to the wrong
address. Comment 5b(f)(2)-2 interprets this provision to allow
creditors to take an action short of terminating the plan and
accelerating the balance, such as temporarily or permanently suspending
advances, reducing the credit limit, changing the payment terms, or
requiring the consumer to pay a fee. A creditor may also provide in its
agreement that a higher rate or fee will apply in circumstances under
which it could otherwise terminate the plan and accelerate the balance.
Proposal
The proposal would interpret the statute to mean that creditors may
not, for payment-related reasons, terminate the plan and accelerate the
balance or take certain actions short of termination and acceleration
permitted under comment 5b(f)(2)-2, unless the consumer has failed to
make a required minimum periodic payment within 30 days after the due
date for that payment. The Board is specifically proposing that account
action under Sec. 226.5b(f)(2)(ii) be prohibited unless the consumer
has failed to make a required minimum periodic payment within 30 days
of the due date, and requesting comment on whether this timeframe is
appropriate, or whether some other time period is more appropriate. The
Board proposes this rule pursuant to its authority in TILA Section
105(a) to issue provisions and make adjustments to the requirements of
TILA that are necessary or proper to effectuate the statute's purposes.
See 15 U.S.C. 1604(a).
The Board believes that specifying the type of payment infraction
required to take action under this provision is necessary to effectuate
the purposes of TILA and Congress in enacting the Home Equity Loan Act
(cited above). According to section-by-section clarifications in the
Home Equity Loan Act, this provision specifically ``deals with the
failure of the borrower to actually make payments. It does not
encompass minor transgressions such as inadvertently sending the
payment to the wrong branch.'' \19\ Creditors and consumer groups have
expressed uncertainty about when an account may be terminated or other
action taken under this provision, as well as concerns that creditor
practices in this regard vary widely. In particular, concerns have been
raised about ``hair-
[[Page 43486]]
trigger'' terminations and other actions being taken on accounts due to
minor late payments.\20\ Some have pointed out that the plain language
of this provision--the consumer ``fails to meet the repayment terms of
the agreement''--arguably allows creditors to take an action that seems
disproportionate to the consumer's actions, such as account termination
due to as little as a single-day delinquency.
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\19\ Section-by-Section Clarifications to H.R. 3011, the Home
Equity Loan Consumer Protection Act of 1988, Pub. L. 100-709,
enacted on Nov. 23, 1988 (inserted by Rep. David Price), Congr.
Rec., H4474 (June 20, 1988) (emphasis added).
\20\ Board staff discussions with creditors revealed that
creditors terminate HELOC accounts due to a consumer's ``fail[ure]
to meet the repayment terms of the agreement'' for payment
delinquencies ranging from 16 to 90 days. In addition to creditor
practices, Board staff have also considered court decisions such
Cunningham v. Nat'l City, C.A. 1-08-CV-10936-RGS (Dist. Mass., Jan.
7, 2009), in which the court held that termination of an account was
permitted based on a seven-day delinquency, even though the consumer
paid within the contractual late fee courtesy period. Standard HELOC
agreements reviewed by the Board typically incorporate the
regulatory language allowing a creditor to terminate and accelerate
an account or take certain lesser actions due to a consumer's
``fail[ure] to meet the repayment terms of the agreement,'' without
specifying the number of days late a consumer's payment may be
before the account will be terminated or other action taken under
Sec. 226.5b(f)(2)(ii).
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The Board believes that the proposed interpretation of the relevant
statutory and regulatory provisions better carries out the legislative
intent to protect consumers against (1) creditor practices that are
unexpected and harmful,\21\ and (2) actions based on ``minor'' payment
infractions.\22\ The Board believes, for example, that terminating a
line based on a payment that was late but made within a contractual
late fee ``courtesy'' period is arguably unexpected and harmful; a
consumer may have a reasonable expectation that no penalty will be
imposed for a payment made within a certain number of days after the
due date where a late fee courtesy period has consistently been applied
to an account. In addition, the proposal acknowledges that payments may
be late for reasons out of the consumer's control, such as postal
delays or automated funds disbursement errors. A delinquency threshold
for taking action on the account of more than 30 days would give
consumers time to discover and correct the error. Finally, a consumer
who is more than 30 days delinquent will, in most cases, have missed at
least two due dates--and thus will have wholly failed to make a
payment. See existing comment 5b(f)(2)(ii)-1 (prohibiting termination
and acceleration of an account unless the consumer ``actually fails to
make payments'').\23\
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\21\ See, e.g., Remarks of Rep. St. Germain, Chair, House
Committee on Banking, Finance and Urban Affairs on H.R. 3011, the
Home Equity Loan Consumer Protection Act of 1988, Public Law 100-
709, enacted on Nov. 23, 1988, Congr. Rec., H4471 (June 20, 1988)
(The Home-equity Loan Act was intended to ensure that creditors
could impose ``no hidden fees, no hidden terms * * * on unsuspecting
homeowners''); Remarks of Rep. Schumer on H.R. 3011, Congr. Rec.,
H4475 (June 20, 1988) (``Home-equity loans have several potential
pitfalls if a consumer is not completely aware * * *'').
\22\ Section-by-Section Clarifications to H.R. 3011, the Home
Equity Loan Consumer Protection Act of 1988, Public Law 100-709,
enacted on Nov. 23, 1988 (inserted by Rep. David Price), Congr.
Rec., H4474 (June 20, 1988).
\23\ See also id.
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Overall, the proposal is intended to strike a more equitable
balance between creditors' need to protect themselves against risk
(and, for depositories, to ensure their safety and soundness), and
effective protection of HELOC consumers from constraints on their
credit privileges that do not correspond with reasonable expectations.
Consumer protection would be enhanced by eliminating the opportunity
for hair-trigger terminations and certain lesser actions for nominal
delinquencies. In addition, the Board believes that a consumer would be
more likely to expect serious consequences for a delinquency of more
than 30 days on a debt secured by the consumer's home than on an
unsecured credit card account. These protections arguably offset the
risk to consumers that creditors now terminating lines of credit based
on delinquencies of 30 days or less (or that rarely terminate lines)
will begin terminating accounts based on the proposed over-30-days
delinquency rule.
At the same time, creditors would retain options to protect
themselves from losses prior to a payment becoming more than 30 days
delinquent. Specifically, a creditor could impose late payment fees
specified in the HELOC agreement. Creditors also could temporarily
suspend or reduce accounts for a ``default of a material obligation''
under Sec. 226.5b(f)(3)(vi)(C), as payment obligations are commonly
considered material obligations. In effect, whether a line can be
terminated due to failure to meet a payment obligation as permitted
under TILA depends on the extent of the default (i.e., is a payment
late by more than 30 days?); whereas whether a line can be temporarily
suspended or reduced depends on the nature of the obligation on which
the consumer defaulted (i.e., is the obligation itself ``material''?).
The Board requests comment on whether a failure to make a payment
within 30 days is appropriate or whether some other time period is more
appropriate for permitting action under this provision. In this regard,
the Board notes that the 2009 Credit Card Act (cited above) has
suggested considering a delinquency threshold of more than 60 days.
Specifically, the Credit Card Act adds a new section 171 to TILA (15
U.S.C. 1666j) to prohibit increasing the APR on existing credit card
balances unless the creditor has not received a minimum payment within
60 days after the due date for the payment. See Credit Card Act, Sec.
101(b). However, the Credit Card Act does not require that a consumer
must be 60 or even 30 days late before a creditor may terminate a
credit card account; the Credit Card Act deals with when a credit card
creditor may reprice balances on an account.
The Board also requests comment on whether the Board should
consider any other payment infractions to be sufficient grounds for
termination and acceleration (and permitted lesser actions).
5b(f)(2)(iv) Terminations Required by Federal Law
Existing Sec. 226.5b(f)(2)(iv) permits a depository institution to
terminate and accelerate a HELOC plan if ``compliance with federal law
dealing with credit extended by a depository institution to its
executive officers specifically requires that as a condition of the
plan the credit shall become due and payable on demand.'' The Board
narrowly tailored this additional provision permitting termination in
light of Section 22(g) of the Federal Reserve Act (implemented by
Regulation O, 12 CFR Part 215) and Section 309 of the Federal Deposit
Insurance Corporation Improvement Act. See 57 FR 34676 (August 6,
1992).
The proposal would amend Sec. 226.5b(f)(2)(iv) to permit creditors
to terminate and accelerate home-equity plans if a federal law requires
the creditor to do so, expanding this provision to cover other federal
laws that may require a creditor to terminate and accelerate a plan.
``Federal law'' under this provision is limited to any federal statute,
its implementing regulation, and official interpretations issued by the
regulatory agency with authority to implement such statute and
regulation.
With this revision, the Board intends to prevent the need to issue
separate revisions to Regulation Z to account for any new federal law
requiring creditors to terminate and accelerate plans under particular
circumstances. Further discussion of the reasons for this proposal and
requests for comment are found in the explanation below of a similar
proposal designated as new Sec. 226.5b(3)(vi)(G).
[[Page 43487]]
Regarding this proposed provision, the Board requests comment on
what additional examples of conflicts between Regulation Z's
restrictions on account termination and other laws the Board should
consider, if any. The Board also requests comment on whether the
definition of ``federal law'' should be broadened to include, for
example, an order or directive of a federal agency.
5b(f)(3) Limitations on Changes in Terms
Section 226.5b(f)(3) generally prohibits a creditor from changing
the terms of a HELOC plan after it is opened. Comment 5b(f)(3)-1 states
that, for example, a creditor may not increase any fee or impose a new
fee once the plan has been opened, even if the fee is charged by a
third party. This comment also provides that the change-in-terms
prohibition applies to ``all features of a plan,'' even if the features
are not required to be disclosed under Sec. 226.5b (i.e., on the
application disclosures). Comment 5b(f)(3)-2, however, lists three
charges that may be changed: (1) Increases in taxes; (2) increases in
premiums for property insurance (if excluded from the finance charge
under Sec. 226.4(d)(2)); and (3) increases in premiums for credit
insurance (if excluded from the finance charge under Sec.
226.4(d)(2)).
The proposal would first revise comment 5b(f)(3)-1 to remove the
example of a charge that is not required to be disclosed--specifically,
a late-payment fee. Under the proposal, a late-payment fee would not be
required to be disclosed in the early HELOC disclosure table under
Sec. 226.5b(b) (see proposed Sec. 226.5b(c)(11), (c)(12) and
(c)(13)), but it would be required to be disclosed on the account-
opening table under proposed Sec. 226.6(a)(2)(x), along with several
other types of fees. Further discussion of these proposed rules is
included in the section-by-section analysis for proposed Sec.
226.6(a)(2).
Second, proposed comment 5b(f)(3)-3 clarifies that creditors may
pass on to consumers costs in the limited categories of debt
collection, collateral protection and foreclosure under Regulation Z,
but only if certain conditions are present. First, the costs must
``bona fide and reasonable,'' meaning that the creditor may pass on to
the consumer only costs that the creditor actually incurs in taking
these actions on a particular plan, and that the amount of any costs
passed on to the consumer must be reasonably related to any services
related to debt collection, collateral protection or foreclosure
incurred by the creditor. These costs might include attorneys' fees,
court costs, property repairs, payment of overdue taxes, or paying sums
secured by a lien with priority over the lien securing the HELOC.
Second, the need for the creditor's actions must arise due to the
consumer's default of an obligation under the agreement.
During outreach to prepare this proposal, the Board received
requests to clarify whether creditors may pass on to consumers bona
fide and reasonable costs incurred by the creditor for collection
activity after default, to protect the creditor's interest in the
property securing the plan, and to foreclose on the securing property.
Creditors have expressed uncertainty about whether a creditor may pass
these types of costs on to consumers under Regulation Z. As noted,
Sec. 226.5b(f)(3) prohibits creditors from changing the terms of a
home-equity plan except in specified circumstances. Existing comment
5b(f)(3)-2 lists only three types of fees that are not covered by this
section. Thus, it could be argued that creditors may not pass certain
costs on to consumers unless they disclose in the agreement the
specific fees and amounts associated with actions required for debt
collection, collateral protection and foreclosure. The Board
understands that the specific amount of costs required for a creditor
to collect unpaid amounts, protect its collateral or execute
foreclosure can rarely be known at the outset of a home-equity plan.
Events giving rise to the need for a creditor to take action for debt
collection, collateral protection or foreclosure may occur several
years after the opening of a plan, and the specific actions required
for collateral protection or foreclosure, for example, may vary widely
depending on the circumstances, such as the nature of the consumer's
action or inaction giving rise to the need for the creditor to take
affirmative action protect its collateral, or the rules of the
jurisdiction governing the foreclosure proceeding. The Board recognizes
that for closed-end home-secured credit, creditors have more certainty
than do HELOC creditors that these costs may be passed on to the
consumer without specific upfront disclosure of their amounts, and that
this uncertainty for HELOCs creates compliance challenges.
Also, other sections of the existing commentary reflect the Board's
longstanding recognition that specific disclosure of these items and
the amount of the charge for each may be difficult. For example,
comment 5b(d)(4)-1 (redesignated in the proposal as comment
5b(c)(7)(i)-1) excludes from the requirement to disclose termination
fees at application ``fees associated with collection of the debt, such
as attorneys' fees and court costs.'' In addition, longstanding comment
6(b)-2.ii (incorporated with changes into proposed Sec.
226.6(a)(3)(ii)(B)) excludes from disclosure in the Sec. 226.6
account-opening statement ``[a]mounts payable by a consumer for
collection activity after default; attorney's fees, whether or not
automatically imposed; foreclosure costs; [and] post-judgment interest
rates imposed by law,'' among others. As discussed in more detail in
the section-by-section analysis under proposed Sec. 226.6(a)(3), one
category of ``charges imposed as part of a home-equity plan'' would be
``charges resulting from the consumer's failure to use the plan as
agreed, except amounts payable for collection activity after default;
costs for protection of the creditor's interest in the collateral for
the plan due to default; attorney's fees whether or not automatically
imposed; foreclosure costs; and post-judgment interest rates imposed by
law'' (emphasis added). Proposed Sec. 226.6(a)(3) generally parallels
Sec. 226.6(b)(3)(ii)(B) applicable to open-end (not home-secured)
plans finalized in the January 2009 Regulation Z Rule and incorporates,
as noted, longstanding comment 6(b)-2.ii.
The Board is mindful of concerns that consumers may be charged a
wide array of fees upon default without adequate notice or explanation.
For these reasons, the Board requests comment on the appropriateness of
this proposed clarification. The Board also requests comment on
whether, if the proposal is adopted, the Board should clarify
requirements regarding disclosure of these costs in the initial
agreement beyond stating that specific amounts need not be disclosed.
For example, would it be sufficient for the creditor to disclose simply
the possibility that costs under the three categories contemplated in
the proposal--debt collection, collateral protection and foreclosure
upon default--may be charged? Or should the creditor be required to
itemize in whole or in part the types of costs under each category that
could be charged?
5b(f)(3)(i) Changes Provided for in Agreement
Section 226.5b(f)(3)(i) provides exceptions from the general
prohibition on changes in terms of home-equity plans. One of these
``exceptions'' is that a creditor may provide in the initial agreement
that a specified change will take place if a specified event occurs.
The section gives an example that the agreement may provide that the
APR may increase by a specified amount if the consumer leaves the
creditor's
[[Page 43488]]
employment. Comment 5b(f)(3)(i)-1 clarifies that both the triggering
event and the resulting change in terms must be stated in the agreement
with specificity. The comment also restates the employee preferred-rate
example, and gives other examples, including a stepped-rate provision
in the agreement, under which specified changes in the rate may take
place after specified periods of time. This section and accompanying
comment are consistent with the general principle stated in comment
5b(f)(1)-3 that rate changes specifically set forth in the agreement
are not prohibited.
The Board proposes to revise comment 5b(f)(3)(i)-1 to clarify that
rate increases are also permissible upon the occurrence of special
circumstances other than those set forth in the existing comment, as
long as they are specifically set forth in the agreement and do not
conflict with other substantive limitations on rate changes in the
regulation. The Board intends this clarification to provide consistency
between comment 5b(f)(1)-3 and comment 5b(f)(3)(i)-1. The proposal also
would limit the amount by which a rate could be increased once
circumstances qualifying the consumer for a preferred rate no longer
apply. Specifically, a creditor could not raise the rate to be higher
than it would have been had the consumer never qualified for a
preferred rate. If a preferred rate of five percent is available to a
consumer who is an employee of the creditor, for example, and the rate
applicable if the consumer were not a creditor employee were seven
percent, the creditor could not raise the rate above seven percent once
the consumer is no longer the creditor's employee. The Board believes
that such an increased rate would constitute a penalty rate imposed for
reasons not permitted under Regulation Z. See Sec. 226.5b(f)(2) and
comment 5b(f)(2)-2; see also 15 U.S.C. Sec. 1647(a); Sec.
226.5b(f)(1).
The revised comment would clarify that the creditor could not
impose a penalty rate for a reason other than those specified in Sec.
226.5b(f)(2) (allowing termination and acceleration and certain lesser
actions only under particular circumstances). The Board believes that
permitting agreements to provide for the application of penalty rates
upon the occurrence of any triggering event would be inconsistent with
the restrictions on rate increases under the statute and regulation.
See 15 U.S.C. Sec. 1647(a); Sec. 226.5b(f)(1). Thus, the proposed
comment would state that the creditor would be permitted to increase
the rate to a penalty rate level only if the triggering event is a
circumstance that would permit the rate to be increased under the
commentary to Sec. 226.5b(f)(2), such as fraud or material
misrepresentation by the consumer (Sec. 226.5b(f)(2)(i)), failure to
make a required payment within 30 days of the due date for that payment
(proposed Sec. 226.5b(f)(2)(ii)), or action or inaction by the
consumer that adversely affects the creditor's security interest for
the plan (Sec. 226.5b(f)(2)(iii)). The Board believes, however, that a
rate increased from a preferred rate to the rate available to consumers
generally, when the condition for the preferred rate is no longer met,
would be consistent with the statutory provision. A consumer who has a
preferred rate is likely to be aware of the conditions for the rate,
and thus if the conditions are no longer met, the rate increase would
not come as an undue surprise.
5b(f)(3)(iv) Beneficial Changes
Section 226.5b(f)(3)(iv) permits a creditor to change a term of a
home-equity plan if the change ``will unequivocally benefit the
consumer throughout the remainder of the plan.'' Comment 5b(f)(3)(iv)-1
gives several examples of beneficial changes, including a temporary
reduction in the rate or fees charged during the plan. In this case,
however, the comment indicates that a creditor ``may'' be required to
give a change-in-terms notice required under Sec. 226.9(c) (see
proposed Sec. 226.9(c)(1)) when the rate or fees return to their
original level.
The proposal would clarify in comment 5b(f)(3)(iv)-1 that a change-
in-terms notice ``would,'' rather than ``may,'' be required to be
provided to the consumer under Sec. 226.9(c) (proposed Sec.
226.9(c)(1)) when the temporarily reduced rate or fees are returned to
their original level, if these reductions and subsequent increases were
not disclosed in the account agreement. The revised comment also would
clarify that including notice of the increased rate or fee with the
notice to the consumer that the rate or fee is being reduced would
constitute appropriate notice of the increase, as long as this notice
is provided 45 days before the effective date of the increase.
Comment 9(c)(1)(ii)-2 (redesignated in the proposal as comment
9(c)(1)(iv)-2) states that a creditor may offer temporary reductions in
finance charges without giving notice when the charges return to their
original level--as long as this feature is disclosed in the account-
opening disclosures required under Sec. 226.6 (including an
explanation of the terms upon resumption).\24\ The ``beneficial
changes'' provision, however, permits the creditor temporarily to
reduce finance charges such as rates and fees without disclosing these
possible reductions in the account agreement (assuming the change is
``unequivocally'' beneficial). When a creditor relies on this provision
to raise the rate or fees after the reduction period has ended,
however, the Board believes that the consumer should be given notice of
when these charges will return to their original level in accordance
with the proposed 45 days advance notice rule under proposed Sec.
226.9(c)(1). This would ensure that the consumer is given sufficient
notice of the change to make any financial adjustments necessary.
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\24\ This provision also states that temporary reductions in
payments disclosed in the account-opening statement are subject to
the notice exemption. See comment 9(c)(1)(ii)-2 (proposed comment
9(c)(1)(iv)-2). Temporary payment reductions might also be
considered beneficial changes permitted under Sec.
226.5b(f)(3)(iv). See comment 5b(f)(3)(iv)-1. However, in the
Supplementary Information to the final rule implementing Sec.
226.5b(f)(3)(iv), the Board noted that ``reducing the amount of the
minimum payment would not be unequivocally beneficial since it may
result in less principal being repaid over the term of the plan and
may result in a higher total amount of finance charges.'' 54 FR 3063
(Jan. 23, 1989).
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5b(f)(3)(v) Insignificant Changes
Background
Section 226.5b(f)(3)(v) permits a creditor to make
``insignificant'' changes to a home-equity plan's terms. Existing
comment 5b(f)(3)(v)-1 explains that this provision is intended to
``accommodate[] operational and similar problems, such as changing the
address of the creditor for purposes of sending payments.'' Under this
comment, a creditor may not change a term such as a late-payment fee.
Comment 5b(f)(3)(v)-2 gives several examples of changes in terms
considered ``insignificant.'' These include ``minor changes'' to the
billing cycle date, the payment-due date, and the day of the month on
which index values are measured; changes to the creditor's rounding
practices for the APR; and changes to the balance computation method
used. The comment also provides that these changes will not in all
cases be considered ``insignificant.'' For example, a change to the
payment-due date would be insignificant only if this change would not
diminish the grace period, if any, during which finance charges and
late fees are not applied to new transactions. A change in the
creditor's rounding practices for disclosing the APR would be
[[Page 43489]]
insignificant only if the change is within the tolerances prescribed by
Sec. 226.14(a). A change to the balance computation method would be
insignificant only if any resulting difference in the finance charge
paid by the consumer is ``insignificant.''
A number of creditors have expressed concerns to the Board about
difficulties arising when the servicing of a HELOC is transferred and
the new servicer's platform is not programmed to allow for previously
available terms. Creditors are concerned that changing the terms of a
HELOC in this circumstance may not be permitted due to Sec.
226.5b(f)(3)'s limitations on term changes. Creditors have reported
that, as a result, they sometimes have to use multiple servicers or
servicing systems to support all the terms of the various HELOCs they
acquire. These servicers and servicing systems may be of widely varying
quality, which could mean that consumers do not receive optimal service
on their HELOCs. Some creditors have reported that a portfolio
acquisition may not occur at all if the acquirer's servicing system
cannot support the terms of the HELOCs offered, and that this may also
harm consumers if, for example, the proposed acquisition was
necessitated in part by challenges facing the current servicer.
Differences between servicing systems cited by creditors may impact,
among other terms, rate indices, minimum payment and late fee
calculations, or the availability of certain payment options or access
devices such as credit cards.
Proposal
The Board proposes to add to comment 5b(f)(3)(v)-2 an example of a
change that would be considered insignificant under this provision: a
creditor may eliminate a method of accessing the line, such as a credit
card, as long as at least one means of access that was available at
account opening remains available to the consumer on the original
terms. The Board also proposes to clarify that changes to the original
terms on which a means of access was originally available--such as any
fees for using the access method--would not be considered
insignificant, but might be permitted as ``beneficial'' changes under
Sec. 226.5b(f)(3)(iv) if the change met the requirements of comment
5b(f)(3)(iv)-1.
The Board believes that a general rule permitting changes in terms
due to servicing transfers would not sufficiently protect consumers,
and thus would undermine the purpose of the change-in-terms
restrictions mandated by TILA. Such a rule would allow creditors to
change terms as a result of a servicer change that are, in practical
effect, significant. Changes to minimum payment calculations, for
example, could increase the overall costs to the consumer of the HELOC,
or materially increase the consumer's payments in the short or long
term. Changes to late fee calculations could be confusing to consumers
and cause undue surprise related to the amount or timing of the late-
payment fee; in addition, longstanding Board policy prohibits changing
fees charged for late payments. See comment 5b(f)(3)(v)-1.
The Board also considered setting a general standard for changes
that would be considered insignificant, such as allowing changes to be
deemed insignificant that result in the same or substantially similar
payments (including periodic payments and the total of payments),
rates, fees, and overall loan costs. One concern about establishing a
general standard is that confusion among creditors and consumers, and
possibly increased litigation, may result, particularly concerning the
meaning of terms such as ``substantially similar.'' The Board requests
comment on whether setting a general standard for term changes that
would be considered insignificant is desirable. In this regard, the
Board also requests comment on whether prescribing specific tolerances
for resulting payments, costs, and fees would be helpful, and what
appropriate tolerances might be.
Servicing transfers, while sometimes beneficial to consumers, are
neither initiated nor controlled by consumers. Thus, the Board believes
that consumers should not in general be subjected to changes in their
HELOC terms when their servicing is transferred. The current regulation
provides several exceptions allowing creditors to change HELOC terms in
keeping with the consumer protection purpose of TILA and Regulation Z--
such as changes by written agreement (Sec. 226.5b(f) (3)(iii)),
beneficial changes (Sec. 226.5b(f)(3)(iv)), and insignificant changes
(Sec. 226.5b(f)(3)(v)). Regarding insignificant changes, current
comment 5b(f)(3)(v)-2, as noted, clarifies in its examples that, in
effect, a change cannot be considered insignificant if it diminishes or
eliminates a financial benefit to the consumer, such as a grace period,
or if it causes the consumer to pay a finance charge that is more than
nominally higher than the finance charge that would have applied under
the original terms.
Rather than make a broad revision such as permitting all term
changes related to servicing transfers or setting a general standard
for determining whether a change in terms is ``insignificant,'' the
Board is proposing to clarify that an access device such as a credit
card may be eliminated as long as previously available access devices
remain available. Creditors indicated that significant problems can
arise where credit card access, for example, was available on the plan
but a new servicer cannot support this; the creditor may be unable to
transfer the servicing or may have to make individual arrangements with
each consumer. The Board requests comment on the appropriateness of
this additional example of an insignificant change. In addition, the
Board requests comment on whether this example, if adopted, should be
modified, broadened, or narrowed.
5b(f)(3)(vi) Temporary Suspension of Credit or Reduction of Credit
Limit
Introduction
Section 226.5b(f)(3)(vi) lists several circumstances under which a
creditor may temporarily suspend advances on a home-equity plan or
reduce the credit limit. As discussed below, the Board proposes
revisions to this section in three major areas: (1) Rules regarding
when a creditor may suspend or reduce an account based on a significant
decline in the property value (Sec. 226.5b(f)(3)(vi)(A) and existing
comment 5b(f)(3)(vi)-6); (2) rules regarding when a creditor may
suspend or reduce an account based on a material change in the
consumer's financial circumstances (Sec. 226.5b(f)(3)(vi)(B) and
existing comment 5b(f)(3)(vi)-7); and (3) rules regarding reinstatement
of accounts that have been suspended or reduced (existing comments
5b(f)(3)(vi)-2, -3, and -4). As also discussed below, the proposal
would permit a creditor to suspend or reduce an account temporarily if
required to do so by federal law. Certain technical amendments are
proposed to Sec. 226.5b(f) and accompanying commentary as well.
Changes and Requests for Comment Related to Sec. 226.5b(f)(3)(vi)
Generally
No changes are proposed to existing comment 5b(f)(3)(vi)-1, which
provides that a creditor may temporarily suspend advances on an account
or reduce the credit limit only under circumstances specified in Sec.
226.5b(f)(3)(vi), Sec. 226.5b(f)(3)(i) when the maximum annual
percentage is reached, or Sec. 226.5b(f)(2), permitting suspension of
advances or reduction of the credit limit in lieu of terminating and
accelerating the account. See comment 5b(f)(2)-2. The Board requests
comment, however,
[[Page 43490]]
on the portion of this comment providing that the creditor's right to
reduce the credit limit does not permit reducing the limit below the
amount of the outstanding balance if this would require the consumer to
make a higher payment. Specifically, the Board requests whether other
limitations on the amount by which a home-equity line may be reduced
may be appropriate. For example, should the amount by which a credit
line may be reduced for a significant decline in the property value
under Sec. 226.5b(f)(3)(vi)(A) (discussed below) be limited to: (1) No
more than the dollar amount of the property value decline; (2) no more
than the amount needed to restore the creditor's equity cushion at
origination (and whether, in this case, the relevant equity cushion
should be the dollar amount or the percentage of the home value not
encumbered by debt); or (3) some other measure? A related request for
comment is whether a creditor should be prohibited from temporarily
suspending advances on the line until, for example, the property value
declines by the full amount of the credit line.
The proposal would redesignate comment 5b(f)(3)(vi)-5 as comment
5b(f)(3)(vi)-2 and make certain technical revisions. Current comment
5b(f)(3)(vi)-5 permits a creditor to honor a specific request by a
consumer to suspend credit privileges. If two or more consumers are
obligated under a plan and each can take advances, comment
5b(f)(3)(vi)-5 permits creditors to provide that any of the consumers
may direct the creditor not to make further advances. This comment also
permits a creditor to require that all persons obligated under a home-
equity plan request reinstatement.
Proposed comment 5b(f)(3)(vi)-2 would add that consumers may
request not only suspended advances but reduction of the credit limit.
It also clarifies that when a consumer later requests reinstatement,
but a condition permitting suspension or reduction exists (under
Sec. Sec. 226.5b(f)(2) or (f)(3)(i) or (f)(3)(vi)), a creditor that
therefore does not re-open the plan must provide the disclosure of the
specific reasons for the action taken under Sec. 226.9(j)(1) (for
temporary suspensions and reductions under Sec. Sec. 226.5b(f)(3)(i)
or (f)(3)(vi)) or (j)(3) (for termination or permitted lesser actions
under Sec. 226.5b(f)(2)), as applicable. Concerns were expressed to
the Board during outreach for this proposal that under some
circumstances, a person with an ownership interest in the property
securing the line, but who is not obligated on the plan, may wish to
request suspension of advances. The Board has not proposed a change to
this provision to address these concerns, but invites comment on the
issue.
Under longstanding Board policy, rate changes for reasons
permitting suspension of advances or credit limit reductions under
Sec. 226.5b(f)(3)(i) and (f)(3)(vi) have been prohibited. See comment
5b(f)(3)(i)-2. Based on issues raised during the Board's outreach to
prepare this proposal, the Board also requests comment on whether and
under what circumstances it might be appropriate for Regulation Z to
permit actions other than temporary suspension of advances or credit
limit reductions under Sec. 226.5b(f)(3)(i) and (f)(3)(vi).
Finally, as discussed in more detail under the section-by-section
analysis for proposed Sec. 226.5b(g), the proposal moves comments
5b(f)(3)(vi)-2, -3, and -4 regarding reinstatement of accounts to
proposed Sec. 226.5b(g) and accompanying commentary, and revises them.
5b(f)(3)(vi)(A) Suspensions and Credit Limit Reductions Based on a
Significant Decline in the Property Value
Background
Section 226.5b(f)(3)(vi)(A), which implements TILA Section
137(c)(2)(B), permits a creditor temporarily to suspend advances or
reduce a credit line on a HELOC if ``the value of the dwelling that
secures the plan declines significantly below the dwelling's appraised
value for purposes of the plan.'' 15 U.S.C. 1647(c)(2)(B). Comment
226.5b(f)(3)(vi)-6 states that whether a decline in value is
significant under this provision ``will vary according to individual
circumstances.'' The comment goes on to provide a ``safe harbor''
standard for determining whether a decline is significant.
Specifically, a decline in value would be considered significant if it
results in the initial difference between the credit limit and the
available equity (the ``equity cushion'') diminishing by 50 percent or
more.
Concerns have been expressed to the Board that the existing safe
harbor may not be a viable standard for the higher combined loan-to-
value (CLTV) HELOCs made in recent years. For loans nearing or
exceeding 100 percent CLTV when originated, for example, a decline in
value of a few dollars could result in more than a 50 percent decline
in the creditor's equity cushion because the equity cushion was zero or
close to zero at origination. For these higher CLTV loans in
particular, creditors have indicated uncertainty about how to determine
whether a decline in value is ``significant.'' For their part, consumer
advocates have expressed concerns that the lack of guidance on the
proper application of the safe harbor gives creditors too much
authority to take action based on nominal declines in value. Finally,
noting that appraisals are not required to take action under this
provision (see comment 5b(f)(3)(vi)-6), creditors have also asked the
Board for guidance on appropriate property valuation methods for
assessing property values under this provision.
Proposal
The proposal would eliminate references to the ``appraised'' value
in both the regulation and commentary, to reflect that appraisals are
not required to originate many HELOCs,\25\ nor are they required to
establish a basis for taking action under this provision. See existing
comment 5b(f)(3)(vi)-6. Beyond this technical change, the proposal
would revise the commentary interpreting Sec. 226.5b(f)(3)(vi)(A) in
two principal ways. First, the commentary would delineate two ``safe
harbors'' on which creditors could rely to determine that a decline in
property value is ``significant'' under this section. Second, the
commentary would provide additional guidance regarding the appropriate
valuation tools for creditors to use in valuing property under this
section.
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\25\ See, e.g., Office of the Comptroller of the Currency, Board
of Governors of the Federal Reserve System, Federal Deposit
Insurance Corporation, Office of Thrift Supervision, ``Interagency
Appraisal and Evaluation Guidelines,'' SR Letter 94-55 (Oct. 28,
1994); see also 12 CFR 225.63 (FRB); 12 CFR 34.43 (OCC); 12 CFR
323.3 (FDIC); 12 CFR 564.3 (OTS). ``Appraisal'' is defined in
federal banking agency regulations relating to appraisal standards
as ``a written statement independently and impartially prepared by a
qualified appraiser setting forth an opinion as to the market value
of an adequately described property as of a specific date(s),
supported by the presentation and analysis of relevant market
information.'' 12 CFR 225.62(a) (FRB); 12 CFR 34.42(a) (OCC); 12 CFR
323.2(a) (FDIC); 12 CFR 564.2(a) (OTS).
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Proposed comment 5b(f)(3)(vi)-4 confirms existing guidance stating
that whether a decline is ``significant'' under Sec.
226.5b(f)(3)(vi)(A) depends on the individual circumstances of a
particular HELOC secured by a property whose value has declined. Thus,
in all cases the creditor must make an individualized assessment of
whether a property value decline is significant, and may not solely
consider general property value trends.
Safe harbors. To facilitate compliance, the Board proposes two
standards under which a property value decline would be deemed
significant under this section.
[[Page 43491]]
First, for plans with a CLTV at origination of 90 percent
or higher, a five percent reduction in the property value on which the
HELOC terms were based would constitute a significant decline in value
for purposes of Sec. 226.5b(f)(3)(vi)(A).
Second, for plans with a CLTV at origination of under 90
percent, the Board proposes to retain the existing safe harbor, under
which a decline in the value of the property securing the plan is
significant if, as a result of the decline, the initial difference
between the credit limit and the available equity (based on the
property's value for purposes of the plan) is reduced by 50 percent.
Five percent decline for HELOCs with a CLTV at origination of 90
percent or higher. The current commentary allows creditors to assume
that a decline in property value is ``significant'' if the decline
results in a 50 percent decline in the creditor's equity cushion. See
comment 5b(f)(3)(vi)-6. The Board proposes to modify this ``safe
harbor'' for loans with a CLTV at origination of 90 percent or higher:
For these loans, the creditor could assume that a decline in the
property value is significant if the property value declines at least 5
percent from its value when the HELOC was originated.
The Board proposes this new safe harbor for several reasons. First,
the current safe harbor, which allows action on a HELOC when the
creditor's equity cushion falls by 50 percent, establishes an
inappropriate metric for measuring whether a value decline on higher
CLTV loans is ``significant.'' As worded, this provision arguably
permits action based on nominal property value declines. Specifically,
the statute permits suspension of advances or reduction of the credit
limit when the value of property securing the HELOC ``is significantly
less than'' the value of the property when the HELOC was originated. 15
U.S.C. 1647(c)(2)(B). The Board's proposal would interpret this
statutory language to mean that, at minimum, the actual decline in
value must be more than nominal. The 5 percent safe harbor thus is
intended to protect consumers with higher CLTV HELOCs from having their
lines suspended or reduced based on property value declines that are
only slightly less than the value of the property at origination.
Second, the new proposed safe harbor standard would be consistent
with the existing safe harbor. Arithmetically, a five percent decline
on loans with an originating CLTV of 90 percent or higher results in at
least a 50 percent decline in the equity cushion. By contrast, a five
percent property value decline on loans with an originating CLTV of
under 90 percent would not reduce the creditor's equity cushion by 50
percent.
Third, the proposed CLTV threshold of 90 percent or higher for
applying a five percent value decline safe harbor would be consistent
with a CLTV threshold already established by the Board. Specifically,
Board risk management guidance defines a ``high [C]LTV loan'' \26\
generally as a loan with a CLTV of 90 percent or higher, unless the
loan has credit enhancements such as mortgage insurance to mitigate the
risk of loss.\27\ Research validates that loans in this category have a
higher probability of default and yield greater losses upon default
than loans of lower CLTVs.\28\
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\26\ Relevant guidance uses the term ``LTV'' (loan-to-value
ratio) to mean what is often referred to as ``CLTV'' (combined loan-
to-value ratio); in other words, all liens on the property are
considered: ``[A] high LTV residential real estate loan is defined
as any loan, line of credit, or combination of credits secured by
liens on or interests in owner-occupied 1- to 4-family residential
property that equals or exceeds 90 percent of the real estate's
appraised value, unless the loan has appropriate credit support.''
Office of the Comptroller of the Currency, Board of Governors of the
Federal Reserve System, Federal Deposit Insurance Corporation,
Office of Thrift Supervision, National Credit Union Administration,
``Interagency Guidance on High LTV Residential Real Estate
Lending,'' SR Letter 99-26 (Oct. 12, 1999) (emphasis added).
\27\ 12 CFR part 208, subpart E, app. C (providing that, if a
loan's LTV is equal to or exceeds 90 percent, the creditor must add
other credit enhancements (such as mortgage insurance) or the loan
will be considered to exceed the supervisory LTV ratios and be
deemed a ``high LTV loan,'' to which additional rules apply). See
also Board of Governors of the Federal Reserve System, SR Letter 99-
26 (Oct. 12, 1999).
\28\ See, e.g., Kristopher Gerardi, Federal Reserve Bank of
Atlanta, Andreas Lehnert and Shane M. Sherlund, Board of Governors
of the Federal Reserve System, and Paul Willen, Federal Reserve Bank
of Boston, ``Making Sense of the Subprime Crisis,'' Brookings Papers
on Economic Activity (Fall 2008). See also, Min Qi and Xiaolong
Yang, Office of the Comptroller of the Currency, ``Loss Given
Default of High Loan-to-Value Residential Mortgages,'' Economics and
Policy Analysis Working Paper 2007-4 (August 2007).
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Retention of existing safe harbor for HELOCs with a CLTV at
origination of lower than 90 percent. For loans with an originating
CLTV of less than 90 percent, the Board proposes to retain the existing
the safe harbor, under which a value decline is significant if the
decline results in the creditor's equity cushion contracting by 50
percent. Comment 5b(f)(3)(vi)-4 clarifies that in determining whether a
decline results in a 50 percent equity cushion reduction, the creditor
may, but does not have to, consider any changes in available equity
based on the status of the first mortgage.
The Board proposes to retain the existing safe harbor for several
reasons. First, no parties during Board outreach to prepare this
proposal objected to the general principal that a property value
decline resulting in a 50 percent reduction of the equity cushion can
reasonably be considered ``significant'' under this provision.
Second, applying this safe harbor to loans with CLTVs of under 90
percent does not depart significantly from the assumption on which the
original safe harbor example was based. See comment Sec.
226.5b(f)(3)(vi)-6. The commentary illustrates the existing safe harbor
with a HELOC at a starting CLTV of 80 percent; thus, the illustration
indicates that a 50 percent equity cushion reduction would be
significant for loans originated with a CLTV of 80 percent. The
proposal clarifies that a property value decline resulting in a 50
percent equity cushion reduction is significant for loans with a CLTV
of only somewhat higher than 80 percent--under 90 percent.
Finally, there is an arithmetical basis for applying the existing
safe harbor, rather than the proposed flat five percent decline safe
harbor, to HELOCs with an originating CLTV of under 90 percent: a five
percent decline in the value of the property for lines with a starting
CLTV lower than 90 percent would not yield an equity cushion decline of
50 percent or more.
Among other alternatives, the Board considered proposing a safe
harbor that applied a flat percentage property value decline to all
HELOCs, regardless of the originating CLTV, but determined that
defining an single metric appropriate for all loans was not possible. A
safe harbor of a 10 percent decline, for example, may impair creditors'
flexibility to take action where reasonable arguments could be made, as
for higher CLTV loans such those discussed above, that adequate risk
mitigation requires action based on a lesser decline. At the same time,
a 10 percent decline may be inappropriate for loans with lower CLTVs,
such as 50 percent. For these loans, a 10 percent property value
decline would still leave the creditor with a significant equity
cushion. By contrast, even on lower CLTV loans, the current safe harbor
of a 50 percent reduction in the creditor's equity cushion might
reasonably be deemed a sufficient change in the creditor's original
risk level to justify action on the line, such as temporarily reducing
the credit limit.
Significant declines outside of the safe harbors. The Board
recognizes that not all property value declines that might reasonably
be considered ``significant'' for taking action under this provision
will fall into one of the two safe harbors. Thus, the Board
[[Page 43492]]
requests comment on whether and what guidance regarding other factors
that creditors might consider in determining whether a decline is
significant is desirable. Specific comment is requested on whether the
Board should provide guidance clarifying that the creditor may (but
does not have to) consider any changes in available equity based on how
much the consumer owes on a mortgage with a lien superior to that of
the HELOC. On a second-lien HELOC where the first-lien mortgage is
negatively amortizing, or was negatively amortizing during any part of
the HELOC term, for example, the CLTV will decline more and faster than
if the first mortgage were fully or partially amortizing, concomitantly
reducing the HELOC creditor's equity cushion. The actual property value
decline alone may not reduce the creditor's equity cushion by 50
percent, but a 50 percent reduction in the equity cushion may
nonetheless occur if the first mortgage loan is negatively amortizing.
The Board also requests comment on whether and under what
circumstances it may be appropriate to permit consideration of a clear
and consistent trend of declining property values in the market area in
which the securing property is located. The Board understands that
creditors commonly rely on general market data to validate findings for
a property-specific valuation; used in this way, general market data
may be a valuable quality control tool contributing to sound portfolio
management. (Depending on comments received, the Board would not
anticipate that consideration of this factor would be permissible
unless the creditor first completed a property valuation that accounts
for specific characteristics of the subject property and meets other
guidelines proposed in comment 5b(f)(3)(vi)-5.) In addition, the Board
solicits comment on the type of market data that would be appropriate,
such as data based on publicly available, empirically-based research,
as well as on whether a more specific definition of ``market area''
would be needed and, if so, what definition would be appropriate.
Finally, as discussed above under the section-by-section analysis
on Sec. 5b(f)(3)(vi) (specifically concerning comment 5b(f)(3)(vi)-1),
the Board requests comment on what, if any, restrictions on the amount
by which a credit line may be reduced for a significant decline in
value may be appropriate.
Property valuation methods. Existing comment 5b(f)(3)(vi)-6 states
that Sec. 226.5b(f)(3)(vi)(A) does not require a creditor to obtain an
appraisal before suspending credit privileges or reducing the credit
limit based on a significant decline in value, although a significant
decline must have occurred. This means that the creditor must be able
to demonstrate that a significant value decline in value has occurred,
even if an appraisal is not obtained. To establish this basis when the
creditor does not obtain an appraisal, the creditor would have to rely
on a property value generated by a valuation method other than an
appraisal. Proposed comment 5b(f)(3)(vi)-5 reaffirms that an appraisal
is not required to take action under this provision, but provides
additional guidance about the valuation tools that may be appropriate
and the standards that should apply to using these tools.
Proposed comment 5b(f)(3)(vi)-5 would clarify that appropriate
property valuation methods under Sec. 226.5b(f)(3)(vi)(A) may include,
but are not limited to, automated valuation models (AVMs),\29\ tax
assessment valuations (TAVs),\30\ and broker price opinions (BPOs).\31\
These examples of appropriate valuation tools are illustrative; the
Board recognizes that the methods named in the commentary may in the
future commonly be referred to by other names, and that new valuation
methods that may be appropriate could be developed over time. Creditors
would not be able to use any valuation method if state or other
applicable law prohibits using that method for determining whether to
suspend or reduce credit lines. For example, some state laws permit
real estate brokers or salespersons to perform BPOs only as part of the
real estate sales or listing process.\32\
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\29\ An automated valuation model or ``AVM'' is a computer
program that analyzes data to determine a property's market value.
``Hedonic'' models use property characteristics (such as square
footage, room count) on the subject and comparable properties to
determine a value. ``Index'' models determine value based on repeat
sales in the marketplace rather than property characteristic data.
``Blended or hybrid'' models use elements of both hedonic and index
models.
\30\ A tax assessment valuation or ``TAV'' determines the value
of the subject property based on the value established for property
tax purposes.
\31\ A broker price opinion or ``BPO'' is an estimate of value
of the subject property prepared by a real estate broker, agent or
sales person that details the probable listing price of the subject
property and provides varying level of detail about the property's
condition, market, and neighborhood, and information on comparable
sales. A BPO does not include use of an AVM.
\32\ See, e.g., Ark. Code Ann. Sec. 17-14-104, Conn. Gen. Stat.
Sec. 20-526, Minn. Stat. Sec. 82B.035, R.I. Gen. Laws Sec. 5-
20.7-3, Tex. Occ. Code Sec. 1103.004.
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Under proposed comment 5b(f)(3)(vi)-5, any property valuation
method on which the creditor relies to take action under this section
must consider specific property characteristics of the underlying
collateral. Methods that use only indices measuring property values
generally in a particular geographic area would not be appropriate.
Thus, AVMs known as ``hedonic'' or ``hybrid'' (also referred to as
``blended'') models that account for specific property characteristics
and location to produce a value would generally be appropriate, whereas
AVMs known as ``repeat sales index'' or ``home price index'' models
that do not account for property characteristics specific to the
underlying collateral would not be appropriate.\33\
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\33\ See supra note 29, regarding ``hedonic,'' ``hybrid,'' and
``index'' AVMs.
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5b(f)(3)(vi)(B) Suspensions and Credit Limit Reductions Based on a
Material Change in the Consumer's Financial Circumstances
Background
Section 226.5b(f)(3)(vi)(B), which implements TILA Section
137(c)(2)(C), permits a creditor to suspend advances or reduce the
credit limit of a HELOC when ``the creditor reasonably believes that
the consumer will be unable to fulfill the repayment obligations of the
plan because of a material change in the consumer's financial
circumstances.'' 15 U.S.C. 1647(c)(2)(C).
In the Board's discussions with creditor representatives and
others, concerns have been raised that the phrase ``unable to meet''
the repayment obligations is inappropriate in the modern credit market,
in which credit decisions generally involve ranking consumers by their
likelihood of repaying, not on whether they can or cannot repay. The
Board understands that, in effect, a creditor may decide not to extend
credit because a consumer's likelihood of default is calculated to be,
for example, 15 percent over a given period. A 15 percent likelihood of
default, however, does not necessarily show that the consumer is
``unable'' to repay the HELOC on the agreed terms. The Board also
recognizes that credit availability may be reduced if the circumstances
under which creditors may take action under this provision are
ambiguous. One creditor expressed to the Board that uncertainty about
how to fulfill the requirements of this provision contributed to the
creditor's decision to stop offering HELOCs altogether. In sum, many
creditors have requested more detailed guidance about when action is
permissible under this provision, including the extent to which they
may rely on declines in credit scores.
Consumer advocates expressed dissatisfaction with the guidance on
[[Page 43493]]
Sec. 226.5b(f)(3)(vi)(B) as well, voicing concerns that the lack of
clear guidelines results in some creditors taking action on accounts of
consumers who are fully capable of meeting their repayment obligations
or whose financial circumstances in fact have not changed in a manner
truly supporting a reasonable belief that the consumer will be unable
to meet these obligations.
Proposal
As an initial matter, the Board is not proposing to eliminate the
phrase ``unable to meet'' the repayment terms from the regulatory text,
in part because the statute itself stipulates that the creditor must
have ``reason to believe that the consumer will be unable to comply
with the repayment requirements of the account due to a material change
in the consumer's financial circumstances.'' 15 U.S.C. Sec.
1647(c)(2)(C) (emphasis added). Legislative history does not explain
Congress's decision to set this standard; the Board interprets the
statute's ``unable'' to pay standard as evincing a legislative intent
to promote creditor restraint in taking action under this provision. At
the same time, the Board, as did Congress, recognizes the need for
creditors to be able to protect themselves against losses on home-
equity lines; \34\ TILA and Regulation Z therefore permit creditors to
take action on accounts in certain circumstances before the creditor
begins to incur losses on those accounts. See 15 U.S.C. 1647(c)(2)(B)-
(E); Sec. 226.5b(f)(3)(vi)(A)-(F).
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\34\ See Remarks of Rep. David Price (primary sponsor of the
H.R. 3011, the Home Equity Loan Consumer Protection Act of 1988,
Pub. L. 100-709, enacted on Nov. 23, 1988, Congr. Rec., H4473 (June
20, 1988) (``[T]hese provisions protect the consumer without
hindering the ability of lenders to operate successfully equity
credit plans.'').
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Thus, the Board requests comment on whether the Board should
consider expressly interpreting the ``unable'' to pay standard to mean,
for example, that the change in the consumer's financial circumstances
resulted in the consumer's likelihood of default ``substantially''
increasing. Another possible interpretation on which the Board requests
comment is that the ``unable'' to pay standard requires that, as a
result in a change in the consumer's financial circumstances, the
consumer moved into a higher default risk category than at origination
(based on the statistical likelihood of default), such that the
creditor would not have made the loan or would have made the loan on
materially less favorable terms and conditions.
Overall, the proposed revisions to guidance in the commentary on
Sec. 226.5b(f)(3)(vi)(B) is intended to protect consumers by ensuring
that creditors exercise prudent judgment in relying on this provision,
while providing certain limited clarifications regarding the
requirements of this provision to guide creditors. To ensure that
before taking action, creditors carefully consider the consumer's
financial circumstances and the likely impact of these circumstances on
the account, the proposed commentary retains the existing two-part test
for justifying account suspensions or credit limit reductions under
Sec. 226.5b(f)(3)(vi)(B). The creditor must first examine the
consumer's financial circumstances and determine whether a ``material''
change has occurred. The Board interprets the word ``material'' in this
part of the test to mean that the change has some bearing on the
consumer's ability to pay his or her financial obligations. The
creditor must then establish that this change supports the creditor's
reasonable belief that the consumer will be unable to meet the
repayment obligations of the HELOC. The proposal would revise the
commentary interpreting Sec. 226.5b(f)(3)(vi)(B) to include additional
examples of how creditors may demonstrate that both parts of the test
are met, as discussed below.
For the first part of the test, under proposed comment
5b(f)(3)(vi)-6 (based on existing comment 5b(f)(3)(vi)-7 with
revisions), evidence of a significant change in financial circumstances
includes, but is not limited to, a significant decrease in the
consumer's income, or credit report information showing late payments
or nonpayments on the part of the consumer, such as delinquencies,
defaults, or derogatory collections or public records related to the
consumer's failure to pay other obligations. The Board proposes to
require that these payment failures must have occurred within a
reasonable time from the date of the creditor's review of the
consumer's credit performance. A safe harbor for determining whether a
payment failure occurred within a reasonable time from the date of the
creditor's review would be one that occurred within six months of the
creditor's suspending advances or reducing the credit limit. In
addition, the consumer cannot have brought the account on which the
payment failure occurred current as of the time of the creditor's
review. The Board believes that this six-month safe harbor
appropriately observes the statutory and regulatory rule that action
can be taken only ``during any period in which'' the consumer's
financial circumstances have materially worsened from those on which
the credit terms were based. See 15 U.S.C. 1647(c)(2)(C); Sec.
226.5b(f)(3)(vi)(B). The Board solicits comment on this approach.
Meeting the second part of the test requires that the change in
financial circumstances support the creditor's reasonable belief that
the consumer will be unable to fulfill the payment obligations of the
plan. For this part of the test, the proposal retains the existing
commentary's safe harbor--namely, that the creditor may rely on
evidence of the consumer's failure to pay other debts other than the
HELOC to support a reasonable belief that the consumer will not be able
to meet the HELOC's repayment obligations. Proposed comment
5b(f)(3)(vi)-6 adds that these payment failures must have occurred
within a reasonable time from the date of the creditor's review of the
consumer's credit performance, with the six-month safe harbor discussed
above.
Proposed comment 5b(f)(3)(vi)-6 also specifies that for the second
prong of the test, the payment failures on which the creditor relies
may not be solely late payments of 30 days or fewer. The Board does not
believe that a late payment of 30 days or fewer is adequate evidence of
a failure to pay a debt. For example, the consumer's payment may not
have reached the creditor due to errors of which the consumer has not
yet had an opportunity to become aware, such as mail delivery or
electronic funds transfer errors.
Reliance on Credit Score Declines
Several industry representatives requested clarity on whether
creditors could rely on credit score declines to satisfy the
requirements of Sec. 226.5b(f)(3)(vi)(B). The Board believes that
credit score declines may be an appropriate screening tool for
determining which consumers to examine more closely for potential
action based on this provision. However, the Board is concerned about
whether credit score declines alone can meet the required statutory
showing. For reasons discussed below, the proposal neither endorses nor
prohibits reliance on credit score declines alone to meet the
requirements of this provision, but solicits comment on this issue.
Permitting reliance on credit scores alone to satisfy the
requirements of this provision raises several concerns. First, a Board
study has observed that credit scores can drop for reasons unrelated to
the consumer's actual failure to pay
[[Page 43494]]
obligations,\35\ which suggests that a credit score decline alone might
be an insufficient basis to satisfy the two-part test. Credit scores
sometimes drop, for example, due to increases in a consumer's
utilization rate on her credit cards or because a consumer closes one
or more credit card accounts. But an increased utilization rate may
occur because a credit card creditor decides to reduce the credit limit
for reasons out of the consumer's control, not because the consumer is
relying more heavily on credit card credit. Similarly, if the consumer
closes accounts because the consumer has consolidated these debts into
a single, lower interest loan, the consumer may have freed up more
income to repay the HELOC; here, the consumer's credit score drop in
fact corresponds with improvement in the consumer's ability to pay.
---------------------------------------------------------------------------
\35\ Board of Governors of the Federal Reserve System, ``Report
to the Congress on Credit Scoring and Its Effects on the
Availability and Affordability of Credit'' (August 2007).
---------------------------------------------------------------------------
Second, standard credit scores do not show a consumer's actual
default or delinquency probability--they reflect only a consumer's
likelihood of falling delinquent or defaulting relative to other
consumers. For example, a consumer with a score of 700 is less likely
to default than a consumer with a score of 600--but these scores by
themselves do not indicate the actual probability that either consumer
will default.
Third, the Board also recognizes the challenge of defining how much
of a decline is sufficient to satisfy the standard. Applying a single
metric such as a 40 point decline to all consumers is especially
problematic, because a consumer whose score declines from 800 to 760 is
still much more likely to be able to pay than, for example, a consumer
whose score decreases from 600 to 560. In addition, different scoring
models use different score ranges, so a decline of 40 points on one
model would not have the same meaning as a 40-point decline in another
model.
Fourth, any expected future debt performance associated with
consumers having a given credit score (relative to consumers with
different scores) can change over time based on macroeconomic
conditions. For example, a consumer with a credit score of 700 in Year
One may have better future debt performance than a consumer with a
score of 700 in Year Three, if the macroeconomic conditions have
worsened from Year One to Year Three. This is because all consumers
will have lower average debt performance levels in Year Three. But
again, credit scores show only a credit performance rank of one
consumer compared to other consumers, not an actual default
probability. Thus, to rely on credit score declines alone to meet the
requirements of this exception, creditors may also have to account for
macroeconomic changes.
In sum, without additional sophisticated empirical analysis, a
creditor could not show that a particular consumer's credit score
decline corresponds to an increased default probability that would meet
either prong of the two-part test.
At the same time, the Board does not believe that expressly
prohibiting reliance on credit scores alone under this provision is
desirable. A black-and-white rule prohibiting reliance on credit scores
to take action under this provision could be overly restrictive for at
least two reasons. First, the Board understands that some creditors may
have a strong empirical basis for relying on credit scores for a
particular HELOC portfolio. The Board recognizes that creditors may be
able to show that a particular level of drop is always associated with
significant negative payment history, for example. Second, the Board's
prohibition could become outdated or unnecessarily constraining on
creditors in using innovative credit scoring tools developed in the
future. Credit scoring methods may change over time in a manner that
makes them more decisively indicative of default probability than
today.
For these reasons, the proposal neither expressly permits nor
prohibits reliance on credit scores alone to determine that action is
justified under this provision. The Board requests comment on the
appropriateness of this approach, as well as whether and why the Board
should consider expressly permitting or prohibiting reliance on credit
scores to meet the requirements of Sec. 226.5b(f)(3)(vi)(B).
In addition, the Board requests comment on the following questions:
What compliance challenges are posed by the proposed standards for
meeting each prong of the test? What further guidance for compliance
with this provision, including examples of well-defined, reasonably
reliable indicators of compliance with each prong of the test, should
the Board consider? For example, should reliance on factors not related
to past credit performance, but that may indicate poor future
performance, be sufficient grounds for taking action under this
provision? In this regard, the Board recognizes that, notwithstanding
the discussion above, factors such as increases in the consumer's
utilization rate and the number of new accounts opened have been shown
to correspond to a reduced capacity of the consumer to repay his or her
financial obligations.\36\
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\36\ Id.
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5b(f)(3)(vi)(C) Default of a Material Obligation
Under Sec. 226.5b(f)(3)(vi)(C), which implements TILA Section
137(c)(2)(D), a creditor may temporarily suspend or reduce an account
if ``the consumer is in default of a material obligation under the
agreement.'' 15 U.S.C. 1647(c)(2)(D). Proposed comment 5b(f)(3)(vi)-7
would clarify that a creditor ``must,'' rather than ``may,'' specify
which consumer obligations are ``material'' for purposes of this
provision, if any. This clarification is intended to ensure that
Regulation Z is interpreted to reflect the statutory requirement, found
in TILA Section 137(c)(3), that the consumer must be given upon the
consumer's request and at the time of account opening a list of the
contract obligations that are considered ``material'' for purposes of
TILA Section 137(c)(2)(D), which is the statutory provision permitting
a creditor to suspend or reduce a line of credit ``during any period in
which the consumer is in default with respect to any material
obligation of the consumer under the agreement.'' See 15 U.S.C.
1647(c)(3) (cross-referencing 15 U.S.C. 1647(c)(2)(D)).
5b(f)(3)(vi)(G) Suspensions and Credit Limit Reductions Required by
Federal Law
Background
During outreach conducted by the Board in preparing the proposal,
creditors pointed out that the federal Internet gambling law (the
Unlawful Internet Gambling Enforcement Act of 2006 or the ``Internet
Gambling Act''), 31 U.S.C. 5361-5367, and implementing regulations,\37\
require non-exempt financial institutions and other participants in
payment systems to have and comply with policies and procedures that,
among other things, ``identify and block restricted transactions.''
\38\ Rules administered by the Office of Foreign Assets Control
(``OFAC'') also require creditors to block accounts under certain
circumstances.\39\ Creditor representatives raised concerns
[[Page 43495]]
about the potential for claims against creditors that prohibit draws to
comply with the Internet Gambling Act or other federal laws, because
TILA and Regulation Z do not expressly permit creditors to refuse to
grant credit in those circumstances.
---------------------------------------------------------------------------
\37\ 12 CFR. Part 233 (Board of Governors of the Federal Reserve
System); 31 CFR part 132 (U.S. Department of Treasury).
\38\ 31 U.S.C. 5362(7) (defining ``restricted transaction'').
See also 31 U.S.C. Sec. 5364; 12 CFR 233.5; 31 CFR 132.5 (requiring
institutions to establish policies and procedures under the Internet
Gambling Act).
\39\ See 31 CFR 500.201, .202, .203.
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Proposal
Similar to the proposed amendments to Sec. 226.5b(f)(2)(iv),
discussed above, proposed Sec. 226.5b(f)(3)(vi)(G) would permit
creditors to suspend advances or reduce the credit limit if a federal
law other than TILA requires the creditor to do so. Proposed Sec.
226.5b(f)(3)(vi)(G) is intended to resolve the conflict between
Regulation Z and federal laws that require creditors to block HELOC
advances or reduce credit limits under circumstances not otherwise
permitted under Regulation Z. Proposed comment 5b(f)(3)(vi)-9 would
clarify that this rule permits creditors to prohibit either a single
advance or multiple advances, depending on what the applicable federal
law requires. By covering federal laws generally, this proposed section
is intended to prevent the need for the Board to issue separate
revisions to Regulation Z to account for any new federal law requiring
creditors to suspend advances or reduce credit limits under particular
circumstances.
The Board believes that this proposal is consistent with
longstanding policy expressed in provisions that permit creditors to
suspend an account or reduce the credit limit temporarily due to
government action. See 15 U.S.C. 1647(c)(2)(E); Sec.
226.5b(f)(3)(vi)(D) and (E). Specifically, TILA and Regulation Z allow
creditors to take these actions when the government precludes them from
imposing the contractual APR or when government action adversely
affects the priority of the creditor's security interest such that the
creditor's secured interest in the property is less than 120 percent of
the credit limit on the account. 15 U.S.C. 1647(c)(2)(E); Sec.
226.5b(f)(3)(vi)(D) and (E).
Regarding this proposed section, the Board requests comment on what
additional examples of conflicts between Regulation Z's restrictions on
account action and other laws the Board should consider, if any. The
Board also requests comment on whether the definition of ``federal
law'' should be broadened to include, for example, an order or
directive of a federal agency.
5b(g) Reinstatement of Credit Privileges
Background
Section 226.5b(f)(3)(i) and (f)(3)(vi) permit creditors to suspend
advances on an account or reduce the credit limit only ``during any
period in which'' designated circumstances exist. See also 15 U.S.C.
1647(c)(2)(B)-(E). The Board has long interpreted this language to
indicate that reinstatement of credit privileges is required once no
circumstances permitting a freeze or credit limit reduction under the
statute or regulation exist. To facilitate compliance, the Board
provided guidance on appropriate reinstatement practices in the
Official Staff Commentary on this provision. See comments 5b(f)(3)(vi)-
2, -3, -4.
Recently, due to declining property values and for other reasons,
HELOCs have been suspended and credit limits reduced more often than in
the past. Consumer groups and other federal agencies have raised
concerns about whether consumers are properly informed about the
creditor's obligation to reinstate credit lines and consumers' rights
to request reinstatement. The Board has also examined the reinstatement
practices of several creditors and determined that additional guidance
is appropriate.
Proposal
The proposal would revise several provisions regarding
reinstatement of credit privileges currently in comments 5b(f)(3)(vi)-
2, -3 and -4, and move them to proposed Sec. 226.5b(g) and comments
5b(g)-1, 5b(g)(1)-1, 5b(g)(2)(i)-1, and 5b(g)(2)(ii)-1. Proposed
explanatory guidance regarding the reinstatement rules is found in
proposed commentary on Sec. 226.5b(g).
Proposed Sec. 226.5b(g) and comment 5b(g)-1 (adopted from existing
comment 5b(f)(3)(vi)-2 with revisions) confirm that line suspensions
and credit limit reductions under both Sec. 226.5b(f)(3)(i) and
(f)(3)(vi) must be temporary and that, accordingly, the creditor is
obligated to restore the consumer's credit privileges as soon as
reasonably possible once no condition permitting the creditor's action
exists, such as reaching the maximum APR or a significant decline in
the value of the property securing the line. See comments 5b(f)(3)(vi)-
1 and -2 and proposed comment 5b(g)-1. This new paragraph and comment
5b(g)-1 are also intended to clarify that the creditor is not obligated
to restore credit privileges if the original condition permitting the
action no longer exists but another condition permitting the creditor
to freeze the line or reduce the credit limit exists.
Proposed comment 5b(g)-2 is adopted from existing comment
5b(f)(3)(vi)-3, with certain technical revisions. The proposed comment
retains the existing prohibition on charging a fee to reinstate an
account, and specifies that this fee prohibition applies when no
condition permitting an account freeze or reduction exists.
5b(g)(1) Methods of Meeting the Obligation To Reinstate Accounts
Proposed Sec. 226.5b(g)(1) and comment 5b(g)(1)-1 are adopted from
existing comment 5b(f)(3)(vi)-4, with revisions. Proposed Sec.
226.5b(g)(1) retains the existing two options for a creditor to fulfill
its obligation to ensure that the consumer's credit privileges are
restored as soon as reasonably possible after no circumstance
permitting a freeze or credit limit reduction exists. First, a creditor
may monitor the line on an ongoing basis to determine whether the
condition permitting the freeze or credit line reduction continues to
exist or another condition exists. Proposed comment 5b(g)(1)-1 requires
creditors choosing this option to investigate the HELOC often enough to
be certain that a condition permitting the action exists. How often a
creditor must investigate depends on the individual circumstances of a
particular situation. For example, in a market with long-term property
value declines that publicly available, independently verifiable data
show are continuing, a creditor might reasonably decide not to
investigate the property value as often as might be reasonable if the
trend of property values begins increasing.
The second compliance option permits creditors to forego ongoing
monitoring and instead require the consumer to request reinstatement.
This option is available only if the creditor complies with the
provisions of Sec. 226.5b(g)(2), described below. During outreach for
this proposal, the Board was asked to consider requiring ongoing
monitoring in all cases, rather than allowing creditors to shift the
burden to consumers to request reinstatement. Proposals to strengthen
requirements on creditors that require consumers to request
reinstatement, as discussed below, were intended in part to address
concerns about allowing creditors to require consumers to request
reinstatement. The Board requests comment on requiring ongoing
monitoring in all cases, including specific information about potential
benefits and burdens of this approach.
5b(g)(2) Obligations of Creditors That Require the Consumer To Request
Reinstatement
Proposed Sec. 226.5b(g)(2)(i), adopted from existing comment
5b(f)(3)(vi)-4, requires that if the creditor requires the consumer to
request reinstatement, the
[[Page 43496]]
creditor must disclose this requirement on the notice of action taken
required under Sec. 226.9(j)(1). As does existing Sec.
226.9(c)(1)(iii) and comment 9(c)(1)(iii)-1, proposed Sec. 226.9(j)(1)
requires the creditor to disclose, among other things, the method by
which the consumer must request reinstatement, such as whether the
request must be in writing and the address to which a written request
must be submitted.
Under Sec. 226.5b(g)(2)(ii), as under the existing commentary (see
comment 5b(f)(3)(vi)-4), the creditor's receipt of a reinstatement
request triggers the creditor's obligation investigate whether the
condition permitting the freeze or credit line reduction exists. See
comment 5b(f)(3)(vi)-4. Proposed Sec. 226.5b(g)(3)(ii), however, would
require the creditor to complete the investigation within 30 days of
receiving the reinstatement request. The Board is proposing a 30-day
investigation rule to conform to the longstanding policy requiring
creditors to investigate reinstatement requests ``promptly'' upon
receiving a request. See comment 5b(f)(3)(vi)-4. Based on information
on creditor practices, the Board believes that the time required to
complete a reinstatement investigation may vary. If a new property
valuation is the primary element of the investigation, creditors may be
able to complete the investigation in as little as a few days. If the
creditor must depend on financial information requested from the
consumer to complete an investigation, the investigation may take
longer, although the Board also believes that once a creditor receives
the financial information necessary to determine whether the original
finding regarding a consumer's financial circumstances continues to
exist, most creditors should be able to evaluate this information in a
few days. In sum, the Board understands that a reinstatement
investigation typically will not take more than two to three weeks to
complete.
The Board therefore proposes to require that the creditor complete
the investigation and mail a notice of reinstatement results (see
proposed Sec. 226.5b(g)(2)(v), discussed in the section-by-section
analysis below) within 30 days of receiving the consumer's
reinstatement request. The Board requests comment on whether this
timeframe is appropriate and whether the Board should consider
additional guidance for creditors when consumers do not provide needed
information to complete the investigation in a timely manner. Such
guidance might, for example, require that the creditor request the
information within a reasonable period of time after receiving the
reinstatement request, and permit the creditor to delay sending the
notice until a reasonable period of time after receipt of the requested
information.
Proposed comment 5b(g)(2)(ii)-1 also provides guidance on
investigating a reinstatement request. Specifically, the investigation
should involve verifying that the information on which the creditor
relied to take action in fact pertained to the specific property
securing the affected line (as with a property valuation) or to the
specific consumer (as with a credit report). In addition, to
investigate whether a significant decline in property value exists
under Sec. 226.5b(f)(3)(vi)(A), the creditor should reassess the value
of the property securing the line based on an updated property
valuation meeting the guidance in proposed comment 5b(f)(3)(vi)-5,
discussed above. To investigate whether a material change in the
consumer's financial circumstances exists under Sec.
226.5b(f)(3)(vi)(B), the creditor should obtain and evaluate financial
information sufficient to validate the original finding on which the
action was based.
Clarification on Fees. Current comment 5b(f)(3)(vi)-3, ``Imposition
of fees,'' states that, if not prohibited by state law, a creditor may
collect bona fide and reasonable appraisal and credit report fees
actually incurred in investigating whether the condition permitting the
freeze continues to exist. The proposal would move this part of the
comment to Sec. 226.5b(g)(2)(iii) and (g)(2)(iv) and revise it. (The
general prohibition in existing comment 5b(f)(3)(vi)-3 on imposing a
fee to reinstate an account once a condition permitting a freeze or
reduction no longer exists would be incorporated into the proposal at
comment 5b(g)-2.)
First, proposed Sec. 226.5b(g)(2)(iii) and (iv) would use the term
``property valuation'' rather than ``appraisal,'' reflecting that an
appraisal will not necessarily be the valuation method used to
investigate a reinstatement request. Beyond this technical change,
proposed Sec. 226.5b(g)(2)(iii) would grant the consumer one
reinstatement request investigation free of charge. That is, for
consumers required by the creditor to request reinstatement, the
regulation would prohibit a creditor from charging the consumer any
fees for investigating the consumer's first reinstatement request after
each time the line is frozen or reduced. Proposed Sec.
226.5b(g)(2)(iv) would permit a creditor to charge bona fide and
reasonable property valuation and credit report fees only for
investigations of reinstatement requests other than the consumer's
initial request after a line is suspended or reduced.
The Board proposes these rules pursuant to its authority in TILA
Section 105(a) to issue provisions and make adjustments to the
requirements of TILA necessary or proper to effectuate the statute's
purposes. See 15 U.S.C. 1604(a). This proposal is intended to ensure
that consumers have a meaningful opportunity to exercise their right to
request reinstatement and to have this request investigated. Assessing
an appraisal fee, for example, before the creditor will investigate the
request may be a hardship for some consumers; in effect, up-front
charges for the initial reinstatement investigation may discourage
those consumers who are potentially the most in need of their HELOC
funds from requesting reinstatement. The proposal is also intended to
protect consumers for whom the original reason for the account freeze
or credit limit reduction turned out to have been incorrect from having
to pay extra costs for their HELOCs, and from the potential burden of
having to pay expenses upfront.
This proposal is based in part on information about creditor
practices suggesting that investigation costs may not be particularly
burdensome for creditors. The Board understands that credit reports and
many valuation methods may be available to a creditor at low cost,
particularly when the creditor can take advantage of bulk rates for
these services. Further, the Board believes that potential burdens on
creditors of the above proposal are adequately offset by proposed Sec.
226.5b(g)(2)(iv), which would permit creditors to charge reasonable and
bona fide property valuation and credit report fees associated with
investigations triggered by reinstatement requests after the consumer's
first request. The Board is proposing this approach to address concerns
about the time and expense associated with having to investigate
multiple reinstatement requests made by a consumer in a period of time
insufficiently long to support a reasonable expectation that the
condition justifying the line action has changed. At the same time, the
consumer's right to request reinstatement as many times as desired is
retained, as are existing limits on the types of investigation fees
that creditors may charge.
The Board requests comment on this approach, including whether
consumers should have to pay reinstatement investigation costs for any
reinstatement request. The Board also requests comment on whether, if
the first reinstatement request is free but fees
[[Page 43497]]
may be charged for subsequent requests, a consumer should be required
to pay investigation costs for a subsequent reinstatement request made
a significant time period after the first request, such as six months,
one year, or other appropriate time period commenters might suggest.
Finally, the Board requests comment on whether the Board should
consider requiring that the amount of the fees be disclosed along with
the notice that the consumer must request reinstatement, and the
burdens and benefits of this requirement.
Notice of Reinstatement Results. Proposed Sec. 226.5b(g)(2)(v)
would require creditors that choose to have the consumer request
reinstatement under Sec. 226.5b(g)(1)(ii) to disclose to the consumer
the results of the investigation of the consumer's reinstatement
request. This notice requirement would apply only for investigations
conducted in response to a consumer's request for reinstatement and
only when the investigation results show that reinstatement is not
warranted, either because the condition permitting the freeze or credit
limit reduction continues to exist, another condition permitting a
freeze or credit line reduction under Regulation Z exists, or both. The
notice must be in writing, and must include the results of the
investigation, as well as the information required in the Sec.
226.9(j)(1) notice, such as the specific reasons for the continued
freeze or credit limit reduction and information about the consumer's
ongoing right to request reinstatement. To facilitate compliance with
this provision, the Board is proposing Model Clauses in G-22(A) and G-
22(B) of Appendix G to Regulation Z.
The Board proposes this rule pursuant to its authority in TILA
Section 105(a) to issue provisions and make adjustments to the
requirements of TILA necessary or proper to effectuate the statute's
purposes. See 15 U.S.C. 1604(a). The Board recognizes that this new
notice requirement will present a compliance cost on creditors who do
not already have a policy of disclosing reinstatement results to their
consumers. The Board believes, however, that the benefits of this
notice requirement outweigh the burden. First, the Board believes that
this provision upholds the consumer protection purpose of TILA by
ensuring that consumers are adequately informed about the status of
their HELOC accounts and responds to concerns expressed to the Board
that currently many consumers are not. With this notice, consumers
would be better equipped to take appropriate action, such as working to
improve their credit or making alternative financial plans. In
addition, the Board anticipates that this notice requirement may reduce
consumer requests and complaints, because transparent investigation
results will help consumers better understand the reasons for continued
freezes or reductions and assure consumers that their reinstatement
requests were considered.
The Board requests comment on this disclosure requirement, and on
whether creditors also should be required to provide notice of
reinstatement results to consumers whose accounts will be reinstated,
but with the option to provide notice orally to these consumers.
5b(g)(3) Obligation To Make Document Supporting Property Valuation
Available to the Consumer
Proposed Sec. 226.5b(g)(2) would require a creditor, upon the
consumer's request, to provide to the consumer a copy of the
documentation supporting the property value on which the creditor
relied to freeze or reduce a line, or to continue an existing line
freeze or reduction, based on a significant decline in the property
value under Sec. 226.5b(f)(vi)(A). Proposed comment 5b(g)(2)1 would
explain that the appropriate documentation under this provision would
include a copy of a report for the valuation method used, such as an
appraisal report, or any written evidence of another valuation method
used (such as an AVM, TAV, or BPO) that clearly and conspicuously shows
the property value specific to the subject property and factors
considered to obtain the value.
The Board believes that consumers should have access to information
about the property value on which action was relied because a line
suspension or reduction may result in serious financial consequences to
consumers. In light of the significance of the impact on the consumer
of the creditor's actions, the consumer should be fully equipped with
necessary information to challenge the finding or otherwise request
reinstatement.
The Board requests comment on the appropriateness of this
requirement, as well as the operational practicality for creditors of
obtaining and providing the required documentation.
5b(g)(4) Reinstatement Rules for Action Taken Under Sec. 226.5b(f)(2)
Proposed paragraph (g)(4) of Sec. 226.5b would clarify that, when
a creditor has a justification for terminating and accelerating a home-
equity plan under Sec. 226.5b(f)(2), but opts to suspend or reduce the
line instead, the creditor is not obligated to comply with the
reinstatement rules of proposed Sec. 226.5b(g). This provision is
intended to respond to questions posed to the Board about whether, when
a creditor has a justification for terminating and accelerating a home-
equity plan under Sec. 226.5b(f)(2), but opts to suspend or reduce the
line instead, the creditor is obligated to comply with the
reinstatement rules of proposed Sec. 226.5b(g). The Board believes
that this clarification is consistent with the existing reinstatement
scheme.
First, reinstatement guidance is in the commentary only for Sec.
226.5b(f)(3)(vi), the provision permitting a creditor temporarily to
suspend advances or reduce the credit limit, reflecting longstanding
Board policy that it applies only when action is taken under Sec.
226.5b(f)(3)(vi) (or under (f)(3)(i); see comments 5b(f)(3)(vi)-1 and -
2). Second, the Board believes that applying the reinstatement rules to
suspensions or line reductions taken when the creditor could terminate
and accelerate a line may harm consumers; a creditor may be discouraged
from choosing the lesser action of temporarily suspending advances or
reducing the credit limit if additional rules apply to those actions.
Third, the Board believes that compliance confusion may arise, as well
as enforcement challenges, in determining to which line suspensions and
reductions under Sec. 226.5b(f)(2) the reinstatement rules should
apply. Existing commentary on Sec. 226.5b(f)(2) gives the creditor the
right to suspend or reduce an account ``temporarily or permanently.''
See comment 5b(f)(2)-2 (retained in the proposal). Logically, the
reinstatement rules could only apply when the creditor chooses to take
temporary action, but both creditors and examiners may have difficulty
determining and documenting which line actions are intended to be
temporary (and thus subject to the reinstatement rules) and which
permanent. Again, creditors may be inclined simply to make all
suspensions and reductions under this provision permanent, potentially
harming consumers to whom creditors might otherwise have given an
opportunity to restore their credit privileges.
Section 226.6 Account-Opening Disclosures
TILA Section 127(a), implemented in Sec. 226.6, requires creditors
to provide information about key credit terms before an open-end plan
is opened, such as rates and fees that may be assessed on the account.
Consumers' rights and responsibilities in the case of unauthorized use
or billing disputes are
[[Page 43498]]
also explained. 15 U.S.C. 1637(a). See also Model Forms G-2 and G-3 in
Appendix G to part 226.
6(a) Rules Affecting Home-Equity Plans
Summary of Proposed Disclosure Requirements
Account-opening disclosure and format requirements for HELOCs
subject to Sec. 226.5b generally were unaffected by the January 2009
Regulation Z Rule, consistent with the Board's plan to review
Regulation Z's disclosure rules for home-secured credit in a future
rulemaking. To facilitate compliance, the Board in the January 2009
Regulation Z Rule grouped the requirements applicable to HELOCs
together in Sec. 226.6(a) (moved from former Sec. 226.6(a) through
(e)).
This proposal contains two significant proposed revisions to
account-opening disclosures for HELOCs subject to Sec. 226.5b, which
are set forth in proposed Sec. 226.6(a). The proposed revisions (1)
would require a tabular summary of key terms to be provided before an
account is opened (see proposed Sec. 226.6(a)(1) and (a)(2)), and (2)
would reform how and when cost disclosures must be made (see proposed
Sec. 226.6(a)(3) for content, proposed Sec. 226.5(b) and proposed
Sec. 226.9(c) for timing).
Proposed Comments 6(a)-1 and 6(a)-2
Fixed-rate and -term payment plans during draw period. As discussed
in the section-by-section analysis to proposed Sec. 226.5b(c), HELOC
plans typically offer the ability to obtain advances that must be
repaid based on a variable interest rate that applies to all
outstanding balances. Some HELOC plans, however, also offer a fixed-
rate and -term payment feature, where a consumer is permitted to repay
all or part of the balance during the draw period at a fixed rate
(rather than a variable rate) and over a specified time period. The
Board understands that for most HELOC plans, consumers must take active
steps to access the fixed-rate and -term payment feature; this feature
is not automatically accessed when a consumer obtains advances from the
HELOC plan. Current Sec. 226.6(a) requires a creditor to disclose
information related to fixed-rate and -term payment features. For
example, a creditor would be required to disclose the rates applicable
to the fixed-rate and -term feature under current Sec. 226.6(a)(1),
any fees that are finance charges under current Sec. 226.6(a)(1), any
fees that are other charges under current Sec. 226.6(a)(2), and
payment terms and other information required under current Sec.
226.6(a)(3).
Under the proposal, the Board would continue to require that a
creditor disclose information applicable to the fixed-rate and -term
feature under proposed Sec. 226.6. Generally, under the proposal,
limited information about the fixed-rate and -term feature would be
included in the account-opening table, and more detailed information
would be included outside the table. Specifically, for the reasons
discussed in the section-by-section analysis to proposed Sec.
226.5b(c), if a HELOC plan offers a variable-rate feature and a fixed-
rate and -term feature during the draw period, a creditor generally
must only disclose limited information in the account-opening table
about the fixed-rate and -term feature. See proposed Sec. 226.6(a)(2).
Instead of requiring that all the details of the fixed-rate and -term
feature be disclosed in the table, the Board proposes to require a
creditor offering this payment feature (in addition to a variable-rate
feature) to disclose in the account-opening table the following: (1) A
statement that the consumer has the option during the draw period to
borrow at a fixed interest rate; (2) the amount of the credit line that
the consumer may borrow at a fixed interest rate for a fixed term; and
(3) a statement that information about the fixed-rate and -term payment
plan is included in the account-opening disclosures or agreement, as
applicable. See proposed Sec. 226.6(a)(2)(xix). However, if a HELOC
plan does not offer a variable-rate feature during the draw period, but
only offers a fixed-rate and -term feature during that period, a
creditor must disclose in the account-opening table information related
to the fixed-rate and -term feature when making the disclosures
required by proposed Sec. 226.6(a)(2). See proposed comment 6(a)-1.
Even though a creditor generally may not disclose the terms of
fixed-rate and -term payment plans in the account-opening table, the
creditor must disclose additional information about these payment plans
in disclosures required by proposed Sec. 226.6(a)(3), (a)(4) and
(a)(5). For example, a creditor must disclose fees and rate information
related to these features under proposed Sec. 226.6(a)(3) and (a)(4),
and information about payment terms and other terms related to these
features under proposed Sec. 226.6(a)(5)(v).
Disclosures for the repayment period. Current comment 6(a)(3)-4
provides that a creditor must provide disclosures about both the draw
and repayment phases when giving the disclosures under Sec. 226.6. To
the extent the required disclosures are the same for the draw and
repayment phase, the creditor need not repeat such information, as long
as it is clear that the information applies to both phases. The Board
proposes to move current comment 6(a)(3)-4 to proposed comment 6(a)-2
and make technical revisions.
6(a)(1) Format for Home-Equity Plan Account Disclosures
As provided by Regulation Z, creditors may, and typically do,
include account-opening disclosures for HELOC plans as a part of an
account agreement document that also contains other contract terms and
state law disclosures. The agreement typically is in a narrative form,
and is lengthy and in small print.
The Board proposes in new Sec. 226.6(a)(1) to impose format
requirements for account-opening disclosures for HELOCs subject to
Sec. 226.5b, similar to proposed format requirements for the proposed
early HELOC disclosures discussed in the section-by-section analysis to
proposed Sec. 226.5b(b)(2). The Board proposes this rule pursuant to
its authority in TILA Section 105(a) to make adjustments and exceptions
to the requirements in TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). Specifically, under the proposal, a creditor would be
required to disclose to a consumer key terms relating to the HELOC plan
in a tabular format at account opening. As discussed in more detail
below, the proposed account-opening table would contain disclosures
that are similar to the ones disclosed in the proposed early HELOC
disclosures table required by proposed Sec. 226.5b(b). A creditor
would be required to disclose certain identification disclosures, such
as the borrower's name and address, directly above the account-opening
table. In addition, a creditor would be required to disclose other
information, such as a statement that the consumer should confirm that
the terms disclosed in the table are the same terms for which the
consumer applied, below the account-opening table. Under the proposal,
not all disclosures that a creditor would be required to provide to a
consumer at account opening would be included in the account-opening
table (or directly above or below the table). For account-opening
disclosures that are not specifically required to be in the account-
opening table (or directly above or below the table), a creditor would
be able to include these disclosures as part of the account agreement.
The Board did not directly test whether providing account-opening
[[Page 43499]]
disclosures in a narrative form as part of the account agreement is an
effective way to communicate those disclosures to consumers.
Nonetheless, in the consumer testing conducted by the Board on HELOC
disclosures, the Board tested application disclosures in a narrative
form. Participants in consumer testing found this form difficult to
read and understand, and their responses to follow-up questions showed
that they also had difficulty identifying specific information in the
text. Participants who saw forms that were structured in a tabular
format, on the other hand, commented that the information was easier to
understand and had more success answering comprehension questions.
These results regarding the benefit of disclosing information in a
tabular format are consistent with the results of research that the
Board conducted on credit card disclosures in relation to the January
2009 Regulation Z Rule. (See Sec. Sec. 226.5a(a)(2), 226.6(b)(1),
226.9(b)(3), 226.9(c)(2)(iii)(B) and 226.9(g)(3)(iii) for certain
disclosures applicable to open-end (not home-secured) credit that must
be disclosed in a tabular format.) The Board also believes that
providing key terms in a table at account opening, which would be
similar to the proposed early HELOC disclosures table required by
proposed Sec. 226.5b(b), would allow consumers to compare more easily
the account-opening terms to those terms that were disclosed earlier to
the consumer. For these reasons, the Board proposes to require that
certain account-opening disclosures must be provided in the form of a
table with headings, content, and format substantially similar to any
of the applicable tables found in proposed G-15 in Appendix G. See
proposed Sec. 226.6(a)(1). Proposed comment 6(a)(1)-3 clarifies that
Sec. 226.6(a)(1)(i) generally requires that the headings, content and
format of the tabular disclosures be substantially similar, but need
not be identical, to the applicable tables in G-15 to Appendix G.
Comparison to early HELOC disclosures table. TILA Section 127(a)(8)
provides that any disclosures required to be disclosed as part of the
early HELOC disclosures required under TILA Section 127A(a) also must
be disclosed as part of the account-opening disclosures. 15 U.S.C.
1637(a)(8). Thus, as discussed in more detail below, most of the
disclosures required to be disclosed in the proposed early HELOC
disclosures table described in proposed Sec. 226.5b(b) also would be
included in the account-opening table described in proposed Sec.
226.6(a)(1) and (a)(2). Nonetheless, while these two proposed tables
would be similar, they would not be identical. For example, the table
containing the early HELOC disclosures would show and compare two
payment options offered on the HELOC (unless a creditor offers only
one), while the account-opening disclosures would show only the payment
plan chosen by the consumer. Proposed comment 6(a)-1 provides guidance
on how the proposed early HELOC disclosures table described in proposed
Sec. 226.5b(b) differs from the proposed account-opening table in
proposed Sec. 226.6(a)(1) and (a)(2). Proposed comment 6(a)(1)-1
specifically notes which rules in proposed Sec. 226.5b applicable to
the early HELOC disclosures table described in proposed Sec. 226.5b(b)
would not apply to the proposed account-opening table.
Clear and conspicuous standard. As discussed in the section-by-
section analysis to proposed Sec. 226.5(a), the Board proposes a clear
and conspicuous standard applicable to Sec. 226.6 disclosures.
Proposed comment 6(a)(1)-2 provides a cross reference to the clear and
conspicuous standard applicable to proposed Sec. 226.6(a) set forth in
proposed comment 5(a)(1)-1.
Terminology. As discussed in the section-by-section analysis to
proposed Sec. 226.5(a), the Board proposes that creditors offering
HELOCs subject to Sec. 226.5b must use certain terminology when
disclosing the draw period, any repayment period, and certain other
terms in the account-opening table. See proposed Sec. 226.5(a)(2).
Proposed comment 6(a)(1)-3 provides a cross reference to the
terminology requirements set forth in proposed Sec. 226.5(a)(2).
6(a)(2) Required Disclosures for Account-Opening Table for Home-Equity
Plans
Fees. Current Sec. 226.6(a)(1) and (a)(2), which implements TILA
Section 127(a)(3) and (a)(5), require a creditor to disclose in the
account-opening disclosures any finance charges or other charges
imposed on the HELOC plan. 15 U.S.C. 1637(a)(3) and (a)(5). As
discussed in more detail below, the Board proposed in new Sec.
226.6(a)(2) that certain fees must be disclosed in the account-opening
table described in proposed Sec. 226.6(a)(1) and (a)(2). Under the
proposal, creditors would have more flexibility regarding disclosure of
other charges imposed as part of a HELOC plan. See proposed Sec.
226.6(a)(3) for content, proposed Sec. 226.5(b) and proposed Sec.
226.9(c) for timing.
Pursuant to TILA Section 127(a)(8) and for the reasons discussed in
the section-by-section analysis to proposed Sec. 226.5b(c), the Board
proposes that a creditor must disclose in the account-opening table the
following fees that also must be disclosed in the early HELOC
disclosures table described in proposed Sec. 226.5b(b): (1) a total of
the one-time fees imposed by the creditor or third parties to open the
HELOC plan and an itemization of those fees; (2) fees imposed by the
creditor for the availability of the HELOC plan; (3) fees imposed by
the creditor for early termination of the plan by the consumer; and (4)
fees imposed for required insurance, debt cancellation or suspension
coverage. See proposed Sec. 226.6(a)(2)(vii), (viii), (ix) and (xx).
In addition, the Board proposes that the account-opening table also
contain the following additional fees that are not required to be
disclosed in the early HELOC disclosures table described in proposed
Sec. 226.5b(b): (1) Late-payment fees; (2) over-the-limit fees; (3)
transaction charges; (4) returned-payment fees; and (5) fees for
failure to comply with transaction limitations described under proposed
Sec. 226.6(a)(2)(xvii). See proposed Sec. 226.6(a)(2)(x), (xi),
(xii), (xiii), and (xiv).
The Board intends that the proposed list of fees and categories of
fees that would be included in the account-opening table be exclusive,
for two reasons. The Board believes that only allowing an exclusive
list of fees to be disclosed in the account-opening table would benefit
consumers. Based on consumer testing conducted by the Board on HELOC
disclosures, the Board believes the fees listed above to be the most
important fees, at least in the current marketplace, for consumers to
know about before they start to use a HELOC account. Participants in
this testing who were shown an account-opening table which contained
the fees listed above indicated that they found this list sufficient,
and could not identify any additional types of fees that they would
want disclosed to them at account opening.
The fees listed above include charges that a consumer could incur
and which a creditor likely would not otherwise be able to disclose in
advance of the consumer engaging in the behavior that triggers the
cost, such as fees triggered by a consumer's use of a cash advance
check or by a consumer's late payment. The proposed list is manageable
and focuses on key information rather than attempting to be
comprehensive. Since consumers must be informed of all fees imposed as
part of the plan before the cost is incurred, the Board believes that
not all fees need to be included in the
[[Page 43500]]
account-opening table provided at account opening.
The Board believes an exclusive list also would ease compliance and
reduce the risk of litigation for creditors; creditors would have the
certainty of knowing that as new services (and associated fees)
develop, fees not required to be disclosed in the summary table under
the proposed rule need not be included in the account-opening summary
unless and until the Board requires their disclosure after notice and
public comment. In addition, as discussed in the section-by-section
analysis to proposed Sec. 226.5(a)(1) and (b)(1), charges required to
be included in the proposed account-opening table would be required to
be provided in a written and retainable form before the first
transaction, and a subsequent written notice is required if one of
these fees increases or if these fees are newly introduced during the
life of the plan (but only as permitted under Sec. 226.5b(f)). Under
the proposal, creditors would have more flexibility regarding
disclosure of other charges imposed as part of a HELOC plan.
6(a)(2)(i) Identification Information
Pursuant to TILA Section 127(a)(8) and for the reasons discussed in
the section-by-section analysis to proposed Sec. 226.5b(c)(1), the
Board proposes in new Sec. 226.6(a)(2)(i) that a creditor must
disclose above the account-opening table the following identification
information that also must be disclosed above the early HELOC
disclosures table described in proposed Sec. 226.5b(b): (1) The
consumer's name and address; (2) the identity of the creditor making
the disclosures; (3) the date the disclosure was prepared; and (4) the
loan originator's unique identifier, as defined by the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008 (``SAFE Act'') Sections
1503(3) and (12). 12 U.S.C. 5102(3) and (12); 15 U.S.C. 1637(a)(8). In
addition, the Board proposes also that the creditor also disclose the
account number as part of the identification information that would be
disclosed above the account-opening table. The Board proposes this rule
pursuant to its authority in TILA Section 105(a) to make adjustments
and exceptions to the requirements in TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uniformed use of credit.
See 15 U.S.C. 1601(a), 1604(a). The Board believes that including the
account number above the account-opening table may allow a consumer in
the future (after account opening) to connect better the account-
opening table with the account to which the disclosures apply.
6(a)(2)(ii) Security Interest and Risk to Home
Current Sec. 226.6(a)(4), which implements TILA Section 127(a)(6),
provides that a creditor must disclose as part of the account-opening
disclosures the fact that the creditor has or will acquire a security
interest in the property purchased under the plan, or in other property
identified by item or type. 15 U.S.C. 1637(a)(6). The Board proposes in
new Sec. 226.6(a)(2)(ii) to require that a creditor must disclose in
the account-opening table a statement that the creditor will acquire a
security interest in the consumer's dwelling and that loss of the
dwelling may occur in the event of default. This same statement would
be required to be disclosed as part of the proposed early HELOC
disclosures table described in proposed Sec. 226.5b(b). See proposed
Sec. 226.5b(c)(6).
6(a)(2)(iii) Possible Actions by Creditor
As discussed in the section-by-section analysis to proposed Sec.
226.5b(c), the Board proposes to require a creditor to disclose in the
early HELOC disclosures table a statement that, under certain
conditions, the creditor may terminate the plan and require payment of
the outstanding balance in full in a single payment and impose fees
upon termination; prohibit additional extensions of credit or reduce
the credit limit; and implement changes in the plan. Pursuant to TILA
Section 127(a)(8), the Board also proposes in new Sec.
226.6(a)(2)(iii) to require a creditor to disclose the above statement
in the account-opening table. 15 U.S.C. 1637(a)(8). In addition, under
the proposal, a creditor also would be required to disclose in the
account-opening table a statement that information about the
circumstances under which the creditor may take these actions is
provided in the account-opening disclosures or agreement, as
applicable. Current Sec. 226.6(a)(3)(i) requires a creditor to
disclose as part of the account-opening disclosures the circumstances
under which the creditor may take the above actions on the HELOC plan.
The Board proposed to move current Sec. 226.6(a)(3)(i) to proposed
Sec. 226.6(a)(5)(iv) and make technical revisions. Under the proposal,
a creditor would be required to disclose the information about the
circumstances under which the creditor may take the above actions on
the HELOC plan outside of the account-opening table under proposed
Sec. 226.6(a)(5)(iv).
6(a)(2)(iv) Tax Implications
Current Sec. 226.6(a)(3)(v), which implements TILA Section
127(a)(8), requires that a creditor must disclose in the account-
opening disclosures a statement that the consumer should consult a tax
adviser for further information regarding the deductibility of interest
and charges. The Board proposed to move this provision in current Sec.
226.6(a)(3)(v) to proposed Sec. 226.6(a)(2)(iv). Under the proposal, a
creditor would be required to include this statement about consulting a
tax adviser in the account-opening table.
In addition, as discussed in the section-by-section analysis to
proposed Sec. 226.5b(c)(8), in implementing Section 1302 of the
Bankruptcy Act, the Board proposes to require a creditor to disclose in
the early HELOC disclosures table a statement that the interest on the
portion of the credit extension that is greater than the fair market
value of the dwelling may not be tax deductible for Federal income tax
purposes. Pursuant to TILA Section 127(a)(8), the Board also proposes
that a creditor be required to disclose this statement in the account-
opening table. 15 U.S.C. 1637(a)(8).
6(a)(2)(v) Payment Terms
Current Sec. 226.6(a)(3)(ii), which implements TILA Section
127(a)(8), requires a creditor to disclose as part of the account-
opening disclosures certain information related to payment terms on the
HELOC plan that is currently required to be disclosed as part of the
application disclosures, as discussed in the section-by-section
analysis to proposed Sec. 226.5b(c)(9). 15 U.S.C. 1637(a)(8). For
example, current Sec. 226.6(a)(3)(ii) requires a creditor to disclose
in the account-opening disclosures the following information: (1) The
length of the draw period and any repayment period; (2) an explanation
of how the minimum periodic payment will be determined and the timing
of the payments; and (3) if paying only the minimum periodic payments
may not repay any of the principal or may repay less than the
outstanding balance, a statement of this fact, as well as a statement
that a balloon payment may result. In addition, current Sec.
226.6(a)(3)(vii) requires a creditor to disclose as part of the
account-opening disclosures payment examples that are currently
required to be disclosed as part of the application disclosures, unless
the application disclosures were in a form the consumer could keep and
included representative payment examples for the category of the
payment option chosen
[[Page 43501]]
by the consumer. The Board proposes to move these provisions in current
Sec. 226.6(a)(3)(ii) and (a)(4)(iv) to proposed Sec. 226.6(a)(2)(v)
and make revisions.
The proposal. Consistent with TILA Section 127(a)(8), the Board
proposes to require a creditor to disclose the same disclosures
relating to payment terms in the account-opening table that a creditor
would be required to disclose in the early HELOC disclosures table
described in proposed Sec. 226.5b(b) (as discussed in the section-by-
section analysis to proposed Sec. 226.5b(c)(9)), with one exception.
15 U.S.C. 1637(a)(8). The table containing the early HELOC disclosures
would show and compare two payment options offered on the HELOC (unless
a creditor offers only one), while the account-opening disclosures
would show only the payment plan chosen by the consumer. Specifically,
proposed Sec. 226.6(a)(2)(v) requires a creditor to disclose in the
account-opening table certain payment terms of the plan that will apply
to the consumer at account opening. Under the proposal, the creditor
would be required to distinguish payment terms applicable to the draw
period and the repayment period, by using the applicable heading
``Borrowing Period'' for the draw period and ``Repayment Period'' for
the repayment period, in a format substantially similar to the format
used in any of the applicable tables found in proposed Samples G-15(B)
and G-15(D) in Appendix G.
Under the proposal, a creditor would be required to disclose in the
account-opening table the length of the plan, the length of the draw
period and the length of any repayment period. When the length of the
plan is definite, a creditor would be required to disclose the length
of the plan, the length of the draw period and the length of any
repayment period in a format substantially similar to the format used
in any of the applicable tables found in proposed Samples G-15(B) and
G-15(C) in Appendix G. If there is no repayment period on the plan, the
creditor would be required to disclose a statement that after the draw
period ends, the consumer must repay the remaining balance in full. In
addition, under the proposal, a creditor would be required to disclose
in the account-opening table an explanation of how the minimum periodic
payment will be determined and the timing of the payments.
Also, under the proposal, a creditor would be required to disclose
in the account-opening table payment examples based on the assumptions
that the consumer borrows the full credit line at account opening, and
does not obtain any additional extensions of credit; the consumer makes
only minimum periodic payments during the draw period and any repayment
period; and the APRs (as described below) used to calculate the payment
examples will remain the same during the draw period and any repayment
period. A creditor would be required to provide payment examples for
two APRs: (1) The current APR for the plan, except that if an
introductory APR applies, the creditor would be required to use the
rate that would otherwise apply to the plan after the introductory rate
expires, as described in proposed Sec. 226.6(a)(2)(vi)(B); and (2) the
maximum APR applicable to the payment plan described in the table, as
described in proposed Sec. 226.6(a)(2)(vi)(A)(1)(v). A creditor also
would be required to disclose other information along with the payment
examples, such as a statement that the sample payments are not the
consumer's actual payments. Under the proposal, a creditor would be
required to disclose the proposed payment examples, and related
information, in a format that is substantially similar to the format
used in any of the applicable tables found in proposed Samples G-15(B),
G-15(C) and G-15(D) in Appendix G.
Moreover, under the proposal, if under the payment plan disclosed
in the account-opening table a consumer may pay a balloon payment, a
creditor would be required to disclose information about the balloon
payment twice in the account-opening table: at the beginning of the
information about payment terms, and as part of the payment examples.
Specifically, proposed Sec. 226.6(a)(2)(v)(B) provides that if under
the payment plan disclosed in the table, paying only the minimum
periodic payments may not repay any of the principal or may repay less
than the outstanding balance by the end of the HELOC plan, the creditor
must disclose a statement of this fact in the account-opening table, as
well as a statement that a balloon payment may result. The ``Balloon
Payment'' row in the ``Borrowing and Repayment Terms'' section of
proposed Samples G-15(B) and G-15(C) in Appendix G provides guidance on
how to comply with the requirements in proposed Sec.
226.6(a)(2)(v)(B).
In addition, regarding disclosure of the amount of the balloon
payment in the proposed payment examples, proposed Sec.
226.6(a)(2)(v)(C)(3)(iii) provides that if a consumer may pay a balloon
payment under the payment plan disclosed in the account-opening table,
a creditor would be required to disclose that fact when disclosing the
proposed payment examples, as well as disclose the amount of the
balloon payment based on the assumptions used the calculate the payment
examples as described in proposed Sec. 226.6(a)(2)(v)(C). The first
paragraph of the ``Sample Payments'' section of proposed Samples G-
15(B) and G-15(C) in Appendix G provides guidance on how to comply with
the requirements in proposed Sec. 226.6(a)(2)(v)(C)(3)(iii).
Under the proposal, a creditor would be required to disclose in the
account-opening table a statement that the consumer can borrow money
during the draw period. In addition, if a repayment period is provided,
a creditor would be required to disclose in the account-opening table a
statement that the consumer cannot borrow money during the repayment
period. Under the proposal, a creditor also would be required to
disclose in the account-opening table a statement indicating whether
minimum payments are due in the draw period and any repayment period.
Choosing payment plan at account opening. The Board understands
that some creditors currently do not require consumers to choose a
payment plan until account opening. Under the proposal, even if a
creditor does not require a consumer to choose a payment plan until
account opening, a creditor would still be required to disclose in the
account-opening table only the payment plan chosen by the consumer.
Thus, a creditor that allows a consumer to choose a payment plan at
account opening would need to prepare account-opening tables for each
payment plan offered on the HELOC plan from which a consumer may choose
(except for fixed-rate and -term payment plans unless those are the
only plans offered during the draw period) and take steps to ensure
that the proper account-opening table is provided to the consumer
depending on which payment plan is chosen by the consumer.
6(a)(2)(vi) Annual Percentage Rate
Current Sec. 226.6(a)(1), which implements TILA Section 127(a)(1)
and (a)(4), sets forth disclosure requirements for rates that would
apply to HELOC accounts. 15 U.S.C. 1637(a)(1) and (a)(4). The Board
proposes to require a creditor to disclose in the account-opening table
the same disclosures relating to APRs that a creditor would be required
to disclose in the early HELOC disclosures table described in proposed
Sec. 226.5b(b) (as discussed in the section-by-section analysis to
proposed Sec. 226.5b(c)(10)). For example, under the proposal, a
creditor would be required to disclose in the account-
[[Page 43502]]
opening table each APR applicable to the payment plan disclosed in the
table, except a creditor must not disclose any penalty rate set forth
in the initial agreement that may be imposed in lieu of termination of
the plan. See proposed Sec. 226.6(a)(2)(vi). Under the proposal, a
creditor also would be required to disclose certain information about
any variable rates disclosed in the account-opening table, such as the
fact that the APR may change due to the variable-rate feature. See
proposed Sec. 226.6(a)(2)(vi)(A). In addition, under the proposal, a
creditor would be required to disclose in the account-opening table any
introductory rate that applies to the payment plan disclosed in the
table, as well as the time period during which the introductory rate
will remain in effect and the rate that will apply after the
introductory rate expires. See proposed Sec. 226.6(a)(2)(vi)(B).
Under the proposal, a creditor would be required to disclose other
rate information under proposed Sec. 226.6(a)(3) and (a)(4). For
example, periodic rates would not be permitted to be disclosed in the
account-opening table. Nonetheless, under the proposal, the Board
proposes to require creditors to disclose periodic rates, as a cost
imposed as part of the plan, before the consumer agrees to pay or
becomes obligated to pay for the charge, and these disclosures could be
provided in the credit agreement or other disclosure, as is likely
currently the case.
6(a)(2)(vii) Fees Imposed by the Creditor and Third Parties To Open the
Plan
Current Sec. 226.6(a)(1) and (a)(2) require a creditor to disclose
in the account-opening disclosures any finance charges or other charges
imposed on the HELOC plan. As discussed above, the Board proposes in
new Sec. 226.6(a)(2)(vii) to require that a creditor disclose in the
account-opening table a total of the one-time fees imposed by the
creditor or third parties to open the HELOC plan and an itemization of
those fees. Under the proposal, the disclosure of these fees in the
account-opening table might differ from how these fees may have been
disclosed in the early HELOC disclosures table. As discussed in the
section-by-section analysis to proposed Sec. 226.5b(c)(11), with
respect to disclosing the itemization of the one-time account-opening
fees in the proposed early HELOC disclosures table, if the dollar
amount of a fee is not known at the time the early HELOC disclosures
are delivered or mailed, a creditor would be allowed to provide a range
for such fee. See proposed Sec. 226.5b(c)(11). With respect to
disclosure of the total of one-time account-opening fees in the
proposed early HELOC disclosures table, if the exact total of one-time
fees for account opening is not known at the time the early HELOC
disclosures are delivered or mailed, a creditor would be required to
disclose in the table as part of the early HELOC disclosures the
highest total of one-time account opening fees possible for the plan
with a indication that the one-time account opening costs may be ``up
to'' that amount. See proposed Sec. 226.5b(c)(11). Nonetheless, in the
account-opening table, a creditor would be required to disclose in the
account-opening table an itemization of all one-time fees imposed by
the creditor and third parties to open the plan, and may not disclose a
range for those fees, as otherwise allowed under proposed Sec.
226.5b(c)(11) for the proposed early HELOC disclosures table. See
proposed comment 6(a)(2)(vii)-1. In addition, in the account-opening
table, a creditor would be required to disclose in the account-opening
table the total of all one-time fees imposed by the creditor and third
parties to open the plan, and may not disclose the highest amount of
possible fees as allowed under proposed Sec. 226.5b(c)(11) for the
proposed early HELOC disclosures table. See proposed comment
6(a)(2)(vii)-1. At the time the creditor is disclosing the account-
opening table, a creditor would know the exact amount of the one-time
fees that will be imposed by the creditor and any third parties to open
the HELOC account, and thus would be able to disclose the exact total
of these one-time fees and an exact itemization of these fees.
Unlike the proposed early HELOC disclosures table, in the account-
opening table, the itemization of the one-time fees to open the account
would not be disclosed with the total of these one-time fees but
instead the itemization of the fees would be disclosed on the second
page of the table with penalty fees and transactions fees. Thus, under
the proposal, a creditor would be required to include in the account-
opening table a cross reference near the disclosure of the total of
one-time fees for opening an account, indicating that the itemization
of the fees is located elsewhere in the table.
6(a)(2)(x) Late-Payment Fee
As discussed above, under the proposal, a creditor would be
required to disclose in the account-opening table any fee imposed for a
late payment. See proposed Sec. 226.6(a)(2)(x) Proposed comment
6(a)(2)(x)-1 provides that the disclosure of the fee for a late payment
includes only those fees that will be imposed for actual, unanticipated
late payments. This proposed comment cross references commentary to
Sec. 226.4(c)(2) for additional guidance on late-payment fees. In
addition, this proposed comment notes that Samples G-15(B), G-15(C) and
G-15(D) provide guidance to creditors on how to disclose clearly and
conspicuously the late-payment fee in the account-opening table.
6(a)(2)(xi) Over-the-Limit Fee
As discussed above, under the proposal, a creditor would be
required to disclose in the account-opening table any fee imposed for
exceeding a credit limit. See proposed Sec. 226.6(a)(2)(xi). Proposed
comment 6(a)(2)(xi)-1 provides that the disclosure of fees for
exceeding a credit limit does not include fees for other types of
default or for services related to exceeding the limit. For example, no
disclosure would be required of fees for reinstating credit privileges
or fees for the dishonor of checks on an account that, if paid, would
cause the credit limit to be exceeded. In addition, this proposed
comment notes that Samples G-15(B), G-15(C) and G-15(D) provide
guidance to creditors on how to disclose clearly and conspicuously the
over-the-limit fee.
6(a)(2)(xii) Transaction Charges
As discussed above, under the proposal, a creditor would be
required to disclose in the account-opening table any transaction
charge imposed by the creditor for use of the HELOC plan. See proposed
Sec. 226.6(a)(2)(xii). Proposed comment 6(a)(2)(xii)-1 provides that
charges imposed by a third party, such as a seller of goods, must not
be disclosed in the account-opening table. This proposed comment also
notes that the third party would be responsible for disclosing the
charge under Sec. 226.9(d)(1).
In addition, proposed comment 6(a)(2)(xii)-2 provides that a
transaction charge imposed by the creditor for use of the HELOC plan
includes any fee imposed by the creditor for transactions in a foreign
currency or that take place outside the United States or with a foreign
merchant. This proposed comment cross references comment 4(a)-4 for
guidance on when a foreign transaction fee is considered charged by the
creditor. This proposed comment also notes that Sample G-15(D) provide
guidance to creditors on how to disclose a foreign transaction fee for
use of a credit card where the same foreign transaction fee applies for
purchases and cash advances in a foreign currency,
[[Page 43503]]
or that take place outside the United States or with a foreign
merchant.
6(a)(2)(xv) Statement About Other Fees
As discussed above, under the proposal, a creditor would not be
required to disclose all the fees that apply to a HELOC plan in the
account-opening table. Under the proposal, creditors would be provided
with flexibility in disclosing fees that would be required to be
disclosed under the regulation but not in the account-opening table. As
discussed in more detail in the section-by-section analysis to proposed
Sec. 226.5(a)(1) and (b)(1), under the proposal, a creditor would be
permitted to disclose charges that are not required to be disclosed in
the account-opening table either before the first transaction or later,
so long as they are disclosed before the cost is imposed. Despite this
flexibility to disclose certain charges after account opening, the
Board expects that creditors would continue to disclose some of these
charges in the account-opening disclosures or account agreement because
of contract law or other reasons. Thus, the Board proposes in new Sec.
226.6(a)(2)(xv) to require a creditor to disclose in the account-
opening table a statement that information about other fees is included
in the account-opening disclosures or agreement, as applicable. In
addition, because certain fees disclosed in the account-opening table
would be disclosed on the first page of the table, and other fees
disclosed in the table would be included on the second page of the
table, the Board proposes to require a creditor to disclose in the
account-opening table near the disclosure of fees on the first page of
the table a statement that other fees are located elsewhere in the
table.
6(a)(2)(xvi) Negative Amortization
Current Sec. 226.6(a)(3)(iii), which implements TILA Section
127(a)(8), provides that a creditor must disclose in the account-
opening disclosures a statement that negative amortization may occur as
described in current Sec. 226.5b(d)(9). 15 U.S.C. 127(a)(8). The Board
proposes to move current Sec. 226.6(a)(3)(iii) to proposed
226.6(a)(2)(xvi) and make revisions. Specifically, under the proposal,
a creditor would be required to disclose in the account-opening table,
as applicable, a statement that negative amortization may occur and
that negative amortization increases the principal balance and reduces
the consumer's equity in the dwelling. This same disclosure would be
required as part of the early HELOC disclosures table required under
proposed Sec. 226.5b(b). See proposed Sec. 226.5b(c)(15).
6(a)(2)(xvii) Transaction Requirements
Current Sec. 226.6(a)(3)(iv), which implements TILA Section
127(a)(8), provides that a creditor must disclose in the account-
opening disclosures a statement of any transaction requirements as
described in current Sec. 226.5b(d)(10). The Board proposes to move
current Sec. 226.6(a)(3)(iv) to proposed Sec. 226.6(a)(2)(xvii) and
make revisions. Specifically, under the proposal, a creditor would be
required to disclose in the account-opening table any limitations on
the number of extensions of credit and the amount of credit that may be
obtained during any time period, as well as any minimum outstanding
balance and minimum draw requirements. This same disclosure would be
required as part of the early HELOC disclosures table required under
proposed Sec. 226.5b(b). See proposed Sec. 226.5b(c)16).
6(a)(2)(xviii) Credit Limit
Currently, a creditor is not required to disclose in the account-
opening disclosures the credit limit applicable to the HELOC plan. As
discussed in the section-by-section analysis to proposed Sec.
226.5b(c)(17), the Board proposes to require a creditor to disclose the
credit limit applicable to the HELOC plan in the early HELOC
disclosures table required under proposed Sec. 226.5b(b). Pursuant to
TILA Section 127(a)(8) and for the reasons set forth in the section-by-
section analysis to proposed Sec. 226.5b(c)(17), the Board proposes
that this disclosure also be required in the account-opening table. 15
U.S.C. 1637(a)(8).
6(a)(2)(xix) Statements About Fixed-Rate and -Term Payment Plan
As discussed above, the Board proposes that if a HELOC plan offers
a variable-rate feature and a fixed-rate and -term feature during the
draw period, a creditor generally would not be allowed to disclose in
the account-opening table all the terms applicable to the fixed-rate
and -term feature. See proposed Sec. 226.6(a)(2). Instead, the Board
proposes to require a creditor offering this payment feature (in
addition to a variable-rate feature) to disclose in the account-opening
table the following: (1) A statement that the consumer has the option
during the draw period to borrow at a fixed interest rate; (2) the
amount of the credit line that the consumer may borrow at a fixed
interest rate for a fixed term; and (3) a statement that information
about the fixed-rate and -term payment plan is included in the account-
opening disclosures or agreement, as applicable. See proposed Sec.
226.6(a)(2)(xix). The Board proposes a similar disclosure in the
proposed early HELOC disclosures table described in proposed Sec.
226.5b(b). See proposed Sec. 226.5b(c)(18).
6(a)(2)(xx) Required Insurance, Debt Cancellation or Debt Suspension
Coverage
Current Sec. 226.6(a)(1) and (a)(2) require a creditor to disclose
in the account-opening disclosures any finance charges or other charges
imposed on the HELOC plan. As discussed in the section-by-section
analysis to proposed Sec. 226.5b(c)(19), in the event that a creditor
requires the insurance or debt cancellation or debt suspension coverage
(to the extent permitted by state or other applicable law), the Board
proposes to require a creditor to disclose in the early HELOC
disclosures table any fee for this coverage. See proposed Sec.
226.5b(c)(19). In addition, proposed Sec. 226.5a(b)(19) require that a
creditor also disclose in the early HELOC disclosures table a cross
reference to where the consumer may find more information about the
insurance or debt cancellation or debt suspension coverage, if
additional information is included outside the early HELOC disclosures
table. For the reasons set forth in the section-by-section analysis to
proposed Sec. 226.5b(c)(19), the Board also proposes to require that a
creditor make these same disclosures in the account-opening table.
6(a)(2)(xxi) Grace Period
Current Sec. 226.6(a)(1)(i), which implements TILA Section
127(a)(1), provides that a creditor must disclose as part of the
account-opening disclosures a statement of when finance charges begin
to accrue, including an explanation of whether or not any time period
exists within which any credit extended may be repaid without incurring
a finance charge. 15 U.S.C. 1637(a)(1). Under the proposal, the Board
proposes to require that a creditor disclose below the account-opening
table the date by which or the period within which any credit extended
may be repaid without incurring a finance charge due to a periodic
interest rate and any conditions on the availability of the grace
period. If no grace period is provided, a creditor would be required to
disclose that fact below the account-opening table. If the length of
the grace period varies, the creditor would be allowed to disclose the
range of days, the minimum number of days, or the average number of the
days in the grace period, if the disclosure is identified as
[[Page 43504]]
a range, minimum, or average. In disclosing a grace period that applies
to all features on the account, under the proposal, a creditor would be
required to use the phrase ``How to Avoid Paying Interest'' as the
heading for the information below the table describing the grace
period. If a grace period is not offered on all features of the
account, in disclosing this fact below the table, a creditor would be
required to use the phrase ``Paying Interest'' as the heading for this
information.
Proposed comment 6(a)(2)(xxi)-1 provides that a creditor that
offers a grace period on all types of transactions for the account and
conditions the grace period on the consumer paying his or her
outstanding balance in full by the due date each billing cycle, or on
the consumer paying the outstanding balance in full by the due date in
the previous and/or the current billing cycle(s) will be deemed to meet
the requirements in proposed Sec. 226.6(a)(2)(xxi) by providing the
following disclosure, as applicable: ``Your due date is [at least] ----
days after the close of each billing cycle. We will not charge you
interest on your account if you pay your entire balance by the due date
each month.'' Proposed comment 6(a)(2)(xxi)-2 provides that a creditor
may use the following language to describe below the account-opening
table that no grace period is offered, as applicable: ``We will begin
charging interest on [applicable transactions] on the date the
transaction is posted to your account.''
The Board understands that most creditors currently do not offer a
grace period on any transactions on the HELOC plan. Thus, in most
cases, creditors would include below the account-opening table a
statement that the creditor will begin charging interest on the
transactions on the HELOC plan on the date the transaction is posted to
the account. The Board believes that requiring a creditor to disclose
this statement below the account-opening table would be an effective
way to inform a consumer that he or she cannot avoid paying interest on
transactions on the HELOC plan.
6(a)(2)(xxii) Balance Computation Method
Current Sec. 226.6(a)(1)(iii), which implements TILA Section
127(a)(2), provides that creditors must explain as part of the account-
opening disclosures the method used to determine the balance to which
rates are applied. 15 U.S.C. 1637(a)(2). Under the proposal, a creditor
would be required to disclose below the account-opening table the name
of the balance computation method used by the creditor for each feature
of the account, along with a statement that an explanation of the
method(s) is provided in the account agreement or disclosure statement.
See proposed Sec. 226.6(a)(2)(xxii). To determine the name of the
balance computation method to be disclosed, a creditor would be
required to refer to Sec. 226.5a(g) for a list of commonly-used
methods; if the method used is not among those identified, creditors
would be required to provide a brief explanation in place of the name.
In determining which balance computation method to disclose, the
creditor would be required to assume that credit extended will not be
repaid within any grace period, if any. The Board believes that the
proposed approach of disclosing the name of the balance computation
method below the table, with a more detailed explanation of the method
in the account-opening disclosures or account agreement, would provide
an effective way to communicate information about the balance
computation method used on a HELOC plan to consumers, while not
distracting from other information included in the account-opening
table.
Proposed comment 6(a)(2)(xxii)-1 provides that in cases where the
creditor uses a balance computation method that is identified by name
in the regulation, the creditor must disclose below the table only the
name of the method. In cases where the creditor uses a balance
computation method that is not identified by name in the regulation,
the disclosure below the table must clearly explain the method in as
much detail as set forth in the descriptions of balance computation
methods in Sec. 226.5a(g). The explanation would not need to be as
detailed as that required for the disclosures under proposed Sec.
226.6(a)(4)(i)(D), as discussed below. Proposed comment 6(a)(2)(xxii)-2
notes that proposed Samples G-15(B), G-15(C) and G-15(D) would provide
guidance to creditors on how to disclose the balance computation method
where the same method is used for all features on the account.
6(a)(2)(xxiii) Billing Error Rights Reference
Current Sec. 226.6(a)(6), which implements TILA Section 127(a)(7),
provides that creditors offering HELOC accounts subject to Sec. 226.5b
must provide notices of billing rights at account opening. This
information is important, but lengthy. The Board proposes in new Sec.
226.6(a)(2)(xxiii) to draw consumers' attention to the notices by
requiring a creditor to disclose below the account-opening table a
statement that information about billing rights and how to exercise
them is provided in the account-opening disclosures or account
agreement, as applicable. As discussed in the section-by-section
analysis to proposed Sec. 226.6(a)(5), under the proposal, a creditor
would be required to provide information about billing rights in the
account-opening disclosures or account agreement, as applicable. See
proposed Sec. 226.6(a)(5)(iii).
6(a)(2)(xxiv) No Obligation Statement
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(2), the Board proposes in new Sec.
226.5b(c)(2) to require a creditor to disclose below the early HELOC
disclosures table a statement that the consumer has no obligation to
accept the terms disclosed in the table. In addition, under proposed
Sec. 226.5b(c)(2), if a creditor provides space for the consumer to
sign or initial the early HELOC disclosures, the creditor would be
required to include a statement that a signature by the consumer only
confirms receipt of the disclosure statement.
Pursuant to TILA Section 127(a)(8) and for the same reasons
discussed in the section-by-section analysis to proposed Sec.
226.5b(c)(2), the Board proposes in new Sec. 226.6(a)(2)(xxiv) to
require these same statements below the account-opening table. 15
U.S.C. 1637(a)(8). In addition, the Board also proposes to require a
creditor to disclose below the account-opening table a statement that
the consumer should confirm that the terms disclosed in the table are
the same terms for which the consumer applied. The Board proposes this
rule pursuant to its authority in TILA Section 105(a) to make
adjustments and exceptions to the requirements in TILA to effectuate
the statute's purposes, which include facilitating consumers' ability
to compare credit terms and helping consumers avoid the uniformed use
of credit. See 15 U.S.C. 1601(a), 1604(a). The Board believes this
statement would be a helpful reminder to consumers to check that the
terms disclosed in the account-opening table are the terms that the
consumer expects to apply to the HELOC plan based on the terms
disclosed in the early HELOC disclosures table.
6(a)(2)(xxv) Statement About Asking Questions
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(20), the Board proposes in new Sec.
226.5b(c)(20) to require a creditor to disclose below the early HELOC
[[Page 43505]]
disclosures table a statement that if the consumer does not understand
any disclosure in the table the consumer should ask questions. Pursuant
to TILA Section 127(a)(8) and for the same reasons discussed in the
section-by-section analysis to proposed Sec. 226.5b(c)(20), the Board
proposes in new Sec. 226.6(a)(2)(xxv) to require that a creditor
disclose this same statement below the account-opening table. 15 U.S.C.
1637(a)(8).
6(a)(2)(xxvi) Statement About Board's Web Site
As discussed in more detail in the section-by-section analysis to
proposed Sec. 226.5b(c)(21), the Board proposes in new Sec.
226.5b(c)(21) to required a creditor to disclose below the early HELOC
disclosures table a statement that the consumer may obtain additional
information at the Web site of the Federal Reserve Board, and a
reference to that Web site. Pursuant to TILA Section 127(a)(8), the
Board proposes in new Sec. 226.5b to require a creditor to provide
these same statements below the account-opening table. 15 U.S.C.
1637(a)(8). Although it is hard to predict how many consumers might use
the Board's Web site, and recognizing that not all consumers have
access to the Internet, the Board believes that this Web site may be
helpful to some consumers as they use their HELOC plan.
6(a)(3) Disclosure of Charges Imposed as Part of Home-Equity Plans
The current rules for disclosing costs related to open-end plans
create two categories of charges covered by TILA: finance charges
(former Sec. 226.6(a)) and ``other charges'' (former Sec. 226.6(b)).
The terms ``finance charge'' and ``other charge'' are given broad and
flexible meanings in the current regulation and commentary. This
ensures that TILA adapts to changing conditions, but it also creates
uncertainty. The distinctions among finance charges, other charges, and
charges that do not fall into either category are not always clear.
Examples of charges that are included or excluded charges are in the
regulation and commentary, but they cannot provide definitive guidance
in all cases. As creditors develop new kinds of services, some
creditors find it difficult to determine whether associated charges for
the new services meet the standard for a ``finance charge'' or ``other
charge'' or are not covered by TILA at all. This uncertainty can pose
legal risks for creditors that act in good faith to classify fees.
To address this problem, the January 2009 Regulation Z Rule created
a single category of ``charges imposed as part of open-end (not home-
secured) plans,'' specified in Sec. 226.6(b)(3). These charges include
finance charges under Sec. 226.4(a) and (b), penalty charges, taxes,
and charges for voluntary credit insurance, debt cancellation or debt
suspension coverage. In addition, charges to be disclosed include any
charge the payment or nonpayment of which affects the consumer's access
to the plan, duration of the plan, the amount of credit extended, the
period for which credit is extended, or the timing or method of billing
or payment. Charges imposed for terminating a plan are also included.
Three examples of types of charges that are not imposed as part of
the plan are listed in Sec. 226.6(b)(3)(iii). These examples include
charges imposed on a cardholder by an institution other than the card
issuer for the use of the other institution's ATM; charges for a
package of services that includes an open-end credit feature, if the
charges would be required whether or not the open-end credit feature
were included and the non-credit services are not merely incidental to
the credit feature; and charges under Sec. 226.4(e).
The Board proposes to apply the same approach to disclosure of
charges under HELOC plans subject to Sec. 226.5b, for the same reasons
as for open-end (not home-secured) plans. Accordingly, proposed Sec.
226.6(a)(3) would set forth a single category of ``charges imposed as
part of home-equity plans.'' The disclosures included, as specified in
proposed Sec. 226.6(a)(3)(i) and (ii), would generally parallel those
included for open-end (not home-secured) plans in Sec. 226.6(b)(3)(i)
and (ii). Similarly, proposed Sec. 226.6(a)(3)(iii) would list types
of charges not considered to be charges imposed as part of a home-
equity plan, generally paralleling Sec. 226.6(b)(3)(iii), which
specifies types of charges not included as charges imposed as part of
an open-end (not home-secured) plan.
As the Board acknowledged in the June 2007 Regulation Z Proposal
and the January 2009 Regulation Z Rule, this proposed approach does not
completely eliminate ambiguity about what charges are subject to TILA
disclosure requirements. However, the proposed commentary provides
examples to ease compliance. In addition, to further mitigate
ambiguity, the proposed rule would provide a complete list in Sec.
226.6(a)(2), as discussed above, of which charges must be disclosed in
tabular format in writing at account opening. Under the proposal, any
charges covered by Sec. 226.6(a)(3), but not identified in Sec.
226.6(a)(2), would not be required to be disclosed in writing at
account opening. However, if they are not disclosed in writing at
account opening, a creditor would be required to disclose these other
charges imposed as part of a HELOC plan in writing or orally at a time
and in a manner such that a consumer would be likely to notice them
before the consumer agrees to or becomes obligated to pay the charge.
This proposed approach is intended in part to reduce creditor burden.
For example, when a consumer orders a service by telephone, creditors
presumably disclose fees related to that service at that time for
business reasons and to comply with other state and federal laws.
Moreover, compared to the approach reflected in the current
regulation, the Board believes that the broad application of the
statutory standard of fees ``imposed as part of the plan'' would make
it easier for a creditor to determine whether a fee is a charge covered
by TILA, and reduce litigation and liability risks. Proposed comment
6(a)(3)(ii)-3 would be added to provide that if a creditor is unsure
whether a particular charge is a cost imposed as part of the plan, the
creditor may, at its option, consider such charges as a cost imposed as
part of the plan for Truth in Lending purposes. In addition, this
proposed approach will help ensure that consumers receive the
information they need when it would be most helpful to them.
Under proposed Sec. 226.6(a)(3)(ii)(B), one of the categories of
charges included in charges imposed as part of a home-equity plan would
be ``charges resulting from the consumer's failure to use the plan as
agreed, except amounts payable for collection activity after default;
costs for protection of the creditor's interest in the collateral for
the plan due to default; attorney's fees whether or not automatically
imposed; foreclosure costs; and post-judgment interest rates imposed by
law.'' This provision generally parallels Sec. 226.6(b)(3)(ii)(B)
applicable to open-end (not home-secured) plans under the January 2009
Regulation Z Rule, as well as longstanding comment 6(b)-2.ii. in the
current regulation. Two of the excepted charges, ``costs for protection
of the creditor's interest in the collateral due to default'' and
``foreclosure costs,'' do not appear in Sec. 226.6(b)(3)(ii)(B);
``foreclosure costs'' appears in current comment 6(b)-2.ii. These types
of charges could occur in HELOC accounts, and would most likely not
occur in the case of open-end (not home-secured) credit; they are
similar to the other excepted types of charges in that all would likely
occur in the
[[Page 43506]]
context of default or foreclosure. It would likely be impracticable for
creditors to disclose, at the time an account is opened, charges
related to default or foreclosure, since the amount of such charges may
not be known at that time. Therefore, the Board believes it would be
appropriate to include these two types of charges in the list of
exceptions in proposed Sec. 226.6(a)(3)(ii)(B).
Proposed comment 6(a)(3)(ii)-2 would give examples of fees that
affect the consumer's access to the plan (and thus are included as
charges that must be disclosed since they are considered charges
imposed as part of the plan). This proposed comment generally parallels
comment 6(b)(3)(ii)-2 for open-end (not home-secured) credit; however,
proposed comment 6(a)(3)(ii)-2 would refer to ``fees to obtain
additional checks or credit cards'' and ``fees to expedite delivery of
checks or credit cards,'' as examples of charges affecting access to
the plan, rather than only referring to fees to obtain or expedite
delivery of credit cards, since HELOC plans are typically accessed by
checks as well as, in some cases, credit cards.
Proposed Sec. 226.6(a)(3)(iii) would list types of charges not
considered to be charges imposed as part of a home-equity plan. As in
the case of open-end (not home-secured) credit under Sec.
226.6(b)(3)(iii), these charges would include charges imposed on a
cardholder by an institution other than the card issuer for the use of
the other institution's ATM; charges for a package of services that
includes an open-end credit feature, if the charges would be required
whether or not the open-end credit feature were included and the non-
credit services are not merely incidental to the credit feature; and
charges under Sec. 226.4(e) (generally, taxes and fees prescribed by
law and related to security instruments). In proposed comment
6(a)(3)(iii)(B)-1, discussing charges for a package of services
including an open-end credit feature, ``credit'' is substituted for ``a
credit card,'' because HELOCs may not offer credit card access.
The Board also proposes new comment 6(a)(3)-1, which would cross-
reference comment 6(a)-1 for guidance on disclosing information related
to fixed-rate and -term payment options; there is no parallel comment
under Sec. 226.6(b)(3), because open-end (not home-secured) credit
plans generally do not offer such options. Proposed comments 6(a)(3)-2
and -3 discuss requirements for disclosing grace periods, and would
generally parallel comments 6(b)(3)-1 and -2, respectively, applying to
open-end (not home-secured) credit as adopted in the January 2009
Regulation Z Rule. Proposed comment 6(a)(3)-4 discusses circumstances
where no finance charge is imposed when the outstanding balance is less
than a certain amount, and would generally parallel comment 6(b)(3)-3
as adopted in the January 2009 Regulation Z Rule.
6(a)(4) Disclosure of Rates for Home-Equity Plans
The January 2009 Regulation Z Rule reorganizes and consolidates
rules for disclosing interest rates in open-end (not home-secured)
credit in Sec. 226.6(b)(4). The Board proposes to follow the same
approach for HELOCs; thus, rules for disclosing interest rates for
HELOCs would appear in proposed Sec. 226.6(a)(4). Proposed Sec.
226.6(a)(4) would generally parallel Sec. 226.6(b)(4). The proposed
commentary to Sec. 226.6(a)(4) also would generally parallel the
commentary to Sec. 226.6(b)(4), with adjustments in certain comments
to address matters in which HELOCs differ from credit card accounts and
other open-end (not home-secured) credit, as well as differences
between the rules applicable to HELOCs and those applicable to open-end
(not home-secured) credit (see, for example, proposed comments
6(a)(4)(ii)-1, -2, and -3 and 6(a)(4)(iii)-1 and -2). In addition, the
Board proposes new comment 6(a)(4)-1, which would cross-reference
comment 6(a)-1 for guidance on disclosing information related to fixed-
rate and -term payment options.
6(a)(4)(i)(D) Balance Computation Method
Proposed Sec. 226.6(a)(4)(i)(D) would require creditors to explain
the method used to determine the balance to which rates apply. In
addition to disclosing the name of the balance computation method with
the account-opening summary table, as discussed under Sec. 226.6(a)(2)
above, creditors would be required, as in the current regulation, to
explain the balance computation method in the account-opening agreement
or other disclosure statement. Under the proposal, a creditor would be
required to disclose under the account-opening summary table a
reference to where the explanation is found, along with the name of the
balance computation method.
Model clauses that explain commonly used balance computation
methods, such as the average daily balance method, are in Model Clauses
G-1 and G-1(A) in Appendix G. In the January 2009 Regulation Z Rule,
the Board adopted new Model Clause G-1(A) containing balance
computation method model clauses for open-end (not home-secured)
credit, while retaining existing Model Clause G-1 to continue to
provide the existing model clauses for HELOCs. The Board is now
proposing to eliminate existing Model Clause G-1 and redesignate Model
Clause G-1(A) as G-1; all creditors offering open-end credit would use
the same model clauses for explanations of balance computation methods.
See the discussion under Appendix G below.
6(a)(4)(ii) Variable-Rate Accounts
Proposed Sec. 226.6(a)(4)(ii) would set forth the rules for
variable-rate disclosures, parallel to Sec. 226.6(b)(4)(ii) for open-
end (not home-secured) credit as adopted in the January 2009 Regulation
Z Rule and contained in footnote 12 to Sec. 226.6(a)(1)(ii) in the
regulation currently in effect. Guidance on the accuracy of variable
rates provided at account opening would be moved from the commentary to
the regulation and revised. Currently, comment 6(a)(1)(ii)-3 provides
that creditors in disclosing a variable-rate in the account-opening
disclosures may provide the current rate, a rate as of a specified date
if the rate is updated from time to time, or an estimated rate under
Sec. 226.5(c). In the January 2009 Regulation Z Rule, the Board
adopted an accuracy standard for variable rates disclosed at account
opening for open-end (not home-secured) credit; the rate disclosed was
deemed accurate if it was in effect as of a specified date within 30
days before the disclosures were provided. Creditors' option to provide
an estimated rate as the rate in effect for a variable-rate account was
eliminated. In adopting this accuracy standard, the Board stated its
belief that 30 days provides sufficient flexibility to creditors and
reasonably current information to consumers. See Sec.
226.6(b)(4)(ii)(G). The Board proposed a further technical
clarification to the accuracy standard in the May 2009 Regulation Z
Proposal. Proposed Sec. 226.6(a)(4)(ii)(G) provides that a variable
rate on HELOC plans disclosed in the account-opening disclosures is
accurate if it is a rate as of a specified date and this rate was in
effect within the last 30 days before the disclosures are provided.
This proposed accuracy standard reflects the proposed technical
clarification that the Board proposed to Sec. 226.6(b)(4)(ii)(G) in
May 2009.
6(a)(5) Additional Disclosures for Home-Equity Plans
Section 226.6(b)(5) of the January 2009 Regulation Z Rule contains
rules for additional disclosures relating to open-end (not home-
secured) credit,
[[Page 43507]]
including: The disclosures required under Sec. 226.4(d) that, if
provided, entitle the creditor to exclude voluntary credit insurance or
debt cancellation or suspension coverage from the finance charge (Sec.
226.6(b)(5)(i)); the disclosure of security interests (Sec.
226.6(b)(5)(ii)); and the statement about consumers' billing rights
under TILA (Sec. 226.6(b)(5)(iii)). Proposed Sec. 226.6(a)(5) would
set forth the parallel disclosures for HELOCs, in Sec. 226.6(a)(5)(i),
(ii), and (iii), respectively.
Proposed comment 6(a)(5)(i)-1 (similar to comment 6(b)(5)(i)-1 for
open-end (not home-secured) credit) would provide that creditors comply
with Sec. 226.6(a)(5)(i) if they provide disclosures required to
exclude the cost of voluntary credit insurance or debt cancellation or
debt suspension coverage from the finance charge in accordance with
Sec. 226.4(d) before the consumer agrees to the purchase of the
insurance or coverage. For example, if the Sec. 226.4(d) disclosures
are given at application, creditors need not repeat those disclosures
at account opening.
Model forms for the billing rights statement under proposed Sec.
226.6(a)(5)(iii) are in Appendices G-3 and G-3(A). In the January 2009
Regulation Z Rule, the Board adopted new Appendix G-3(A) for open-end
(not home-secured) credit for improved readability, while retaining
existing Appendix G-3 to give HELOC creditors the option of providing
the existing model billing rights statement form. The Board proposes to
eliminate existing Appendix G-3 and redesignate Appendix G-3(A) as G-3;
thus, all creditors offering open-end credit would use the same model
form for the billing rights statement. See the discussion under
Appendix G below.
Proposed commentary for Sec. 226.6(a)(5)(i), (ii), and (iii) would
parallel the commentary to Sec. 226.6(b)(5)(i), (ii), and (iii),
respectively, with adjustments to address differences between HELOCs
and open-end (not home-secured) credit and between the rules applicable
to each. For example, in proposed comment 6(a)(5)(ii)-2, a reference to
``your home'' (as the collateral for the credit) would be substituted
for ``motor vehicle or household appliances.'' Comments 6(b)(5)(ii)-4
and -5 for open-end (not home-secured) credit do not appear relevant to
HELOCs, and therefore parallel comments under Sec. 226.6(a)(5)(ii) are
not proposed and current comments 6(a)(4)-4 and -5, which state these
interpretations for HELOCs, would be deleted. Comment 6(b)(5)(ii)-4
(and comment 6(a)(4)-4) addresses the situation where collateral will
be required only when the outstanding balance reaches a certain amount;
HELOCs generally require that the consumer's home secure the line of
credit from the outset. Comment 6(b)(5)(ii)-5 (and comment 6(a)(4)-5)
discusses circumstances in which the collateral is owned by someone
other than the consumer liable for the credit extended; this would
generally not be the case with HELOCs. However, the Board requests
comment on whether, and how often, the situations addressed by these
two comments might occur in HELOC accounts, and accordingly whether
these two comments should be retained for HELOCs.
Proposed Sec. 226.6(a)(5) would contain two additional paragraphs
without counterparts in Sec. 226.6(b)(5). Section 226.6(a)(5)(iv)
would require a disclosure of the conditions under which the creditor
in a HELOC may take certain actions, such as terminating the plan or
changing its terms. The account-opening table required under proposed
Sec. 226.6(a)(2), as discussed above, would require a statement of the
actions the creditor may take, such as terminating and accelerating a
HELOC, reducing the credit limit, suspending further advances, or
changing other terms, but would not require or permit setting forth the
conditions under which the creditor is permitted, under Sec.
226.5b(f), to take such actions. Instead, the account-opening table
would have to contain a reference to the disclosure or credit agreement
in which the conditions would be disclosed. See also discussion under
Sec. 226.6(a)(2)(iii), above.
Proposed Sec. 226.6(a)(5)(v) would require disclosure of
additional information about any fixed-rate and -term payment option
offered under the HELOC plan. Under current Regulation Z, guidance on
disclosing fixed-rate and -term payment options is contained only in
the commentary (comment 5b(d)(5)(ii)-2). To provide clearer guidance,
the Board proposes to state the rules about disclosure of such options
in Sec. 226.6(a)(5)(v).
The account-opening table required under proposed Sec.
226.6(a)(2), as discussed above, would require a brief statement about
a fixed-rate and -term payment option, including a statement that the
consumer has the option during the draw period to borrow at a fixed
interest rate, the amount of credit available under the option, and a
statement that details about this option are included in the credit
agreement or other document, as applicable. See the discussion under
Sec. 226.6(a)(2)(xix), above. Proposed Sec. 226.6(a)(5)(v) would
require that a creditor disclose at account opening, but outside of the
table prescribed in Sec. 226.6(a)(2), the following additional
information about the option: The period during which the option may be
exercised (Sec. 226.6(a)(5)(v)(A)), the length of time over which
repayment can occur (Sec. 226.6(a)(5)(v)(B)), an explanation of how
the minimum periodic payment for the option will be determined (Sec.
226.6(a)(5)(v)(C)), and any limitations on the number or total amount
of loans that can be obtained under the option, as well as any minimum
outstanding balance or minimum draw requirements (Sec.
226.6(a)(5)(v)(D)). Proposed comment 6(a)(5)(v)-1 would refer to
proposed comment 6(a)-1 for further guidance on disclosing information
related to fixed-rate and -term payment options.
Section 226.7 Periodic Statement
TILA Section 127(b), implemented in Sec. 226.7, identifies
information about an open-end account that must be disclosed when a
creditor is required to provide periodic statements. See 15 U.S.C.
1637(b).
Periodic statement disclosure and format requirements for HELOCs
subject to Sec. 226.5b generally were unaffected by the January 2009
Regulation Z Rule, consistent with the Board's plan to review
Regulation Z's disclosure rules for home-secured credit in a future
rulemaking. To facilitate compliance, the Board in the January 2009
Regulation Z Rule grouped the requirements applicable to HELOCs
together in Sec. 226.7(a) (moved from former Sec. 226.7(a) through
(k)).
This proposal contains a number of significant revisions to
periodic statement disclosures currently applicable to creditors
offering HELOCs subject to Sec. 226.5b. Except as discussed below,
these proposed revisions are substantially similar to revisions adopted
for open-end (not home-secured) credit plans in the January 2009
Regulation Z Rule, and as proposed to be revised in the May 2009
Regulation Z Proposal. First, the Board proposes to eliminate the
requirement to disclose the effective APR for HELOC accounts subject to
Sec. 226.5b. Second, the proposal contains several formatting
requirements for periodic statement disclosures for HELOC accounts
subject to Sec. 226.5b. For example, interest charges and fees imposed
as part of the plan must be grouped together and totals disclosed for
the statement period and year to date. In addition, if an advance
notice of a change in rates or terms is provided on or with a periodic
statement, the proposal requires that a summary of the change appear on
the front of the periodic statement. To
[[Page 43508]]
facilitate compliance, sample forms are proposed to illustrate the
revisions. See proposed Samples G-24(A), G-24(B) and G-24(C) of
Appendix G to part 226.
Effective Annual Percentage Rate
Background on effective APR. TILA Section 127(b)(6) requires
disclosure of an APR calculated as the quotient of the total finance
charge for the period to which the charge relates divided by the amount
on which the finance charge is based, multiplied by the number of
periods in the year. See 15 U.S.C. 1637(b)(6) (implemented by Sec.
226.7(a)(7) for HELOCs subject to Sec. 226.5b). This rate has come to
be known as the ``historical APR'' or ``effective APR.'' A creditor
does not have to disclose an effective APR when the total finance
charge is 50 cents or less for a monthly or longer billing cycle, or
the pro rata share of 50 cents for a shorter cycle. See 15 U.S.C.
1637(b)(6). In such a case, the creditor must disclose only the
periodic rate and the annualized rate that corresponds to the periodic
rate (the ``corresponding APR''). See 15 U.S.C. 1637(b)(5).
The effective APR and corresponding APR for any given plan feature
are the same when the finance charge in a period arises only from
applying the periodic rate to the applicable balance (the balance
calculated according to the creditor's chosen method, such as average
daily balance method). When the two APRs are the same, Regulation Z
requires that the APR be stated just once. The effective and
corresponding APRs diverge when the finance charge in a period arises
(at least in part) from a charge not determined by application of a
periodic rate and the total finance charge exceeds 50 cents. When they
diverge, Regulation Z currently requires that both be stated. See Sec.
226.7(a)(4) and (a)(7).
The statutory requirement of an effective APR is intended to
provide the consumer with an annual rate that reflects the total
finance charge, including both the finance charge due to application of
a periodic rate (interest) and finance charges that take the form of
fees. This rate, like other APRs required by TILA, presumably was
intended to provide consumers information about the cost of credit that
would help consumers compare credit costs and make informed credit
decisions and, more broadly, strengthen competition in the market for
consumer credit. See 15 U.S.C. 1601(a). There is, however, a
longstanding controversy about whether the requirement to disclose an
effective APR advances TILA's purposes or, as some argue, actually
undermines them.
Industry and consumer groups disagree as to whether the effective
APR conveys meaningful information for open-end plans. Creditors argue
that the cost of a transaction is rarely, if ever, as high as the
effective APR makes it appear, and that this tendency of the rate to
exaggerate the cost of credit makes this APR misleading. Industry
representatives also claim that the effective APR imposes direct costs
on creditors that consumers pay indirectly. They represent that the
effective APR raises compliance costs when they introduce new services,
including costs of: (1) Conducting legal analysis of Regulation Z to
determine whether the fee for the new service is a finance charge and
must be included in the effective APR; (2) reprogramming software if
the fee must be included; and (3) responding to telephone inquiries
from confused customers and accommodating them (e.g., with fee waivers
or rebates).
Consumer groups contend that the information the rate provides
about the cost of credit, even if limited, is meaningful. The effective
APR for a specific transaction or set of transactions in a given cycle
may provide the consumer a rough indication that the cost of repeating
such transactions is high in some sense or, at least, higher than the
corresponding APR alone conveys. Consumer advocates and industry
representatives also disagree as to whether the effective APR promotes
credit shopping. Industry and consumer group representatives find some
common ground in their observations that consumers do not understand
the effective APR well.
Consumer research on credit card disclosures conducted by the
Board. In relation to the January 2009 Regulation Z Rule, the Board
undertook research through a third-party consultant on consumer
awareness and understanding of the effective APR, and on whether
changes to the presentation of the disclosure could increase awareness
and understanding. The consultant used one-on-one cognitive interviews
with consumers; consumers were provided mock disclosures of periodic
statements for credit card accounts that included effective APRs and
asked questions about the disclosure designed to elicit their
understanding of the rate. The Board tested effective APR disclosures
with different versions of explanatory text in seven rounds of one-on-
one interviews with consumers. In the first round the statements were
copied from examples in disclosures currently used in the market. For
subsequent testing rounds, the language and design of the statements
were modified to better convey how the effective APR differs from the
corresponding APR. Several different approaches and many variations on
those approaches were tested. For example, in later rounds of testing,
the effective APR was labeled the ``Fee-Inclusive APR.''
In all but one round of testing, a minority of participants
correctly explained that the effective APR for cash advances was higher
than the corresponding APR for cash advances because the effective APR
included a cash advance fee that had been imposed. A smaller minority
correctly explained that the effective APR for purchases was the same
as the corresponding APR for purchases because no transaction fee had
been imposed on purchases. A majority offered incorrect explanations or
did not offer any explanation. In addition, the inclusion of the
effective APR disclosure on the statement was often confusing to
participants; in each round some participants mistook the effective APR
for the corresponding APR.
In addition, in September 2008 the Board conducted additional
consumer research using quantitative methods for the purpose of
validating the qualitative research (one-on-one interviews) conducted
previously. The quantitative consumer research conducted by the Board
validated the results of the qualitative testing; it shows that most
consumers do not understand the effective APR, and that for some
consumers the effective APR is confusing and detracts from the
effectiveness of other disclosures. The quantitative consumer research
involved surveys of around 1,000 consumers at shopping malls in seven
locations around the country. Two research questions were investigated.
The first was designed to determine what percentage of consumers
understand the significance of the effective APR. The interviewer
pointed out the effective APR disclosure for a month in which a cash
advance occurred, triggering a transaction fee and thus making the
effective APR higher than the corresponding APR (interest rate). The
interviewer then asked what the effective APR would be in the next
month, in which the cash advance balance was not paid off but no new
cash advances occurred. A very small percentage of respondents gave the
correct answer (that the effective APR would be the same as the
corresponding APR). Some consumers stated that the effective APR would
be the same in the next month as in the current month, others indicated
that
[[Page 43509]]
they did not know, and the remainder gave other incorrect answers.
The second research question was designed to determine whether the
disclosure of the effective APR adversely affects consumers' ability to
identify correctly the current corresponding APR on cash advances. Some
consumers were shown a periodic statement disclosing an effective APR,
while other consumers were shown a statement without an effective APR
disclosure. Consumers were then asked to identify the corresponding APR
on cash advances. A greater percentage of consumers who were shown a
statement without an effective APR than of those shown a statement with
an effective APR correctly identified the corresponding APR on cash
advances. This finding was statistically significant, as discussed in
the December 2008 Macro Report on Quantitative Testing. Some of the
consumers who did not correctly identify the corresponding APR on cash
advances instead mistakenly identified the effective APR as that rate.
Proposal. After considering the results of the consumer testing and
other factors mentioned in the background discussion of the effective
APR, the Board is proposing that creditors offering HELOCs subject to
Sec. 226.5b no longer be required to disclose the effective APR on
periodic statements. (An identical exemption was adopted for open-end
(not home-secured) plans in the January 2009 Regulation Z Rule.) The
Board proposes this rule pursuant to its exception and exemption
authorities under TILA Section 105. Section 105(a) authorizes the Board
to make exceptions to TILA to effectuate the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a). Section 105(f) authorizes the Board to exempt any
class of transactions from coverage under any part of TILA if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
See 15 U.S.C. 1604(f)(1). The Board must make this determination in
light of specific factors. See 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process; (3)
the status of the borrower, including any related financial
arrangements of the borrower, the financial sophistication of the
borrower relative to the type of transaction, and the importance to the
borrower of the credit, related supporting property, and coverage under
TILA; (4) whether the loan is secured by the principal residence of the
borrower; and (5) whether the exemption would undermine the goal of
consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes that the proposed exemption is appropriate.
Consumer testing conducted on credit card disclosures in relation to
the January 2009 Regulation Z Rule shows that consumers find the
current disclosure of an APR that combines rates and fees to be
confusing. Based on this consumer testing, the Board believes that
consumers are likely confused by the effective APR disclosure on HELOC
accounts. Under this proposal, creditors offering HELOCs subject to
Sec. 226.5b would be required to disclose interest and fees in a
manner that is more readily understandable and comparable across
institutions. The Board believes that this approach can more
effectively further the goals of consumer protection and the informed
use of credit for all types of open-end credit.
The Board also considered whether there were potentially competing
considerations that would suggest retention of the requirement to
disclose an effective APR. First, the Board considered the extent to
which ``sticker shock'' from the effective APR benefits consumers, even
if the disclosure does not enable consumers to compare costs
meaningfully from month to month or for different products. A second
consideration was whether the effective APR may be a hedge against fee-
intensive pricing by creditors, and if so, the extent to which it
promotes transparency. On balance, however, the Board believes that the
benefits of eliminating the requirement to disclose the effective APR
outweigh these considerations.
The consumer testing conducted for the Board supports this
determination. Again, with the exception of one round of one-on-one
testing, the overall results of the testing demonstrated that most
consumers do not correctly understand the effective APR. Some consumers
in the testing offered no explanation of the difference between the
corresponding and effective APR, and others appeared to have an
incorrect understanding.
Even if some consumers have some understanding of the effective
APR, the Board believes that sound reasons support eliminating the
requirement to disclose it. Disclosure of the effective APR on periodic
statements does not significantly assist consumers in credit shopping,
because the effective APR disclosed on a periodic statement for a HELOC
account cannot be compared to the corresponding APR disclosed in early
disclosures given pursuant to Sec. 226.5b. In addition, even within
the same account, the effective APR for a given cycle is unlikely to
indicate accurately the cost of credit in a future cycle, because if
any of several factors (such as the timing of transactions and payments
and the amount carried over from the prior cycle) is different in the
future cycle, the effective APR will be different even if the amounts
of the transaction and the fee are the same in both cycles.
As to contentions that the effective APR for a particular billing
cycle provides the consumer a rough indication that the cost of
repeating transactions triggering transaction fees is high in some
sense, the Board believes the proposed requirements to disclose
interest and fee totals for the cycle and year to date will better
serve that purpose. In addition, the proposed interest and fee total
disclosure requirements would ensure that creditors must clearly
disclose all costs; this should address concerns that eliminating the
effective APR would remove disincentives for creditors to adopt fee-
intensive pricing on HELOC accounts.
7(a) Rules Affecting Home-Equity Plans
In the January 2009 Regulation Z Rule, the Board provided in Sec.
226.7(a) that at their option, creditors offering HELOCs subject to
Sec. 226.5b may comply with the periodic statement requirements of
Sec. 226.7(b) applicable to creditors offering open-end (not home-
secured) credit, instead of the requirements in Sec. 226.7(a). The
Board provided this flexibility because some creditors may use a single
processing system to generate periodic statements for all open-end
products they offer, including HELOCs. These creditors would have the
option to generate statements according to a single set of rules, until
the Board completed its review of Regulation Z's disclosure rules for
home-secured credit. In this proposal, the Board proposes to remove the
option for creditors offering HELOCs to comply with the periodic
statement requirements of Sec. 226.7(b) applicable to creditors
offering open-end (not home-secured) credit. Instead, creditors
offering HELOCs subject to Sec. 226.5b would have to comply with the
requirements in Sec. 226.7(a). Nonetheless, the proposed periodic
statement requirements in Sec. 226.7(a) applicable to
[[Page 43510]]
HELOC creditors are substantially similar to the requirements in Sec.
226.7(b) applicable to open-end (not home-secured) plans, except for
provisions related to the itemization of interest charges in Sec.
226.7(a)(6), and certain late-payment disclosures, minimum payment
disclosures and formatting requirements related to those disclosures,
as discussed in more detail below. The Board requests comment on
whether creditors that currently use a single processing system to
generate periodic statements for all open-end products they offer would
be able to continue to do so under the proposal.
7(a)(1) Previous Balance
Section 226.7(a)(1), which implements TILA Section 127(b)(1),
requires a creditor offering HELOCs subject to Sec. 226.5b to disclose
on the periodic statement the account balance outstanding at the
beginning of the billing cycle. 15 U.S.C. 1637(b)(1). The Board
proposes no changes to these disclosure requirements.
7(a)(2) Identification of Transactions
Section 226.7(a)(2), which implements TILA Section 127(b)(2),
requires creditors offering HELOCs subject to Sec. 226.5b to identify
on the periodic statement transactions according to the rules in Sec.
226.8. 15 U.S.C. 1637(b)(2). Some HELOC plans involve different
features, such as a variable-rate feature and optional fixed-rate
features. Comment 7(a)(2)-1 currently provides that in identifying
transactions under Sec. 226.7(a)(2) for multifeatured plans, creditors
may, for example, choose to arrange transactions by feature or in some
other clear manner, such as by arranging the transactions in
chronological order. The Board proposes technical revisions to this
comment, without substantive change, to conform this comment to a
similar comment applicable to open-end (not home-secured) credit plans.
See comment 7(b)(2)-1. Specifically, the Board proposes to revise
comment 7(a)(2)-1 to specify that creditors may, but are not required
to, arrange transactions by feature. Thus, creditors offering HELOCs
subject to Sec. 226.5b would still be permitted to list transactions
chronologically or organize transactions in any other way that would be
clear to consumers. The Board also proposes to revise this comment to
clarify, consistent with proposed Sec. 226.7(a)(6), that all fees and
interest must be grouped together under separate headings and may not
be interspersed with transactions.
7(a)(3) Credits
Section 226.7(a)(3), which implements TILA Section 127(b)(3),
requires creditors offering HELOCs subject to Sec. 226.5b to disclose
any credits to the account during the billing cycle. 15 U.S.C.
1637(b)(3). Creditors typically disclose credits among other
transactions. The Board proposes to revise comment 7(a)(3)-1 to clarify
that credits may be distinguished from transactions in any way that is
clear and conspicuous; for example, by use of debit and credit columns
or by use of plus signs for credits and minus signs for debits.
7(a)(4) Periodic Rates
Rates that ``may be used.'' TILA Section 127(b)(5) requires
creditors to disclose all periodic rates that may be used to compute
the finance charge, and the APR that corresponds to the periodic rate
multiplied by the number of periods in a year. See 15 U.S.C.
1637(b)(5); Sec. 226.14(b). Prior to the January 2009 Regulation Z
Rule, former comment 7(d)-1 interpreted the requirement to disclose all
periodic rates that ``may be used'' to mean ``whether or not [the rate]
is applied during the billing cycle.'' In the January 2009 Regulation Z
Rule, the Board adopted for HELOCs a limited exception to TILA Section
127(b)(5) regarding promotional rates that were offered but not
actually applied, to effectuate the purposes of TILA to require
disclosures that are meaningful and to facilitate compliance.
Specifically, creditors offering HELOCs subject to Sec. 226.5b are
required to disclose a promotional rate only if the rate actually
applied during the billing period. See Sec. 226.7(a)(4)(ii) and
comment 7(a)(4)-1. The Board noted that interpreting TILA to require
the disclosure of all promotional rates would be operationally
burdensome for creditors and result in information overload for
consumers. This proposal retains the exception in Sec.
226.7(a)(4)(ii).
Periodic rates. In this proposal, the Board proposes to eliminate
the requirement to disclose periodic rates on periodic statements for
HELOCs subject to Sec. 226.5b. See proposed Sec. 226.7(a)(4) and
accompanying commentary. Under the proposal, creditors would still be
required to disclose an APR that corresponds to each periodic rate that
may be used to compute the finance charge. For example, assume a
monthly periodic rate of 1.5 percent applies to transactions on a HELOC
account. The corresponding APR to this periodic rate would be 18
percent. Under the proposal, creditors would be required to disclose
the 18 percent corresponding APR, but would not be required to disclose
the 1.5 percent periodic rate.
The Board proposes to eliminate the requirement to disclose
periodic rates on periodic statements, pursuant to the Board's
exception and exemption authorities under TILA Section 105. Section
105(a) authorizes the Board to make exceptions to TILA to effectuate
the statute's purposes, which include facilitating consumers' ability
to compare credit terms and helping consumers avoid the uninformed use
of credit. See 15 U.S.C. 1601(a), 1604(a). Section 105(f) authorizes
the Board to exempt any class of transactions from coverage under any
part of TILA if the Board determines that coverage under that part does
not provide a meaningful benefit to consumers in the form of useful
information or protection. See 15 U.S.C. 1604(f)(1). The Board must
make this determination in light of specific factors. See 15 U.S.C.
1604(f)(2). These factors are (1) the amount of the loan and whether
the disclosure provides a benefit to consumers who are parties to the
transaction involving a loan of such amount; (2) the extent to which
the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
For this proposal, the Board considered each of these factors
carefully, and based on that review, determined that the proposed
exemption is appropriate. In consumer testing conducted for the Board
on credit card disclosures in relation to the January 2009 Regulation Z
Rule, consumers indicated they do not use periodic rates to verify
interest charges. Based on this consumer testing, the Board believes
consumers are not likely to use periodic rates to verify interest
charges for HELOC accounts. Requiring periodic rates to be disclosed on
periodic statements may detract from more important information on the
statement, and contribute to information overload. Thus, eliminating
periodic rates from the periodic statement has the potential to further
the goals of consumer protection and the informed use of credit for
HELOCs more effectively than if they are included.
[[Page 43511]]
The Board notes that under the proposal, creditors may continue to
disclose the periodic rate, as long as the additional information is
presented in a way that is consistent with creditors' duty to provide
required disclosures clearly and conspicuously. See proposed comment
app. G-15.
Labeling APRs. Currently creditors offering HELOCs subject to Sec.
226.5b are provided with considerable flexibility in identifying the
APR that corresponds to the periodic rate. Comment 7(a)(4)-4 permits
labels such as ``corresponding annual percentage rate,'' ``nominal
annual percentage rate,'' or ``corresponding nominal annual percentage
rate.'' This proposal would amend Sec. 226.7(a)(4) to require
creditors offering HELOCs subject to Sec. 226.5b to label the APR
disclosed under Sec. 226.7(a)(4) as the ``annual percentage rate.''
Comment 7(a)(4)-4 would be deleted. The proposal is intended to promote
uniformity in how the ``interest only'' APR is described in HELOC
disclosures. Under Sec. Sec. 226.5b and 226.6, creditors must use the
term ``annual percentage rate'' to describe the ``interest only''
APR(s) that must be disclosed in the tabular disclosures described in
proposed Sec. 226.5b(b) provided to a consumer within three business
days after the consumer submits an application (but no later than
account opening) and in the tabular disclosures described in proposed
Sec. 226.6(a)(1) provided at account opening. See proposed Model Forms
G-14(A) and G-15(A).
Combining interest and other charges. Currently, creditors offering
HELOCs subject to Sec. 226.5b must disclose finance charges
attributable to periodic rates. These costs are typically interest
charges but may include other costs such as premiums for required
credit insurance. If applied to the same balance, creditors may
disclose each rate, or a combined rate. See comment 7(a)(4)-3. As
discussed below, consumer testing for the Board conducted on credit
card disclosures in relation to the January 2009 Regulation Z Rule
indicated that participants appeared to understand credit costs in
terms of ``interest'' and ``fees.'' Because consumers tend to associate
periodic rates with ``interest,'' it seems unhelpful to consumers'
understanding to permit creditors to include periodic rate charges
other than interest in the dollar cost disclosed for ``interest.''
Thus, the Board proposes to require creditors offering HELOCs subject
to Sec. 226.5b that impose finance charges attributable to periodic
rates (other than interest) to disclose the amount of those charges in
dollars as a ``fee.'' See section-by-section analysis to Sec.
226.7(a)(6) below. This proposal would delete current guidance in
comment 7(a)(4)-3, which permits periodic rates attributable to
interest and other finance charges to be combined.
In addition, the Board proposes to add new comment 7(a)(4)-4 to
provide guidance to creditors when a fee is imposed, remains unpaid,
and interest accrues on the unpaid balance. The proposed comment
provides that creditors disclosing fees in accordance with the format
requirements of Sec. 226.7(a)(6) need not separately disclose which
periodic rate applies to the unpaid fee balance. For example, assume a
fee is imposed for a late payment in the previous cycle and that the
fee, unpaid, would be included in the purchases balance and accrue
interest at the rate for purchases. The creditor need not separately
disclose that the purchase rate applies to the portion of the purchases
balance attributable to the unpaid fee.
7(a)(5) Balance on Which Finance Charge Is Computed
Section 226.7(a)(5), which implements TILA Section 127(b)(7),
currently requires creditors offering HELOCs subject to Sec. 226.5b to
disclose the amount of the balance to which a periodic rate was applied
and an explanation of how the balance was determined. 15 U.S.C.
127(b)(7) The Board provides model clauses that creditors may use to
explain common balance computation methods. See Model Clauses G-1. The
staff commentary to Sec. 226.7(a)(5) interprets how creditors may
comply with TILA in disclosing the ``balance,'' which typically changes
in amount throughout the cycle, on periodic statements.
Explanation of how finance charges may be verified. In disclosing
the amount of the balance to which a periodic rate was applied,
creditors offering HELOCs subject to Sec. 226.5b that use a daily
balance method are permitted to disclose an average daily balance for
the period, so long as they explain that the amount of the finance
charge can be verified by multiplying the average daily balance by the
number of days in the statement period, and then applying the periodic
rate. See comment 7(a)(5)-4. The Board proposes to revise comment
7(a)(5)-4 to permit creditors offering HELOCs subject to Sec. 226.5b,
at their option, not to include an explanation of how the finance
charge may be verified for creditors that use a daily balance method.
As a result, the Board proposes to retain the rule permitting creditors
to disclose an average daily balance but eliminate the requirement to
provide the explanation. Consumer testing conducted for the Board on
credit card disclosures in relation to the January 2009 Regulation Z
Rule suggested that the explanation may not be used by consumers as an
aid to calculate their interest charges. Participants suggested that if
they had questions about how the balances were calculated or wanted to
verify interest charges based on information on the periodic statement,
they would call the creditor for assistance. Based on this consumer
testing, the Board believes that the explanation may not be useful to
consumers with HELOC accounts.
In addition, the Board proposes to require creditors offering
HELOCs subject to Sec. 226.5b to refer to the balance as ``balances
subject to interest rate,'' to complement proposed revisions intended
to further consumer understanding of interest charges, as distinguished
from fees. See section-by-section analysis to Sec. 226.7(b)(6).
Proposed Samples G-24(B) and G-24(C) illustrate this format
requirement.
Explanation of balance computation method. As discussed above,
creditors offering HELOCs subject to Sec. 226.5b currently must
disclose the amount of the balance to which a periodic rate was applied
and an explanation of how the balance was determined. This proposal
contains an alternative to providing an explanation of how the balance
was determined. Under proposed Sec. 226.7(a)(5), a creditor that uses
a balance computation method identified in Sec. 226.5a(g) would have
two options. The creditor could: (1) Provide an explanation, as the
rule currently requires, or (2) identify the name of the balance
computation method and provide a toll-free telephone number where
consumers may obtain more information from the creditor about how the
balance is computed and resulting interest charges are determined. If
the creditor uses a balance computation method that is not identified
in Sec. 226.5a(g), the creditor would be required to provide a brief
explanation of the method. Under the proposal, comment 7(a)(5)-6, which
refers creditors to guidance in comment 6(a)(1)(ii)-1 about disclosing
balance computation methods, would be deleted as unnecessary. The
Board's proposal is guided by the following factors.
Calculating balances on open-end plans can be complex, and requires
an understanding of how creditors allocate payments, assess fees, and
record transactions as they occur during the cycle. Currently, neither
TILA nor Regulation Z requires creditors to disclose on periodic
statements all the information necessary to compute a
[[Page 43512]]
balance, and requiring that level of detail appears unwarranted.
Although the Board's model clauses are intended to assist creditors in
explaining common balance computation methods, consumers continue to
find these explanations lengthy and complex. As stated earlier,
consumer testing conducted on credit card disclosures in relation to
the January 2009 Regulation Z Rule indicates that consumers call the
creditor for assistance when they have questions on how to calculate
balances and verify interest charges.
7(a)(6) Charges Imposed
Section 227.7(a)(6)(i), which implements TILA Section 127(b)(4),
requires creditors offering HELOC subject to Sec. 226.5b to disclose
on the periodic statement the amount of any finance charge added to the
account during the period, itemized to show amounts due to the
application of periodic rates and the amount imposed as a fixed or
minimum charge. 15 U.S.C. 1637(b)(4). In addition, Sec.
226.7(a)(6)(ii) requires these creditors to disclose on the periodic
statement the amount, itemized and identified by type, of any ``other
charges'' debited to the account during the billing cycle. Some charges
do not fall with the ``finance charge'' and ``other charges''
categories and thus are not required to be disclosed on the periodic
statement even if they are imposed in a particular billing cycle. See
current comment 6(a)(2)-2.
As discussed in the section-by-section analysis to proposed Sec.
226.6(a)(3), the Board proposes to create a single category of charges,
namely ``charges imposed as part of home-equity plans.'' Consistent
with proposed Sec. 226.6(a)(3), proposed Sec. 226.7(a)(6) requires
creditors offering HELOCs subject to Sec. 226.5b to disclose on the
periodic statement the amount of any charge imposed as part of a HELOC
plan, as stated in proposed Sec. 226.6(a)(3), for the statement
period. Charges imposed as part of a HELOC plan consist of two types of
charges--interest and fees. Proposed Sec. 226.7(a)(6)(ii) establishes
periodic statement disclosure requirements for interest charges. If
different periodic rates apply to different types of transactions,
creditors offering HELOCs subject to Sec. 226.5b would be required to
itemize interest charges for the statement period by type of
transaction or group of transactions subject to different periodic
rates. The Board proposes that these itemized interest charges must be
grouped together. In addition, the Board proposes to require a creditor
to disclose a total of interest charges disclosed for the statement
period and calendar year. See proposed Sec. 226.7(a)(6)(ii). Proposed
Sec. 226.7(a)(iii) establishes periodic statement disclosure
requirements for fees. The Board proposes that fee imposed during the
statement period must be itemized and grouped together, and a total of
fees disclosed for the statement period and calendar year to date. See
proposed Sec. 226.7(a)(6)(iii). In addition, the Board proposes that
these disclosures regarding interest and fees must be grouped together
in proximity to the transactions identified under Sec. 226.7(a)(2), in
a manner substantially similar to Sample G-24(A) in Appendix G to part
226. See proposed Sec. 226.7(a)(6)(i).
Charges imposed as part of the plan. As discussed above, under the
proposal, creditors would be required to disclose on the periodic
statement the amount of any charges imposed as part of a HELOC plan, as
stated in proposed Sec. 226.6(a)(3), for the statement period.
Guidance on which charges would be deemed to be imposed as part of the
plan is in proposed Sec. 226.6(a)(3)(ii) and accompanying commentary.
As discussed in the section-by-section analysis to proposed Sec.
226.6(a)(3), coverage of charges is broader under the proposed standard
of ``charges imposed as part of the plan'' than under current standards
for finance charges and other charges. While the Board understands that
some creditors offering HELOCs subject to Sec. 226.5b have been
disclosing on the statement all charges debited to the account
regardless of whether they are now defined as ``finance charges,''
``other charges,'' or charges that do not fall into either category,
other creditors currently do not disclose on periodic statements the
charges that fall outside the current ``finance charge'' and ``other
charge'' categories. Nonetheless, the Board believes that requiring
creditors to disclose on the periodic statement all charges imposed as
part of the HELOC plan that are charged during a particular billing
cycle would help ensure that consumers are informed of these charges
Labeling costs imposed as part of the plan as interest or fees. For
creditors offering HELOCs subject to Sec. 226.5b, the Board proposes
to delete the requirement in Sec. 226.7(a)(6) to label finance charges
as such. Consumer testing conducted for the Board on credit card
disclosures in relation to the January 2009 Regulation Z Rule indicated
that most participants reviewing mock credit card periodic statements
could not correctly explain the term ``finance charge.'' Consumers
generally understand interest as the cost of borrowing money over time
and view other costs--regardless of their characterization under TILA
and Regulation Z--as fees. Based on this consumer testing, the Board
proposes to amend Sec. 226.7(a)(6) to label costs as either ``interest
charge'' or ``fees'' rather than ``finance charge'' to align more
closely with consumers' understanding.
Interest charges. TILA Section 127(b)(4) requires creditors to
disclose on periodic statements the amount of any finance charge added
to the account during the period, itemized to show amounts due to the
application of periodic rates and the amount imposed as a fixed or
minimum charge. See 15 U.S.C. 1637(b)(4). This current requirement with
respect to creditors offering HELOCs subject to Sec. 226.5b is
implemented in Sec. 226.7(a)(6)(i), which gives considerable
flexibility regarding totaling or subtotaling finance charges
attributable to periodic rates and other fees. See current Sec.
226.7(a)(6)(i) and comments 7(a)(6)(i)-1, -2, -3, and -4. As discussed
in more detail below, the Board proposes to amend Sec. 226.7(a)(6) to
require creditors offering HELOCs subject to Sec. 226.5b to disclose
total interest charges, for the statement period and year to date,
labeled as such. In addition, if different periodic rates apply to
different types of transactions, creditors offering HELOCs subject to
Sec. 226.5b would be required to itemize finance charges attributable
to interest by type of transaction, or group of transactions subject to
different periodic interest rates, labeled as such. Creditors offering
HELOCs subject to Sec. 226.5b, at their option, would be allowed to
itemize interest charges by transaction type, even if the same periodic
interest rates apply to those transactions. A creditor would be
required to group all itemized interest charges on an account together,
regardless of whether the interest charges are attributable to
different authorized users or sub-accounts. See proposed Sec.
226.7(a)(6)(ii). Under this proposal, finance charges attributable to
periodic rates other than interest charges, such as required credit
insurance premiums, would be required to be identified as fees and
would not be permitted to be combined with interest costs. See proposed
comments 7(a)(4)-3 and 7(a)(6)-3.
The Board understands that for most HELOCs subject to Sec. 226.5b,
the same variable rate on the account applies to most transactions on
the account, regardless of the type of transactions (e.g., purchases or
cash advances) and regardless of whether these transactions are
initiated by check, wire transfer or by a credit card device linked to
the HELOC. In some cases, creditors may offer optional features on the
HELOC at different periodic interest rates from the generally
applicable variable rate
[[Page 43513]]
feature, such as fixed-rate features. Under the proposal, in this
example, creditors offering HELOCs subject to Sec. 226.5b would be
required to itemize the interest charges applicable to the general
variable-rate feature separate from the interest charges applicable to
other features (such as fixed rate optional features) that are subject
to different periodic interest rates. Proposed Sample G-24(A) in
Appendix G to part 226 illustrates the proposal.
Although creditors offering HELOCs subject to Sec. 226.5b are not
currently required to itemize interest charges, these creditors often
do so. For example, creditors may separately disclose the dollar
interest costs associated with advances under the general variable-rate
feature and advances under fixed-rate optional features. The Board
believes that the breakdown of interest charges by features subject to
different periodic interest rates enables consumers to better
understand the cost of using each feature.
This proposal regarding itemization of interest charges differs
from the provision for itemization of interest charges applicable to
open-end (not home-secured) credit plans that the Board adopted in the
January 2009 Regulation Z Rule. Specifically, creditors offering open-
end (not home-secured) credit plans must itemize interest charges by
transaction type, regardless of whether the same rate applies to the
types of transactions. Unlike for open-end (not home-secured) credit,
the Board is not proposing for HELOC accounts to require an itemization
of interest charges by transaction type in all cases, even if the same
rates apply to those types of transactions (although creditors are
permitted to do so). The distinction between types of transactions
(such as purchases and cash advances) is generally more important for
open-end (not home-secured) credit plans--particularly unsecured credit
card accounts--than for HELOCs. For unsecured credit card accounts,
different rates, fees and other account terms typically apply to
purchases and cash advances. The Board believes that requiring a
breakdown of interest charges by transactions type in all cases for
unsecured credit cards, even if a particular unsecured credit card does
not apply different rates to purchases and cash advances, provides for
uniformity in periodic statements and allows consumers to compare more
easily one unsecured credit card account with other unsecured credit
card accounts the consumer may have. As discussed above, most HELOC
accounts do not charge different rates on purchases and cash advances.
Fees. For HELOC accounts, existing Sec. 226.7(a)(6)(ii) requires
the disclosure of ``other charges'' parallel to the requirement in TILA
Section 127(a)(5) and Sec. 226.6(b) to disclose such charges at
account opening. See 15 U.S.C. 1637(a)(5). Consistent with current
rules to disclose ``other charges,'' proposed Sec. 226.7(a)(6)(iii)
requires that charges other than interest be identified consistent with
the feature (e.g., cash advances or fixed-rate transactions) or type
(e.g., late-payment or over-the-limit), and itemized. The proposal
differs from current requirements in the following respect: Fees would
be required to be grouped together and a total of all fees for the
statement period and year to date would be required, as discussed in
more detail below.
In consumer testing conducted on credit card disclosures in
relation to the January 2009 Regulation Z Rule, the Board tested in the
fall of 2008 consumers' ability to identify fees (1) on periodic
statements where fees were grouped together and (2) on periodic
statements where fees were interspersed with transactions, and the fees
and transactions were listed in chronological order. Testing evidence
showed that the periodic statement with grouped fees performed better
among participants with respect to identifying fees.
Consumers' ability to match a transaction fee to the transaction
giving rise to the fee was also tested. Among participants who
correctly identified the transaction to which they were asked to find
the corresponding fee, a larger percentage of consumers who saw a
statement on which account activity was arranged chronologically were
able to match the fee to the transaction than when the fees were
grouped together; however, out of the participants who were able to
identify the transaction to which they were asked to find the
corresponding fee, the percentage of participants able to find the
corresponding fee was very high for both types of listings.
The Board believes that the ability to identify all fees is
important for consumers to assess their cost of credit. As discussed
above, the Board would expect that the vast majority of consumers with
HELOC accounts would not comprehend the effective APR; thus, the Board
believes that highlighting fees and interest for consumers would more
effectively inform consumers of their costs of credit on HELOC
accounts. As also discussed above, the results of consumer testing on
credit card disclosures indicated that grouping fees together on
periodic statements for unsecured credit cards helped consumers find
fees more easily. Based on this consumer testing, the Board proposes
under Sec. 226.7(a)(6)(iii) to require creditors offering HELOCs
subject to Sec. 226.5b to group fees together. The Board proposes this
rule pursuant to its authority in TILA Section 105(a) to make
adjustments and exceptions to the requirements in TILA to effectuate
the statute's purposes, which include facilitating consumers' ability
to compare credit terms and helping consumers avoid the uniformed use
of credit. See 15 U.S.C. 1601(a), 1604(a). Under the proposal, a
creditor would be required to group all fees assessed on the account
during the billing cycle together under one heading even if fees may be
attributable to different users of the account or to different sub-
accounts.
The Board solicits comment on this aspect of the proposal.
Specifically, the Board solicits comment on whether grouping fees
together (and not allowing them to be interspersed with transactions)
is necessary to help consumer find fees more easily on HELOC accounts.
The Board understands that consumers may use unsecured credit cards
differently than HELOC accounts, even where the HELOC is linked to a
credit card device. For example, consumers may use unsecured credit
cards to engage in a significant number of smaller transactions per
billing cycle. On the other hand, consumers appear to use their HELOC
accounts for only a small number of larger transactions each billing
cycle, even if those HELOCs are linked to credit card devices.
Consumers may have more difficulty identifying fees on unsecured credit
cards when the fees are interspersed with transactions because of the
large number of transactions shown on the periodic statement. The Board
solicits comment on the typical number of transactions and fees shown
on periodic statements for HELOC accounts. The Board also solicits
comment on the burden on creditors and the benefit to consumers of
requiring fees to be grouped together on periodic statements for HELOC
accounts.
Cost totals for the statement period and year to date. Under this
proposal, creditors offering HELOCs subject to Sec. 226.5b would be
required to disclose the total amount of interest charges and fees for
the statement period and calendar year to date. See proposed Sec.
226.7(a)(6)(ii) and (iii). The Board believes that providing consumers
with the total of interest and fee costs, expressed in dollars, for the
statement period and year to date would be a
[[Page 43514]]
significant enhancement to consumers' ability to understand the overall
cost of credit for the account. The Board's consumer testing on credit
card disclosures in relation to the January 2009 Regulation Z Rule
indicates that consumers notice and understand credit costs expressed
in dollars. In addition, year-to-date cost information enables
consumers to evaluate how the use of an account may impact the amount
of interest and fees charged over the year and thus promotes the
informed use of credit.
Proposed comment 7(a)(6)-3 provides guidance on how creditors may
disclose the year-to-date totals at the end of a calendar year on
monthly and quarterly statements. Proposed comment 7(a)(6)-5 provides
guidance on creditors' duty to reflect refunded fees or interest in
year-to-date totals.
Proposed comments 7(a)-6 and -7 clarify a creditor's obligations
under Sec. 227.7(a)(6) when it acquires a HELOC account from another
creditor or when a creditor replaces one HELOC account it has with a
consumer with another HELOC account. The proposed comments would
generally provide that the creditor must include the interest charges
and fees incurred by the consumer prior to the account acquisition or
replacement in the aggregate totals provided for the statement period
and calendar year to date after the change. At the creditor's option,
the creditor would be allowed to add the prior charges and fees to the
disclosed totals following the change, or it may provide separate
totals for each time period. Comment is requested regarding the
operational issues associated with carrying over cost totals in the
circumstances described in the proposed commentary.
Format requirements. Under proposed Sec. 226.7(a)(6)(i), interest
charges and fees must be grouped together and listed in proximity to
transactions identified under Sec. 226.7(a)(2), in a manner
substantially similar to proposed Sample G-24(A) in Appendix G to part
226. In consumer testing conducted by the Board on credit card
disclosures in relation to the January 2009 Regulation Z Rule,
consumers consistently reviewed transactions identified on their
periodic statements and noticed fees and interest charges when they
were grouped together, and disclosed in proximity to the transactions
on the statement. The Board believes that similar results would exist
with respect to HELOC accounts. Some HELOC creditors also disclose
these costs in account summaries or in a progression of figures
associated with disclosing finance charges attributable to periodic
interest rates. This proposal does not affect creditors' flexibility to
provide this information in these summaries. See proposed Samples G-
24(B) and G-24(C), which illustrate, but do not require, these
summaries. Nonetheless, creditors would be required to group interest
charges and fees together and list them in proximity to transaction
identified in Sec. 226.7(a)(2), regardless of whether these creditors
also provide information about interest and fees in the account
summaries. The Board believes that TILA's purpose to promote the
informed use of credit would be furthered significantly if consumers
are uniformly provided basic cost information--interest and fees--in a
location they routinely review.
7(a)(7) Change-in-Terms and Increased Penalty Rate Summary
For the reasons set forth in the section-by-section analysis to
proposed Sec. 226.9(c) and (i), the Board proposes to require
creditors that provide a change-in-terms notice required by proposed
Sec. 226.9(c)(1), or a rate increase notice required by proposed Sec.
226.9(i), on or with the periodic statement, to disclose the
information in proposed Sec. 226.9(c)(1)(iii)(A) or proposed Sec.
226.9(i)(3) on the periodic statement in accordance with the format
requirements in proposed Sec. 226.9(c)(1)(iii)(B), and proposed Sec.
226.9(i)(4).
7(a)(8) Grace Period
Section 226.7(a)(8), which implements TILA Section 127(b)(9),
requires a creditor offering HELOCs subject to 226.5b to disclose on
the periodic statement the date by which or the time period within
which the new balance or any portion of the new balance must be paid to
avoid additional finance charges. 15 U.S.C. 1637(b)(9). If such a time
period is provided, a creditor may, at its option and without
disclosure, impose no finance charge if payment is received after the
time period's expiration.
Comment 7(a)(8)-1 provides that although the creditor is required
under Sec. 226.7(a)(8) to indicate on the periodic statement any time
period the consumer may have to pay the balance outstanding without
incurring additional finance charges, no specific wording is required,
so long as the language used is consistent with that used on the
account-opening disclosure statement.
The Board proposes to revise this comment to provide that in
describing the grace period, the language used must be consistent with
that used on the account-opening disclosure statement and to cross
reference proposed Sec. 226.6(a)(2)(xxi) that contains required
terminology that a creditor must use in describing a grace period
beneath the account-opening table described in proposed Sec.
226.6(a)(1). As discussed in the section-by-section analysis to
proposed Sec. 226.6(a)(2)(xxi), the Board proposes to require that a
creditor disclose below the account-opening table the date by which or
the period within which any credit extended may be repaid without
incurring a finance charge due to a periodic interest rate and any
conditions on the availability of the grace period. In disclosing a
grace period that applies to all features on the account, the Board
proposes to require a creditor to use the phrase ``How to Avoid Paying
Interest'' as the heading for the information below the table
describing the grace period.
7(a)(9) Address for Notice of Billing Errors
Consumers who allege billing errors must do so in writing. See 15
U.S.C. 1666; Sec. 226.13(b). Section 226.7(a)(9), which implements
TILA Section 127(b)(10), requires creditors offering HELOCs subject to
Sec. 226.5b must provide on or with periodic statements an address for
this purpose. 15 U.S.C. 1637(b)(10). Former comment 7(k)-1 provides
that creditors may also provide a telephone number along with the
mailing address as long as the creditor makes clear a telephone call to
the creditor will not preserve consumers' billing error rights. In many
cases, an inquiry or question can be resolved in a phone conversation,
without requiring the consumer and creditor to engage in a formal error
resolution procedure.
In the January 2009 Regulation Z Rule, the Board moved this comment
to 7(a)(9)-2 and updated it to address notification by e-mail or via a
Web site. Specifically, this comment states that the address is deemed
to be clear and conspicuous if a precautionary instruction is included
that telephoning or notifying the creditor by e-mail or via a Web site
will not preserve the consumer's billing rights, unless the creditor
has agreed to treat billing error notices provided by electronic means
as written notices, in which case the precautionary instruction is
required only for telephoning. (See also comment 13(b)-2, which
addresses circumstances under which electronic notices are deemed to
satisfy the written billing error requirement.) This rule gives
consumers flexibility to attempt to resolve inquiries or questions
about billing statements informally, while advising them that if the
matter is not resolved in a telephone call or via e-
[[Page 43515]]
mail, the consumer must submit a written inquiry to preserve billing
error rights. Under this proposal, the revised comment would be
retained in 7(a)(9)-2.
7(a)(10) Closing Date of Billing Cycle; New Balance
Section 226.7(a)(10), which implements TILA Section 127(b)(8),
requires creditors offering HELOCs subject to Sec. 226.5b to disclose
the closing date of the billing cycle and the account balance
outstanding on that date. 15 U.S.C. 1637(b)(8). The Board proposes no
changes to these disclosure requirements.
Late-Payment Disclosures
In 2005, the Bankruptcy Act amended TILA to add Section 127(b)(12),
which required creditors that charge a late-payment fee to disclose on
the periodic statement (1) the payment due date, or, if the due date
differs from when a late-payment fee would be charged, the earliest
date on which the late-payment fee may be charged, and (2) the amount
of the late-payment fee. See 15 U.S.C. 1637(b)(12). In the January 2009
Regulation Z Rule, the Board implemented this section of TILA for open-
end (not home-secured) plans. In addition, in the Supplementary
Information to the January 2009 Regulation Z Rule, the Board stated its
intention to implement this section of TILA for HELOC accounts subject
to Sec. 226.5b as part of its review of rules affecting home-secured
credit.
The Credit Card Act (cited above) was enacted in May 2009. Section
202 of the Credit Card Act amends TILA Section 127(b)(12) to provide
that for a ``credit card account under an open-end consumer credit
plan,'' a credit card issuer that charges a late-payment fee must
disclose in a conspicuous location on the periodic statement (1) the
payment due date, or, if the due date differs from when a late-payment
fee would be charged, the earliest date on which the late-payment fee
may be charged, and (2) the amount of the late-payment fee. In
addition, if a late payment may result in an increase in the APR
applicable to the account, a credit card issuer also must provide on
the periodic statement a disclosure of this fact, along with the
applicable penalty APR. The disclosure related to the penalty APR must
be placed in close proximity to the due-date disclosure discussed
above. Finally, if a credit card issuer is a financial institution
which maintains branches or offices at which payments on a credit card
account under an open-end consumer credit plan are accepted from a
cardholder in person, the date on which the cardholder makes a payment
on the account at the branch or office must be considered to be the
date on which the payment is made for determining whether a late-
payment fee may be imposed due to the failure of the cardholder to make
payment by the due date for such payment. These amendments to TILA
Section 127(b)(12) become effective February 22, 2010. See Credit Card
Act Sec. 3.
The Board is interpreting the term ``credit card account under an
open-end consumer credit plan,'' as that term is used in TILA Section
127(b)(12), not to include HELOC accounts subject to Sec. 226.5b, even
if those accounts may be accessed by a credit card device. Thus, the
provisions in TILA Section 127(b)(12), as amended by the Credit Card
Act, would not apply to HELOC accounts. The Board makes this
interpretation pursuant to its authority in TILA Section 105(a) to
prescribe regulations to carry out the statute's purposes, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uniformed use of credit. See 15 U.S.C.
1601(a), 1604(a).
In addition, the Board does not propose to use its authority in
TILA Section 105(a) to make adjustments that are necessary to
effectuate the purposes of TILA to apply newly-revised TILA Section
127(b)(12) to HELOC accounts subject to Sec. 226.5b. 15 U.S.C.
1604(a). The Board believes that the late-payment disclosures and the
provision about crediting of payments made at a financial institution's
branches or offices are not needed for HELOC accounts to effectuate the
purposes of TILA. The consequences to a consumer of not making the
minimum payment by the due date are less severe for HELOC accounts than
for unsecured credit cards. As discussed in more detail below, unlike
with unsecured credit cards, creditors offering HELOC accounts subject
to Sec. 226.5b typically do not impose a late-payment fee until 10-15
days after the payment is due. In addition, under the proposal,
creditors offering HELOC accounts would be restricted from terminating
and accelerating the account, permanently suspending the account or
reducing the credit line, or imposing penalty rates or penalty fees
(except for the contractual late-payment fee) for a consumer's failure
to pay the minimum payment due on the account, unless the payment is
more than 30 days late.
Late-payment fee. For HELOC accounts, the Board does not believe
that disclosure of the late-payment fee is needed on the periodic
statement to effectuate the purposes of TILA. The Board understands
that creditors offering HELOCs subject to Sec. 226.5b generally are
restricted by state law, or the terms of the account agreement or both,
from imposing a late-payment fee until a certain number of days have
elapsed following a due date--typically 10-15 days after the due date.
In contrast, most unsecured credit card issuers will impose a late-
payment fee if the payment is not received by the due date. Some
unsecured credit card issuers may provide informal ``courtesy periods''
that are not part of the legal agreement where the card issuer will not
impose a late-payment fee if a cardholder's payment is received after
the due date but before the end of the ``courtesy period.''
Nonetheless, these ``courtesy periods'' are typically only one to three
days, not 10-15 days long.
In addition, some unsecured credit card issuers currently consider
payment in person at their branches or offices to be non-conforming
payments, and thus, under current Regulation Z, may delay crediting of
these payments for up to five days after these payments are received at
the branch or office. See current Sec. 226.10(b). Under the Credit
Card Act, unsecured credit card issuers must consider the date on which
a person makes payment in person at the issuer's branches or offices as
the date on which the payment is made for determining whether a late-
payment fee may be imposed. By contrast, even if creditors offering
HELOCs subject to Sec. 226.5b treat payments in person at branches or
offices as non-conforming payments and delay crediting of these
payments for up to five days after the payments are received, this
delay in crediting typically will not result in late-payment fees
because, as discussed above, creditors for HELOC accounts typically do
not impose late-payment fees until the account is 10-15 days past due.
Penalty rates and fees. Under the Credit Card Act, if a late
payment may result in an increase in the APR applicable to the account,
a credit card issuer offering an unsecured credit card account must
provide on the periodic statement a disclosure that a late payment may
result in a penalty APR, along with the applicable penalty APR. For
unsecured credit card accounts, some credit card issuers currently
increase the rates applicable to both existing balances and new
transactions on a consumer's account to a penalty rate if a consumer
does not pay by the due date just one time. Under Section 101 of the
Credit Card Act, unsecured credit card issuers would be restricted from
increasing a rate or fee during the
[[Page 43516]]
first year after an account is opened unless the consumer is more than
60 days late in making the minimum payment, in which case the creditor
could apply the increase rate or fee to existing balances and new
transactions. See Credit Card Act Sec. 101(b). After the first year an
account is opened, unsecured credit card issuers may increase rates or
fees on new transactions for a late payment, even if the consumer is
only one day late in making the minimum payment. If the consumer is
more than 60 days late, an unsecured credit card issuer may increase
the rates or fees on all transactions (including existing balances).
Credit Card Act Sec. 101(d). These provisions become effective
February 22, 2010. See Credit Card Act Sec. 3.
The Board does not believe that a disclosure of the penalty APR on
the periodic statement is needed for HELOC accounts to effectuate the
purposes of TILA. In this proposal, the Board proposes strict limits on
when penalty rates or penalty fees may be imposed for HELOCs subject to
Sec. 226.5b. As discussed in the section-by-section analysis to Sec.
226.5b(f), the Board proposes to restrict creditors offering HELOCs
subject to Sec. 226.5b from imposing a penalty rate or penalty fees
(except for a contractual late-payment fee) on the account for a
consumer's failure to pay the account when due, unless the consumer is
more than 30 days late in paying the account. As discussed above, under
the Credit Card Act, after the first year an account is opened,
unsecured credit card issuers may increase rates or fees on new
transactions for a late payment, even if the consumer is only one day
late in making the minimum payment. Unlike with unsecured credit cards,
even after the first year that the account is open, creditors offering
HELOC accounts subject to Sec. 226.5b could not impose penalty rates
or penalty fees (except for a contractual late-payment fee) on new
transactions for a consumer's failure to pay the minimum payment on the
account, unless the consumer's payment is more than 30 days late.
Other actions. Under the proposal, HELOC creditors would not be
restricted from temporarily suspending the account or reducing the line
if a consumer does not pay by the due date (assuming that failure to
pay by the due date is considered a default of a material obligation
under the HELOC contract). See Sec. 226.5b(f)(3)(vi)(C). Nonetheless,
even though creditors may have the right under the HELOC contract to
suspend temporarily the account or reduce the credit line if a consumer
does not pay by the due date (i.e., one day delinquent on the account),
the Board understands that creditors typically do not temporarily
suspend the account or reduce the credit line until the consumer's
payment is at least 10-15 days late on the account, and oftentimes
later.
For all the reasons discussed above, the Board does not propose to
use its authority under TILA Section 105(a) to require creditors
offering HELOC accounts subject to Sec. 226.5b to provide the late-
payment disclosures on periodic statements, or to comply with the
provision about crediting of payments made at a financial institution's
branches or offices, as set forth in the Credit Card Act. The Board
solicits comment on this aspect of the proposal.
Minimum Payment Disclosures
The Bankruptcy Act added TILA Section 127(b)(11) to require
creditors that extend open-end credit to provide a disclosure on the
front of each periodic statement in a prominent location about the
effects of making only minimum payments. 15 U.S.C. 1637(b)(11). This
disclosure included: (1) A ``warning'' statement indicating that making
only the minimum payment will increase the interest the consumer pays
and the time it takes to repay the consumer's balance; (2) a
hypothetical example of how long it would take to pay off a specified
balance if only minimum payments are made; and (3) a toll-free
telephone number that the consumer may call to obtain an estimate of
the time it would take to repay his or her actual account balance.
In the January 2009 Regulation Z Rule, the Board implemented this
section of TILA. In that rulemaking, the Board limited the minimum
payment disclosures required by the Bankruptcy Act to credit card
accounts, pursuant to the Board's authority under TILA Section 105(a)
to make adjustments that are necessary to effectuate the purposes of
TILA. 15 U.S.C. 1604(a). The Board exempted all HELOC accounts from the
minimum payment disclosures required by the Bankruptcy Act, even where
the HELOC account could be accessed by a credit card device. In the
Supplementary Information to the January 2009 Regulation Z Rule, the
Board explained that the minimum payment disclosures would not appear
to provide additional information to consumers that is not already
disclosed to them with the application under Sec. 226.5b(d)(5)(i) and
at account opening under Sec. 226.6(a)(3)(ii). Specifically, Sec.
226.5b(d)(5)(i) requires a creditor to disclose with the application
the length of the draw period and any repayment period. A creditor is
also required to provide this information at account opening under
Sec. 226.6(a)(3)(ii). The Board stated that these disclosures appear
to be sufficient for HELOC consumers because, unlike most unsecured
credit card accounts, most HELOCs have a fixed repayment period
determinable at the outset of the plan. In addition, the Board stated
that the cost to creditors of providing this information a second time,
including the costs to reprogram periodic statement systems and to
establish and maintain a toll-free telephone number, appeared not to be
justified by the limited benefit to consumers.
The Credit Card Act substantially revised this section of TILA.
Specifically, Section 201 of the Credit Card Act amends TILA Section
127(b)(11) to provide that creditors that extend open-end credit must
provide the following disclosures on each periodic statement: (1) A
``warning'' statement indicating that making only the minimum payment
will increase the interest the consumer pays and the time it takes to
repay the consumer's balance; (2) the number of months that it would
take to repay the outstanding balance if the consumer pays only the
required minimum monthly payments and if no further advances are made;
(3) the total cost to the consumer, including interest and principal
payments, of paying that balance in full, if the consumer pays only the
required minimum monthly payments and if no further advances are made;
(4) the monthly payment amount that would be required for the consumer
to eliminate the outstanding balance in 36 months, if no further
advances are made, and the total cost to the consumer, including
interest and principal payments, of paying that balance in full if the
consumer pays the balance over 36 months; and (5) a toll-free telephone
number at which the consumer may receive information about accessing
credit counseling and debt management services. See Credit Card Act
Sec. 201. These provisions become effective February 22, 2010. See
Credit Card Act Sec. 3.
The Board proposes that the minimum payment disclosures required by
TILA Section 127(b)(11), as amended by the Credit Card Act, not apply
to HELOC accounts, including HELOC accounts that can be accessed by a
credit card device. The Board proposes this rule pursuant to its
exception and exemption authorities under TILA Section 105. Section
105(a) authorizes the Board to make exceptions to TILA to effectuate
the statute's purposes, which include facilitating consumers'
[[Page 43517]]
ability to compare credit terms and helping consumers avoid the
uniformed use of credit. See 15 U.S.C. 1601(a), 1604(a). Section 105(f)
authorizes the Board to exempt any class of transactions from coverage
under any part of TILA if the Board determines that coverage under that
part does not provide a meaningful benefit to consumers in the form of
useful information or protection. See 15 U.S.C. 1604(f)(1). The Board
must make this determination in light of specific factors. See 15
U.S.C. 1604(f)(2). These factors are (1) the amount of the loan and
whether the disclosure provides a benefit to consumers who are parties
to the transaction involving a loan of such amount; (2) the extent to
which the requirement complicates, hinders, or makes more expensive the
credit process; (3) the status of the borrower, including any related
financial arrangements of the borrower, the financial sophistication of
the borrower relative to the type of transaction, and the importance to
the borrower of the credit, related supporting property, and coverage
under TILA; (4) whether the loan is secured by the principal residence
of the borrower; and (5) whether the exemption would undermine the goal
of consumer protection.
The Board has considered each of these factors carefully, and based
on that review, believes that the proposed exemption is appropriate.
The Board believes that the minimum payment disclosures in the Credit
Card Act would be of limited benefit to consumers for HELOC accounts
and are not necessary to effectuate the purposes of TILA. As discussed
above, the Board understands that most HELOCs have a fixed repayment
period. Under the proposal, creditors offering HELOCs subject to Sec.
226.5b would be required to disclose the length of the plan, the length
of the draw period and the length of any repayment period in the
disclosures that must be given within three business days after
application (but not later than account opening). See proposed Sec.
226.5b(d)(9)(i). In addition, this information also must be disclosed
at account opening under proposed Sec. 226.6(a)(2)(v)(A). Thus, for a
HELOC account with a fixed repayment period, a consumer could learn
from those disclosures the amount of time it would take to repay the
HELOC account if the consumer only makes required minimum payments. The
cost to creditors of providing this information a second time,
including the costs to reprogram periodic statement systems, appears
not to be justified by the limited benefit to consumers.
In addition, the Board does not believe that the disclosure about
total cost to the consumer of paying that balance in full (if the
consumer pays only the required minimum monthly payments and if no
further advances are made) would be useful to consumers for HELOC
accounts. The Board understands that HELOC consumers intend to finance
the transactions made on the HELOC account over a number of years, and
often will not have the ability to repay the balances on the HELOC
account at the end of each billing cycle, or even within a few years.
By contrast, consumers tend to use unsecured credit cards to engage in
a significant number of small dollar transactions per billing cycle,
and may not intend to finance these transactions for many years. HELOC
consumers, however, tend to use HELOC accounts for larger transactions
that they can finance at a lower interest rate than is offered on
unsecured credit cards, and intend to repay these transactions over the
life of the HELOC account. To illustrate, the Board's 2007 Survey of
Consumer Finances data indicates that the median balance on HELOCs (for
families that had a balance at the time of the interview) was $24,000,
while the median balance on credit cards (for families that had a
balance at the time of the interview) was $3,000.\40\
---------------------------------------------------------------------------
\40\ Brian Bucks, et al., Changes in U.S. Family Finances from
2004 to 2007: Evidence from the Survey of Consumer Finances, Federal
Reserve Bulletin (February 2009).
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The nature of consumers' use of HELOCs also underlie the Board's
belief that periodic disclosure of the monthly payment amount required
for the consumer to eliminate the outstanding balance in 36 months, and
the total cost to the consumer of paying that balance in full if the
consumer pays the balance over 36 months, would not provide useful
information to consumers for HELOC accounts.
For all these reasons, the Board proposes to exempt HELOC accounts
(even when they are accessed by a credit card account) from the minimum
payment disclosure requirements set forth in TILA Section 127(b)(11),
as revised by the Credit Card Act.
Format Requirements Related to Late-Payment and Minimum Payment
Disclosures
Under the January 2009 Regulation Z Rule, creditors offering open-
end (not home-secured) plans are required to disclose the payment due
date on the front side of the first page of the periodic statement. The
amount of any late-payment fee and penalty APR that could be triggered
by a late payment is required to be disclosed in close proximity to the
due date. In addition, the ending balance and the minimum payment
disclosures must be disclosed closely proximate to the minimum payment
due. Also, the due date, late-payment fee, penalty APR, ending balance,
minimum payment due, and the minimum payment disclosures must be
grouped together. See Sec. 226.7(b)(13). In the Supplementary
Information to the January 2009 Regulation Z Rule, the Board stated
that these formatting requirements were intended to fulfill Congress'
intent to have the new late payment and minimum payment disclosures
enhance consumers' understanding of the consequences of paying late or
making only minimum payments. Because the Board proposes not to require
the late-payment disclosures (i.e., the due date, late-payment fee and
penalty APR) and the minimum payment disclosures for HELOC accounts,
the Board proposes not to require the format requirements described
above for HELOC accounts.
Section 226.9 Subsequent Disclosure Requirements
Section 226.9 sets forth a number of disclosure requirements that
apply after a HELOC subject to Sec. 226.5b is opened, including a
requirement to provide at least 15 days' advance notice whenever a term
required to be disclosed in the account-opening disclosures is changed,
and a requirement to provide notice of the action taken and specific
reasons for the action when a HELOC creditor prohibits additional
extensions of credit or reduces the credit limit pursuant to Sec.
226.5b(f)(3)(i) or (f)(3)(vi).
9(c) Change in Terms
Under Sec. 226.9(c) of Regulation Z, a creditor must notify a
consumer of certain changes to the terms of an open-end plan. The
general rule has been that a change-in-terms notice must be given 15
days in advance of the effective date of the change, with some
exceptions. Advance notice has not been required in all cases; for
example, if an interest rate increases due to a consumer's default or
delinquency, notice has been required, but not in advance of the rate
increase. In addition, no notice (either advance or contemporaneous)
has been required if the specific change is set forth in the account-
opening disclosures.
In the January 2009 Regulation Z Rule, the Board adopted a number
of revisions to the requirements for change-in-terms notices. The
revisions are intended to improve consumers'
[[Page 43518]]
awareness about changes to their account terms or increased rates due
to delinquency, default, or otherwise as a penalty, and to enhance
consumers' ability to shop for alternative financing before the changes
become effective. First, the revisions expand the circumstances in
which consumers receive advance notice of changed terms, or of
increased rates due to delinquency or default or otherwise as a
penalty. Second, the revisions provide consumers with earlier notice.
Third, the revisions introduce format requirements to make the
disclosures about changes in terms, or of increased rates due to
delinquency, default or otherwise as a penalty, more effective.
The January 2009 revisions to the change-in-terms notice rules do
not affect HELOCs subject to Sec. 226.5b; the revised rules for credit
card and other open-end (not home-secured) credit appear in Sec.
226.9(c)(2) and 226.9(g) (for increased rates due to delinquency,
default or otherwise as a penalty), while the existing rules are
preserved for HELOCs in Sec. 226.9(c)(1). In the January 2009
Regulation Z Rule, the Board stated that the change-in-terms rules for
HELOCs would be addressed in the review of open-end (home-secured)
credit.
The Board is proposing to revise the change-in-terms rules for
HELOCs to parallel generally the revisions adopted for open-end (not
home-secured) credit, including with regard to the circumstances
covered, timing, and format, although with some differences. The Board
believes that the purposes underlying the revisions to the change-in-
terms rules for open-end (not home-secured) credit--to improve
consumers' awareness of changes in their account terms and to enhance
consumers' ability to seek alternative sources of credit--are
applicable to HELOC credit as well. The proposed revisions to Sec.
226.9(c)(1) are explained in the section-by-section discussion below.
The proposal regarding notice of increased rates due to delinquency,
default or otherwise as a penalty would be set forth in new Sec.
226.9(i) and is explained in the section-by-section discussion of that
section. In addition to the substantive changes discussed below, other
minor revisions would be made, such as to change cross-references as
appropriate for new or renumbered provisions, substitute examples and
other wording appropriate for HELOCs for wording appropriate for credit
card accounts or other open-end (not home-secured) credit, or conform
wording to the revised wording in Sec. 226.9(c)(2) for open-end (not
home-secured) credit.
9(c)(1) Rules Affecting Home-Equity Plans
Comment 9(c)(1)-1, which discusses changes that do not require
notice because the specific change has been set forth in the account-
opening disclosures, would be revised. First, the phrase ``Except as
provided in Sec. 226.9(i)'' would be added, referring to the fact that
under proposed new Sec. 226.9(i), notice of increased rates due to
delinquency, default or otherwise as a penalty would be required under
Sec. 226.9(i) even though that change was set forth in the account-
opening disclosures. Second, language referring to a rate increase
occurring because a preferential rate ends (such as because the
consumer is no longer employed by the creditor or because the consumer
no longer maintains a certain balance in a deposit account with the
creditor) would be deleted because rate increases triggered by these
events would require notice under proposed Sec. 226.9(i), discussed
below, even though they would not require notice under Sec. 226.9(c).
Comment 9(c)(1)-3 would be revised by deleting the phrase ``or
increases the minimum payment'' as redundant, because the minimum
payment is a required disclosure under Sec. 226.6(a); the comment
already requires notice of changes affecting any term required to be
disclosed under Sec. 226.6(a). This comment would also be revised to
delete the example referring to a grace period because the Board
understands that grace periods (in which interest does not accrue on an
outstanding balance) are not typical in HELOCs.
9(c)(1)(i) Written Notice Required
The requirement for notice 15 days in advance of the effective date
of a change would be changed to require notice 45 days in advance, for
the same reasons the Board adopted this requirement for open-end (not
home-secured) credit. As discussed in the January 2009 Regulation Z
Rule, the Board believes that the shorter notice periods suggested by
some commenters on the June 2007 Regulation Z Proposal, such as 30 days
or one billing cycle, would not provide consumers with sufficient time
to shop for and possibly obtain alternative financing. The 45-day
advance notice requirement refers to when the change-in-terms notice
must be sent, but as discussed in the June 2007 Regulation Z Proposal,
it may take several days for the consumer to receive the notice. As a
result, as stated in the January 2009 Regulation Z Rule, the Board
believes that the 45-day advance notice requirement will give
consumers, in most cases, at least one calendar month after receiving a
change-in-terms notice to seek alternative financing or otherwise to
mitigate the impact of an unexpected change in terms.
The Board solicits comment on whether 45 days is an appropriate
period for the advance notice requirement for changes in terms of
HELOCs. Commenters are asked to address, for example, whether it may be
more difficult to seek alternative financing or otherwise mitigate the
impact of a change in terms for HELOCs than for credit card accounts,
as well as whether, because changes in terms are more narrowly
restricted for HELOCs than for credit card accounts, the impact on
consumers of term changes for HELOCs is likely to be less severe than
for credit cards and thus the proposed time period is likely adequate.
In other changes to this paragraph, the phrase ``or the required
minimum periodic payment is increased'' would be deleted as redundant
because the minimum payment is a required disclosure under current
Sec. 226.6(a)(3) (redesignated as proposed Sec. 226.6(a)(2)(v)(B));
the rule already requires notice of changes affecting any term required
to be disclosed under Sec. 226.6(a). A sentence would be added to
clarify that an increase in the rate due to delinquency, default or
otherwise as a penalty would require notice under proposed new Sec.
226.9(i) rather than under Sec. 226.9(c)(1).
Revisions would be made to comments 9(c)(1)(i)-1 through -4 to
refer to the proposed requirement for notice 45 days in advance rather
than 15 and to replace examples of changes appropriate for credit cards
and other open-end (not home-secured) credit with examples more
appropriate for HELOCs, or to replace examples that would not be
permissible for HELOCs with examples that would be permissible. In
comment 9(c)(1)(i)-3, language referring to a consumer's general
acceptance of a creditor's contract reservation of the right to change
terms, as well as other unilateral term changes, would be deleted, to
avoid the possible inference that such changes in terms would be
permissible under Sec. 226.5b(f). In comment 9(c)(1)(i)-4, language
would be added to clarify that a complete set of account-opening
disclosures containing the changed term does not qualify as a change-
in-terms notice if Sec. 226.9(c)(1)(iii) applies. (Section
226.9(c)(1)(iii), as discussed below, would require that disclosures
required to be in a tabular format in the account-opening disclosures
also appear in a tabular format, and meet other formatting
requirements, when the
[[Page 43519]]
disclosed terms change. However, changes in other disclosures, not
required to be in a tabular format at account opening, would not be
subject to these requirements.)
Comment 9(c)(1)(i)-5, which discusses changes involving addition of
a security interest or addition or substitution of collateral, would be
deleted because the Board believes it unlikely that any of these events
would occur in the case of an existing HELOC. However, the Board
solicits comment on whether the comment should be retained to cover the
possibility of such an event occurring.
In comment 9(c)(1)(i)-6 (redesignated as proposed comment
9(c)(1)(i)-5), the limitation to plans entered into on or after
November 7, 1989, would be deleted; it appears unlikely that any HELOCs
opened before that date are still in existence.
9(c)(1)(ii) Charges Not Covered by Tabular Format Requirements of Sec.
226.6(a)(2)
Current Sec. 226.9(c)(1)(ii) would be renumbered Sec.
226.9(c)(1)(iv), as discussed below. The Board proposes to add, as new
Sec. 226.9(c)(1)(ii), an exception to the requirement for written
advance notice of changes in terms. The exception would apply to
disclosures of charges not required to appear in a tabular format in
the account-opening disclosures under Sec. 226.6(a)(2), and would
parallel a similar exception for credit cards and other open-end (not
home-secured) credit in Sec. 226.9(c)(2)(ii). Under the exception, if
a creditor increases a charge, or introduces a new charge, required to
be disclosed under Sec. 226.6(a)(3) but not required to appear in the
summary account-opening table under Sec. 226.6(a)(2), the creditor may
either provide advance written notice under Sec. 226.9(c)(1)(i), or
provide oral or written notice of the amount of the charge at a
relevant time before the consumer agrees to or becomes obligated to pay
the charge. Comment 9(c)(1)(ii)-1 would discuss a fee for expedited
delivery of a credit card as an example of how this exception would
operate. Of course, any increase in a charge, or addition of a new
charge, would have to be permissible under Sec. 226.5b(f).
9(c)(1)(iii) Disclosure Requirements
Current Sec. 226.9(c)(1)(iii), regarding notices to restrict
credit on HELOCs subject to Sec. 226.5b, would be renumbered as Sec.
226.9(j) and revised, as discussed below. The Board proposes to add, as
new Sec. 226.9(c)(1)(iii), a provision specifying the content and
format of disclosures for certain changes in terms, similar to the new
requirements for change-in-terms notices for open-end (not home-
secured) credit set forth in Sec. 226.9(c)(2)(iii). If any of the
terms required to be provided at account opening in a tabular format
under Sec. 226.6(a)(2) changes, the creditor would have to provide a
summary of the changes (as set forth in proposed Sec.
226.9(c)(1)(iii)(A)(1), similar to Sec. 226.9(c)(2)(iii)(A)(1) for
open-end (not home-secured) credit), in a tabular format (as set forth
in Sec. 226.9(c)(1)(iii)(B)(1), similar to Sec.
226.9(c)(2)(iii)(B)(1) for open-end (not home-secured) credit), with
headings and format substantially similar to any of the account-opening
tables in G-15 in Appendix G.
In addition, the notice would be required to contain a statement
that changes are being made to the account, a statement indicating (if
applicable) that the consumer has the right to opt out of the changes,
the effective date of the changes, and a statement (if applicable) that
the consumer may find additional information about the summarized
changes, and other changes to the account, in the notice. These
disclosures are in proposed Sec. 226.9(c)(1)(ii)(A)(2) through (5),
similar to Sec. 226.9(c)(2)(iii)(A)(2) through (5) for open-end (not
home-secured) credit.
Two other disclosures required for open-end (not home-secured)
credit, found in Sec. 226.9(c)(2)(iii)(A)(6) and (7), would not be
required for HELOCs subject to Sec. 226.5b. Section
226.9(c)(2)(iii)(A)(6) applies if a creditor is changing a rate on an
account other than the penalty rate, and requires a disclosure that if
the penalty rate currently applies to the account, the new rate
described in the notice will not apply to the consumer's account until
the consumer's account balances are no longer subject to the penalty
rate. The Board believes that this situation is unlikely to occur for
HELOCs subject to Sec. 226.5b because of the restrictions on rate
increases for these HELOCs. Section Sec. 226.9(c)(2)(iii)(A)(7)
applies if the change being disclosed is a rate increase, and requires
a disclosure of the balances to which the increased rate will apply.
Section 226.9(c)(1)(iii) is not an appropriate location for this
disclosure, because in general rate increases for HELOCs subject to
Sec. 226.5b, where permissible at all, must occur only as specified in
the credit agreement and therefore the notice of such an increase would
be provided under Sec. 226.9(i) rather than Sec. 226.9(c)(1). A
similar disclosure of the balances to which the increased rate would
apply is proposed under Sec. 226.9(i), as discussed below.
Under proposed Sec. 226.9(c)(1)(iii)(B)(2) and (3), if the change-
in-terms notice is included on or with a periodic statement, the
tabular summary required under Sec. 226.9(c)(1)(iii)(A)(1) must appear
on the front of any page of the statement, immediately following the
other items required to be disclosed (as specified in Sec.
226.9(c)(1)(iii)(A)(2) through (5)). If the notice is not included on
or with a periodic statement, the tabular summary must appear on the
front of the first page of the notice or segregated on a separate page
from other information given with the notice, immediately following the
other items. These requirements would be similar to those applicable to
open-end (not home-secured) credit, as set forth in Sec.
226.9(c)(2)(iii)(B)(2) and (3).
The Board is proposing these content and format rules for the same
reasons as for the new open-end (not home-secured) credit rules adopted
in the January 2009 Regulation Z Rule. As discussed in the January 2009
Regulation Z Rule, consumer testing conducted on behalf of the Board
suggests that consumers tend to set aside change-in-terms notices when
they are presented as a separate pamphlet inserted in the periodic
statement. In addition, testing prior to the June 2007 Regulation Z
Proposal also revealed that consumers are more likely to identify the
changes to their account correctly if the changes in terms are
summarized in a tabular format. Quantitative consumer testing conducted
in the fall of 2008 confirmed that disclosing a change in terms in a
tabular summary on the statement (versus a disclosure on the statement
indicating that changes were being made to the account and referring to
a separate change-in-terms insert) led to a small increase in the
percentage of consumers who were able to identify correctly the new
rate that would apply to the account following the change. As stated in
the January 2009 Regulation Z Rule, the Board believes that as
consumers become more familiar with the new format for the change-in-
terms summary, which was new to all testing participants, they may
become better able to recognize and understand the information
presented. The same could be expected to apply to the change-in-terms
summary for HELOCs.
Although the Board has not yet conducted consumer testing of
change-in-terms notices for HELOCs, consumer testing of disclosures
provided at application and account-opening for HELOCs indicates, as
discussed above, that consumers find disclosures
[[Page 43520]]
presented in a tabular format more useful and understandable than
disclosures in the current format; thus the Board proposes to require
such a format for the HELOC application and account-opening
disclosures. A tabular format standard for change-in-terms notices for
HELOCs would be consistent with this approach and could be expected to
result in greater noticeability and consumer comprehension of HELOC
change-in-terms notices. The Board intends to conduct consumer testing
of tabular-format change-in-terms notices for HELOCs during the comment
period on this proposal.
Proposed comments 9(c)(1)(iii)(A)-1 through -10 provide guidance on
the change-in-terms disclosures required under Sec.
226.9(c)(1)(iii)(A), and parallel comments 9(c)(2)(iii)(A)-1 through 10
applying to open-end (not home-secured) credit change-in-terms
disclosures. The changes discussed in comments 9(c)(1)(iii)(A)-1
through -7 might or might not be permissible under Sec. 226.5b(f)
depending upon the circumstances; therefore, language would be included
in each of these comments to refer to change in terms restrictions for
HELOCs subject to Sec. 226.5b, to avoid implying that the changes
discussed would be permissible in all cases.
9(c)(1)(iv) Notice Not Required
Section 226.9(c)(1)(ii) in the current regulation (as modified by
the January 2009 Regulation Z Rule) relates to changes for which a
change-in-terms notice is not required (reduction of any component of a
finance or other charge or when the change results from an agreement
involving a court proceeding), and would be renumbered Sec.
226.9(c)(1)(iv). Language would be added to clarify that suspension of
credit privileges, reduction of a credit limit, or termination of an
account would not require notice under Sec. 226.9(c)(1)(i), but must
be disclosed pursuant to Sec. 226.9(j), discussed below.
In comment 9(c)(1)(ii)-1 (renumbered comment 9(c)(1)(iv)-1), two
examples of changes not requiring notice--paragraphs i. (change in the
consumer's credit limit) and iv. (termination or suspension of credit
privileges)--would be deleted, because such actions (assuming they were
permissible under Sec. 226.5b(f)) would require notice, although
notice under Sec. 226.9(j) rather than Sec. 226.9(c)(1)(i). A new
paragraph iv. would be added to clarify that suspension of credit
privileges, reduction of a credit limit, or termination of an account
would not require notice under Sec. 226.9(c)(1)(i), but must be
disclosed pursuant to Sec. 226.9(j). In paragraph v. (changes arising
merely by operation of law; renumbered paragraph iii.), the example
given (the creditor's security interest in a consumer's car
automatically extending to the proceeds when the consumer sells the
car) would be deleted as unlikely to apply to HELOC accounts.
In comment 9(c)(1)(ii)-2 (renumbered comment 9(c)(1)(iv)-2),
relating to skip features and temporary reductions in finance charges,
language would be added to clarify that the actions discussed would be
permissible as beneficial changes under Sec. 226.5b(f)(3)(iv), and
that a creditor offering a temporary reduction in an interest rate must
provide a notice complying with the timing, content, and format
requirements of Sec. 226.9(c)(1) prior to resuming the original rate.
The latter addition parallels a clarification to the comparable comment
9(c)(2)(iv)-2, applying to open-end (not home-secured) credit, proposed
for comment in the May 2009 Regulation Z Proposal.
New comments 9(c)(1)(iv)-3 and -4, similar to comments 9(c)(2)(iv)-
3 and -4 for open-end (not home-secured) credit, would be added. These
comments would clarify that if a creditor changes a rate from a
variable rate to a non-variable rate, or vice versa (assuming such
action is permissible under Sec. 226.5b(f)), a change-in-terms notice
must be provided even if the immediate effect of the change is a lower
rate.
9(i) Increase in Rates Due to Delinquency or Default or as a Penalty--
Rules Affecting Home-Equity Plans
As discussed above under Sec. 226.9(c)(1)(i), an increase in the
rate due to delinquency, default, or as a penalty, pursuant to the
contractual terms of the consumer's account, would not require notice
under Sec. 226.9(c)(1), but would require a notice under proposed new
Sec. 226.9(i). Under the previous version of Regulation Z for credit
cards and other open-end (not home-secured) credit (and the current
version for HELOCs), if the agreement between the consumer and the
creditor specifically sets forth a change that will take place upon the
occurrence of a specific triggering event, a change-in-terms notice is
not required when the change occurs. This rule was changed in the
January 2009 Regulation Z Rule for open-end (not home-secured) credit
by the addition of new Sec. 226.9(g).
In discussing Sec. 226.9(g) in the June 2007 Regulation Z Proposal
and the January 2009 Regulation Z Rule, the Board expressed concern
that the imposition of penalty rates might come as a costly surprise to
consumers who are not aware of, or do not understand, what behavior
constitutes a default under the credit agreement, even though for
credit card and other open-end (not home-secured) credit, the account-
opening disclosures are required to set forth the penalty rate. The
Board also stated that it believed that consumers would be the most
likely to notice and be motivated to act to avoid the imposition of the
penalty rate if they receive a specific notice alerting them of an
imminent rate increase, rather than a general disclosure stating the
circumstances when a rate might increase.
In the case of HELOCs subject to Sec. 226.5b, the same reasoning
could be expected to apply. In addition, because the proposed account-
opening disclosures for HELOCs do not include a disclosure of the
penalty rate, providing notice to a consumer at the time the penalty
rate is imposed is even more important. Therefore, the Board proposes
to add new Sec. 226.9(i) applying to HELOCs, which would generally
parallel Sec. 226.9(g) applying to open-end (not home-secured) credit.
Section 226.9(i)(1) would require that a creditor must provide
written notice to each consumer who may be affected when a rate is
increased due to the consumer's delinquency or default or otherwise as
a penalty for one or more events specified in the account agreement.
Rate increases could only occur, of course, as permitted under Sec.
226.5b(f). Section 226.9(i)(2) would require that the notice be
provided at least 45 days before the effective date of the increase,
and after the occurrence of the events that trigger the imposition of
the increase.
Section 226.9(i)(3) would specify the content of the notice, which
would include a statement that the delinquency or default rate, or
other penalty rate, has been triggered (Sec. 226.9(i)(3)(i)); the date
on which the increased rate will apply (Sec. 226.9(i)(3)(ii)); the
circumstances under which the increased rate will cease to apply to the
consumer's account, or that the increased rate will remain in effect
for a potentially indefinite time period (Sec. 226.9(i)(3)(iii)); and
a disclosure indicating to which balances the increased rate will apply
(Sec. 226.9(i)(3)(iv)). These disclosures parallel disclosures under
Sec. 226.9(g)(3)(i). One other disclosure under Sec. 226.9(g)(3)(i),
however, would not be included in Sec. 226.9(i)(3): A description of
any balances to which the current rate will continue to apply (Sec.
226.9(g)(3)(i)(E)). For credit cards, under the Credit Card Act (cited
above), in some circumstances increases in rates
[[Page 43521]]
may be permitted to apply only to future balances; in other cases rate
increases may apply to all balances, including outstanding balances.
See Credit Card Act Sec. 101(b) and (d). In contrast, rate increases
for HELOCs subject to Sec. 226.5b, where permissible at all (i.e., for
a reason that would permit termination and acceleration of the plan
under Sec. 226.5b(f)(2)), would generally apply to all balances. Thus,
the disclosure under Sec. 226.9(g)(3)(i)(E) would not appear
appropriate for HELOCs. However, the disclosure under Sec.
226.9(i)(3)(i)(D) may be useful to indicate, for example, whether a
rate increase would apply to balances under the regular variable-rate
feature of a HELOC, while not applying to balances under a fixed-rate
option. The Board solicits comment on the appropriateness of this
disclosure.
Section 226.9(i)(4) would parallel Sec. 226.9(g)(3)(ii) and would
address format requirements. Section 226.9(i)(4)(i) would provide that
if the notice is included on or with a periodic statement, it must be
in the form of a table and must appear on the front of any page of the
periodic statement. Section 226.9(i)(4)(ii) would provide that if the
notice is not included on or with a periodic statement, the disclosures
must be appear on the front of the first page of the notice.
Section 226.9(i)(5) would parallel Sec. 226.9(g)(4)(i) and would
provide an exception for workout and temporary hardship arrangements,
where the rate increases due to completion of the arrangement, or for
failure to comply with the terms of the arrangement, provided that the
increased rate does not exceed the rate that applied before the start
of the arrangement. Two other exceptions in Sec. 226.9(g)(4) would not
be included in Sec. 226.9(i)(5): A rate increase where the credit
limit is exceeded, and a rate increase applicable to outstanding
balances where a notice had already been provided of a rate increase on
future balances. The first situation would not arise for HELOCs subject
to Sec. 226.5b because, under Sec. 226.5b(f), a creditor may not
increase an interest rate based on the credit limit being exceeded. The
second situation also likely would not arise for HELOCs subject to
Sec. 226.5b because, as discussed above, a rate increase for a HELOC,
if permissible at all, would not apply to future balances differently
than to outstanding balances.
Comments 9(i)-1 through -5 would be added to the commentary and
would provide general guidance regarding notices of rate increases
under Sec. 226.9(i). The proposed comments would parallel comments
9(g)-2 through -6 under Sec. 226.9(g). A comment would not be added to
parallel comment 9(g)-1, because that comment addresses the
relationship between the change-in-terms notice requirements (and
notice of rate increase requirements) under Regulation Z and the
requirements under Regulation AA (or similar law) regarding unfair or
deceptive acts or practices in credit card accounts, which do not apply
to HELOCs subject to Sec. 226.5b.
9(j) Notices of Action Taken for Home-Equity Plans
As noted above, Sec. 226.9(c)(1)(iii), regarding notices to
restrict credit for HELOCs subject to Sec. 226.5b, would be
redesignated as Sec. 226.9(j)(1) and revised. Proposed Sec.
226.9(j)(1) would retain the existing requirement that a creditor
provide the consumer with notice of temporary account suspension or
credit limit reduction under Sec. 226.5b(f)(3)(i) or (f)(3)(vi), but
with certain clarifications and additions. The proposal also would
eliminate the existing exemption from notice requirements for a
creditor that suspends advances, reduces a credit limit, or terminates
a plan under Sec. 226.5b(f)(3). See comment 9(c)(1)(iii)-2. Under
proposed Sec. 226.9(j)(3), creditors taking action under Sec.
226.5b(f)(2) would be required to provide the consumer with a notice of
the action taken and specific reasons for the action. To facilitate
compliance, model clauses are proposed to illustrate the requirements
for these notices. See proposed Model Clauses G-23(A) and G-23(B) in
Appendix G of part 226.
9(j)(1) Notice of Action Taken Under Sec. 226.5b(f)(3)(i) or
(f)(3)(vi)
Proposed Sec. 226.9(j)(1) would retain the existing requirement
that require a creditor taking action under Sec. 226.5b(f)(3)(i) or
(f)(3)(vi) must provide to any consumer who will be affected notice of
the action taken and specific reasons for the action within three
business days of the action. The proposed paragraph, however, would
require the creditor to include a number of additional disclosures in
the notice. The clarifications and additional disclosures discussed
below are proposed in response to concerns expressed during outreach
conducted by the Board that creditors are not certain how to comply
with the current notice requirements and that notices provided often
contain unclear or incomplete information about the reasons for the
action taken and the consumer's reinstatement rights. The Board's
independent review of notices of action taken currently used by
creditors corroborated these concerns.
First, proposed Sec. 226.9(j)(1)(i) and comment 9(j)(1)-1 clarify
that, as part of the disclosure of the action taken, the creditor must
include the following basic information that the HELOC consumer whose
credit privileges have been restricted needs to make appropriate
financial accommodations: (1) If the creditor reduced the credit limit,
the new credit limit; and (2) the date as of which the account
suspension or reduction took effect.
Second, proposed Sec. 226.9(j)(1)(ii) requires disclosure of
specific reasons for the action, and proposed comments 9(j)(1)-2, -3, -
4, and -5 would provide additional guidance regarding what the creditor
must disclose to comply with this requirement. Proposed comment
9(j)(1)-2 requires that a creditor provide the principal reasons for
the action taken, and indicates that the principal reasons should
include the reason permitting the action under Sec. 226.5b(f)(3)(i) or
(vi), such as that the maximum APR has been reached or the value of
property securing the plan has significantly declined.
Proposed comment 9(j)(1)-3 sets forth information that, if
disclosed, would constitute compliance with the requirement to disclose
the specific reasons for the action taken when the reason for the
action taken is a significant decline in the property value under Sec.
226.5b(f)(3)(vi)(A). Specifically, compliance with the requirement
would be met by disclosing the following information--
(i) The value of the property obtained by the creditor.
(ii) The type of valuation method used to obtain the property
value.
(iii) A statement that the consumer has a right to a copy of
documentation supporting the property value on which the action was
based.
The Board believes that the property value on which the creditor
relied to freeze or reduce a line, and access to information about the
basis for that property value finding, are integral components of the
``specific reasons'' disclosure required when a creditor freezes or
reduces a line due to a significant decline in the property value. This
information is also necessary for the consumer to assess whether and
when to challenge the finding and request reinstatement.
Proposed comment 9(j)(1)-4 sets forth information that, if
disclosed, would constitute compliance with the requirement to disclose
the specific reasons for the action taken when a creditor prohibits
credit extensions or reduces a credit limit because the consumer's
financial circumstances have materially changed such that the
[[Page 43522]]
creditor has a reasonable belief that the consumer will be unable to
meet the repayment obligations of the plan under Sec.
226.5b(f)(3)(vi)(B). Specifically, compliance with the provision would
be met by disclosing the type of information concerning the consumer's
financial circumstances on which the creditor relied, such as
information about the consumer's income, credit report information, or
some other indicia of the consumer's financial circumstances, as
applicable.
The Board believes that more information than simply the regulatory
reason for the action taken is an appropriate element of the ``specific
reasons'' disclosure requirement when action is taken due to a material
change in the consumer's financial circumstances under Sec.
226.5b(f)(vi)(B). First, the type of financial information relied on
(i.e., income, credit report information) gives the consumer more
``specific'' reasons for the action taken than a disclosure simply
stating that the line was frozen or reduced because the consumer's
financial circumstances have changed. Second, the consumer is thereby
better able to assess whether to request reinstatement and to address
problems that the consumer may be able to correct, such as errors in
the consumer's credit report, credit performance deficiencies, or
inadequate or outdated income information.
Proposed comment 9(j)(1)-5 explains when a creditor takes action
because the consumer defaulted on a material obligation under the
agreement (see Sec. 226.5b(f)(3)(vi)(C)), the creditor would comply
with this provision if it specified the material obligation on which
the consumer defaulted. The Board believes that the material obligation
on which the consumer defaulted is a key element of ``specific
reasons'' disclosure requirement when action is based on a consumer's
default of a material obligation. With this information, the consumer
would have an opportunity to correct a default or to dispute the
creditor's determination that a default occurred. Either way, the
consumer would be in a better position to exercise his or her
reinstatement right and to have credit privileges restored.
Proposed comment 9(j)(1)-5 also addresses the specific reasons
disclosure requirement for other reasons justifying temporary line
suspension or reduction. This includes the following: (1) the creditor
is precluded by government action from imposing the APR provided for in
the agreement (Sec. 226.5b(f)(3)(vi)(D)); the priority of the
creditor's security interest is adversely affected by government action
to the extent that the value of the security interest is less than 120
percent of the credit line (Sec. 226.5b(f)(3)(vi)(E)); the creditor is
notified by its regulatory agency that continued advances constitute an
unsafe and unsound practice (Sec. 226.5b(f)(3)(vi)(F)); and federal
law prohibits the creditor from extending credit under a plan or
requires that the creditor reduce the credit limit for a plan (Sec.
226.5b(f)(3)(vi)(G)). For action based on these provisions, the Board
believes that a statement of the regulatory reason for the action is
sufficient to comply the ``specific reasons'' disclosure requirement.
The principal reason for this proposed approach is that the consumer is
not likely to be able to take any steps to change the circumstances
justifying the suspension or reduction.
The Board requests comment on whether more or less information than
the information proposed would be appropriate to require to meet the
``specific reasons'' disclosure requirement when action is taken for
any of the reasons permitted under Sec. 226.5b(f)(3)(i) and
(f)(3)(vi). The Board requests comment in particular on whether more or
less information would be appropriate to require to meet the ``specific
reasons'' disclosure requirement when action is taken due to a material
change in the consumer's financial circumstances under Sec.
226.5b(f)(3)(vi)(B).
Disclosure of information regarding reinstatement. Proposed Sec.
226.9(j)(1)(iii) requires the creditor to provide certain information
when the creditor has opted to require that the consumer request
reinstatement before the creditor will consider restoring credit
privileges. As in the existing commentary, the proposal would require
that the creditor disclose that the consumer must request
reinstatement. Addressing concerns that creditors may provide
inadequate information about reinstatement rights to consumers, the
proposal would amplify existing requirements by requiring that the
creditor inform the consumer of his or her right to request
reinstatement of the account at any time, and that the creditor
disclose the specific manner in which the consumer should request
reinstatement, including the address or telephone number to which the
creditor must submit requests. In addition, the creditor must disclose
that the creditor will complete an investigation of the consumer's
request within 30 days of receiving the request (as required under
proposed Sec. 226.5b(g)(2)(ii)). The purpose of these disclosures is
to ensure that consumers understand their rights regarding an
investigation.
The proposal also requires the creditor to disclose that, in
accordance with proposed Sec. 226.5b(g)(2)(iii) and (iv), the creditor
may not charge the consumer for costs associated with the investigation
of the consumer's first reinstatement request made after the creditor
has suspended advances or reduced the credit limit, but may charge the
consumer bona fide and reasonable costs for property valuations or
credit reports associated with investigations of any requests that the
consumer makes after the first request. This provision is intended to
put the consumer on notice of the potential for additional costs when
requesting reinstatement. The reasons for proposing the above rules
regarding when creditors may charge consumers fees for investigating a
reinstatement request are discussed in the section-by-section analysis
to proposed Sec. 226.5b(g)(2).
9(j)(2) Imposition of Fees
Proposed Sec. 226.9(j)(2) provides that a creditor that reduces
the credit limit on an account under Sec. 226.5b(f)(3)(i) or (vi) may
not charge the consumer fees for exceeding the credit limit until after
the consumer has received notice of the action under Sec. 226.9(j)(1).
Similarly, after a creditor has suspended advances on an account, the
creditor may not charge the consumer a fee for any advance that it
denies until the consumer receives the Sec. 226.9(j)(1) notice.
Proposed Sec. 226.9(j)(2) and comment 9(j)(2)-1 specify that in
general only fees disclosed in the original agreement may be charged
and that these would be subject to the notice waiting period. Imposing
denied advance or over-the-limit fees not disclosed in the original
agreement would be permitted only if an exception to the general
limitations on changing home-equity plan terms under Sec. 226.5b(f)
applies.
The Board believes that imposition of denied advance or over-the-
limit fees before the consumer has notice of the suspension on advances
or credit limit reduction is inappropriate for at least two reasons.
First, consumers who did not yet receive the notice of action taken
under Sec. 226.9(j)(1) presumably did not know of the credit limit
reduction or suspension of advances and may have attempted to access
their home-equity funds with the good faith expectation that these
funds would be available to them. Second, in many cases, action taken
under Sec. 226.5b(f)(3)(i) or (f)(3)(vi) is based on circumstances
beyond the consumer's control, such as the maximum rate being reached
or a significant decline in the value of the consumer's dwelling.
Prohibiting
[[Page 43523]]
creditors from imposing over-the-limit or denied advance fees until
consumers have appropriate notice of a suspension or credit limit
reduction is intended to strengthen the protection of consumers facing
the financial challenge of a HELOC freeze or reduction.
Proposed comment 9(j)(2)-2 clarifies that, for purposes of
determining when the consumer receives the notice, the more precise
definition of business day (meaning all calendar days except Sundays
and specified federal holidays) applies referred to in Sec.
226.2(a)(6). See comment 2(a)(6)-2. For example, if the creditor were
to place the disclosures in the mail on Thursday, June 4, under the
proposal the disclosures would be considered received on Monday, June
8. The Board proposes that the more precise definition apply to
determining when Sec. 226.9(j)(1) notices are received by the consumer
to conform to the Board's rules for determining receipt of disclosures
for other dwelling-secured transactions under Sec. Sec.
226.19(a)(1)(ii) and 226.31(c), as well as to the Board's recently
adopted rules under Sec. 226.19(a)(2). See 74 FR 23289 (May 19, 2009).
The Board requests comment on this proposed limitation on when
denied advance and over-the-limit fees may be charged.
9(j)(3) Notice of Action Taken Under Sec. 226.5b(f)(2)
Proposed Sec. 226.9(j)(2) would require creditors to provide a
notice to each consumer affected by the creditor's termination and
acceleration of the account, suspension of advances on the account, or
reduction of the credit limit under circumstances permitting these
actions pursuant to Sec. 226.5b(f)(2). This notice requirement is
intended to remedy an inconsistency in the current rules--namely, that
suspending or reducing lines under Sec. 226.5b(f)(3)(i) and (f)(3)(vi)
is required under Sec. 226.9(c)(1)(iii) (redesignated and revised in
the proposal as Sec. 226.9(j)(1)), but no notice is required for any
action taken under Sec. 226.5b(f)(2). The Board believes that this new
notice requirement for actions taken under Sec. 226.5b(f)(2) will
enhance consumer protection and education by ensuring that affected
consumers will know why the action was taken. As with the current and
proposed notice requirement for credit restrictions under Sec.
226.5b(f)(3)(i) and (f)(3)(vi), the proposed notice for actions taken
under Sec. 226.5b(f)(2) is not required until three business days
after the action is taken, rather than before the action is taken. The
principal reason for this timing is that post-action notice protects
creditors from the risk that consumer may immediately draw down the
line once they receive advance notice of the action; concerns about
this risk were confirmed through Board outreach in preparing this
proposal. The Board's recognition of this risk is reflected in the
longstanding policy of requiring notice for actions under Sec.
226.5b(f)(3)(i) and (f)(3)(vi) three business days after the action
taken.
As indicated in proposed comment 5b(f)(2)-2, the specific reasons
that a creditor must disclose when taking action under Sec.
226.5b(f)(2) will vary, because Sec. 226.5b(f)(2) allows creditors to
terminate and accelerate a home-equity plan or take a lesser action,
such as suspending advances or reducing the credit limit, for four
reasons: (1) ``Fraud or material misrepresentation on the part of the
consumer in connection with the account'' (Sec. 226.5b(f)(2)(i)); (2)
failure of the consumer ``to make a required minimum periodic payment
within 30 days after the due date for that payment'' (proposed Sec.
226.5b(f)(2)(ii)); (3) ``any other action or failure to act by the
consumer which adversely affects the creditor's security for the
account or any right of the creditor to such security'' (Sec.
226.5b(f)(2)(iii)); or, (4) ``compliance with federal law requires the
creditor to terminate and demand repayment of the entire outstanding
balance in advance of the original term'' (in which case, lesser action
would not be appropriate) (proposed Sec. 226.5b(f)(2)(iv)).
Thus, proposed comment 9(j)(2)-2 explains that when a creditor
takes action under Sec. 226.5b(f)(2)(i) for a consumer's fraud or
misrepresentation related to the home-equity plan, the creditor need
only disclose that the action was taken due to either, as applicable,
fraud or misrepresentation by the consumer; the creditor is not
required to specify in the notice the nature of the fraud or
misrepresentation. During Board outreach, creditors expressed concerns
that a requirement to disclose the specific nature of the fraud or
misrepresentation could more readily expose them to claims of libel or
slander, whether spurious or not, than a generic disclosure that the
consumer's fraud or misrepresentation precipitated the creditor's
action. Concerns were also expressed that, even if the consumer in fact
committed fraud or misrepresentation, a court may penalize the creditor
for the particular way in which it phrased the nature of the fraud or
misrepresentation in the notice. The Board requests comment on whether
the creditor should also be required to include on the notice a toll-
free telephone number that the consumer may call to receive additional
information about the action taken and other information on the notice,
particularly when the reason for the action is stated simply as fraud
or material misrepresentation.
Also under proposed comment 5b(f)(2)-2, when a creditor takes
action under Sec. 226.5b(f)(2)(iii) for a consumer's action or
inaction affecting the creditor's security interest, the creditor must
include in the notice the consumer's action or inaction that threatens
creditor's interest in the property securing the account, such as
failing to pay property taxes or allowing a new superior lien on the
property.
9(j)(3) Notices Required When Action Other Than Termination,
Suspension, or Credit Limit Reduction Is Taken Under Sec. 226.5b(f)(2)
Proposed Sec. 226.9(j)(3) would require a creditor that takes
action other than account termination, suspension, or credit limit
reduction under Sec. 226.5b(f)(2), such as a rate increase or fee, to
disclose these changes according to the 45-day advance notice
requirements of Sec. 226.9(c)(1) (for fee changes) or (i) (for rate
changes), as applicable. The Board does not believe that advance notice
for these actions jeopardizes the creditor's interest as in the case of
account termination, suspension, or reduction, where a concern about
the consumer drawing down the full line exists. By taking lesser action
such as imposing a fee or rate increase, the creditor itself has
determined that adequate risk management does not require taking away
from the consumer full access to the account. The proposed provision is
intended to enhance consumer protection and education for the reasons
discussed in this section-by-section analysis under Sec. 226.9(c)(1)
and (i).
Section 226.14 Determination of Annual Percentage Rate
Section 226.14 contains rules for calculation of the APR for open-
end credit. Section 226.14(a) states general rules for determination of
the APR, including rules on accuracy and good faith errors in
disclosure. Section 226.14(b) contains rules for calculation of the APR
for disclosure at the time of application for open-end (not home-
secured) credit under Sec. 226.5a or a HELOC under Sec. 226.5b, at
account opening under Sec. 226.6, in change-in-terms notices under
Sec. 226.9, in rescission notices under Sec. 226.15, in advertising
under Sec. 226.16, and in oral disclosures under Sec. 226.26. The APR
is calculated for purposes of these disclosures, as stated in Sec.
226.14(b), by
[[Page 43524]]
multiplying each periodic rate by the number of periods in a year.
Section 226.14(b) also states the rules for calculation of the APR
for disclosure on periodic statements for open-end (not home-secured)
plans under Sec. 226.7(b)(4), and for disclosure of the corresponding
APR for HELOCs subject to Sec. 226.5b under Sec. 226.7(a)(4). The
calculation rules for the Sec. 226.7(a)(4) and (b)(4) disclosures are
the same as those stated above, i.e., multiply each periodic rate by
the number of periods in a year. For HELOCs, creditors have the option
of disclosing, in addition to the corresponding APR, the effective APR
under Sec. 226.7(a)(7). The rules for calculation of the effective APR
for optional disclosure for HELOCs are set forth in Sec. 226.14(c) and
(d).
As discussed above under Sec. 226.7, in the January 2009
Regulation Z Rule, the Board eliminated the requirement to disclose the
effective APR for open-end (not home-secured) credit, and made the
disclosure of the effective APR optional for HELOCs subject to Sec.
226.5b. As also discussed above under Sec. 226.7, the Board is now
proposing to eliminate the disclosure of the effective APR for HELOCs
subject to Sec. 226.5b. Accordingly, the Board proposes to delete
Sec. 226.14(c) and (d) and the accompanying staff commentary.
Section 226.14(b) would be revised by replacing a reference to
disclosures under various sections of the regulation with a reference
to disclosures under Subpart B, because with the elimination of the
requirement to disclose the effective APR on periodic statements, Sec.
226.14 would now provide rules for calculation of the APR for open-end
disclosures generally. Comment 14(b)-1 would be revised similarly.
Comment 14(b)-1 would also be revised by deleting a sentence referring
to the ``corresponding annual percentage rate,'' because that term
would now become obsolete; all disclosures of the annual percentage
rate would use the term ``annual percentage rate'' or ``APR.''
Appendix F--Annual Percentage Rate Computations for Certain Open-End
Credit Plans
Appendix F contains guidance on calculation of the effective APR
under Sec. 226.14(c)(3) when the finance charge imposed during the
billing cycle includes a charge relating to a specific transaction. As
discussed above under Sec. Sec. 226.7 and 226.14, the Board is
proposing to eliminate the disclosure of the effective APR on periodic
statements, and therefore is also proposing to delete Sec. 226.14(c)
and (d), which contain the rules for calculation of the effective APR.
If the effective APR disclosure is eliminated, Appendix F will have no
further purpose. Accordingly, the Board proposes to remove and reserve
Appendix F and the accompanying staff commentary.
Appendix G--Open-End Model Forms and Clauses
Appendix G to part 226 sets forth model forms, model clauses and
sample forms that creditors may use to comply with the requirements of
Regulation Z for open-end credit. Although use of the model forms and
clauses is not required, creditors using them properly will be deemed
to be in compliance with the regulation with regard to those
disclosures.
As discussed in detail below, the Board proposes to modify the
model clauses applicable to balance computation method disclosures,
notices of liability for unauthorized use, and notices of billing-error
rights; to add new model and sample forms for HELOC early disclosures
and account-opening disclosures; to add new model clauses for notices
of results of reinstatement investigations and for notices of actions
taken on accounts in HELOCs; and to add new sample forms for HELOC
periodic statements, change-in-terms notices, and notices of rate
increases. In addition, as discussed below, the Board is proposing to
adopt, for both open-end and closed-end credit, new samples and models
for disclosures relating to credit insurance, debt cancellation or debt
suspension; for a detailed discussion of these proposed disclosures and
the related proposed models and samples, refer to the notice of the
Board's proposal regarding closed-end mortgage lending requirements
under Regulation Z, published today elsewhere in this Federal Register.
The staff commentary to Appendices G and H contains comment App. G
and H-1, which discusses permissible changes that creditors may make to
the model forms and clauses without losing protection from liability
for failure to comply with the regulation's disclosure requirements.
Comment App. G and H-1 also lists the models to which formatting
changes may not be made because the related disclosure requirements
provide that the disclosures must be made in a form substantially
similar to that in the models. The Board proposes to revise comment
App. G and H-1 by adding a number of proposed new open-end and closed-
end models to this list.
Model clauses for balance computation methods. Under various
sections of the regulation, creditors are required to disclose the
method of calculating the balance to which rates are applied. See
Sec. Sec. 226.5a(b)(6), 226.6(b)(2)(vi), 226.6(b)(4)(i)(D), and
226.7(b)(5), and proposed Sec. Sec. 226.6(a)(2)(xxii),
226.6(a)(4)(i)(D), and 226.7(a)(5). Under some of these provisions, the
creditor is permitted in some circumstances to identify the name of the
balance calculation method, but under others the creditor must in
either some or all cases provide an explanation of how the balance was
calculated. Model Clauses that explain commonly used methods, such as
the average daily balance method, are at Appendices G-1 and G-1(A) to
part 226.
In the January 2009 Regulation Z Rule, Appendix G-1(A) was added
for open-end (not home-secured) plans. The clauses in Appendix G-1(A)
refer to ``interest charges'' rather than ``finance charges'' to
explain balance computation methods. The consumer testing conducted by
the Board prior to the June 2007 Regulation Z Proposal indicated that
consumers generally had a better understanding of ``interest charge''
than ``finance charge,'' which is reflected in the Board's use of
``interest'' (rather than ``finance charge'') in account-opening
samples and to describe costs other than fees on periodic statement
samples and forms in the January 2009 Regulation Z Rule. For HELOCs
subject to Sec. 226.5b, the January 2009 Regulation Z Rule permits
creditors to use the model clauses in either Appendix G-1 or G-1(A).
Consumer testing conducted for the Board during the development of
this proposal for HELOCs confirms that consumers generally understand
``interest charge'' better than ``finance charge.'' As discussed above
under Sec. Sec. 226.5b, 226.6, and 226.7, the Board is accordingly
proposing to require use of ``interest charge'' in HELOC disclosures.
Therefore, the Board proposes to delete current Appendix G-1 and to
redesignate Appendix G-1(A) as Appendix G-1 for use by all creditors
offering open-end credit, both HELOCs and open-end (not home-secured)
credit. In addition, the commentary would be revised to delete material
that refers only to the existing version of Appendix G-1, or that
indicates that HELOC creditors have the option to use either Appendix
G-1 or G-1(A).
Model clauses for notice of liability for unauthorized use and
billing-error rights. Appendix G contains Model Clauses G-2 and G-2(A),
which provide models for the notice of liability for unauthorized use
of a credit card. In the January 2009 Regulation Z Rule, the Board
adopted Model Clause G-2(A) for open-end (not home-secured) plans.
Model Clause G-2(A) does not differ in
[[Page 43525]]
substance from Model Clause G-2, but was revised to improve
readability. In addition, Appendix G includes Model Forms G-3 and G-
3(A), which contain models for the long-form billing-error rights
statement (for use with the account-opening disclosures and as an
annual disclosure or, at the creditor's option, with each periodic
statement), and G-4 and G-4(A), which contain models for the
alternative billing-error rights statement (for use with each periodic
statement). As with Model Clause G-2, the Board adopted Model Forms G-
3(A) and G-4(A) for open-end (not home-secured) plans, with revisions
to improve readability. For HELOCs subject to Sec. 226.5b, the January
2009 Regulation Z rule permits a creditor to use either the current
forms (G-2, G-3, and G-4) or the revised forms (G-2(A), G-3(A), and G-
4(A)), in order to avoid requiring HELOC creditors to make forms
changes pending the completion of the Board's HELOC review.
Revised Model clauses and forms G-2(A), G-3(A), and G-4(A) adopted
in the January 2009 Regulation Z Rule are fully applicable to HELOCs,
and represent improvements on models G-2, G-3, and G-4 in terms of
readability. Therefore, the Board proposes to delete current G-2, G-3,
and G-4, and to redesignate G-2(A), G-3(A), and G-4(A) as G-2, G-3, and
G-4, respectively, for use by all creditors offering open-end credit,
both HELOCs and open-end (not home-secured) credit. A technical
correction would be made in the titles of Model Forms G-3 and G-4 in
the table of contents to Appendix G. In addition, the commentary would
be revised to delete material that refers to existing versions of G-2,
G-3, or G-4, or that indicates that HELOC creditors have the option to
use either the old or the new versions.
Model and sample forms applicable to HELOC early disclosures and
account-opening disclosures. Currently, Appendix G contains three
sample and model forms and clauses related to the disclosures required
by Sec. 226.5b at the time a consumer submits an application for a
HELOC: G-14A and G-14B, which are sample application disclosures, and
G-15, which contains model clauses that may be used as applicable in a
creditor's HELOC application disclosure. Appendix G does not currently
contain any model or sample forms or clauses related to the account-
opening disclosures required by Sec. 226.6(a) at the time a consumer
opens a HELOC.
As discussed above in the section-by-section analysis to Sec.
226.5b, the Board is proposing to change disclosure timing so that the
generic application disclosures required under the current regulation
would be replaced with more transaction-specific disclosures to be
provided within three business days after a consumer submits a HELOC
application (the ``early disclosures''). In addition, as discussed
above, the Board is proposing to substantially revise the format of the
disclosures. The application disclosures currently required are subject
to few formatting requirements and, in particular, are not required to
be in a tabular format or in any minimum font size. Under the proposal,
the early disclosures would have to be provided in a tabular format, in
a minimum font size of 10 points, and would be subject to other format
requirements.
Accordingly, the Board proposes to replace current Samples G-14A
and G-14B and Model G-15 with new model and sample forms reflecting the
proposed new format requirements. Proposed Models G-14(A) and G-14(B)
and Samples G-14(C), G-14(D), and G-14(E) would illustrate, in the
tabular format, the early disclosures proposed to be required under
Sec. 226.5b. Under proposed Sec. 226.5b, the early disclosures would
have to be given in the form of a table with headings, content, and
format substantially similar to any of the applicable models.
Proposed Models G-14(A) and G-14(B) differ in that the former
provides guidance for creditors that offer two or more HELOC plans,
while the latter provides guidance for creditors that offer only one
HELOC plan. Proposed Samples G-14(C), G-14(D), and G-14(E) differ in
that they illustrate differing minimum payment terms, such as whether
the HELOC has a repayment period, how the length of the repayment
period is determined, whether a balloon payment will or may be due, and
how the minimum payment amount is calculated during the draw and
repayment periods. The proposed samples also differ in that Samples G-
14(C) and G-14(E) illustrate plans with discounted introductory APRs,
while Sample G-14(D) illustrates a plan without a discounted
introductory APR.
As discussed above in the section-by-section analysis to Sec.
226.6, the Board is also proposing to require that certain account-
opening disclosures be provided in a tabular format, a minimum font
size of 10 points, and subject to other format requirements, similar to
the proposed requirements for the early disclosures under proposed
Sec. 226.5b. The disclosures that would be required to be provided in
tabular format as set forth in proposed Sec. 226.6(a)(2); account-
opening disclosures set forth in proposed Sec. 226.6(a)(3), (4), and
(5), if not listed in proposed Sec. 226.6(a)(2), would not have to be
given in tabular format.
As mentioned above, Appendix G does not currently contain any model
or sample forms or clauses for the account-opening disclosures. To
provide guidance on the proposed new account-opening disclosure tabular
format requirements, the Board proposes to adopt new Model G-15(A) and
Samples G-15(B), G-15(C), and G-15(D), reflecting those requirements.
Under proposed Sec. 226.6(a)(1), specified account-opening disclosures
would have to be given in the form of a table with headings, content,
and format substantially similar to any of the applicable models.
The Board is proposing only one model form for the account-opening
disclosures, rather than two forms as in the case of the early
disclosures. When the early disclosures are provided soon after
application, the consumer may not have chosen a particular HELOC plan,
and thus if the creditor offers more than one plan, showing more than
one in the disclosures would be helpful to the consumer and accordingly
one of the early disclosure models shows two plans, as discussed above.
In contrast, at the time the HELOC account is opened, the consumer will
have chosen a particular plan and therefore a second model form is not
needed.
Proposed Samples G-15(B), G-15(C), and G-15(D), similarly to
proposed Samples G-14(C), G-14(D), and G-14(E), differ in that they
illustrate differing minimum payment terms, such as whether the HELOC
has a repayment period, how the length of the repayment period is
determined, whether a balloon payment will or may be due, and how the
minimum payment amount is calculated during the draw and repayment
periods. The proposed samples also differ with regard to whether the
illustrated plan has a discounted introductory APR.
Currently, the staff commentary to Appendix G does not contain any
comments addressing the model and sample forms and clauses related to
the HELOC disclosures. The Board proposes to add staff commentary to
provide guidance on the proposed new model and sample forms for the
early HELOC disclosures required under proposed Sec. 226.5b(b), as
well as on the proposed new model and sample forms for certain account-
opening disclosures under proposed Sec. 226.6(a)(2). The proposed
commentary would provide guidance on how to use the model and sample
forms and on how the various forms differ. In addition, the proposed
commentary would provide details on the formatting
[[Page 43526]]
techniques used in presenting the information in the sample forms, such
as on font style and size, spacing between lines of text, paragraphs,
words, and characters, and sufficient contrast. The commentary would
also state that, while the Board would not require creditors to use
these formatting techniques (except for the font size requirements),
the Board would encourage creditors to consider these techniques when
deciding how to disclose information in the table, to ensure that the
information is presented in a readable format. This portion of the
proposed commentary would generally parallel the commentary to the
model and sample forms and clauses for open-end (not home-secured)
credit adopted in the January 2009 Regulation Z Rule.
Model clauses for notice of results of reinstatement investigation.
Model clauses in proposed Models G-22(A) and G-22(B) illustrate the
disclosures required under Sec. 226.5b(g)(2)(v). They inform the
consumer that the consumer's reinstatement request has been received
and that the creditor has investigated the request. They contain sample
language for explaining the results of a reinstatement investigation in
which the creditor found that a reason for suspension of advances or
reduction of the credit limit still exists. Clauses in Model G-22(A)
illustrate how a notice may explain that the same reason or reasons
originally supporting the suspension or reduction still exist. Clauses
in Model G-22(B) illustrate how a creditor may explain that a new
reason or reasons for account suspension or reduction exist.
Models G-22(A) and G-22(B) do not contain sample clauses for all
reasons in which a creditor may temporarily suspend or reduce a home-
equity plan; they illustrate only three of the reasons why a creditor
may take these actions: (1) A significant decline in the value of the
property securing the plan (Sec. 226.5b(f)(3)(vi)(A)); (2) a material
change in the consumer's financial circumstances such that the creditor
has a reasonable belief that the consumer will be unable to meet the
repayment terms of the plan (Sec. 226.5b(f)(3)(vi)(B)); and (3) the
consumer's default of a material obligation under the plan (Sec.
226.5b(f)(3)(vi)(C)). The Board chose to feature these three reasons
for temporary suspension or reduction because Board outreach and
research indicated that creditors rely on these reasons to take action
more often than the reasons found in Sec. 226.5b(f)(3)(vi)(D)-(F), and
because they may present more challenges regarding the specificity
required to comply with disclosure requirement.
Proposed comment 12 to Appendix G of part 226 is intended to affirm
that the creditor has flexibility in complying with the disclosure
requirement of Sec. 226.5b(g)(2)(v). The creditor may comply by using
language substantially similar to the language in the model clauses or
by substituting applicable reasons for the action not represented in
the model clauses, as long as the information required to be disclosed
is clear and conspicuous.
Model clauses for notice of action taken on account. These model
clauses illustrate the disclosures required under Sec. 226.9(j)(1) and
(j)(3). Clauses in Model G-23(A) contain information required under
proposed Sec. 226.9(j)(1) regarding the nature of the action taken on
the account under Sec. 226.5b(f)(3)(i) and (f)(3)(vi) and the specific
reasons for the action taken. In particular, they illustrate language
for a notice in which the creditor temporarily suspended advances or
reduced a credit limit due to a significant decline in the value of the
property securing the plan under Sec. 226.5b(f)(3)(vi)(A); a material
change in the consumer's financial circumstances such that the creditor
has a reasonable belief that the consumer will be unable to meet the
repayment terms of the plan under Sec. 226.5b(f)(3)(vi)(B); and the
consumer's default of a material obligation under the plan under Sec.
226.5b(f)(3)(vi)(C). Again, the Board chose to feature these three
reasons for temporary suspension or reduction because Board outreach
and research indicated that creditors rely on these reasons to take
action more often than the reasons found in Sec. 226.5b(f)(3)(vi)(D)-
(F), and because they may present more challenges regarding the
specificity required to comply with the disclosure requirement. Model
G-23(A) clauses also contain information regarding the consumer's
rights when the creditor requires the consumer to request reinstatement
under Sec. 226.5b(g)(1)(ii).
Clauses in Model G-23(B) contain information required under
proposed Sec. 226.9(j)(3) regarding the nature of the action taken on
the account under Sec. 226.5b(f)(2) and the specific reasons for the
action taken. In particular, they illustrate language for a notice in
which the creditor takes action on an account due to the consumer's
failure to make a required minimum periodic payment within 30 days of
the due date under proposed Sec. 226.5b(f)(2)(ii) and the consumer's
action or inaction that adversely affected the creditor's interest in
the property securing the plan under Sec. 226.5b(f)(2)(iii). Model
clauses for the notice when a creditor takes action due to a consumer's
fraud or material misrepresentation under Sec. 226.5b(f)(2)(i) are not
included because, under proposed comment 9(j)(3)-2.ii, a creditor need
disclose only that the consumer's fraud or misrepresentation is the
reason for the action.
Proposed comment 13 to Appendix G is intended to affirm that a
creditor has flexibility in complying with the disclosure requirements
of Sec. 226.9(j)(1) and (j)(3). The creditor may comply by using
language substantially similar to the language in the model clauses or
by substituting applicable reasons for the action not represented in
the model clauses, as long as the information required to be disclosed
is clear and conspicuous.
The Board developed the clauses in proposed Models G-22(A), G-
22(B), G-23(A) and G-23(B) in consultation with ICF Macro, a third-
party consumer research and testing firm contracted by the Board to
assist with developing and testing disclosures for home-equity plans.
The Board has not yet tested the clauses in proposed Models G-22(A), G-
22(B), G-23(A) and G-23(B) with consumers. The Board requests comment
on whether consumer testing of these clauses is necessary, whether the
Board should develop model forms rather than model clauses for the
disclosure requirements of Sec. 226.5b(g)(2)(v) and Sec. 226.9(j)(1)
and (j)(3), and whether the Board should consider modifying, deleting,
or adding any proposed clauses for these models.
Sample forms for periodic statements, change-in-terms notices, and
notices of rate increases. As discussed above in the section-by-section
analysis to proposed Sec. 226.7(a), the Board is proposing to revise
the requirements for disclosures on periodic statements for HELOC
accounts. Periodic statements would be subject to certain content and
formatting requirements, including a requirement to disclose a total of
interest and a total of fees charged, both for the statement period and
for year to date, in proximity to the list of transactions on the
statement. To provide guidance on the proposed periodic statement
requirements, the Board proposes to adopt new Samples G-24(A), G-24(B),
and G-24(C). Under proposed Sec. 226.7(a), the interest and fee
disclosures would have to be made using a format substantially similar
to the samples. Proposed Sample G-24(A) illustrates the disclosure of
total interest and total fees for the period and year to date in
proximity to transactions. Proposed Samples G-24(B) and G-24(C) show
entire periodic statements, including the grouping shown in Sample G-
24(A) as well as other elements of the statements.
[[Page 43527]]
As discussed above in the section-by-section analysis to proposed
Sec. 226.9(c)(1) and (i), the Board is also proposing to revise the
requirements for providing change-in-terms notices for HELOCs, and to
adopt a new requirement to provide a notice of rate increase. The
notice would be subject to certain formatting requirements including
the use of a tabular format, and if the notice is given with a periodic
statement, would have to be disclosed on the front of any page of the
statement. If the notice is not given with a periodic statement, the
notice would have to be disclosed, at the creditor's option, on the
front of the first page or segregated on a separate page from other
information. The Board proposes to adopt new Sample G-25, illustrating
a change-in-terms notice using the tabular format, and Sample G-26,
showing a notice of rate increase using the tabular format. Proposed
Sample G-24(C) illustrates a change-in-terms notice given on the front
of a periodic statement using the tabular format, and proposed Sample
G-24(B) provides the same guidance with regard to a notice of rate
increase.
The Board also proposes to adopt staff commentary to provide
guidance on the use of proposed Samples G-24(A), G-24(B), G-24(C), G-
25, and G-26. The proposed commentary would discuss how the forms may
be used and how they differ from each other. In addition, the
commentary would make clear that the samples contain information that
is not required by Regulation Z, and that they present information in
additional formats that are not required by Regulation Z.
Model and sample forms for credit insurance, debt cancellation or
debt suspension. As discussed in the notice of the Board's proposal
regarding closed-end mortgage lending requirements under Regulation Z,
published today elsewhere in this Federal Register, the Board is
proposing certain additional disclosure requirements relating to credit
insurance, debt cancellation or debt suspension. Generally, the
proposed disclosures would enhance information provided to consumers
about the optional nature of the insurance or coverage, the cost, and
eligibility requirements. The Board is proposing to adopt new samples
and models for these disclosures, designated G-16(C) and G-16(D) for
open-end credit and H-17(C) and H-17(D) for closed-end credit. For the
proposed text of the sample and model disclosures and for further
discussion of them, refer to the Board's separate Federal Register
notice published today elsewhere in this Federal Register.
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The collection of information that is
required by this proposed rule is found in 12 CFR part 226. The Board
may not conduct or sponsor, and an organization is not required to
respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0199.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board
does not collect any information, no issue of confidentiality arises.
The respondents/recordkeepers are creditors and other entities subject
to Regulation Z.
TILA and Regulation Z are intended to ensure effective disclosure
of the costs and terms of credit to consumers. For open-end credit,
creditors are required to, among other things, disclose information
about the initial costs and terms and to provide periodic statements of
account activity, notice of changes in terms, and statements of rights
concerning billing error procedures. Regulation Z requires specific
types of disclosures for credit and charge card accounts and home
equity plans. For closed-end loans, such as mortgage and installment
loans, cost disclosures are required to be provided prior to
consummation. Special disclosures are required in connection with
certain products, such as reverse mortgages, certain variable-rate
loans, and certain mortgages with rates and fees above specified
thresholds. TILA and Regulation Z also contain rules concerning credit
advertising. Creditors are required to retain evidence of compliance
for twenty-four months, Sec. 226.25, for certain types of records.\41\
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\41\ See comments 25(a)-3 and -4.
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Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the state member banks and other
creditors supervised by the Board that engage in consumer credit
activities covered by Regulation Z and, therefore, are respondents
under the PRA. Appendix I of Regulation Z defines the Federal Reserve-
regulated institutions as: State member banks, branches and agencies of
foreign banks (other than federal branches, federal agencies, and
insured state branches of foreign banks), commercial lending companies
owned or controlled by foreign banks, and organizations operating under
section 25 or 25A of the Federal Reserve Act. Other federal agencies
account for the paperwork burden imposed on the entities for which they
have administrative enforcement authority. The current total annual
burden to comply with the provisions of Regulation Z is estimated to be
734,127 hours for the 1,138 Federal Reserve-regulated institutions that
are deemed to be respondents for the purposes of the PRA. To ease the
burden and cost of complying with Regulation Z (particularly for small
entities), the Board provides model forms, which are appended to the
regulation.
As discussed in the preamble, the Board is proposing changes to
format, timing, and content requirements for HELOC disclosures required
by Regulation Z: (1) Educational information published by the Board
provided at application; (2) transaction-specific disclosures provided
within three days after application; (3) transaction-specific
disclosures provided at account-opening; (4) periodic statements and
notices of changes to the transaction's terms provided during the life
of the plan; and (5) notices related to terminating, suspending, and
reinstating accounts, and reducing the credit limit. The proposed rule
would impose a one-time increase in the total annual burden under
Regulation Z for all respondents regulated by the Federal Reserve by
104,160 hours, from 734,127 to 838,287 hours. In addition, the Board
estimates that, on a continuing basis, the proposed revisions to the
rules would increase the total annual burden on a continuing basis from
734,127 to 1,323,049 hours.
The total estimated burden increase, as well as the estimates of
the burden increase associated with each major section of the proposed
rule as set forth below, represents averages for all respondents
regulated by the Federal Reserve. The Board expects that the amount of
time required to implement each of the proposed changes for a given
institution may vary based on the size and complexity of the
respondent. Furthermore, the burden estimate for this rulemaking does
not include the burden of complying with proposed disclosure and timing
requirements that apply to private educational lenders making private
education loans as announced in a separate proposed rulemaking (Docket
No. R-1353) or the proposed disclosure and timing requirements of the
Board's separate
[[Page 43528]]
notice published simultaneously with this proposal for closed-end
mortgages.
The Board estimates that 651 respondents regulated by the Federal
Reserve would take, on average, 160 hours (four business weeks) to
update their systems, internal procedure manuals, and provide training
for relevant staff to comply with the proposed disclosure requirements
in Sec. 226.5b(b). This one-time revision would increase the burden by
104,160 hours. On a continuing basis the Board estimates that 651
respondents regulated by the Federal Reserve would take, on average, 64
hours a month to comply with the all of the disclosure requirements for
open-end credit plans secured by real property and would increase the
ongoing burden from 15,532 hours to 500,294 hours. To ease the burden
and cost of complying with the new and proposed requirements under
Regulation Z the Board proposes to revise or add several model forms,
model clauses and sample forms to Appendix G.
The other federal financial agencies: Office of the Comptroller of
the Currency (OCC), Office of Thrift Supervision (OTS), the Federal
Deposit Insurance Corporation (FDIC), and the National Credit Union
Administration (NCUA) are responsible for estimating and reporting to
OMB the total paperwork burden for the domestically chartered
commercial banks, thrifts, and federal credit unions and U.S. branches
and agencies of foreign banks for which they have primary
administrative enforcement jurisdiction under TILA Section 108(a), 15
U.S.C. 1607(a). These agencies may, but are not required to, use the
Board's burden estimation methodology. Using the Board's method, the
total current estimated annual burden for the approximately 17,200
domestically chartered commercial banks, thrifts, and federal credit
unions and U.S. branches and agencies of foreign banks supervised by
the Federal Reserve, OCC, OTS, FDIC, and NCUA under TILA would be
approximately 13,568,725 hours. The proposed rule would impose a one-
time increase in the estimated annual burden for such institutions by
2,752,000 hours to 16,320,725 hours. On a continuing basis the proposed
rule would impose an increase in the estimated annual burden by
13,209,600 to 26,778,325 hours. The above estimates represent an
average across all respondents; the Board expects variations between
institutions based on their size, complexity, and practices.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Federal
Reserve's functions; including whether the information has practical
utility; (2) the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collection, including the cost of
compliance; (3) ways to enhance the quality, utility, and clarity of
the information to be collected; and (4) ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments on the collection of information should be sent to
Cynthia Ayouch, Acting Federal Reserve Board Clearance Officer,
Division of Research and Statistics, Mail Stop 95-A, Board of Governors
of the Federal Reserve System, Washington, DC 20551, with copies of
such comments sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0199), Washington, DC 20503.
VIII. Initial Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601-612, the Board is publishing an initial regulatory
flexibility analysis for the proposed amendments to Regulation Z. The
RFA requires an agency either to provide an initial regulatory
flexibility analysis with a proposed rule or to certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. Under regulations issued by the
Small Business Administration, an entity is considered ``small'' if it
has $175 million or less in assets for banks and other depository
institutions; and $7 million or less in revenues for non-depository
lenders and loan originators.\42\
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\42\ 13 CFR 121.201.
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Based on its analysis and for the reasons stated below, the Board
believes that the proposed rule will have a significant economic impact
on a substantial number of small entities. A final regulatory
flexibility analysis will be conducted after consideration of comments
received during the public comment period. The Board requests public
comment in the following areas.
A. Reasons for the Proposed Rule
Congress enacted TILA based on findings that economic stability
would be enhanced and competition among consumer credit providers would
be strengthened by the informed use of credit resulting from consumers'
awareness of the cost of credit. One of the stated purposes of TILA is
to provide a meaningful disclosure of credit terms to enable consumers
to compare credit terms available in the marketplace more readily and
avoid the uninformed use of credit. In this regard, the goal of the
proposed amendments to Regulation Z is to improve the effectiveness of
the disclosures that creditors provide to consumers beginning before
application and throughout the life of a HELOC plan. Accordingly, the
Board is proposing changes to format, timing, and content requirements
for HELOC disclosures required by Regulation Z: (1) Educational
information published by the Board provided with the application; (2)
transaction-specific disclosures provided shortly after application;
(3) transaction-specific disclosures provided at account-opening; (4)
periodic statements and notices of changes to the transaction's terms
provided during the life of the plan; and (5) notices related to
terminating, suspending, and reinstating accounts, and reducing the
credit limit.
Specifically, the proposed regulations would revise and enhance the
content of HELOC disclosures currently required at application and
account-opening, as well as periodic statements and change-in-terms
notices. The Board's proposal also would require creditors to provide
transaction-specific disclosures early enough in the process (i.e.,
within three business days after application rather than at account-
opening, as currently required) to enable consumers to make decisions
based on credit terms that would be offered to them and not on general
information that may not apply to a particular consumer. The Board's
proposal also would revise notice of action taken requirements for
accounts that are temporarily suspended or reduced; require a notice of
action taken when a creditor takes any action for reasons that would
allow the creditor to terminate the account; and require a notice of
the results of a creditor's investigation of a consumer's request for
reinstatement of credit privileges on accounts that have been
temporarily suspended or reduced. These amendments are proposed in
furtherance of the Board's responsibility to prescribe regulations to
carry out the purposes of TILA, including promoting consumers'
awareness of the cost of credit and their informed use of credit.
B. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION contains information about objectives
of and legal basis for the proposed rule. In summary, the proposed
amendments to Regulation Z are designed to achieve
[[Page 43529]]
two goals: (1) Revise content, timing and format of disclosures
required for HELOCs at application, account-opening, and after the
HELOC is opened; and (2) clarify and strengthen certain substantive
restrictions on when creditors may change the terms of a HELOC plan,
including when a creditor may terminate, suspend, or reduce a HELOC.
The legal basis for the proposed rule is in Sections 105(a),
105(f), 127(a)(8), 127A(a)(14) and 127A(e) of TILA. 15 U.S.C. 1604(a),
1604(f), 1637(a)(8), 1637a(a)(14), and 1637a(e). A more detailed
discussion of the Board's rulemaking authority is set forth in part IV
of the SUPPLEMENTARY INFORMATION.
C. Description of Small Entities to Which the Proposed Rule Would Apply
The proposed regulations would apply to all institutions and
entities that engage in originating or extending HELOCs. The Board is
not aware of a reliable source for the total number of small entities
likely to be affected by the proposal; and the credit provisions of
TILA and Regulation Z have broad applicability to individuals and
businesses that originate, extend and service even small numbers of
home-secured credit. See Sec. 226.1(c)(1).\43\ Thus, all small
entities that originate, extend, or service HELOCs potentially could be
subject to at least some aspects of the proposed rule.
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\43\ Regulation Z generally applies to ``each individual or
business that offers or extends credit when four conditions are met:
(i) The credit is offered or extended to consumers; (ii) the
offering or extension of credit is done regularly, (iii) the credit
is subject to a finance charge or is payable by a written agreement
in more than four installments, and (iv) the credit is primarily for
personal, family, or household purposes.'' Sec. 226.1(c)(1).
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The Board can, however, identify through data from Reports of
Condition and Income (``call reports'') approximate numbers of small
depository institutions that would be subject to the proposed rules if
they originate or extend HELOCs. Based on December 2008 call report
data, approximately 7,557 small institutions would be subject to the
proposed rule. Approximately 16,345 depository institutions in the
United States filed call report data, approximately 11,907 of which had
total domestic assets of $175 million or less and thus were considered
small entities for purposes of the Regulatory Flexibility Act. Of 4,231
banks, 565 thrifts and 7,111 credit unions that filed call report data
and were considered small entities, 2,397 banks, 363 thrifts, and 4,797
credit unions, totaling 7,557 institutions, extended HELOCs. For
purposes of this analysis, thrifts include savings banks, savings and
loan entities, co-operative banks and industrial banks.
The Board cannot identify with certainty the number of small non-
depository institutions that would be subject to the proposed rule.
Home Mortgage Disclosure Act (HMDA) \44\ data indicate that 1,752 non-
depository institutions filed HMDA reports in 2007.\45\ Based on the
small volume of lending activity reported by these institutions in
general, most are likely to be small.\46\
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\44\ The 8,610 lenders (both depository institutions and
mortgage companies) covered by HMDA in 2007 accounted for an
estimated 80% of all home lending in the United States (2008 HMDA
data are not yet available). Under HMDA, lenders use a ``loan/
application register'' (HMDA/LAR) to report information annually to
their federal supervisory agencies for each application and loan
acted on during the calendar year. Lenders must make their HMDA/LARs
available to the public by March 31 following the year to which the
data relate, and they must remove the two date-related fields to
help preserve applicants' privacy. Only lenders that have offices
(or, for non-depository institutions, are deemed to have offices) in
metropolitan areas are required to report under HMDA. However, if a
lender is required to report, it must report information on all of
its home loan applications and loans in all locations, including
non-metropolitan areas.
\45\ The 2007 HMDA Data, http://www.federalreserve.gov/pubs/bulletin/2008/articles/hmda/default.htm.
\46\ The Board recognizes that reporting HELOC originations
under HMDA is optional, so HMDA reporting is not an exact gauge of
small non-depositories engaging in HELOC lending.
---------------------------------------------------------------------------
Another aspect of the Board's proposal that would affect
individuals and small entities that are non-depositories is the
requirement that creditors disclose as part of the early HELOC
disclosure the identity of the creditor making the disclosures and the
loan originator's unique identifier, as defined by the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008 (``SAFE Act'') Sections
1503(3) and (12), 12 U.S.C. 5102(3) and (12). 15 U.S.C. 1637a(a)(14).
Currently, a creditor is not required to disclose identification
information about the creditor and the borrower as part of the
application disclosures. Loan originators other than brokers that would
be affected by the proposal are employees of creditors (or of brokers)
and, as such, are not business entities in their own right. In its 2008
proposed rule under HOEPA, 73 FR 1672, 1720 (Jan. 9, 2008), the Board
noted that, according to the National Association of Mortgage Brokers
(NAMB), in 2004 there were 53,000 brokerage companies that employed an
estimated 418,700 people.\47\ The Board estimated that most of these
companies are small entities. In addition, a comment letter received
from the U.S. Small Business Administration under the Board's 2008
HOEPA proposal cited the U.S. Census Bureau's 2002 Economic Census in
stating that there were 15,195 small broker entities.
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\47\ http://www.namb.org/namb/Industry_Facts.asp?SnID=719224934. The cited page of the NAMB Web site,
however, no longer provides an estimate of the number of mortgage
brokerage companies.
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The compliance requirements of the proposed rules are described in
parts II, V and VI of the SUPPLEMENTARY INFORMATION. The exact effect
of the proposed revisions to Regulation Z on small entities is unknown.
Some small entities would be required, among other things, to modify
their HELOC disclosures and disclosure delivery process to comply with
the revised rules. The precise costs to small entities of updating
their systems and disclosures are difficult to predict. These costs
will depend on a number of unknown factors, including, among other
things, the specifications of the current systems used by such entities
to prepare and provide disclosures and to administer and maintain
accounts, the complexity of the terms of HELOCs that they offer, and
the range of their HELOC product offerings.
E. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
Other Federal Rules
The Board has not identified any federal rules that conflict with
the proposed revisions to Regulation Z.
Overlap With SAFE Act
The proposed rule's required disclosure contents for HELOCs would
overlap with the SAFE Act by requiring that the disclosure include the
loan originator's unique identifier, as defined by SAFE Act, if
applicable.
F. Identification of Duplicative, Overlapping, or Conflicting State
Laws
State Laws Requiring Loan Originator's Unique Identifier
The Board is aware that many states regulate loan originators,
especially brokers. Under TILA Section 111, the proposed rule would not
preempt such state laws except to the extent they are inconsistent with
the proposal's requirements. 15 U.S.C. 1610.
State TILA Equivalents
Many states regulate consumer credit through statutory disclosure
schemes similar to TILA (``TILA equivalents''). Similarly to state laws
regulating loan originators, such state TILA equivalents
[[Page 43530]]
would be preempted only to the extent they are inconsistent with the
proposal's requirements. Id.
The Board seeks comment regarding any state or local statutes or
regulations that would duplicate, overlap, or conflict with the
proposed rule.
G. Discussion of Significant Alternatives
The Board welcomes comments on any significant alternatives,
consistent with the requirements of TILA, that would minimize the
impact of the proposed rule on small entities.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside arrows while language that
would be deleted is set off with brackets. In certain cases deemed
appropriate by the Board to aid understanding, redesignated text, such
as text moved from the commentary into the regulation or from one
paragraph to another, reflects changes to the original text, with
arrows and brackets.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System,
Mortgages, 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 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, and 1637(c)(5).
Subpart A--General
2. Section 226.2 is amended by revising paragraph (a)(6) to read as
follows:
Sec. 226.2 Definitions and rules of construction.
(a) * * *
(6) Business Day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. Sec. 226.15
and 226.23, and for purposes of [rtrif]Sec. 226.5b(e), Sec.
226.9(j)(2),[ltrif] Sec. 226.19(a)(1)(ii), Sec. 226.19(a)(2), and
Sec. 226.31, the term means all calendar days except Sundays and the
legal public holidays specified in 5 U.S.C. 6103(a), such as New Year's
Day, the Birthday of Martin Luther King, Jr., Washington's Birthday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day.
* * * * *
Subpart B--Open-End Credit
3. Section 226.5 is amended by revising paragraphs (a)(1), (a)(2),
(a)(3), (b)(1), (b)(4), and (c), and by re-publishing paragraph (d) to
read as follows:
Sec. 226.5 General disclosure requirements.
(a) Form of disclosures--(1) General. (i) The creditor shall make
the disclosures required by this subpart clearly and conspicuously.
(ii) The creditor shall make the disclosures required by this
subpart in writing,\7\ in a form that the consumer may keep,\8\ except
that:
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\7\ [Reserved].
\8\ [Reserved].
---------------------------------------------------------------------------
(A) The following disclosures need not be written:
[rtrif](1) Disclosures under Sec. 226.6(a)(3) of charges that are
imposed as part of a home-equity plan that are not required to be
disclosed under Sec. 226.6(a)(2) and related disclosures under Sec.
226.9(c)(1)(ii)(B) of charges;
(2)[ltrif] Disclosures under Sec. 226.6(b)(3) of charges that are
imposed as part of an open-end (not home-secured) plan that are not
required to be disclosed under Sec. 226.6(b)(2) and related
disclosures under Sec. 226.9(c)(2)(ii)(B) of charges;
[rtrif](3) Disclosures[ltrif] [disclosures] under Sec.
226.9(c)(2)(v); and
[rtrif](4) Disclosures[ltrif] [disclosures] under Sec. 226.9(d)
when a finance charge is imposed at the time of the transaction.
(B) The following disclosures need not be in a retainable form:
[rtrif](1)[ltrif] Disclosures that need not be written under
paragraph (a)(1)(ii)(A) of this section;
[rtrif](2) Disclosures[ltrif] [disclosures] for credit and charge
card applications and solicitations under Sec. 226.5a; [home-equity
disclosures under Sec. 226.5b(d)];
[rtrif](3) The[ltrif] [the] alternative summary billing-rights
statement under Sec. 226.9(a)(2);
[rtrif](4) The[ltrif] [the] credit and charge card renewal
disclosures required under Sec. 226.9(e); and
[rtrif](5) The[ltrif] [the] payment requirements under Sec.
226.10(b), except as provided in Sec. 226.7(b)(13).
(iii) The disclosures required by this subpart may be provided to
the consumer in electronic form, subject to compliance with the
consumer consent and other applicable provisions of the Electronic
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C.
7001 et seq.). The disclosures required by Sec. Sec. 226.5a,
226.5b[rtrif](a)[ltrif], and 226.16 may be provided to the consumer in
electronic form without regard to the consumer consent or other
provisions of the E-Sign Act in the circumstances set forth in those
sections.
(2) Terminology. (i) Terminology used in providing the disclosures
required by this subpart shall be consistent.
(ii) [rtrif]If disclosures are required to be presented in a
tabular format pursuant to paragraph (a)(3)(ii) of this section, the
terms borrowing period (in reference to the draw period), repayment
period, and balloon payment shall be used, as applicable. If credit
insurance or debt cancellation or debt suspension coverage is required
as part of the plan, the term required shall be used and the program
shall be identified by its name.[ltrif] [For home-equity plans subject
to Sec. 226.5b, the terms finance charge and annual percentage rate,
when required to be disclosed with a corresponding amount or percentage
rate, shall be more conspicuous than any other required disclosure.\9\
The terms need not be more conspicuous when used for periodic statement
disclosures under Sec. 226.7(a)(4) and for advertisements under Sec.
226.16.]
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\9\ [Reserved].
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(iii) If disclosures are required to be presented in a tabular
format pursuant to paragraph (a)(3)[rtrif](except for paragraph
(a)(3)(ii) and the disclosures required under Sec. 226.6(a)(2) that
must be presented in a tabular format pursuant to paragraph
(a)(3)(iii))[ltrif] of this section, the term penalty APR shall be
used, as applicable. The term penalty APR need not be used in reference
to the annual percentage rate that applies with the loss of a
promotional rate, assuming the annual percentage rate that applies is
not greater than the annual percentage rate that would have applied at
the end of the promotional period; or if the annual percentage rate
that applies with the loss of a promotional rate is a variable rate,
the annual percentage rate is calculated using the same index and
margin as would have been used to calculate the annual percentage rate
that would have applied at the end of the promotional period. If credit
insurance or debt cancellation or debt suspension coverage is required
as part of the plan, the term required shall be used and the program
shall be identified by its name. If an annual percentage rate is
required to be presented in a tabular format pursuant to paragraph
(a)(3)(i) or (a)(3)(iii) (except for the disclosures required under
Sec. 226.6(a)(2) that must be presented in a tabular format
[[Page 43531]]
pursuant to paragraph (a)(3)(iii)) of this section), the term fixed, or
a similar term, may not be used to describe such rate unless the
creditor also specifies a time period that the rate will be fixed and
the rate will not increase during that period, or if no such time
period is provided, the rate will not increase while the plan is open.
(3) Specific formats. (i) Certain disclosures for credit and charge
card applications and solicitations must be provided in a tabular
format in accordance with the requirements of Sec. 226.5a(a)(2).
(ii) Certain disclosures for home-equity plans [must precede other
disclosures and] must be [given] [rtrif]provided in a tabular
format[ltrif] in accordance with the requirements of Sec.
226.5b[(a)][rtrif](b)(2)[ltrif].
(iii) Certain account-opening disclosures must be provided in a
tabular format in accordance with the requirements of Sec.
226.6[rtrif](a)(1) and[ltrif] (b)(1).
(iv) Certain disclosures provided on periodic statements must be
grouped together in accordance with the requirements of Sec.
226.7[rtrif](a)(6),[ltrif] (b)(6) and (b)(13).
(v) Certain disclosures accompanying checks that access a credit
card account must be provided in a tabular format in accordance with
the requirements of Sec. 226.9(b)(3).
(vi) Certain disclosures provided in a change-in-terms notice must
be provided in a tabular format in accordance with the requirements of
Sec. 226.9(c)[rtrif](1)(iii)(B) and (c)[ltrif](2)(iii)(B).
(vii) Certain disclosures provided when a rate is increased due to
delinquency, default or as a penalty must be provided in a tabular
format in accordance with the requirements of Sec.
226.9(g)(3)(ii)[rtrif]and (i)(4)[ltrif].
* * * * *
(b) Time of disclosures--(1) Account-opening disclosures--(i)
General rule. The creditor shall furnish account-opening disclosures
required by Sec. 226.6 before the first transaction is made under the
plan.
(ii) Charges imposed as part of an open-end [(not home-secured)]
plan. Charges that are imposed as part of an open-end [(not home-
secured)] plan and are not required to be disclosed under Sec.
226.6[rtrif](a)(2) or[ltrif] (b)(2) may be disclosed after account
opening but before the consumer agrees to pay or becomes obligated to
pay for the charge, provided they are disclosed at a time and in a
manner [rtrif]such[ltrif] that a consumer would be likely to notice
them. [This provision does not apply to charges imposed as part of a
home-equity plan subject to the requirements of Sec. 226.5b.]
(iii) Telephone purchases. Disclosures required by Sec. 226.6 may
be provided as soon as reasonably practicable after the first
transaction if:
(A) The first transaction occurs when a consumer contacts a
merchant by telephone to purchase goods and at the same time the
consumer accepts an offer to finance the purchase by establishing an
open-end plan with the merchant or third-party creditor;
(B) The merchant or third-party creditor permits consumers to
return any goods financed under the plan and provides consumers with a
sufficient time to reject the plan and return the goods free of cost
after the merchant or third-party creditor has provided the written
disclosures required by Sec. 226.6; and
(C) The consumer's right to reject the plan and return the goods is
disclosed to the consumer as a part of the offer to finance the
purchase.
(iv) Membership fees--(A) General. In general, a creditor may not
collect any fee before account-opening disclosures are provided. A
creditor may collect, or obtain the consumer's agreement to pay,
membership fees, including application fees excludable from the finance
charge under Sec. 226.4(c)(1), before providing account-opening
disclosures if, after receiving the disclosures, the consumer may
reject the plan and have no obligation to pay these fees (including
application fees) or any other fee or charge. A membership fee for
purposes of this paragraph has the same meaning as a fee for the
issuance or availability of credit described in Sec. 226.5a(b)(2). If
the consumer rejects the plan, the creditor must promptly refund the
membership fee if it has been paid, or take other action necessary to
ensure the consumer is not obligated to pay that fee or any other fee
or charge.
(B) Home-equity plans. Creditors offering home-equity plans subject
to the requirements of Sec. 226.5b are not subject to the requirements
of paragraph (b)(1)(iv)(A) of this section. [rtrif](See Sec. Sec.
226.5b(d), 226.5b(e), and 226.15 regarding requirements for refunds of
fees applicable to creditors offering home-equity plans.)[ltrif]
(v) Application fees. [rtrif](A) General. In general, a[ltrif] [A]
creditor may collect an application fee excludable from the finance
charge under Sec. 226.4(c)(1) before providing account-opening
disclosures. However, if a consumer rejects the plan after receiving
account-opening disclosures, the consumer must have no obligation to
pay such an application fee, or if the fee was paid, it must be
refunded. See Sec. 226.5(b)(1)(iv).
[rtrif](B) Home-equity plans. Creditors offering home-equity plans
subject to the requirements of Sec. 226.5b are not subject to the
requirements of paragraph (b)(1)(v)(A) of this section. (See Sec. Sec.
226.5b(d), 226.5b(e), and 226.15 regarding requirements for refunds of
fees applicable to creditors offering home-equity plans.)[ltrif]
* * * * *
(4) Home-equity plan[s][rtrif]application and three days after
application disclosures[ltrif]. Disclosures for home-equity plans shall
be made in accordance with the timing requirements of Sec.
226.5b[rtrif](a)(1) and[ltrif] (b)[rtrif](1)[ltrif].
(c) Basis of disclosures and use of estimates. Disclosures shall
reflect the terms of the legal obligation between the parties. If any
information necessary for accurate disclosure is unknown to the
creditor, [rtrif]the creditor[ltrif][it] shall make the disclosure
based on the best information reasonably available and shall state
clearly that the disclosure is an estimate.
(d) Multiple creditors; multiple consumers. If the credit plan
involves more than one creditor, only one set of disclosures shall be
given, and the creditors shall agree among themselves which creditor
must comply with the requirements that this regulation imposes on any
or all of them. If there is more than one consumer, the disclosures may
be made to any consumer who is primarily liable on the account. If the
right of rescission under Sec. 226.15 is applicable, however, the
disclosures required by Sec. Sec. 226.6 and 226.15(b) shall be made to
each consumer having the right to rescind.
* * * * *
4. Section 226.5b is amended by revising paragraphs (a) through
(e), (f)(2)(ii), (f)(2)(iv), and (f)(3)(vi)(A), adding new paragraphs
(f)(3)(vi)(G), and (g), and revising and redesignating current
paragraph (g) as paragraph (d) and current paragraph (h) as paragraph
(e) as follows:
Sec. 226.5b Requirements for home-equity plans.
The requirements of this section apply to open-end credit plans
secured by the consumer's dwelling. [For purposes of this section, an
annual percentage rate is the annual percentage rate corresponding to
the periodic rate as determined under section 226.14(b).]
[rtrif](a) Home-equity document provided on or with the
application--(1) In general. (i) Except as provided in paragraph
(a)(1)(ii) of this section, the home-equity document ``Key Questions
[[Page 43532]]
to Ask about Home Equity Lines of Credit'' published by the Board shall
be provided at the time an application is provided to the consumer. The
document must be provided in a prominent location on or with an
application.
(ii) For telephone applications or applications received through an
intermediary agent or broker, the document required by paragraph
(a)(1)(i) of this section must be delivered or mailed not later than
account opening or three business days following receipt of a
consumer's application by the creditor, whichever is earlier, with the
disclosures required by paragraph (b) of this section.
(2) Electronic disclosure. For an application that is accessed by
the consumer in electronic form, the document required by paragraph
(a)(1) of this section may be provided to the consumer in electronic
form on or with the application.
(3) Duties of third parties. Persons other than the creditor who
provide applications to consumers for home-equity plans must comply
with paragraphs (a)(1) and (a)(2) of this section, except that these
third parties are not required to deliver or mail the document required
by paragraph (a)(1)(i) of this section for telephone applications as
discussed in paragraph (a)(1)(ii) of this section.\10a\
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\10a\ [Reserved].
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(b) Home-equity disclosures provided no later than account opening
or three business days after application, whichever is earlier--(1)
Timing. The disclosures required by paragraph (c) of this section shall
be delivered or mailed not later than account opening, or three
business days following receipt of a consumer's application by the
creditor, whichever is earlier.
(2) Form of disclosures; tabular format. (i) The disclosures
required by paragraphs (c)(4)(ii) through (c)(19) of this section
generally shall be in the form of a table with headings, content, and
format substantially similar to any of the applicable tables found in
G-14 in Appendix G to this part.
(ii) The table described in paragraph (b)(2)(i) of this section
shall contain only the information required or permitted by paragraphs
(c)(4)(ii) through (c)(19).
(iii) Disclosures required by paragraph (c)(1) and (c)(3) of this
section must be placed directly above the table described in paragraph
(b)(2)(i) of this section, in a format substantially similar to any of
the applicable tables found in G-14 in Appendix G to this part.
(iv) The disclosures required by paragraphs (c)(2), (c)(4)(i),
(c)(20) through (c)(22) of this section must be disclosed directly
below the table described in paragraph (b)(2)(i) of this section, in a
format substantially similar to any of the applicable tables found in
G-14 in Appendix G to this part.
(v) Other information may be presented with the table described in
paragraph (b)(2)(i) of this section, provided that such information
appears outside of the required table.
(vi) The following disclosures must be disclosed in bold text:
(A) Disclosures required by paragraphs (c)(2), (c)(4)(i), (c)(20),
(c)(21), and (c)(22)(i) of this section.
(B) Any annual percentage rates required to be disclosed under
paragraph (c)(10) of this section.
(C) Total account opening fees disclosed under paragraph (c)(11) of
this section.
(D) Any percentage or dollar amount required to be disclosed under
paragraphs (c)(12), (c)(13), (c)(16), (c)(17) and (c)(19) of this
section, except the amount of any periodic fee disclosed pursuant to
paragraph (c)(12) of this section that is not an annualized amount.
(E) If a creditor is required under paragraph (c)(9) of this
section to provide a disclosure in a format substantially similar to
the format used in any of the applicable tables found in Samples G-
14(C), 14(D) and 14(E) in Appendix G to this part, the creditor must
provide in bold text any terms and phrases that are shown in bold text
for that disclosure in the applicable tables.
(3) Disclosures based on a percentage. Except for disclosing fees
under paragraph (c)(11) of this section, if the amount of any fee
required to be disclosed under paragraph (c) of this section or if the
amount of any transaction requirement required to be disclosed under
paragraph (c)(16) of this section is determined on the basis of a
percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee or transaction
amount, as applicable.[ltrif]
[(a) Form of disclosures--(1) General. The disclosures required by
paragraph (d) of this section shall be made clearly and conspicuously
and shall be grouped together and segregated from all unrelated
information. The disclosures may be provided on the application form or
on a separate form. The disclosure described in paragraph (d)(4)(iii),
the itemization of third-party fees described in paragraph (d)(8), and
the variable-rate information described in paragraph (d)(12) of this
section may be provided separately from the other required disclosures.
(2) Precedence of certain disclosures. The disclosures described in
paragraph (d)(1) through (4)(ii) of this section shall precede the
other required disclosures.
(3) For an application that is accessed by the consumer in
electronic form, the disclosures required under this section may be
provided to the consumer in electronic form on or with the application.
(b) Time of disclosures. The disclosures and brochure required by
paragraphs (d) and (e) of this section shall be provided at the time an
application is provided to the consumer.10a
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\10a\ [The disclosures and the brochure may be delivered or
placed in the mail not later than three business days following
receipt of a consumer's application in the case of applications
contained in magazines or other publications, or when the
application is received by telephone or through an intermediary
agent or broker.]
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(c) Duties of third parties--Persons other than the creditor who
provide applications to consumers for home-equity plans must provide
the brochure required under paragraph (e) of this section at the time
an application is provided. If such persons have the disclosures
required under paragraph (d) of this section for a creditor's home-
equity plan, they also shall provide the disclosures at such
time.10a]
[(d)][rtrif](c)[ltrif] Content of disclosures. The creditor shall
provide the following disclosures [rtrif]in the manner prescribed by
paragraph (b) of this section[ltrif], as applicable. [rtrif]In making
the disclosures required by this paragraph (except under paragraph
(c)(18) of this section), a creditor must not disclose in the table
described in paragraph (b)(2)(i) of this section any terms applicable
to fixed-rate and -term payment plans offered during the draw period of
the plan, unless fixed-rate and -term payment plans are the only
payment plans offered during the draw period of the plan.
(1) Identification information.
(i) The consumer's name and address.
(ii) The identity of the creditor making the disclosures.
(iii) The date the disclosure was prepared.
(iv) The loan originator's unique identifier, as defined by the
Secure and Fair Enforcement for Mortgage Licensing Act of 2008 Sections
1503(3) and (12), 12 U.S.C. 5102(3) and (12).[ltrif] [(1) Retention of
information. A statement that the consumer should make or otherwise
retain a copy of the disclosures.]
[rtrif](2) No obligation statement. A statement that the consumer
has no
[[Page 43533]]
obligation to accept the terms disclosed in the table. If the creditor
has a provision for the consumer's signature, a statement that a
signature by the consumer only confirms receipt of the disclosure
statement.
(3) Identification of plan as a home-equity line of credit. A
statement that the consumer has applied for a home-equity line of
credit. [ltrif]
[rtrif](4)[ltrif][(2)] Conditions for disclosed terms. (i) [A
statement of the time by which the consumer must submit an application
to obtain specific terms disclosed and an identification]
[rtrif]Identification[ltrif] of any disclosed term that is subject to
change prior to opening the plan.
(ii) A statement that, if a disclosed term changes (other than a
change due to fluctuations in the index in a variable-rate plan) prior
to opening the plan and the consumer [therefore] elects not to open the
plan, the consumer may receive a refund of all fees paid [rtrif]by the
consumer[ltrif][in connection with the application].
[rtrif](5) Refund of fees under paragraph (e) of this section. A
statement that the consumer may receive a refund of all fees paid by
the consumer, if the consumer notifies the creditor within three
business days of receiving the disclosures given pursuant to paragraph
(b) of this section that the consumer does not want to open the
plan.[ltrif]
[rtrif](6)[ltrif][(3)] Security interest and risk to home. A
statement that the creditor will acquire a security interest in the
consumer's dwelling and that loss of the dwelling may occur in the
event of default.
[rtrif](7)[ltrif][(4)] Possible actions by creditor. (i) A
statement that, under certain conditions, the creditor may terminate
the plan and require payment of the outstanding balance in full in a
single payment and impose fees upon termination; prohibit additional
extensions of credit or reduce the credit limit; and [, as specified in
the initial agreement,] implement [certain] changes in the plan.
(ii) [rtrif]As applicable, either (A) a[ltrif] [A] statement that
the consumer may receive, upon request, information about the
conditions under which such actions may occur[rtrif], or (B) if the
information about the conditions is provided with the table described
in paragraph (b)(2)(i) of this section, a reference to the location of
the information.[ltrif]
[(iii) In lieu of the disclosure required under paragraph
(d)(4)(ii) of this section, a statement of such conditions.]
[rtrif](8) Tax implications. A statement that the interest on the
portion of the credit extension that is greater than the fair market
value of the dwelling may not be tax deductible for Federal income tax
purposes. A statement that the consumer should consult a tax adviser
for further information regarding the deductibility of interest and
charges.[ltrif]
[rtrif](9)[ltrif][(5)] Payment terms. The payment terms of the
plan, [rtrif]as follows.[ltrif][including:] [rtrif] A creditor must
distinguish payment terms applicable to the draw period and the
repayment period, by using the heading ``Borrowing Period'' for the
draw period and ``Repayment Period'' for the repayment period, in a
format substantially similar to the format used in any of the
applicable tables found in Samples G-14(C) and G-14(E) in Appendix G to
this part.[ltrif]
(i) The length of the [rtrif]plan, the length of the[ltrif] draw
period and [rtrif]the length of[ltrif] any repayment period.
[rtrif]When the length of the plan is definite, a creditor must
disclose the length of the plan, the length of the draw period and the
length of any repayment period in a format substantially similar to the
format used in any of the applicable tables found in Samples G-14(C)
and G-14(D) in Appendix G to this part. If there is no repayment period
on the plan, a statement that after the draw period ends, the consumer
must repay the remaining balance in full. [ltrif]
(ii) [rtrif](A) If a creditor offers to the consumer only one
payment plan option, an[ltrif] [An] explanation of how the minimum
periodic payment will be determined and the timing of the payments. If
paying only the minimum periodic payments may not repay any of the
principal or may repay less than the outstanding balance [rtrif]by the
end of the plan[ltrif], a statement of this fact, as well as a
statement that a balloon payment may result [rtrif]or will result, as
applicable[ltrif].\10b\ [rtrif]If a balloon payment will not result
under the payment plan, a creditor must not disclose in the table
required by paragraph (b)(2)(i) of this section the fact that a balloon
payment will not result for the plan.[ltrif]
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\10b\ [rtrif]Reserved.[ltrif] [A balloon payment results if
paying the minimum periodic payments does not fully amortize the
outstanding balance by a specified date or time, and the consumer
must repay the entire outstanding balance at such time.]
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[rtrif](B) If a creditor offers to the consumer more than one
payment plan option, the creditor must disclose only two payment plan
options in the table described in paragraph (b)(2)(i) of this section.
If under one or more payment plans offered by the creditor a consumer
would repay all of the principal by the end of the plan if the consumer
makes only the minimum payments, the creditor must describe one of
these payment plans in the table required by paragraph (b)(2)(i) of
this section. A creditor must include a statement indicating that the
table shows how the creditor determines minimum required payments for
two plans offered by the creditor. If a creditor offers more than the
two payment plans described in the table described in paragraph
(b)(2)(i) of this section (other than fixed-rate and -term payment
plans unless those are the only plans offered on the HELOC plan during
the draw period), the creditor also must disclose that other payment
plans are available, and that the consumer should ask the creditor for
additional details about these other payment plans. The creditor must
provide the following information:
(1) If under at least one of the payment plans disclosed in the
table required by paragraph (b)(2)(i) of this section, paying only the
minimum periodic payments may not repay any of the principal or may
repay less than the outstanding balance by the end of the plan, a
statement of this fact, as well as a statement that a balloon payment
may result or will result, as applicable. If a balloon payment would
result under one payment plan but not both payment plans, the creditor
must disclose that a balloon payment may result depending on the terms
of the payment plan. If a balloon payment would result under both
payment plans, the creditor must disclose that a balloon payment will
result. If a balloon payment would not result under both payment plans,
a creditor must not disclose in the table required by paragraph
(b)(2)(i) of this section the fact that a balloon payment would not
result for both plans.
(2) An explanation of how the minimum periodic payments will be
determined and the timing of the payments for each plan.
(3) For each payment plan described in the table required under
paragraph (b)(2)(i) of this section, if paying only the minimum
periodic payments may not repay any of the principal or may repay less
than the outstanding balance by the end of the plan, a statement that a
balloon payment may result or will result under that plan, as
applicable. If one of the plans has a balloon payment and the other
does not, a creditor must disclose that a balloon payment will not
result for the plan in which no balloon payment would occur. If neither
payment plan has a balloon payment, a creditor must not disclose the
fact that a balloon payment will not result for the plan.
(iii)(A) For the payment plan(s) described in paragraph (c)(9)(ii)
of this section, sample payments showing the first minimum periodic
payment for the
[[Page 43534]]
draw period and any repayment period, and the balance outstanding at
the beginning of any repayment period, based on the following
assumptions:
(1) The consumer borrows the full credit line (as disclosed in
paragraph (c)(17) of this section) at account opening, and does not
obtain any additional extensions of credit.
(2) The consumer makes only minimum periodic payments during the
draw period and any repayment period.
(3) The annual percentage rates used to calculate the sample
payments, as described in paragraph (c)(9)(iii)(B) of this section,
will remain the same during the draw period and any repayment period.
(B) A creditor must provide the information described in paragraph
(c)(9)(iii)(A) of this section for the following two annual percentage
rates:
(1) The current annual percentage rate for the plan, as disclosed
under paragraph (c)(10) of this section, except that if an introductory
annual percentage rate applies, the creditor must use the rate that
would otherwise apply to the plan after the introductory rate expires,
as described in paragraph (c)(10)(ii) of this section.
(2) The maximum annual percentage rate that may apply under the
payment option, as described in paragraph (c)(10)(i)(A)(5).
(C) In disclosing the payment samples as required by paragraph
(c)(9)(iii)(A) of this section, a creditor also must include the
following information:
(1) A statement that the sample payments show the first periodic
payments at the current and maximum annual percentage rates if the
consumer borrows the maximum credit available when the account is
opened and does not borrow any more money.
(2) A statement that the sample payments are not the consumer's
actual payments. A statement that the actual payments each period will
depend on the amount that the consumer has borrowed and the interest
rate that period.
(3) If a creditor is disclosing two payment plans under paragraph
(c)(9)(ii) of this section, the creditor must identify which plan
results in the least amount of interest, and which plan results in the
most amount of interest, based on the assumptions described in
paragraphs (c)(9)(iii)(A) and (B) of this section.
(4) For each payment plan disclosed under paragraph (c)(9)(ii) of
this section, if a consumer may pay a balloon payment under that plan,
the creditor must disclose that fact, and the amount of the balloon
payment based on the assumptions described in paragraphs (c)(9)(iii)(A)
and (B) of this section. If a creditor is disclosing only one payment
plan under paragraph (c)(9)(ii), and a balloon payment will not occur
for that plan, the creditor must not disclose that a balloon payment
will not result for the plan. If a creditor is disclosing two payment
plans under paragraph (c)(9)(ii) of this section, one in which a
balloon payment would occur and one in which it would not, a creditor
must disclose that a balloon payment will not result for the plan in
which no balloon payment would occur. If neither payment plan has a
balloon payment, a creditor must not disclose the fact that a balloon
payment will not result for the plan.
(D) A creditor must provide the information described in paragraph
(c)(9)(iii) of this section in a format that is substantially similar
to the format used in any of the applicable tables found in Samples G-
14(C), G-14(D) and G-14(E) in Appendix G to this part.[ltrif]
[(iii) An example, based on a $10,000 outstanding balance and a
recent annual percentage rate,\10c\ showing the minimum periodic
payment, any balloon payment, and the time it would take to repay the
$10,000 outstanding balance if the consumer made only those payments
and obtained no additional extensions of credit. If different payment
terms may apply to the draw and any repayment period, or if different
payment terms may apply within either period, the disclosures shall
reflect the different payment terms.]
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\10c\ [rtrif]Reserved.[ltrif][For fixed-rate plans, a recent
annual percentage rate is a rate that has been in effect under the
plan within the twelve months preceding the date the disclosures are
provided to the consumer. For variable-rate plans, a recent annual
percentage rate is the most recent rate provided in the historical
example described in paragraph (d)(12)(xi) of this section or a rate
that has been in effect under the plan since the date of the most
recent rate in the table.]
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[rtrif](iv) A statement that the consumer can borrow money during
the draw period. If a repayment period is provided, a statement that
the consumer cannot borrow money during the repayment period.
(v) A statement indicating whether minimum payments are due in the
draw period and any repayment period.[ltrif]
[rtrif](10)[ltrif][(6)] Annual percentage rate. [rtrif]Each
periodic interest rate applicable to any payment plan disclosed under
paragraph (c)(9)(ii) of this section that may be used to compute the
finance charge on an outstanding balance, expressed as an annual
percentage rate (as determined by Sec. 226.14(b)), except a creditor
must not disclose any penalty rate set forth in the initial agreement
that may be imposed in lieu of termination of the plan. The annual
percentage rates disclosed pursuant to this paragraph shall be in at
least 16-point type, except for the following: Any minimum or maximum
annual percentage rates that may apply; and any disclosure of rate
changes set forth in the initial agreement except for rates that would
apply after the expiration of an introductory rate.[ltrif] [For fixed-
rate plans, a recent annual percentage rate \10c\ imposed under the
plan and a statement that the rate does not include costs other than
interest.]
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\10c\ [rtrif]Reserved.[ltrif][For fixed-rate plans, a recent
annual percentage rate is a rate that has been in effect under the
plan within the twelve months preceding the date the disclosures are
provided to the consumer. For variable-rate plans, a recent annual
percentage rate is the most recent rate provided in the historical
example described in paragraph (d)(12)(xi) of this section or a rate
that has been in effect under the plan since the date of the most
recent rate in the table.]
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[rtrif](i) Disclosures for variable-rate plans. (A) If a rate
disclosed under paragraph (c)(10) of this section is a variable rate,
the following disclosures, as applicable:
(1) The fact that the annual percentage rate may change due to the
variable-rate feature, using the term ``variable rate'' in underlined
text as shown in any of the applicable tables found in Samples G-14(C),
G-14(D) and G-14(E) in Appendix G to this part.
(2) An explanation of how the annual percentage rate will be
determined. Except as provided in paragraph (c)(10)(A)(6) of this
section, in providing this disclosure, a creditor must only identify
the index used and the amount of any margin.
(3) The frequency of changes in the annual percentage rate.
(4) Any rules relating to changes in the index value and the annual
percentage rate and resulting changes in the payment amount, including,
for example, an explanation of payment limitations and rate carryover.
(5) A statement of any limitations on changes in the annual
percentage rate, including the minimum and maximum annual percentage
rate that may be imposed under each payment plan disclosed under
paragraph (c)(9)(ii) of this section. If no annual or other periodic
limitations apply to changes in the annual percentage rate, a statement
that no annual limitation exists.
(6) The lowest and highest value of the index in the past 15 years.
(B) A variable rate is accurate if it is a rate as of a specified
date and this rate was in effect within the last 30 days before the
disclosures are provided.
(ii) Introductory initial rate. If the initial rate is an
introductory rate, the creditor must also disclose the rate that
[[Page 43535]]
would otherwise apply to the plan pursuant to paragraph (c)(10) of this
section. Where the rate is fixed, the creditor must disclose the rate
that will apply after the introductory rate expires. Where the rate is
variable, the creditor must disclose the rate based on the applicable
index or formula. A creditor must disclose in the table described in
paragraph (b)(2)(i) of this section the introductory rate along with
the rate that would otherwise apply to the plan, and use the term
``introductory'' or ``intro'' in immediate proximity to the
introductory rate. The creditor must also disclose the time period
during which the introductory rate will remain in effect.[ltrif]
[rtrif](11)[ltrif][(7)] Fees imposed by the creditor[rtrif] and
third parties to open the plan[ltrif]. [rtrif]The total of all one-time
fees imposed by the creditor and any third parties to open the plan,
stated as a dollar amount.[ltrif] An itemization of [any] [rtrif]all
one-time[ltrif] fees imposed by the creditor [rtrif]and any third
parties[ltrif] to open [, use, or maintain] the plan, stated as a
dollar amount [or percentage], and when such fees are payable.[rtrif]
If the exact total of one-time fees for account opening is not known at
the time the disclosures under paragraph (b) of this section are
delivered or mailed, a creditor must provide the highest total of one-
time account opening fees possible for the plan terms described in the
table required under paragraph (b)(2)(i) of this section with a
indication that the one-time account opening costs may be ``up to''
that amount. If the dollar amount of an itemized fee is not known at
the time the disclosures under paragraph (b) of this section are
delivered or mailed, a creditor must provide a range for such fee. A
creditor must not disclose the amount of any property insurance
premiums under this paragraph, even if the creditor requires property
insurance.
(12) Fees imposed by the creditor for availability of the plan. All
annual or other periodic fees that may be imposed by the creditor for
the availability of the plan, including any fee based on account
activity or inactivity; how frequently the fee will be imposed; and the
annualized amount of the fee. A creditor must not disclose the amount
of any property insurance premiums under this paragraph, even if the
creditor requires property insurance.
(13) Fees imposed by the creditor for early termination of the plan
by the consumer. Any fee that may be imposed by the creditor if a
consumer terminates the plan prior to its scheduled maturity.
(14) Statement about other fees. A statement that other fees will
apply and a reference to penalty fees and transaction fees as examples
of those fees, as applicable. As applicable, either (i) a statement
that the consumer may receive, upon request, additional information
about fees applicable to the plan, or (ii) if the additional
information about fees is provided with the table described in
paragraph (b)(2)(i) of this section, a reference to the location of the
information.[ltrif]
[(8) Fees imposed by third parties to open a plan. A good faith
estimate, stated as a single dollar amount or range, of any fees that
may be imposed by persons other than the creditor to open the plan, as
well as a statement that the consumer may receive, upon request, a good
faith itemization of such fees. In lieu of the statement, the
itemization of such fees may be provided.]
[rtrif](15)[ltrif][(9)] Negative amortization. [rtrif]If
applicable, a[ltrif] [A] statement that negative amortization may occur
and that negative amortization increases the principal balance and
reduces the consumer's equity in the dwelling.
[rtrif](16)[ltrif][(10)] Transaction requirements. Any limitations
on the number of extensions of credit and the amount of credit that may
be obtained during any time period, as well as any minimum outstanding
balance and minimum draw requirements [, stated as dollar amounts or
percentages].
[(11) Tax implications. A statement that the consumer should
consult a tax advisor regarding the deductibility of interest and
charges under the plan.]
[rtrif](17) Credit limit. The credit limit applicable to the plan.
(18) Statements about fixed-rate and -term payment plans. (i)
Except as provided in paragraph (c)(18)(ii) of this section, if a
creditor offers a fixed-rate and -term payment plan under the plan, the
following information:
(A) A statement that the consumer has the option during the draw
period to borrow at a fixed interest rate.
(B) The amount of the credit line that the consumer may borrow at a
fixed interest rate for a fixed term.
(C) As applicable, either (1) a statement that the consumer may
receive, upon request, further details about the fixed-rate and -term
payment plan, or (2) if information about the fixed-rate and -term
payment plan is provided with the table described in paragraph
(b)(2)(i) of this section, a reference to the location of the
information.
(ii) A creditor must not make the disclosures required by paragraph
(c)(18)(i) of this section if fixed-rate and -term payment plans are
the only payment plans offered during the draw period.
(19) Required insurance, debt cancellation or debt suspension
coverage. (i) A fee for insurance described in Sec. 226.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
226.4(b)(10), if the insurance or debt cancellation or suspension
coverage is required as part of the plan; and
(ii) A cross reference to any additional information provided with
the table described in paragraph (b)(2)(i) of this section about the
insurance or coverage, as applicable.
(20) Statement about asking questions. A statement that if the
consumer does not understand any disclosure in the table the consumer
should ask questions.
(21) Statement about Board's Web site. A statement that the
consumer may obtain additional information at the Web site of the
Federal Reserve Board, and a reference to that Web site.
(22) Statement about refundability of fees. (i) A statement that
the consumer may be entitled to a refund of all fees paid if the
consumer decides not to open the plan; and
(ii) A cross reference to the ``Fees'' section in the table
described in paragraph (b)(2)(i) of this section.[ltrif]
[(12) Disclosures for variable-rate plans. For a plan in which the
annual percentage rate is variable, the following disclosures, as
applicable:
(i) The fact that the annual percentage rate, payment, or term may
change due to the variable-rate feature.
(ii) A statement that the annual percentage rate does not include
costs other than interest.
(iii) The index used in making rate adjustments and a source of
information about the index.
(iv) An explanation of how the annual percentage rate will be
determined, including an explanation of how the index is adjusted, such
as by the addition of a margin.
(v) A statement that the consumer should ask about the current
index value, margin, discount or premium, and annual percentage rate.
(vi) A statement that the initial annual percentage rate is not
based on the index and margin used to make later rate adjustments, and
the period of time such initial rate will be in effect.
(vii) The frequency of changes in the annual percentage rate.
(viii) Any rules relating to changes in the index value and the
annual percentage rate and resulting changes in the payment amount,
including, for example, an explanation of payment limitations and rate
carryover.
(ix) A statement of any annual or more frequent periodic
limitations on
[[Page 43536]]
changes in the annual percentage rate (or a statement that no annual
limitation exists), as well as a statement of the maximum annual
percentage rate that may be imposed under each payment option.
(x) The minimum periodic payment required when the maximum annual
percentage rate for each payment option is in effect for a $10,000
outstanding balance, and a statement of the earliest date or time the
maximum rate may be imposed.
(xi) An historical example, based on a $10,000 extension of credit,
illustrating how annual percentage rates and payments would have been
affected by index value changes implemented according to the terms of
the plan. The historical example shall be based on the most recent 15
years of index values (selected for the same time period each year) and
shall reflect all significant plan terms, such as negative
amortization, rate carryover, rate discounts, and rate and payment
limitations, that would have been affected by the index movement during
the period.
(xii) A statement that rate information will be provided on or with
each periodic statement.
(e) Brochure. The home-equity brochure published by the Board or a
suitable substitute shall be provided.]
[(g)][rtrif](d)[ltrif] Refund of fees. A creditor shall refund all
fees paid by the consumer [to anyone in connection with an application]
if any term required to be disclosed under paragraph [(d)]
[rtrif](b)[ltrif] of this section changes (other than a change due to
fluctuations in the index in a variable-rate plan) before the plan is
opened and [, as a result,] the consumer elects not to open the plan.
[(h)][rtrif](e)[ltrif] Imposition of nonrefundable fees. Neither a
creditor nor any other person may impose a nonrefundable fee [in
connection with an application] until three business days after the
consumer receives the disclosures [and brochure] required under
[rtrif]paragraph (b) of[ltrif] this section.\10d\ If the disclosures
required under this section are mailed to the consumer, the consumer is
considered to have received them three business days after they are
mailed.
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\10d\ [rtrif]Reserved[ltrif] [If the disclosures and brochure
are mailed to the consumer, the consumer is considered to have
received them three business days after they are mailed.]
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(f) Limitations on home-equity plans. No creditor may, by contract
or otherwise--
* * * * *
(2) terminate a plan and demand repayment of the entire outstanding
balance in advance of the original term (except for reverse-mortgage
transactions that are subject to paragraph (f)(4) of this section)
unless--
(i) there is fraud or material misrepresentation by the consumer in
connection with the plan;
(ii) the consumer fails to [rtrif]make a required minimum periodic
payment within 30 days after the due date for that payment[ltrif] [meet
the repayment terms of the agreement for any outstanding balance];
(iii) any action or inaction by the consumer adversely affects the
creditor's security for the plan, or any right of the creditor in such
security; or
(iv) federal law [rtrif]requires the creditor to terminate the plan
and demand repayment of the entire outstanding balance in advance of
the original term[ltrif] [dealing with credit extended by a depository
institution to its executive officers specifically requires that as a
condition of the plan the credit shall become due and payable on
demand], provided that the creditor includes such a provision in the
initial agreement.
(3) change any term, except that a creditor may--
(i) provide in the initial agreement that it may prohibit
additional extensions of credit or reduce the credit limit during any
period in which the maximum annual percentage rate is reached. A
creditor also may provide in the initial agreement that specified
changes will occur if a specified event takes place (for example, that
the annual percentage rate will increase a specified amount if the
consumer leaves the creditor's employment).
(ii) change the index and margin used under the plan if the
original index is no longer available, the new index has an historical
movement substantially similar to that of the original index, and the
new index and margin would have resulted in an annual percentage rate
substantially similar to the rate in effect at the time the original
index became unavailable.
(iii) make a specified change if the consumer specifically agrees
to it in writing at that time.
(iii) make a specified change if the consumer specifically agrees
to it in writing at that time.
(v) make an insignificant change to terms.
(vi) prohibit additional extensions of credit or reduce the credit
limit applicable to an agreement during any period in which--
(A) the value of the dwelling that secures the plan declines
significantly below the dwelling's [appraised] value for purposes of
the plan;
(B) the creditor reasonably believes that the consumer will be
unable to fulfill the repayment obligations under the plan because of a
material change in the consumer's financial circumstances;
(C) the consumer is in default of any material obligation under the
agreement;
(D) the creditor is precluded by government action from imposing
the annual percentage rate provided for in the agreement;
(E) the priority of the creditor's security interest is adversely
affected by government action to the extent that the value of the
security interest is less than 120 percent of the credit line; or
(F) the creditor is notified by its regulatory agency that
continued advances constitute an unsafe and unsound practice.
[rtrif](G) federal law prohibits the creditor from extending credit
under a plan or requires that the creditor reduce the credit limit for
a plan.[ltrif]
(g) [rtrif]Reinstatement of credit privileges. If a creditor
prohibits additional extensions of credit or reduces the credit limit
applicable to a home-equity plan pursuant to Sec. 226.5b(f)(3)(i) or
(f)(3)(vi), the creditor must reinstate credit privileges as soon as
reasonably possible after the condition that permitted the creditor's
action ceases to exist, assuming that no other circumstance permitting
such action exists at that time.
(1) The creditor shall meet the obligation of this paragraph by
either--
(i) monitoring the line on an ongoing basis to determine when no
condition permitting the action exists; or
(ii) requiring the consumer to request reinstatement of credit
privileges.
(2) If the creditor requires the consumer to request reinstatement
of credit privileges under Sec. 226.5b(g)(1)(ii), the creditor--
(i) shall disclose that the consumer must request reinstatement of
credit privileges in accordance with Sec. 226.9(j)(1)(iii)(A);
(ii) upon receipt of a reinstatement request from a consumer, shall
complete an investigation of whether a condition allowing the
suspension of credit extensions or credit limit reduction exists within
30 days of receiving the consumer's request;
(iii) may not charge the consumer any fees associated with
investigating the consumer's first reinstatement request after a
suspension of advances or credit limit reduction;
(iv) if not prohibited by state law, may charge the consumer bona
fide and reasonable property valuation and credit report fees actually
incurred in investigating the consumer's
[[Page 43537]]
reinstatement requests after the first request; and
(v) if investigation of the consumer's reinstatement request shows
that a condition permitting continued suspension of advances or
reduction of the credit limit exists and that therefore credit
privileges will not be restored, shall, within 30 days of receiving the
consumer's request, mail or deliver to the consumer a written notice
with the following information (see Model Clauses G-22(A) and G-22(B)
in Appendix G to this part):
(A) the results of any investigation by the creditor conducted in
response to the consumer's first request; and
(B) the information required by Sec. 226.9(j)(1).
(3) If a creditor prohibits additional extensions of credit or
reduces the credit limit applicable to a home-equity plan for a
significant decline in the property value pursuant to Sec.
226.5b(f)(vi)(A), or continues an existing suspension of credit
extensions or reduction of the credit limit pursuant to Sec.
2265b(f)(vi)(A), the creditor must provide, upon the consumer's
request, a copy of the documentation supporting the property value on
which the creditor based the action.
(4) When conditions permitting termination and acceleration exist
under Sec. 226.5b(f)(2), but the creditor opts to suspend advances or
reduce the credit limit, the creditor has no obligation to reinstate
the account.[ltrif]
[(g)] [rtrif](d)[ltrif]
* * * * *
[(h)] [rtrif](e)[ltrif]
* * * * *
5. Section 226.6 is amended by revising paragraph (a) as follows:
Sec. 226.6 Account-opening disclosures.
(a) Rules affecting home-equity plans. The requirements of
paragraph (a) of this section apply only to home-equity plans subject
to the requirements of Sec. 226.5b. [A creditor shall disclose the
items in this section, to the extent applicable:]
[rtrif](1) Form of disclosures; tabular format--(i) In general. A
creditor must provide the account-opening disclosures specified in
paragraphs (a)(2)(ii) through (a)(2)(xx) of this section in the form of
a table with headings, content, and format substantially similar to any
of the applicable tables found in G-15 in Appendix G to this part.
(ii) Location. Only the information required or permitted by
paragraphs (a)(2)(ii) through (a)(2)(xx) of this section shall be in
the table required under paragraph (a)(1)(i) of this section.
Disclosures required by paragraph (a)(2)(i) of this section must be
placed directly above the table, in a format substantially similar to
any of the applicable tables found in G-15 in Appendix G to this part.
Disclosures required by paragraphs (a)(2)(xxi) through (a)(2)(xxvi) of
this section must be placed directly below the table, in a format
substantially similar to any of the applicable tables found in G-15 in
Appendix G to this part. Disclosures required by paragraphs (a)(3)
through (a)(5) of this section that are not otherwise required to be in
the table (or directly above or below the table) and other information
may be presented with the account agreement or account-opening
disclosure statement, provided such information appears outside the
required table.
(iii) Highlighting. The following disclosures must be disclosed in
bold text:
(A) Any annual percentage rates required to be disclosed under
paragraph (a)(2)(vi) of this section.
(B) Any percentage or dollar amount required to be disclosed under
paragraphs (a)(2)(vii) through (a)(2)(xiv), (a)(2)(xvii), (a)(2)(xviii)
and (a)(2)(xx) of this section, except the amount of any periodic fee
disclosed pursuant to paragraph (a)(2)(viii) of this section that is
not an annualized amount.
(C) If a creditor is required under paragraph (a)(2)(v) of this
section to provide a disclosure in a format substantially similar to
the format used in any of the applicable tables found in Samples G-
15(B), G-15(C) and G-15(D) in Appendix G to this part, the creditor
must provide in bold text any terms and phrases that are shown in bold
text for that disclosure in the applicable tables.
(D) Disclosures required by paragraphs (a)(2)(xxiv)(A),
(a)(2)(xxiv)(C) and (a)(2)(xxv) through (a)(2)(xxvi) of this section.
(iv) Fees based on a percentage. Except for disclosing fees under
paragraph (a)(2)(vii) of this section, if the amount of any fee
required to be disclosed under paragraph (a)(2) of this section or if
the amount of any transaction requirement required to be disclosed
under paragraph (a)(2)(xvii) of this section is determined on the basis
of a percentage of another amount, the percentage used and the
identification of the amount against which the percentage is applied
may be disclosed instead of the amount of the fee or transaction
amount, as applicable.
(2) Required disclosures for account-opening table for home-equity
plans. The creditor shall disclose the items in paragraph (a)(2) of
this section to the extent applicable. In making the disclosures
required by paragraph (a)(2) of this section (except under paragraph
(a)(2)(xix) of this section), a creditor must not disclose in the table
described in paragraph (a)(1) of this section any terms applicable to
fixed-rate and -term payment plans offered during the draw period of
the plan, unless fixed-rate and -term payment plans are the only
payment plans offered during the draw period of the plan.
(i) Identification information. The following information:
(A) The consumer's name, address, and account number.
(B) The identity of the creditor making the disclosures.
(C) The date the disclosure was prepared.
(D) The loan originator's unique identifier, as defined by the
Secure and Fair Enforcement for Mortgage Licensing Act of 2008 Sections
1503(3) and (12), 12 U.S.C. 5102(3) and (12).
(ii) Security interest and risk to home. A statement that the
creditor will acquire a security interest in the consumer's dwelling
and that loss of the dwelling may occur in the event of default.
(iii) Possible actions by creditor. (A) A statement that, under
certain conditions, the creditor may terminate the plan and require
payment of the outstanding balance in full in a single payment and
impose fees upon termination; prohibit additional extensions of credit
or reduce the credit limit; and implement changes in the plan.
(B) A statement that information about the conditions under which
the creditor may take the actions described in paragraph (a)(2)(iii)(A)
of this section is included in the account-opening disclosures or
agreement, as applicable.
(iv) Tax implications. A statement that the interest on the portion
of the credit extension that is greater than the fair market value of
the dwelling may not be tax deductible for Federal income tax purposes.
A statement that the consumer should consult a tax adviser for further
information regarding the deductibility of interest and charges.
(v) Payment terms. The payment terms of the plan that will apply to
the consumer at account opening, as follows. The creditor must
distinguish payment terms applicable to the draw period and the
repayment period, by using the applicable heading ``Borrowing Period''
for the draw period and ``Repayment Period'' for the repayment period,
in a format substantially similar to the format used in any of the
applicable tables found in Samples G-15(B) and G-15(D) in Appendix G to
this part.
(A) The length of the plan, the length of the draw period and the
length of any
[[Page 43538]]
repayment period. When the length of the plan is definite, a creditor
must disclose the length of the plan, the length of the draw period and
the length of any repayment period in a format substantially similar to
the format used in any of the applicable tables found in Samples G-
15(B) and G-15(C) in Appendix G to this part. If there is no repayment
period on the plan, a statement that after the draw period ends, the
consumer must repay the remaining balance in full.
(B) An explanation of how the minimum periodic payment will be
determined and the timing of the payments. If paying only the minimum
periodic payments may not repay any of the principal or may repay less
than the outstanding balance by the end of the plan, a statement of
this fact, as well as a statement that a balloon payment may result or
will result, as applicable. If a balloon payment will not result under
the payment plan, a creditor must not disclose in the table required by
paragraph (a)(1) of this section the fact that a balloon payment will
not result for the plan.
(C)(1) For the payment plan described in paragraph (a)(2)(v) of
this section, sample payments showing the first minimum periodic
payment for the draw period and any repayment period, and the balance
outstanding at the beginning of any repayment period, based on the
following assumptions:
(i) The consumer borrows the full credit line (as disclosed in
paragraph (a)(2)(xviii) of this section) at account opening, and does
not obtain any additional extensions of credit.
(ii) The consumer makes only minimum periodic payments during the
draw period and any repayment period.
(iii) The annual percentage rate used to calculate the sample
payments, as described in paragraph (a)(2)(v)(C)(2) of this section,
will remain the same during the draw period and any repayment period.
(2) A creditor must provide the information described in paragraph
(a)(2)(v)(C)(1) of this section for the following two annual percentage
rates:
(i) The current annual percentage rate for the plan, as disclosed
under paragraph (a)(2)(vi) of this section, except that if an
introductory annual percentage rate applies, the creditor must use the
rate that would otherwise apply to the plan after the introductory rate
expires, as described in paragraph (a)(2)(vi)(B) of this section.
(ii) The maximum annual percentage rate that may apply under the
payment plan as described in paragraph (a)(2)(vi)(A)(1)(v).
(3) In disclosing the payment samples as required by paragraph
(a)(2)(v)(C) of this section, a creditor also must include the
following information:
(i) A statement that the sample payments show the first periodic
payments at the current and maximum annual percentage rates if the
consumer borrows the maximum credit available when the account is
opened and does not borrow any more money.
(ii) A statement that the sample payments are not the consumer's
actual payments. A statement that the actual payments each period will
depend on the amount that the consumer has borrowed and the interest
rate that period.
(iii) If a creditor is disclosing a payment plan under paragraph
(a)(2)(v)(B) of this section under which a consumer may pay a balloon
payment, the creditor must disclose that fact, and the amount of the
balloon payment based on the assumptions described in paragraphs
(a)(2)(v)(C)(1) and (a)(2)(v)(C)(2) of this section. If a balloon
payment will not result under the payment plan, a creditor must not
disclose in the table required by paragraph (a)(1) of this section the
fact that a balloon payment will not result for the plan.
(4) A creditor must provide the information described in paragraph
(a)(2)(v)(C) of this section in a format that is substantially similar
to the format used in any of the applicable tables found in Samples G-
15(B), G-15(C) and G-15(D) in Appendix G to this part.
(D) A statement that the consumer can borrow money during the draw
period. If a repayment period is provided, a statement that the
consumer cannot borrow money during the repayment period.
(E) A statement indicating whether minimum payments are due in the
draw period and any repayment period.
(vi) Annual percentage rate. Each periodic interest rate applicable
to the payment plan disclosed under paragraph (a)(2)(v) of this section
that may be used to compute the finance charge on an outstanding
balance, expressed as an annual percentage rate (as determined by Sec.
226.14(b)), except a creditor must not disclose any penalty rate set
forth in the initial agreement that may be imposed in lieu of
termination of the plan. The annual percentage rates disclosed pursuant
to this paragraph shall be in at least 16-point type, except for the
following: Any minimum or maximum annual percentage rates that may
apply; and any disclosure of rate changes set forth in the initial
agreement except for rates that would apply after the expiration of an
introductory rate.
(A) Disclosures for variable rate plans. (1) If a rate disclosed
under paragraph (a)(2)(vi) of this section is a variable rate, the
following disclosures, as applicable:
(i) The fact that the annual percentage rate may change due to the
variable-rate feature, using the term ``variable rate'' in underlined
text as shown in any of the applicable tables found in Samples G-15(B),
G-15(C) and G-15(D) in Appendix G of this part.
(ii) An explanation of how the annual percentage rate will be
determined. Except as provided in paragraph (a)(2)(vi)(A)(1)(vi) of
this section, in providing this disclosure, a creditor must only
identify the type of index used and the amount of any margin.
(iii) The frequency of changes in the annual percentage rate.
(iv) Any rules relating to changes in the index value and the
annual percentage rate and resulting changes in the payment amount,
including, for example, an explanation of payment limitations and rate
carryover.
(v) A statement of any limitations on changes in the annual
percentage rate, including the minimum and maximum annual percentage
rate that may be imposed under the payment plan disclosed under
paragraph (a)(2)(v) of this section. If no annual or other periodic
limitations apply to changes in the annual percentage rate, a statement
that no annual limitation exists.
(vi) The lowest and highest value of the index in the past 15
years.
(2) A variable rate is accurate if it is a rate as of a specified
date and this rate was in effect within the last 30 days before the
disclosures are provided.
(B) Introductory initial rate. If the initial rate is an
introductory rate, the creditor must disclose the rate that would
otherwise apply to the plan pursuant to paragraph (a)(2)(vi) of this
section. Where the rate is fixed, the creditor must disclose the rate
that will apply after the introductory rate expires. Where the rate is
variable, the creditor must disclose the rate based on the applicable
index or formula. A creditor must disclose in the table described in
paragraph (a)(1) of this section the introductory rate along with the
rate that would otherwise apply to the plan, and use the term
``introductory'' or ``intro'' in immediate proximity to the
introductory rate. The creditor must also disclose the time period
during which the introductory rate will remain in effect.
(vii) Fees imposed by the creditor and third parties to open the
plan. The total of all one-time fees imposed by the
[[Page 43539]]
creditor and any third parties to open the plan, stated as a dollar
amount. An itemization of all one-time fees imposed by the creditor and
any third parties to open the plan, stated as a dollar amount, and when
such fees are payable. A cross-reference from the disclosure of the
total of one-time fees, indicating that the itemization of the fees is
located elsewhere in the table. A creditor must not disclose the amount
of any property insurance premiums under this paragraph, even if the
creditor requires property insurance.
(viii) Fees imposed by the creditor for availability of the plan.
Any annual or other periodic fees that may be imposed by the creditor
for the availability of the plan, including any fee based on account
activity or inactivity; how frequently the fee will be imposed; and the
annualized amount of the fee. A creditor must not disclose the amount
of any property insurance premiums under this paragraph, even if the
creditor requires property insurance.
(ix) Fees imposed by the creditor for early termination of the plan
by the consumer. Any fee that may be imposed by the creditor if a
consumer terminates the plan prior to its scheduled maturity.
(x) Late-payment fee. Any fee imposed for a late payment.
(xi) Over-the-limit fee. Any fee imposed for exceeding a credit
limit.
(xii) Transaction charges. Any transaction charge imposed by the
creditor for use of the home-equity plan.
(xiii) Returned-payment fee. Any fee imposed by the creditor for a
returned payment.
(xiv) Fees for failure to comply with transaction limitations. Any
fee imposed by the creditor for a consumer's failure to comply with:
(A) Any limitations on the number of extensions of credit or the
amount of credit that may be obtained during any time period.
(B) Any minimum outstanding balance requirements.
(C) Any minimum draw requirements.
(xv) Statement about other fees. A cross-reference indicating that
other fees are located elsewhere in the table. A statement that other
fees may apply. A statement that information about other fees is
included in the account-opening disclosures or agreement, as
applicable.
(xvi) Negative amortization. If applicable, a statement that
negative amortization may occur and that negative amortization
increases the principal balance and reduces the consumer's equity in
the dwelling.
(xvii) Transaction requirements. Any limitations on the number of
extensions of credit and the amount of credit that may be obtained
during any time period, as well as any minimum outstanding balance and
minimum draw requirements.
(xviii) Credit limit. The credit limit applicable to the plan.
(xix) Statements about fixed-rate and -term payment plans. (A)
Except as provided in paragraph (a)(2)(xix)(B) of this section, if a
creditor offers a fixed-rate and -term payment plan under the plan, the
following information:
(1) A statement that the consumer has the option during the draw
period to borrow at a fixed interest rate.
(2) The amount of the credit line that the consumer may borrow at a
fixed interest rate for a fixed term.
(3) A statement that information about the fixed-rate and -term
payment plan is included in the account-opening disclosures or
agreement, as applicable.
(B) A creditor must not make the disclosures required by paragraph
(a)(2)(xix)(A) of this section if fixed-rate and -term payment plans
are the only payment plans offered during the draw period.
(xx) Required insurance, debt cancellation or debt suspension
coverage. (A) A fee for insurance described in Sec. 226.4(b)(7) or
debt cancellation or suspension coverage described in Sec.
226.4(b)(10), if the insurance or debt cancellation or suspension
coverage is required as part of the plan; and
(B) A cross reference to any additional information provided with
the table described in paragraph (a)(1) of this section about the
insurance or coverage, as applicable.
(xxi) Grace period. The date by which or the period within which
any credit extended may be repaid without incurring a finance charge
due to a periodic interest rate and any conditions on the availability
of the grace period. If no grace period is provided, that fact must be
disclosed. If the length of the grace period varies, the creditor may
disclose the range of days, the minimum number of days, or the average
number of the days in the grace period, if the disclosure is identified
as a range, minimum, or average. In disclosing a grace period that
applies to all features on the account, the phrase ``How to Avoid
Paying Interest'' shall be used as the heading for the information
below the table describing the grace period. If a grace period is not
offered on all features of the account, in disclosing this fact below
the table, the phrase ``Paying Interest'' shall be used as the heading
for this information.
(xxii) Balance computation method. The name of the balance
computation method listed in Sec. 226.5a(g) that is used to determine
the balance on which the finance charge is computed for each feature,
or an explanation of the method used if it is not listed, along with a
statement that an explanation of the method(s) required by paragraph
(a)(4)(i)(D) of this section is provided with the account-opening
disclosures. In determining which balance computation method to
disclose, the creditor shall assume that credit extended will not be
repaid within any grace period, if any.
(xxiii) Billing error rights reference. A statement that
information about consumers' right to dispute transactions is included
in the account-opening disclosures.
(xxiv) No obligation statement.
(A) A statement that the consumer has no obligation to accept the
terms disclosed in the table.
(B) A statement that the consumer should confirm that the terms
disclosed in the table are the same terms for which the consumer
applied.
(C) If the creditor has a provision for the consumer's signature, a
statement that a signature by the consumer only confirms receipt of the
disclosure statement.
(xxv) Statement about asking questions. A statement that if the
consumer does not understand any disclosure in the table the consumer
should ask questions.
(xxvi) Statement about Board's Web site. A statement that the
consumer may obtain additional information at the Web site of the
Federal Reserve Board, and a reference to this Web site.
(3) Disclosure of charges imposed as part of home-equity plans. A
creditor shall disclose, to the extent applicable:[ltrif]
[ (1) Finance charge. The circumstances under which a finance
charge will be imposed and an explanation of how it will be determined,
as follows.]
[rtrif](i) For charges imposed as part of a home-equity plan
subject to the requirements of Sec. 226.5b, the circumstances under
which the charge may be imposed, including the amount of the charge or
an explanation of how the charge is determined.\11\ For finance
charges, a[ltrif] [(i) A] statement of when [rtrif]the charge[ltrif]
[finance charges] begin[rtrif]s[ltrif] to accrue [, including]
[rtrif]and[ltrif] an explanation of whether or not any time period
exists within which any credit [rtrif]that has been [ltrif] extended
may be repaid without incurring [rtrif]the[ltrif] [a finance] charge.
If such a time period is provided, a creditor may, at its option and
without disclosure, [rtrif]elect not to[ltrif] impose [no]
[rtrif]a[ltrif]
[[Page 43540]]
finance charge when payment is received after the time period
[rtrif]expires.[ltrif] ['s expiration.]
---------------------------------------------------------------------------
\11\ [Reserved].
---------------------------------------------------------------------------
[rtrif](ii) Charges imposed as part of the plan are:
(A) Finance charges identified under Sec. 226.4(a) and Sec.
226.4(b).
(B) Charges resulting from the consumer's failure to use the plan
as agreed, except amounts payable for collection activity after
default; costs for protection of the creditor's interest in the
collateral for the plan due to default; attorney's fees whether or not
automatically imposed; foreclosure costs; and post-judgment interest
rates imposed by law.
(C) Taxes imposed on the credit transaction by a state or other
governmental body, such as documentary stamp taxes on cash advances.
(D) Charges for which the payment, or nonpayment, affect the
consumer's access to the plan, the duration of the plan, the amount of
credit extended, the period for which credit is extended, or the timing
or method of billing or payment.
(E) Charges imposed for terminating a plan.
(F) Charges for voluntary credit insurance, debt cancellation or
debt suspension.
(iii) Charges that are not imposed as part of the plan include:
(A) 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.
(B) A charge for a package of services that includes an open-end
credit feature, if the fee is required whether or not the open-end
credit feature is included and the non-credit services are not merely
incidental to the credit feature.
(C) Charges under Sec. 226.4(e) disclosed as specified.
(4) Disclosure of rates for home-equity plans. A creditor shall
disclose, to the extent applicable:
(i) For each periodic rate that may be used to calculate interest:
(A) Rates. The rate, expressed as a periodic rate and a
corresponding annual percentage rate.\12\
---------------------------------------------------------------------------
\12\ [Reserved].
---------------------------------------------------------------------------
(B) Range of balances. The range of balances to which the rate is
applicable; however, a creditor is not required to adjust the range of
balances disclosure to reflect the balance below which only a minimum
charge applies.\13\
---------------------------------------------------------------------------
\13\ [Reserved].
---------------------------------------------------------------------------
(C) Type of transaction. The type of transaction to which the rate
applies, if different rates apply to different types of transactions.
(D) Balance computation method. An explanation of the method used
to determine the balance to which the rate is applied.
(ii) Variable-rate accounts. For interest rate changes that are
tied to increases in an index or formula (variable-rate accounts)
specifically set forth in the account agreement:
(A) The fact that the annual percentage rate may increase.
(B) How the rate is determined, including the margin.
(C) The circumstances under which the rate may increase.
(D) The frequency with which the rate may increase.
(E) Any limitation on the amount the rate may change.
(F) The effect(s) of an increase.
(G) A rate is accurate if it is a rate as of a specified date and
this rate was in effect within the last 30 days before the disclosures
are provided.
(iii) Rate changes not due to index or formula. For interest rate
changes that are specifically set forth in the account agreement and
not tied to increases in an index or formula:
(A) The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate) required under paragraph
(a)(4)(i)(A) of this section.
(B) How long the initial rate will remain in effect and the
specific events that cause the initial rate to change.
(C) The rate (expressed as a periodic rate and a corresponding
annual percentage rate) that will apply when the initial rate is no
longer in effect and any limitation on the time period the new rate
will remain in effect.
(D) The balances to which the new rate will apply.
(E) The balances to which the current rate at the time of the
change will apply.[ltrif]
[(ii) A disclosure of each periodic rate that may be used to
compute the finance charge, the range of balances to which it is
applicable, and the corresponding annual percentage rate. If a creditor
offers a variable-rate plan, the creditor shall also disclose: the
circumstances under which the rate(s) may increase; any limitations on
the increase; and the effect(s) of an increase. When different periodic
rates apply to different types of transactions, the types of
transactions to which the periodic rates shall apply shall also be
disclosed. A creditor is not required to adjust the range of balances
disclosure to reflect the balance below which only a minimum charge
applies.
(iii) An explanation of the method used to determine the balance on
which the finance charge may be computed.
(iv) An explanation of how the amount of any finance charge will be
determined, including a description of how any finance charge other
than the periodic rate will be determined.
(2) Other charges. The amount of any charge other than a finance
charge that may be imposed as part of the plan, or an explanation of
how the charge will be determined.
(3) Home-equity plan information. The following disclosures
described in Sec. 226.5b(d), as applicable:
(i) A statement of the conditions under which the creditor may take
certain action, as described in Sec. 226.5b(d)(4)(i), such as
terminating the plan or changing the terms.
(ii) The payment information described in Sec. 226.5b(d)(5)(i) and
(ii) for both the draw period and any repayment period.
(iii) A statement that negative amortization may occur as described
in Sec. 226.5b(d)(9).
(iv) A statement of any transaction requirements as described in
Sec. 226.5b(d)(10).
(v) A statement regarding the tax implications as described in
Sec. 226.5b(d)(11).
(vi) A statement that the annual percentage rate imposed under the
plan does not include costs other than interest as described in Sec.
226.5b(d)(6) and (d)(12)(ii).
(vii) The variable-rate disclosures described in Sec.
226.5b(d)(12)(viii), (d)(12)(x), (d)(12)(xi), and (d)(12)(xii), as well
as the disclosure described in Sec. 226.5b(d)(5)(iii), unless the
disclosures provided with the application were in a form the consumer
could keep and included a representative payment example for the
category of payment option chosen by the consumer.]
[rtrif](5) Additional disclosures for home-equity plans. A creditor
shall disclose, to the extent applicable:
(i) Voluntary credit insurance, debt cancellation or debt
suspension. The disclosures in Sec. Sec. 226.4(d)(1)(i) and (d)(1)(ii)
and (d)(3)(i) through (d)(3)(iii) if the creditor offers optional
credit insurance or debt cancellation or debt suspension coverage that
is identified in Sec. 226.4(b)(7) or (b)(10).[ltrif]
[rtrif](ii)[ltrif][(4)] Security interests. The fact that the
creditor has or will acquire a security interest in the property
purchased under the plan, or in other property identified by item or
type.
[rtrif](iii)[ltrif][(5)] Statement of billing rights. A statement
that outlines the consumer's rights and the creditor's responsibilities
under Sec. Sec. 226.12(c) and 226.13 and that is substantially similar
to the statement found in Model Form G-3 [or, at the creditor's option
G-3(A),] in Appendix G to this part.
[[Page 43541]]
[rtrif](iv) Possible creditor actions. A statement of the
conditions under which the creditor may take certain actions, as
described in Sec. 226.5b(c)(7)(i), such as terminating the plan or
changing the terms.
(v) Additional information on fixed-rate and -term payment plans.
Information related to any fixed-rate and -term payment plans, as
follows.
(A) The period during which the plan can be selected.
(B) The length of time over which repayment can occur.
(C) An explanation of how the minimum periodic payment will be
determined for the payment plan.
(D) Any limitations on the number of extensions of credit or the
amount of credit that may be obtained under the payment plan. Any
minimum outstanding balance requirements or any minimum draw
requirements applicable to the payment plan.[ltrif]
* * * * *
6. Section 226.7, as amended on January 29, 2009 (74 FR 5409) is
amended by republishing the introductory text and by revising paragraph
(a), as follows:
Sec. 226.7 Periodic Statement.
The creditor shall furnish the consumer with a periodic statement
that discloses the following items, to the extent applicable:
(a) Rules affecting home-equity plans. The requirements of
paragraph (a) of this section apply only to home-equity plans subject
to the requirements of Sec. 226.5b. [Alternatively, a creditor subject
to this paragraph may, at its option, comply with any of the
requirements of paragraph (b) of this section; however, any creditor
that chooses not to provide a disclosure under paragraph (a)(7) of this
section must comply with paragraph (b)(6) of this section.]
(1) Previous balance. The account balance outstanding at the
beginning of the billing cycle.
(2) Identification of transactions. An identification of each
credit transaction in accordance with Sec. 226.8.
(3) Credits. Any credit to the account during the billing cycle,
including the amount and the date of crediting. The date need not be
provided if a delay in [accounting] [rtrif]crediting[ltrif] does not
result in any finance or other charge.
(4) Periodic rates. (i) Except as provided in paragraph (a)(4)(ii)
of this section, each periodic rate that may be used to compute the
[finance charge,] [rtrif]interest charge expressed as an annual
percentage rate and using the term, Annual Percentage Rate,\14\ along
with[ltrif] the range of balances to which it is applicable [, and the
corresponding annual percentage rate].\15\ If no [finance]
[rtrif]interest[ltrif] charge is imposed when the outstanding balance
is less than a certain amount, the creditor is not required to disclose
that fact, or the balance below which no [finance]
[rtrif]interest[ltrif] charge will be imposed. If different periodic
rates apply to different types of transactions, the types of
transactions to which the periodic rates apply shall also be disclosed.
For variable-rate plans, the fact that the [periodic rate(s)]
[rtrif]annual percentage rate[ltrif] may vary.
---------------------------------------------------------------------------
\14\ [Reserved].
\15\ [Reserved].
---------------------------------------------------------------------------
(ii) Exception. An annual percentage rate that differs from the
rate that would otherwise apply and is offered only for a promotional
period need not be disclosed except in periods in which the offered
rate is actually applied.
(5) Balance on which finance charge computed. The amount of the
balance to which a periodic rate was applied and an explanation of how
that balance was determined [rtrif]using the term Balance Subject to
Interest Rate[ltrif]. When a balance is determined without first
deducting all credits and payments made during the billing cycle, the
fact and the amount of the credits and payments shall be disclosed.
[rtrif]As an alternative to providing an explanation of how the balance
was determined, a creditor that uses a balance computation method
identified in Sec. 226.5a(g) may, at the creditor's option, identify
the name of the balance computation method and provide a toll-free
telephone number where consumers may obtain from the creditor more
information about the balance computation method and how resulting
interest charges were determined. If the method used is not identified
in Sec. 226.5a(g), the creditor shall provide a brief explanation of
the method used.[ltrif]
[rtrif](6) Charges imposed. (i) The amounts of any charges imposed
as part of a plan as stated in Sec. 226.6(a)(3) grouped together, in
proximity to transactions identified under paragraph (a)(2) of this
section, substantially similar to Sample G-24(A) in Appendix G to this
part.
(ii) Interest. A total of finance charges attributable to periodic
interest rates, using the term Total Interest, must be disclosed for
the statement period and calendar year to date. If different periodic
rates apply to different types of transactions, finance charges
attributable to periodic interest rates, using the term Interest
Charge, must be grouped together under the heading Interest Charged,
itemized and totaled by type of transaction or group of transactions
subject to different periodic rates. The disclosures made pursuant to
this paragraph must be provided using a format substantially similar to
Sample G-24(A) in Appendix G to this part.
(iii) Fees. Charges imposed as part of the plan other than charges
attributable to periodic interest rates must be grouped together under
the heading Fees, identified consistent with the feature or type, and
itemized, and a total of charges, using the term Fees, must be
disclosed for the statement period and calendar year to date, using a
format substantially similar to Sample G-24(A) in Appendix G.
(7) Change-in-terms and increased penalty rate summary for home-
equity loans. Creditors that provide a change-in-terms notice required
by Sec. 226.9(c)(1), or a rate increase notice required by Sec.
226.9(i), on or with the periodic statement, must disclose the
information in Sec. 226.9(c)(1)(iii)(A) or Sec. 226.9(i)(3) on the
periodic statement in accordance with the format requirements in Sec.
226.9(c)(1)(iii)(B), and Sec. 226.9(i)(4). See Samples G-25 and G-26
in Appendix G to this part.[ltrif]
[(6) Amount of finance charge and other charges. Creditors may
comply with paragraphs (a)(6) of this section, or with paragraph (b)(6)
of this section, at their option.
(i) Finance charges. The amount of any finance charge debited or
added to the account during the billing cycle, using the term finance
charge. The components of the finance charge shall be individually
itemized and identified to show the amount(s) due to the application of
any periodic rates and the amount(s) of any other type of finance
charge. If there is more than one periodic rate, the amount of the
finance charge attributable to each rate need not be separately
itemized and identified.
(ii) Other charges. The amounts, itemized and identified by type,
of any charges other than finance charges debited to the account during
the billing cycle.
(7) Annual percentage rate. At a creditor's option, when a finance
charge is imposed during the billing cycle, the annual percentage
rate(s) determined under Sec. 226.14(c) using the term annual
percentage rate.]
(8) Grace period. The date by which or the time period within which
the new balance or any portion of the new balance must be paid to avoid
additional finance charges. If such a time period is provided, a
creditor may, at its option and without disclosure, impose no finance
charge if payment is
[[Page 43542]]
received after the time period's expiration.
(9) Address for notice of billing errors. The address to be used
for notice of billing errors. Alternatively, the address may be
provided on the billing rights statement permitted by Sec.
226.9(a)(2).
(10) Closing date of billing cycle; new balance. The closing date
of the billing cycle and the account balance outstanding on that date.
7. Section 226.9, as amended on January 29, 2009 (74 FR 5412), is
amended by revising paragraph (c)(1), and adding new paragraphs (i) and
(j), as follows
Sec. 226.9 Subsequent disclosure requirements.
* * * * *
(c) Change in terms--(1) Rules affecting home-equity plans--(i)
Written notice required. For home-equity plans subject to the
requirements of Sec. 226.5b, [rtrif]except as provided in paragraphs
(c)(1)(ii) and (c)(1)(iv) of this section,[ltrif] whenever any term
required to be disclosed under Sec. 226.6(a) is changed [or the
required minimum periodic payment is increased], [rtrif]a[ltrif][the]
creditor [rtrif]must provide a[ltrif][shall mail or deliver] written
notice of the change [rtrif]at least 45 days prior to the effective
date of the change[ltrif] to each consumer who may be affected. [The
notice shall be mailed or delivered at least 15 days prior to the
effective date of the change.] The [rtrif]45-day[ltrif][15-day] timing
requirement does not apply if the [rtrif]consumer has agreed to a
particular[ltrif] change [has been agreed to by the consumer]; the
notice shall be given, however, before the effective date of the
change. [rtrif]Increases in the rate applicable to a consumer's account
due to delinquency, default or as a penalty described in paragraph (i)
of this section must be disclosed pursuant to paragraph (i) of this
section.[ltrif]
[rtrif](ii) Charges not covered by Sec. 226.6(a)(1) and (a)(2).
Except as provided in paragraph (c)(1)(iv) of this section, if a
creditor increases any component of a charge or introduces a new charge
required to be disclosed under Sec. 226.6(a)(3) that is not required
to be disclosed in a tabular format under Sec. 226.6(a)(2), a creditor
may either, at its option:
(A) Comply with the requirements of paragraph (c)(1)(i) of this
section; or
(B) Provide notice of the amount of the charge before the consumer
agrees to or becomes obligated to pay the charge, at a time and in a
manner that a consumer would be likely to notice the disclosure of the
charge. The notice may be provided orally or in writing.
(iii) Disclosure requirements--(A) Changes to terms described in
account-opening table. If a creditor changes a term required to be
disclosed in a tabular format pursuant to Sec. 226.6(a)(1) and (a)(2),
the creditor must provide the following information on the notice
provided pursuant to paragraph (c)(1)(i) of this section:
(1) A summary of the changes made to terms required by Sec.
226.6(a)(1) and (2);
(2) A statement that changes are being made to the account;
(3) A statement indicating the consumer has the right to opt out of
these changes, if applicable, and a reference to additional information
describing the opt-out right provided in the notice, if applicable;
(4) The date the changes will become effective; and
(5) If applicable, a statement that the consumer may find
additional information about the summarized changes, and other changes
to the account, in the notice.
(B) Format requirements--(1) Tabular format. The summary of changes
described in paragraph (c)(1)(iii)(A)(1) of this section must be in a
tabular format, with headings and format substantially similar to any
of the account-opening tables found in G-15 in Appendix G to this part.
The table must disclose the changed term(s) and information relevant to
the change(s), if that relevant information is required by Sec.
226.6(a)(1) and (a)(2). The new terms must be described with the same
level of detail as required when disclosing the terms under Sec.
226.6(a)(2).
(2) Notice included with periodic statement. If a notice required
by paragraph (c)(1)(i) of this section is included on or with a
periodic statement, the information described in paragraph
(c)(1)(iii)(A)(1) of this section must be disclosed on the front of any
page of the statement. The summary of changes described in paragraph
(c)(1)(iii)(A)(1) of this section must immediately follow the
information described in paragraph (c)(1)(iii)(A)(2) through
(c)(1)(iii)(A)(5) of this section, and be substantially similar to the
format shown in Sample G-25 in Appendix G to this part.
(3) Notice provided separately from periodic statement. If a notice
required by paragraph (c)(1)(i) of this section is not included on or
with a periodic statement, the information described in paragraph
(c)(1)(iii)(A)(1) of this section must, at the creditor's option, be
disclosed on the front of the first page of the notice or segregated on
a separate page from other information given with the notice. The
summary of changes required to be in a table pursuant to paragraph
(c)(1)(iii)(A)(1) of this section may be on more than one page, and may
use both the front and reverse sides, so long as the table begins on
the front of the first page of the notice and there is a reference on
the first page indicating that the table continues on the following
page. The summary of changes described in paragraph (c)(1)(iii)(A)(1)
of this section must immediately follow the information described in
paragraph (c)(1)(iii)(A)(2) through (c)(1)(iii)(A)(5) of this section,
substantially similar to the format shown in Sample G-25 in Appendix G
to this part.[ltrif]
[rtrif](iv)[ltrif][(ii)] Notice not required. For home-equity plans
subject to the requirements of Sec. 226.5b, a creditor is not required
to provide notice under this section when the change involves a
reduction of any component of a finance or other charge or when the
change results from an agreement involving a court proceeding.
[rtrif]Suspension of credit privileges, reduction of a credit limit, or
termination of an account do not require notice under paragraph
(c)(1)(i) of this section, but must be disclosed pursuant to paragraph
(j) of this section.[ltrif]
[(iii) Notice to restrict credit. For home-equity plans subject to
the requirements of Sec. 226.5b, if the creditor prohibits additional
extensions of credit or reduces the credit limit pursuant to Sec.
226.5b(f)(3)(i) or (f)(3)(vi), the creditor shall mail or deliver
written notice of the action to each consumer who will be affected. The
notice must be provided not later than three business days after the
action is taken and shall contain specific reasons for the action. If
the creditor requires the consumer to request reinstatement of credit
privileges, the notice also shall state that fact.]
* * * * *
(g) Increase in rates due to delinquency or default or as a penalty
[rtrif]--rules affecting open-end (not home-secured) plans[ltrif].
* * * * *
[rtrif](i) Increase in rates due to delinquency or default or as a
penalty--rules affecting home-equity plans--(1) Increases subject to
this section. For home-equity plans subject to the requirements of
Sec. 226.5b, except as provided in paragraph (i)(5) of this section, a
creditor must provide a written notice to each consumer who may be
affected when:
(i) A rate is increased due to the consumer's delinquency or
default as specified in the account agreement; or
(ii) A rate is increased as a penalty for one or more events, other
than a
[[Page 43543]]
consumer's default or delinquency, as specified in the account
agreement.
(2) Timing of written notice. Whenever any notice is required to be
given pursuant to paragraph (i)(1) of this section, the creditor shall
provide written notice of the increase in rates at least 45 days prior
to the effective date of the increase. The notice must be provided
after the occurrence of the events described in paragraphs (i)(1)(i)
and (i)(1)(ii) of this section that trigger the imposition of the rate
increase.
(3) Disclosure requirements for rate increases. If a creditor is
increasing the rate due to delinquency or default or as a penalty, the
creditor must provide the following information on the notice sent
pursuant to paragraph (i)(1) of this section:
(i) A statement that the delinquency, default, or penalty rate, as
applicable, has been triggered;
(ii) The date on which the delinquency, default, or penalty rate
will apply;
(iii) The circumstances under which the delinquency, default, or
penalty rate, as applicable, will cease to apply to the consumer's
account, or that the delinquency, default, or penalty rate will remain
in effect for a potentially indefinite time period; and
(iv) A statement indicating to which balances the delinquency or
default rate or penalty rate will be applied.
(4) Format requirements. (i) If a notice required by paragraph
(i)(1) of this section is included on or with a periodic statement, the
information described in paragraph (i)(3) of this section must be in
the form of a table and provided on the front of any page of the
periodic statement, above the notice described in paragraph
(c)(1)(iii)(A) of this section if that notice is provided on the same
statement.
(ii) If a notice required by paragraph (i)(1) of this section is
not included on or with a periodic statement, the information described
in paragraph (i)(3) of this section must be disclosed on the front of
the first page of the notice. Only information related to the increase
in the rate to a penalty rate may be included with the notice, except
that this notice may be combined with a notice described in paragraph
(c)(1)(iii)(A) of this section.
(5) Exception for workout and temporary hardship arrangements. A
creditor is not required to provide a notice pursuant to paragraph
(i)(1) of this section if a rate applicable to a category of
transactions is increased due to the consumer's completion of a workout
or temporary hardship arrangement or as a result of the consumer's
failure to comply with the terms of a workout or temporary hardship
arrangement between the creditor and the consumer, provided that:
(i) The rate following any such increase does not exceed the rate
that applied to the category of transactions prior to commencement of
the workout or temporary hardship arrangement; or
(ii) If the rate that applied to a category of transactions prior
to the commencement of the workout or temporary hardship arrangement
was a variable rate, the rate following any such increase is a variable
rate determined by the same formula (index and margin) that applied to
the category of transactions prior to commencement of the workout or
temporary hardship arrangement.[ltrif]
[rtrif](j) Notices of action taken for home-equity plans.
(1) For home-equity plans subject to the requirements of Sec.
226.5b, if the creditor prohibits additional extensions of credit or
reduces the credit limit pursuant to Sec. 226.5b(f)(3)(i) or
226.5b(f)(3)(vi), the creditor shall mail or deliver written notice of
the action to any consumer who will be affected. The notice must be
provided not later than three business days after the action is taken
and shall contain [specific reasons for the action. If the creditor
requires the consumer to request reinstatement of credit privileges,
the notice shall state that fact.] the following information (see Model
Clauses G-23(A) in Appendix G of this part):
(i) a statement of the action taken, including the date on which
the action was effective and, if the credit limit was reduced, the
amount of the new credit limit;
(ii) a statement of specific reasons for the action taken;
(iii) if the creditor requires the consumer to request
reinstatement of credit privileges under Sec. 226.5b(g)(1)(ii)--
(A) a statement that the consumer has a right to request
reinstatement of the account at any time and the method with which the
consumer may request reinstatement, including specific contact
information for submitting reinstatement requests to the creditor;
(B) a statement that, upon receiving a reinstatement request, the
creditor will complete an investigation of whether a reason for
continuing the suspension or reduction exists within 30 days of
receiving the request, and that if no reason is found to exist, the
creditor will restore the consumer's credit privileges; and
(C) a statement that, to investigate the consumer's first
reinstatement request after advances have been suspended or the credit
limit reduced, the creditor may not charge the consumer any fees, but
that for subsequent reinstatement requests by the consumer, the
creditor has a right to charge the consumer bona fide and reasonable
property valuation or credit report fees associated with the
investigation.
(2) For home-equity plans subject to the requirements of Sec.
226.5b, if a creditor suspends advances or decreases the credit limit
on an account under Sec. 226.5b(f)(3)(i) or (f)(3)(vi), the creditor
may not charge a fee for denied advances or exceeding the credit limit
provided for in the original agreement until the consumer has received
the notice of action taken required by Sec. 226.9(j)(1).
(3) For home-equity plans subject to the requirements of Sec.
226.5b, if, pursuant to Sec. 226.5b(f)(2), a creditor terminates a
plan and demands repayment of the entire outstanding balance in advance
of the original term or temporarily or permanently suspends further
advances or reduces the credit limit applicable to a home-equity plan,
the creditor shall mail or deliver written notice of the action to any
consumer who will be affected. The notice must be provided not later
than three business days after the action is taken and shall contain
the following information (see Model Clauses G-23(B) in Appendix G of
this part):
(i) a statement of the action taken; and
(ii) a statement of specific reasons for the action taken.
(4) If, pursuant to Sec. 226.5b(f)(2), a creditor takes any action
other than terminating a plan and demanding repayment of the entire
outstanding balance in advance of the original term, or temporarily or
permanently suspending further advances or reducing the credit limit
for a home-equity plan, the creditor must comply with the notice
requirements of Sec. 226.9(c)(1) or (i), as applicable.[ltrif]
8. Section 226.14 is revised to read as follows:
Sec. 226.14 Determination of annual percentage rate.
(a) General rule. The annual percentage rate is a measure of the
cost of credit, expressed as a yearly rate. An annual percentage rate
shall be considered accurate if it is not more than \1/8\th of 1
percentage point above or below the annual percentage rate determined
in accordance with this section.\31a\ An error in disclosure of the
annual percentage rate or finance charge
[[Page 43544]]
shall not, in itself, be considered a violation of this regulation if:
---------------------------------------------------------------------------
\31a\ [Reserved].
---------------------------------------------------------------------------
(1) The error resulted from a corresponding error in a calculation
tool used in good faith by the creditor; and
(2) Upon discovery of the error, the creditor promptly discontinues
use of that calculation tool for disclosure purposes, and notifies the
Board in writing of the error in the calculation tool.
(b) Annual percentage rate--in general. Where one or more periodic
rates may be used to compute the finance charge, the annual percentage
rate(s) to be disclosed for purposes of [rtrif]subpart B of this
regulation[ltrif] [Sec. Sec. 226.5a, 226.5b, 226.6, 226.7(a)(4) or
(b)(4), 226.9, 226.15, 226.16, and 226.26] shall be computed by
multiplying each periodic rate by the number of periods in a year.
[(c) Optional effective annual percentage rate for periodic
statements for creditors offering open-end plans subject to the
requirements of Sec. 226.5b. A creditor offering an open-end plan
subject to the requirements of Sec. 226.5b need not disclose an
effective annual percentage rate. Such a creditor may, at its option,
disclose an effective annual percentage rate(s) pursuant to Sec.
226.7(a)(7) and compute the effective annual percentage rate as
follows:
(1) Solely periodic rates imposed. If the finance charge is
determined solely by applying one or more periodic rates, at the
creditor's option, either:
(i) By multiplying each periodic rate by the number of periods in a
year; or
(ii) By dividing the total finance charge for the billing cycle by
the sum of the balances to which the periodic rates were applied and
multiplying the quotient (expressed as a percentage) by the number of
billing cycles in a year.
(2) Minimum or fixed charge, but not transaction charge, imposed.
If the finance charge imposed during the billing cycle is or includes a
minimum, fixed, or other charge not due to the application of a
periodic rate, other than a charge with respect to any specific
transaction during the billing cycle, by dividing the total finance
charge for the billing cycle by the amount of the balance(s) to which
it is applicable \32\ and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year.\33\ If there is
no balance to which the finance charge is applicable, an annual
percentage rate cannot be determined under this section. Where the
finance charge imposed during the billing cycle is or includes a loan
fee, points, or similar charge that relates to opening, renewing, or
continuing an account, the amount of such charge shall not be included
in the calculation of the annual percentage rate.
---------------------------------------------------------------------------
\32\ [Reserved].
\33\ [Reserved].
---------------------------------------------------------------------------
(3) Transaction charge imposed. If the finance charge imposed
during the billing cycle is or includes a charge relating to a specific
transaction during the billing cycle (even if the total finance charge
also includes any other minimum, fixed, or other charge not due to the
application of a periodic rate), by dividing the total finance charge
imposed during the billing cycle by the total of all balances and other
amounts on which a finance charge was imposed during the billing cycle
without duplication, and multiplying the quotient (expressed as a
percentage) by the number of billing cycles in a year,\34\ except that
the annual percentage rate shall not be less than the largest rate
determined by multiplying each periodic rate imposed during the billing
cycle by the number of periods in a year.\35\ Where the finance charge
imposed during the billing cycle is or includes a loan fee, points, or
similar charge that relates to the opening, renewing, or continuing an
account, the amount of such charge shall not be included in the
calculation of the annual percentage rate. See Appendix F to this part
regarding determination of the denominator of the fraction under this
paragraph.
---------------------------------------------------------------------------
\34\ [Reserved].
\35\ [Reserved].
---------------------------------------------------------------------------
(4) If the finance charge imposed during the billing cycle is or
includes a minimum, fixed, or other charge not due to the application
of a periodic rate and the total finance charge imposed during the
billing cycle does not exceed 50 cents for a monthly or longer billing
cycle, or the pro rata part of 50 cents for a billing cycle shorter
than monthly, at the creditor's option, by multiplying each applicable
periodic rate by the number of periods in a year, notwithstanding the
provisions of paragraphs (c)(2) and (c)(3) of this section.
(d) Calculations where daily periodic rate applied. If the
provisions of paragraph (c)(1)(ii) or (c)(2) of this section apply and
all or a portion of the finance charge is determined by the application
of one or more daily periodic rates, the annual percentage rate may be
determined either:
(1) By dividing the total finance charge by the average of the
daily balances and multiplying the quotient by the number of billing
cycles in a year; or
(2) By dividing the total finance charge by the sum of the daily
balances and multiplying the quotient by 365.]
9. Appendix F is removed and reserved as follows:
Appendix F to Part 226 [--Optional Annual Percentage Rate Computations
for Creditors Offering Open-End Plans Subject to the Requirements of
Sec. 226.5b] [rtrif][Reserved][ltrif]
[In determining the denominator of the fraction under Sec.
226.14(c)(3), no amount will be used more than once when adding the
sum of the balances \1\ subject to periodic rates to the sum of the
amounts subject to specific transaction charges. (Where a portion of
the finance charge is determined by application of one or more daily
periodic rates, the phrase ``sum of the balances'' shall also mean
the ``average of daily balances.'') In every case, the full amount
of transactions subject to specific transaction charges shall be
included in the denominator. Other balances or parts of balances
shall be included according to the manner of determining the balance
subject to a periodic rate, as illustrated in the following examples
of accounts on monthly billing cycles:
---------------------------------------------------------------------------
\1\ [Reserved].
---------------------------------------------------------------------------
1. Previous balance--none. A specific transaction of $100 occurs
on the first day of the billing cycle. The average daily balance is
$100. A specific transaction charge of 3 percent is applicable to
the specific transaction. The periodic rate is 1\1/2\ percent
applicable to the average daily balance. The numerator is the amount
of the finance charge, which is $4.50. The denominator is the amount
of the transaction (which is $100), plus the amount by which the
balance subject to the periodic rate exceeds the amount of the
specific transactions (such excess in this case is 0), totaling
$100.
The annual percentage rate is the quotient (which is 4\1/2\
percent) multiplied by 12 (the number of months in a year), i.e., 54
percent.
2. Previous balance--$100. A specific transaction of $100 occurs
at the midpoint of the billing cycle. The average daily balance is
$150. A specific transaction charge of 3 percent is applicable to
the specific transaction. The periodic rate is 1\1/2\ percent
applicable to the average daily balance. The numerator is the amount
of the finance charge which is $5.25. The denominator is the amount
of the transaction (which is $100), plus the amount by which the
balance subject to the periodic rate exceeds the amount of the
specific transaction (such excess in this case is $50), totaling
$150. As explained in example 1, the annual percentage rate is 3\1/
2\ percent x 12 = 42 percent.
3. If, in example 2, the periodic rate applies only to the
previous balance, the numerator is $4.50 and the denominator is $200
(the amount of the transaction, $100, plus the balance subject only
to the periodic rate, the $100 previous balance). As explained in
example 1, the annual percentage rate is 2\1/4\ percent x 12 = 27
percent.
4. If, in example 2, the periodic rate applies only to an
adjusted balance (previous balance
[[Page 43545]]
less payments and credits) and the consumer made a payment of $50 at
the midpoint of the billing cycle, the numerator is $3.75 and the
denominator is $150 (the amount of the transaction, $100, plus the
balance subject to the periodic rate, the $50 adjusted balance). As
explained in example 1, the annual percentage rate is 2\1/2\ percent
x 12 = 30 percent.
5. Previous balance--$100. A specific transaction (check) of
$100 occurs at the midpoint of the billing cycle. The average daily
balance is $150. The specific transaction charge is $.25 per check.
The periodic rate is 1\1/2\ percent applied to the average daily
balance. The numerator is the amount of the finance charge, which is
$2.50 and includes the $.25 check charge and the $2.25 resulting
from the application of the periodic rate. The denominator is the
full amount of the specific transaction (which is $100) plus the
amount by which the average daily balance exceeds the amount of the
specific transaction (which in this case is $50), totaling $150. As
explained in example 1, the annual percentage rate would be 1\2/3\
percent x 12 = 20 percent.
6. Previous balance--none. A specific transaction of $100 occurs
at the midpoint of the billing cycle. The average daily balance is
$50. The specific transaction charge is 3 percent of the transaction
amount or $3.00. The periodic rate is 1\1/2\ percent per month
applied to the average daily balance. The numerator is the amount of
the finance charge, which is $3.75, including the $3.00 transaction
charge and $.75 resulting from application of the periodic rate. The
denominator is the full amount of the specific transaction ($100)
plus the amount by which the balance subject to the periodic rate
exceeds the amount of the transaction ($0). Where the specific
transaction amount exceeds the balance subject to the periodic rate,
the resulting number is considered to be zero rather than a negative
number ($50 - $100 = -$50). The denominator, in this case, is $100.
As explained in example 1, the annual percentage rate is 3\3/4\
percent x 12 = 45 percent.]
10. Appendix G to Part 226 is amended by:
A. Revising the table of contents at the beginning of the appendix;
B. Removing Model Clauses and Forms G-1, G-2, G-3, and G-4;
C. Redesignating Model Clauses and Forms G-1(A), G-2(A), G-3(A),
and G-4(A) as Model Clauses and Forms G-1, G-2, G-3, and G-4,
respectively;
D. Removing Sample Forms and Model Clauses G-14A, G-14B, and G-15;
and
E. Adding new Model and Sample Forms and Clauses G-14(A) through G-
14(E), G-15(A) through G-15(D), G-22(A), G-22(B), G-23(A), G-23(B), G-
24(A) through G-24(C), G-25, and G-26, in numerical order, to read as
follows:
Appendix G to Part 226--Open-End Model Forms and Clauses
G-1 Balance Computation Methods Model Clauses [(Home-equity Plans)]
(Sec. Sec. 226.6 and 226.7)
[G-1(A) Balance Computation Methods Model Clauses (Plans other than
Home-equity Plans) (Sec. Sec. 226.6 and 226.7)]
G-2 Liability for Unauthorized Use Model Clause [(Home-equity
Plans)] (Sec. 226.12)
[G-2(A) Liability for Unauthorized Use Model Clause (Plans other
than Home-equity Plans) (Sec. 226.12)]
G-3 Long-Form Billing-Error Rights Model Form [(Home-equity Plans)]
(Sec. Sec. 226.6 and [rtrif]226.7[ltrif] [226.9])
[G-3(A) Long-Form Billing-Error Rights Model Form (Plans other than
Home-equity Plans) (Sec. Sec. 226.6 and 226.9)]
G-4 Alternative Billing-Error Rights Model Form [(Home-equity
Plans)] (Sec. [rtrif]226.7[ltrif] [226.9)])
[G-4(A) Alternative Billing-Error Rights Model Form (Plans other
than Home-equity Plans) (Sec. 226.9)]
G-5 Rescission Model Form (When Opening an Account) (Sec. 226.15)
G-6 Rescission Model Form (For Each Transaction) (Sec. 226.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec.
226.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec.
226.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec.
226.15)
G-10(A) Applications and Solicitations Model Form (Credit Cards)
(Sec. 226.5a(b))
G-10(B) Applications and Solicitations Sample (Credit Cards) (Sec.
226.5a(b))
G-10(C) Applications and Solicitations Sample (Credit Cards) (Sec.
226.5a(b))
G-10(D) Applications and Solicitations Model Form (Charge Cards)
(Sec. 226.5a(b))
G-10(E) Applications and Solicitations Sample (Charge Cards) (Sec.
226.5a(b))
G-11 Applications and Solicitations Made Available to General Public
Model Clauses (Sec. 226.5a(e))
G-12 Reserved
G-13(A) Change in Insurance Provider Model Form (Combined Notice)
(Sec. 226.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec. 226.9(f)(2))
[G-14A Home-equity Sample
G-14B Home-equity Sample
G-15 Home-equity Model Clauses]
[rtrif]G-14(A) Early Disclosure Model Form (Home-equity Plans)
(Sec. 226.5b(c))
G-14(B) Early Disclosure Model Form (Home-equity Plans) (Sec.
226.5b(c))
G-14(C) Early Disclosure Sample (Home-equity Plans) (Sec.
226.5b(c))
G-14(D) Early Disclosure Sample (Home-equity Plans) (Sec.
226.5b(c))
G-14(E) Early Disclosure Sample (Home-equity Plans) (Sec.
226.5b(c))
G-15(A) Account-Opening Disclosure Model Form (Home-equity Plans)
(Sec. 226.6(a)(2))
G-15(B) Account-Opening Disclosure Sample (Home-equity Plans) (Sec.
226.6(a)(2))
G-15(C) Account-Opening Disclosure Sample (Home-equity Plans) (Sec.
226.6(a)(2))
G-15(D) Account-Opening Disclosure Sample (Home-equity Plans) (Sec.
226.6(a)(2))[ltrif]
G-16(A) Debt Suspension Model Clause (Sec. 226.4(d)(3))
G-16(B) Debt Suspension Sample (Sec. 226.4(d)(3))
G-17(A) Account-opening Model Form (Sec. 226.6(b)(2))
G-17(B) Account-opening Sample (Sec. 226.6(b)(2))
G-17(C) Account-opening Sample (Sec. 226.6(b)(2))
G-17(D) Account-opening Sample (Sec. 226.6(b)(2))
G-18(A) Transactions; Interest Charges; Fees Sample (Sec. 226.7(b))
G-18(B) Late Payment Fee Sample (Sec. 226.7(b))
G-18(C) Actual Repayment Period Sample Disclosure on Periodic
Statement (Sec. 226.7(b))
G-18(D) New Balance, Due Date, Late Payment and Minimum Payment
Sample (Credit cards) (Sec. 226.7(b))
G-18(E) New Balance, Due Date, and Late Payment Sample (Open-end
Plans (Non-credit-card Accounts)) (Sec. 226.7(b))
G-18(F) Periodic Statement Form
G-18(G) Periodic Statement Form
G-19 Checks Accessing a Credit Card Account Sample (Sec.
226.9(b)(3))
G-20 Change-in-Terms Sample (Sec. 226.9(c)(2))
G-21 Penalty Rate Increase Sample (Sec. 226.9(g)(3))
[rtrif]G-22(A) Home-equity Notice of Reinstatement Investigation
Results Model Clauses (Sec. 226.5b(g)(2)(v))
G-22(B) Home-equity Notice of Reinstatement Investigation Results
Model Clauses (Sec. 226.5b(g)(2)(v))
G-23(A) Home-equity Notice of Action Taken Model Clauses (Sec.
226.9(j)(1))
G-23(B) Home-equity Notice of Action Taken Model Clauses (Sec.
226.9(j)(2))
G-24(A) Periodic Statement Transactions; Interest Charges; Fees
Sample (Home-equity Plans) (Sec. 226.7(a))
G-24(B) Periodic Statement Sample (Home-equity Plans) (Sec.
226.7(a))
G-24(C) Periodic Statement Sample (Home-equity Plans) (Sec.
226.7(a))
G-25 Change-in-Terms Sample (Home-equity Plans) (Sec. 226.9(c)(1))
G-26 Rate Increase Sample (Home-equity Plans) (Sec.
226.9(i)(3))[ltrif]
[G-1--Balance Computation Methods Model Clauses (Home-equity Plans)
(a) Adjusted balance method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``adjusted balance'' of your
account. We get the ``adjusted balance'' by taking the balance you
owed at the end of the previous billing cycle and subtracting [any
unpaid finance charges and] any payments and credits received during
the present billing cycle.
(b) Previous balance method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the beginning of
each billing cycle [minus any unpaid finance
[[Page 43546]]
charges]. We do not subtract any payments or credits received during
the billing cycle. [The amount of payments and credits to your
account this billing cycle was $ ------.]
(c) Average daily balance method (excluding current transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (excluding current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day and
subtract any payments or credits [and any unpaid finance charges].
We do not add in any new [purchases/advances/loans]. This gives us
the daily balance. Then, we add all the daily balances for the
billing cycle together and divide the total by the number of days in
the billing cycle. This gives us the ``average daily balance.''
(d) Average daily balance method (including current transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``average daily balance'' of your
account (including current transactions). To get the ``average daily
balance'' we take the beginning balance of your account each day,
add any new [purchases/advances/loans], and subtract any payments or
credits, [and unpaid finance charges]. This gives us the daily
balance. Then, we add up all the daily balances for the billing
cycle and divide the total by the number of days in the billing
cycle. This gives us the ``average daily balance.''
(e) Ending balance method
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the amount you owe at the end of each
billing cycle (including new purchases and deducting payments and
credits made during the billing cycle).
(f) Daily balance method (including current transactions)
We figure [a portion of] the finance charge on your account by
applying the periodic rate to the ``daily balance'' of your account
for each day in the billing cycle. To get the ``daily balance'' we
take the beginning balance of your account each day, add any new
[purchases/advances/fees], and subtract [any unpaid finance charges
and] any payments or credits. This gives us the daily balance.]
G-1[(A)]--Balance Computation Methods Model Clauses [(Plans Other Than
Home-Equity Plans)]
(a) Adjusted balance method
We figure the interest charge on your account by applying the
periodic rate to the ``adjusted balance'' of your account. We get
the ``adjusted balance'' by taking the balance you owed at the end
of the previous billing cycle and subtracting [any unpaid interest
or other finance charges and] any payments and credits received
during the present billing cycle.
(b) Previous balance method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the beginning of each billing
cycle. We do not subtract any payments or credits received during
the billing cycle.
(c) Average daily balance method (excluding current transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To
get the ``average daily balance'' we take the beginning balance of
your account each day and subtract [any unpaid interest or other
finance charges and] any payments or credits. We do not add in any
new [purchases/advances/fees]. This gives us the daily balance.
Then, we add all the daily balances for the billing cycle together
and divide the total by the number of days in the billing cycle.
This gives us the ``average daily balance.''
(d) Average daily balance method (including current transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``average daily balance'' of your account. To
get the ``average daily balance'' we take the beginning balance of
your account each day, add any new [purchases/advances/fees], and
subtract [any unpaid interest or other finance charges and] any
payments or credits. This gives us the daily balance. Then, we add
up all the daily balances for the billing cycle and divide the total
by the number of days in the billing cycle. This gives us the
``average daily balance.''
(e) Ending balance method
We figure the interest charge on your account by applying the
periodic rate to the amount you owe at the end of each billing cycle
(including new [purchases/advances/fees] and deducting payments and
credits made during the billing cycle).
(f) Daily balance method (including current transactions)
We figure the interest charge on your account by applying the
periodic rate to the ``daily balance'' of your account for each day
in the billing cycle. To get the ``daily balance'' we take the
beginning balance of your account each day, add any new [purchases/
advances/fees], and subtract [any unpaid interest or other finance
charges and] any payments or credits. This gives us the daily
balance.
[G-2--Liability for Unauthorized Use Model Clause (Home-Equity Plans)
You may be liable for the unauthorized use of your credit card
[or other term that describes the credit card]. You will not be
liable for unauthorized use that occurs after you notify [name of
card issuer or its designee] at [address], orally or in writing, of
the loss, theft, or possible unauthorized use. [You may also contact
us on the Web: [Creditor Web or e-mail address]] In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].]
G-2[(A)]--Liability for Unauthorized Use Model Clause [(Plans Other
Than Home-equity Plans)]
If you notice the loss or theft of your credit card or a
possible unauthorized use of your card, you should write to us
immediately at:
[address] [address listed on your bill],
or call us at [telephone number].
[You may also contact us on the Web: [Creditor Web or e-mail
address]]
You will not be liable for any unauthorized use that occurs
after you notify us. You may, however, be liable for unauthorized
use that occurs before your notice to us. In any case, your
liability will not exceed [insert $50 or any lesser amount under
agreement with the cardholder].
[G-3--Long-Form Billing-Error Rights Model Form (Home-Equity Plans)
YOUR BILLING RIGHTS
KEEP THIS NOTICE FOR FUTURE USE
This notice contains important information about your rights and
our responsibilities under the Fair Credit Billing Act.
Notify Us in Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address listed on your bill]. Write to us as soon as
possible. We must hear from you no later than 60 days after we sent
you the first bill on which the error or problem appeared. [You may
also contact us on the Web: [Creditor Web or e-mail address]] You
can telephone us, but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are not sure about.
If you have authorized us to pay your credit card bill
automatically from your savings or checking account, you can stop
the payment on any amount you think is wrong. To stop the payment
your letter must reach us three business days before the automatic
payment is scheduled to occur.
Your Rights and Our Responsibilities After We Receive Your Written
Notice
We must acknowledge your letter within 30 days, unless we have
corrected the error by then. Within 90 days, we must either correct
the error or explain why we believe the bill was correct.
After we receive your letter, we cannot try to collect any
amount you question, or report you as delinquent. We can continue to
bill you for the amount you question, including finance charges, and
we can apply any unpaid amount against your credit limit. You do not
have to pay any questioned amount while we are investigating, but
you are still obligated to pay the parts of your bill that are not
in question.
If we find that we made a mistake on your bill, you will not
have to pay any finance charges related to any questioned amount. If
we didn't make a mistake, you may have to pay finance charges, and
you will have to make up any missed payments on the questioned
amount. In either case, we will send you a statement of the amount
you owe and the date that it is due.
[[Page 43547]]
If you fail to pay the amount that we think you owe, we may
report you as delinquent. However, if our explanation does not
satisfy you and you write to us within ten days telling us that you
still refuse to pay, we must tell anyone we report you to that you
have a question about your bill. And, we must tell you the name of
anyone we reported you to. We must tell anyone we report you to that
the matter has been settled between us when it finally is.
If we don't follow these rules, we can't collect the first $50
of the questioned amount, even if your bill was correct.
Special Rule for Credit Card Purchases
If you have a problem with the quality of property or services
that you purchased with a credit card, and you have tried in good
faith to correct the problem with the merchant, you may have the
right not to pay the remaining amount due on the property or
services.
There are two limitations on this right:
(a) You must have made the purchase in your home state or, if
not within your home state within 100 miles of your current mailing
address; and
(b) The purchase price must have been more than $50.
These limitations do not apply if we own or operate the
merchant, or if we mailed you the advertisement for the property or
services.]
G-3[(A)]--Long-Form Billing-Error Rights Model Form [(Plans Other Than
Home-equity Plans)]
Your Billing Rights: Keep this Document for Future Use
This notice tells you about your rights and our responsibilities
under the Fair Credit Billing Act.
What To Do If You Find a Mistake on Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or e-mail
address]]
In your letter, give us the following information:
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of problem: If you think there is an error
on your bill, describe what you believe is wrong and why you believe
it is a mistake.
You must contact us:
Within 60 days after the error appeared on your
statement.
At least 3 business days before an automated payment is
scheduled, if you want to stop payment on the amount you think is
wrong.
You must notify us of any potential errors in writing [or
electronically]. You may call us, but if you do we are not required
to investigate any potential errors and you may have to pay the
amount in question.
What Will Happen After We Receive Your Letter
When we receive your letter, we must do two things:
1. Within 30 days of receiving your letter, we must tell you
that we received your letter. We will also tell you if we have
already corrected the error.
2. Within 90 days of receiving your letter, we must either
correct the error or explain to you why we believe the bill is
correct.
While we investigate whether or not there has been an error:
We cannot try to collect the amount in question, or
report you as delinquent on that amount.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
After we finish our investigation, one of two things will
happen:
If we made a mistake: You will not have to pay the
amount in question or any interest or other fees related to that
amount.
If we do not believe there was a mistake: You will have
to pay the amount in question, along with applicable interest and
fees. We will send you a statement of the amount you owe and the
date payment is due. We may then report you as delinquent if you do
not pay the amount we think you owe.
If you receive our explanation but still believe your bill is
wrong, you must write to us within 10 days telling us that you still
refuse to pay. If you do so, we cannot report you as delinquent
without also reporting that you are questioning your bill. We must
tell you the name of anyone to whom we reported you as delinquent,
and we must let those organizations know when the matter has been
settled between us.
If we do not follow all of the rules above, you do not have to
pay the first $50 of the amount you question even if your bill is
correct.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to
pay the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these are necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still
dissatisfied with the purchase, contact us in writing [or
electronically] at:
[Creditor Name]
[Creditor Address]
[[Creditor Web or e-mail address]]
While we investigate, the same rules apply to the disputed
amount as discussed above. After we finish our investigation, we
will tell you our decision. At that point, if we think you owe an
amount and you do not pay, we may report you as delinquent.
[G-4--Alternative Billing-Error Rights Model Form (Home-equity Plans)
BILLING RIGHTS SUMMARY
In Case of Errors or Questions About Your Bill
If you think your bill is wrong, or if you need more information
about a transaction on your bill, write us [on a separate sheet] at
[address] [the address shown on your bill] as soon as possible. [You
may also contact us on the Web: [Creditor Web or e-mail address]] We
must hear from you no later than 60 days after we sent you the first
bill on which the error or problem appeared. You can telephone us,
but doing so will not preserve your rights.
In your letter, give us the following information:
Your name and account number.
The dollar amount of the suspected error.
Describe the error and explain, if you can, why you
believe there is an error. If you need more information, describe
the item you are unsure about.
You do not have to pay any amount in question while we are
investigating, but you are still obligated to pay the parts of your
bill that are not in question. While we investigate your question,
we cannot report you as delinquent or take any action to collect the
amount you question.
Special Rule for Credit Card Purchases
If you have a problem with the quality of goods or services that
you purchased with a credit card, and you have tried in good faith
to correct the problem with the merchant, you may not have to pay
the remaining amount due on the goods or services. You have this
protection only when the purchase price was more than $50 and the
purchase was made in your home state or within 100 miles of your
mailing address. (If we own or operate the merchant, or if we mailed
you the advertisement for the property or services, all purchases
are covered regardless of amount or location of purchase.)]
G-4[(A)]--Alternative Billing-Error Rights Model Form [(Plans
Other Than Home-equity Plans)]
What To Do If You Think You Find a Mistake on Your Statement
If you think there is an error on your statement, write to us
at:
[Creditor Name]
[Creditor Address]
[You may also contact us on the Web: [Creditor Web or e-mail
address]]
In your letter, give us the following information:
[[Page 43548]]
Account information: Your name and account number.
Dollar amount: The dollar amount of the suspected
error.
Description of Problem: If you think there is an error
on your bill, describe what you believe is wrong and why you believe
it is a mistake.
You must contact us within 60 days after the error appeared on
your statement.
You must notify us of any potential errors in writing [or
electronically]. You may call us, but if you do we are not required
to investigate any potential errors and you may have to pay the
amount in question.
While we investigate whether or not there has been an error, the
following are true:
We cannot try to collect the amount in question, or
report you as delinquent on that amount.
The charge in question may remain on your statement,
and we may continue to charge you interest on that amount. But, if
we determine that we made a mistake, you will not have to pay the
amount in question or any interest or other fees related to that
amount.
While you do not have to pay the amount in question,
you are responsible for the remainder of your balance.
We can apply any unpaid amount against your credit
limit.
Your Rights If You Are Dissatisfied With Your Credit Card Purchases
If you are dissatisfied with the goods or services that you have
purchased with your credit card, and you have tried in good faith to
correct the problem with the merchant, you may have the right not to
pay the remaining amount due on the purchase.
To use this right, all of the following must be true:
1. The purchase must have been made in your home state or within
100 miles of your current mailing address, and the purchase price
must have been more than $50. (Note: Neither of these are necessary
if your purchase was based on an advertisement we mailed to you, or
if we own the company that sold you the goods or services.)
2. You must have used your credit card for the purchase.
Purchases made with cash advances from an ATM or with a check that
accesses your credit card account do not qualify.
3. You must not yet have fully paid for the purchase.
If all of the criteria above are met and you are still
dissatisfied with the purchase, contact us in writing [or
electronically] at:
[Creditor Name]
[Creditor Address]
[Creditor Web address]
While we investigate, the same rules apply to the disputed
amount as discussed above. After we finish our investigation, we
will tell you our decision. At that point, if we think you owe an
amount and you do not pay we may report you as delinquent.
BILLING CODE 6210-01-P
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BILLING CODE 6210-01-C
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* * * * *
[rtrif]G-22(A)--Home-equity Notice of Reinstatement Investigation
Results Model Clauses (Sec. 226.5b(g)(2)(v)) (The Same Reason
Originally Permitting Action Still Exists)
We received your request to have your credit privileges on your
account reinstated and have investigated this matter. Based on the
results of our investigation, we are not able to reinstate your
credit privileges at this time.
Our investigation showed that
[your property value as of [date] is [property value], which still
shows a significant decline in value. To determine the value of your
home, we relied on [property valuation type, such as a tax record,
automated valuation model, appraisal]. You have a right to receive a
copy of information supporting this property value. You may send
your request to the following [mail/e-mail address or telephone
number: ]].
[your financial circumstances have not [improved] [improved
enough to reinstate your credit privileges]. To review your
financial circumstances, we relied on [information about your
income] [credit report information] [other].
You have the right to ask us to reinstate your credit privileges
at any time [by sending a request for reinstatement in writing to:
[mail/e-mail address]] [other method of requesting reinstatement and
corresponding contact information designated by the creditor, such
as by telephone].
We will complete an investigation within 30 days of receiving
your request. If no reason for [suspending your credit privileges]
[reducing your credit limit] is found, we will restore your credit
privileges.
If you ask us again to reinstate your account, we may charge you
fees for credit report information and property valuation reports to
investigate your request.
G-22(B)--Home-equity Notice of Reinstatement Investigation Results
Model Clauses (Sec. 226.5b(g)(2)(v)) (A different reason than the
original reason permitting action exists)
Our investigation showed that [your property value as of [date]
is [property value]]. However, our investigation also showed that
[your financial circumstances have materially changed.] As a result,
we will not be able to reinstate your credit privileges at this
time. To review your financial circumstances, we relied on
[information about your income] [credit report information] [other].
You have the right to ask us to reinstate your credit privileges
at any time [by sending a request for reinstatement in writing to:
[mail/e-mail address]] [other method of requesting reinstatement and
corresponding contact information designated by the creditor, such
as by telephone].
We will complete an investigation within 30 days of receiving
your request. If no reason for [suspending your credit privileges]
[reducing your credit limit] is found, we will restore your credit
privileges.
If you ask us again to reinstate your account, we may charge you
fees for credit information and property valuation reports to
investigate your request.
G-23(A) Home-equity Notice of Action Taken Model Clauses (Sec.
226.9(j)(1))
(a) Action Based on a Significant Decline in the Property Value
As of [month/day/year], your [line of credit has been suspended]
[credit limit has been reduced] to [new credit limit] because the
value of the property securing your loan has declined significantly.
The value of your property as of [month/day/year] has declined to
[property value obtained].
The property valuation method used to obtain your updated
property value was [property valuation type, such as a tax record,
automated valuation model, appraisal]. You have a right to receive a
copy of information supporting this property value. You may send
your request to the following [mail/e-mail address or telephone
number:].
(b) Action Based on a Material Change in the Consumer's Financial
Circumstances
As of [date], [your line of credit has been suspended] [credit
limit has been reduced] because your financial circumstances have
materially changed. To review your financial circumstances, we
relied on [information about your income] [credit report
information] [other].
(c) Action Taken Based on the Consumer's Default of a Material
Obligation
As of [month/day/year], [your line of credit has been suspended]
[credit limit has been reduced] because you defaulted on your
obligation under your HELOC agreement to [material obligation].
You have the right to ask us to reinstate your credit privileges
at any time [by sending a request for reinstatement in writing to:
[mail/e-mail address]] [other method of requesting reinstatement and
corresponding contact information designated by the creditor, such
as by telephone].
We will complete an investigation within 30 days of receiving
your request. If no reason for [suspending your credit privileges]
[reducing your credit limit] is found, we will restore your credit
privileges.
We do not charge you any fees to investigate the first time you
ask us to reinstate your credit privileges after your [line of
credit has been suspended] [credit limit has been reduced]. If you
ask us to reinstate your account after the first request, we may
charge you a fee for a credit report or property valuation needed to
investigate your request.
G-23(B) Home-equity Notice of Action Taken Model Clauses (Sec.
226.9(j)(2))
As of [month/day/year], your
[line of credit has been terminated. The outstanding balance on
your account is due on [month/day/year]]
[line of credit has been suspended]
[credit limit has been reduced to [new credit limit]].
The specific reason[s] for the action on your account [is][are]
the following:
[your payment is [more than 30 days overdue.]
[Our interest in the property securing your HELOC has been
adversely affected because [you transferred title to the property
without our permission.] [you failed to maintain property insurance
on the property.] [you did not pay required taxes on the property.]]
[We have reason to believe that fraud or material
misrepresentation regarding your account has occurred.]
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BILLING CODE 6210-01-C
11. In Supplement I to Part 226:
A. Under Section 226.2--Definitions and Rules of Construction,
2(a)(6) Business day, paragraph 2 is revised.
B. Section 226.5--General Disclosure Requirements is revised.
C. Under Section 226.5b--Requirements for Home-equity Plans:
i. Paragraph 1 is republished; paragraph 2 is revised; paragraphs 3
and 4 are removed; and paragraphs 5 and 6 are redesignated as
paragraphs 3 and 4, respectively.
ii. 5b(a) Form of disclosures and 5b(b) Time of disclosures are
removed.
iii. New 5b(a) Home-equity document provided on or with the
application and 5b(b) Home-equity disclosures provided no later than
account opening or three business days after application, whichever is
earlier are added.
iv. 5b(c) Duties of third parties is removed.
v. 5b(d) Content of disclosures is redesignated 5b(c) Content of
disclosures and revised.
vi. 5b(g) Refund of fees is redesignated 5b(d) Refund of fees and
revised.
vii. 5b(e) Brochure is removed.
viii. 5b(h) Imposition of nonrefundable fees is redesignated 5b(e)
Imposition of nonrefundable fees and revised.
ix. Under 5b(f) Limitations on home-equity plans, Paragraph
5b(f)(2)(ii) is revised; new Paragraph 5b(f)(2)(iv) is added; and
Paragraphs 5b(f)(3), 5b(f)(3)(i), 5b(f)(3)(iv), 5b(f)(3)(v) and
5b(f)(3)(vi) are revised.
x. New 5b(g) Reinstatement of Credit Privileges is added.
D. Under Section 226.6--Account-opening Disclosures, 6(a) Rules
affecting home-equity plans is revised.
E. Under Section 226.7--Periodic Statement, 7(a) Rules affecting
home-equity plans is revised.
F. Under Section 226.9--Subsequent Disclosure Requirements, 9(c)
Change in terms, 9(c)(1) Rules affecting home-equity plans is revised;
9(g) Increase in rates due to delinquency or default or as a penalty,
the heading is revised; and new 9(i) Increase in rates due to
delinquency or default or as a penalty--rules affecting home-equity
plans and (9)(j) Notices of action taken for home-equity plans are
added.
G. Section 226.14--Determination of Annual Percentage Rate is
revised.
H. Appendix F--Optional Annual Percentage Rate Computations for
Creditors Offering Open-end Plans Subject to the Requirements of Sec.
226.5b is removed and reserved.
I. Under Appendices G and H--Open-end and Closed-end Model Forms
and Clauses, paragraph 1 is revised.
J. Under Appendix G--Open-end Model Forms and Clauses, paragraphs
1, 2, and 3 are revised and new paragraphs 12, 13, 14, and 15 are
added.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Sec. 226.2--Definitions and Rules of Construction.
2(a) Definitions.
* * * * *
2(a)(6) Business day.
* * * * *
2. Rule for rescission and disclosures for certain mortgage
[rtrif]and home-equity line of credit[ltrif] transactions. A more
precise rule for what is a business day (all calendar days except
Sundays and the federal legal holidays specified in 5 U.S.C. 6103(a))
applies when the right of rescission or the receipt of disclosures for
certain dwelling-secured mortgage transactions [rtrif]for purposes
of[ltrif] [under] Sec. Sec. [rtrif]226.5b(e), 226.9(j)(2),[ltrif]
226.19(a)(1)(ii), 226.19(a)(2), or 226.31(c) is involved. Four federal
legal holidays are identified in 5 U.S.C. 6103(a) by a specific date:
New Year's Day, January 1; Independence Day, July 4; Veterans Day,
November 11; and Christmas Day, December 25. When one of these holidays
(July 4, for example) falls on a Saturday, federal offices and other
entities might observe the holiday on the preceding Friday (July 3). In
cases where the more precise rule applies, the observed holiday (in the
example, July 3) is a business day.
* * * * *
Subpart B--Open-end Credit
Sec. 226.5--General Disclosure Requirements
[rtrif]1. Guidance on compliance with rules for open-end (not home-
secured) credit versus rules for home-equity
[[Page 43576]]
plans. In some cases creditors offering open-end credit plans secured
by residential property may not know whether the property is, or
remains, the consumer's principal residence, second or vacation home,
or rental or investment property. If the property is the consumer's
principal residence or a second or vacation home (and not rental
property), the credit plan is subject to Sec. 226.5b and the
associated rules for home-equity plans elsewhere in Regulation Z such
as those in Sec. Sec. 226.6(a), 226.7(a), 226.9(c)(1), 226.9(i), and
226.9(j). If the property is the consumer's rental or investment
property, and the credit plan is used primarily for personal, family,
or household purposes, the credit plan is subject to the rules for
open-end (not home-secured) credit set forth in Sec. Sec. 226.6(b),
226.7(b), 226.9(c)(2), and 226.9(g). (In this case, if the credit plan
is accessible by credit card, the creditor must also comply with the
rules applicable to open-end credit card plans under Sec. 226.5a.) If
the credit plan is used primarily for business purposes rather than
personal, family, or household purposes, the credit plan is not subject
to Regulation Z. (See Sec. 226.3(a) and the related staff commentary
provisions for guidance in determining whether credit is considered to
be used primarily for business purposes.) In determining which rules
apply, creditors may rely on the following guidance:
i. For existing credit plans, if the creditor does not know whether
the property is or remains the consumer's principal residence or second
or vacation home, and the creditor has been complying with the rules
under Sec. 226.5b and associated other rules, the creditor may
continue to do so.
ii. Alternatively, the creditor in these circumstances may
investigate the use of the property. If the creditor ascertains that
the property is not used as the consumer's principal residence or as a
second or vacation home, but the credit plan is nonetheless used for
personal, family, or household purposes, the creditor may begin
complying with the rules applicable to open-end (not home-secured)
credit under Regulation Z. In this case, if the credit plan is
accessible by credit card, the creditor must comply with the rules for
open-end (not home-secured) credit card plans under Sec. 226.5a and
associated sections in the regulation, in addition to the rules
applicable to open-end credit generally.
iii. When a new open-end credit plan is opened, the creditor may
attempt to ascertain the status of the property securing the plan, and
comply accordingly with the appropriate set of rules. However, if the
creditor is not able, or chooses not, to determine the status of the
property, the creditor may comply with the rules for home-equity plans
under Sec. 226.5b and associated sections of the regulation.[ltrif]
5(a) Form of disclosures.
5(a)(1) General.
1. Clear and conspicuous standard. The ``clear and conspicuous''
standard generally requires that disclosures be in a reasonably
understandable form. Disclosures for credit card applications and
solicitations under Sec. 226.5a, [rtrif]disclosures for home-equity
plans required three business days after application under Sec.
226.5b(b),[ltrif] highlighted account-opening disclosures under
[rtrif]Sec. 226.6(a)(1) and[ltrif] Sec. 226.6(b)(1), highlighted
disclosure on checks that access a credit card under Sec. 226.9(b)(3),
highlighted change-in-terms disclosures under [rtrif]Sec.
226.9(c)(1)(iii)(B) and[ltrif] Sec. 226.9(c)(2)(iii)(B), and
highlighted disclosures when a rate is increased due to delinquency,
default or [rtrif]otherwise as[ltrif] [for] a penalty under Sec.
226.9(g)(3)(ii) [rtrif]and Sec. 226.9(i)(4)[ltrif] must also be
readily noticeable to the consumer [rtrif]to meet the ``clear and
conspicuous'' standard[ltrif].
2. Clear and conspicuous--reasonably understandable form. Except
where otherwise provided, the reasonably understandable form 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. For
disclosures that are given orally, the standard requires that they be
given at a speed and volume sufficient for a consumer to hear and
comprehend them. (See comment 5(b)(1)(ii)-1.) Except where otherwise
provided, the standard does not prohibit:
i. Pluralizing required terminology (``finance charge'' and
``annual percentage rate'').
ii. Adding to the required disclosures such items as contractual
provisions, explanations of contract terms, state disclosures, and
translations.
iii. Sending promotional material with the required disclosures.
iv. Using commonly accepted or readily understandable abbreviations
(such as ``mo.'' for ``month'' or ``Tx.'' for ``Texas'') in making any
required disclosures.
v. 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.
3. Clear and conspicuous--readily noticeable standard. To meet the
readily noticeable standard, disclosures for credit card applications
and solicitations under Sec. 226.5a, [rtrif]disclosures for home-
equity plans required three business days after application under Sec.
226.5b(b),[ltrif] highlighted account-opening disclosures under
[rtrif]Sec. 226.6(a)(1) and[ltrif] Sec. 226.6(b)(1), highlighted
disclosures on checks that access a credit card account under Sec.
226.9(b)(3), highlighted change-in-terms disclosures under [rtrif]Sec.
226.9(c)(1)(iii)(B) and[ltrif] Sec. 226.9(c)(2)(iii)(B), and
highlighted disclosures when a rate is increased due to delinquency,
default or penalty pricing under Sec. 226.9(g)(3)(ii) [rtrif]and Sec.
226.9(i)(4)[ltrif] must be given in a minimum of 10-point font. (See
special rule for font size requirements for the annual percentage rate
for purchases [rtrif]in an open-end (not home-secured) plan[ltrif]
under Sec. Sec. 226.5a(b)(1) and 226.6(b)(2)(i)[rtrif], and for the
annual percentage rate in a home-equity plan under Sec. Sec.
226.5b(c)(10) and 226.6(a)(2)(vi)[ltrif].)
4. Integrated document. The creditor may make both the account-
opening disclosures (Sec. 226.6) and the periodic-statement
disclosures (Sec. 226.7) on more than one page, and use both the front
and the reverse sides, except where otherwise indicated, so long as the
pages constitute an integrated document. An integrated document would
not include disclosure pages provided to the consumer at different
times or disclosures interspersed on the same page with promotional
material. An integrated document would include, for example:
i. Multiple pages provided in the same envelope that cover related
material and are folded together, numbered consecutively, or clearly
labeled to show that they relate to one another; or
ii. A brochure that contains disclosures and explanatory material
about a range of services the creditor offers, such as credit, checking
account, and electronic fund transfer features.
5. Disclosures covered. Disclosures that must meet the ``clear and
conspicuous'' standard include all required communications under this
subpart. For example, disclosures made by a person other than the card
issuer, such as disclosures of finance charges imposed at the time of
honoring a consumer's credit card under Sec. 226.9(d), and notices,
such as the correction notice required to be sent to the consumer under
Sec. 226.13(e), must also be clear and conspicuous.
Paragraph 5(a)(1)(ii)(A).
[[Page 43577]]
1. Electronic disclosures. Disclosures that need not be provided in
writing under Sec. 226.5(a)(1)(ii)(A) may be provided in writing,
orally, or in electronic form. If the consumer requests the service in
electronic form, such as on the creditor's Web site, the specified
disclosures may be provided in electronic form without regard to the
consumer consent or other provisions of the Electronic Signatures in
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).
Paragraph 5(a)(1)(iii).
1. Disclosures not subject to E-Sign Act. See the commentary to
Sec. 226.5(a)(1)(ii)(A) regarding disclosures (in addition to those
specified under Sec. 226.5(a)(1)(iii)) that may be provided in
electronic form without regard to the consumer consent or other
provisions of the E-Sign Act.
5(a)(2) Terminology.
[1. When disclosures must be more conspicuous. For home-equity
plans subject to Sec. 226.5b, the terms finance charge and annual
percentage rate, when required to be used with a number, must be
disclosed more conspicuously than other required disclosures, except in
the cases provided in Sec. 226.5(a)(2)(ii). At the creditor's option,
finance charge and annual percentage rate may also be disclosed more
conspicuously than the other required disclosures even when the
regulation does not so require. The following examples illustrate these
rules:
i. In disclosing the annual percentage rate as required by Sec.
226.6(a)(1)(ii), the term annual percentage rate is subject to the more
conspicuous rule.
ii. In disclosing the amount of the finance charge, required by
Sec. 226.7(a)(6)(i), the term finance charge is subject to the more
conspicuous rule.
iii. Although neither finance charge nor annual percentage rate
need be emphasized when used as part of general informational material
or in textual descriptions of other terms, emphasis is permissible in
such cases. For example, when the terms appear as part of the
explanations required under Sec. 226.6(a)(1)(iii) and (a)(1)(iv), they
may be equally conspicuous as the disclosures required under Sec. Sec.
226.6(a)(1)(ii) and 226.7(a)(7).
2. Making disclosures more conspicuous. In disclosing the terms
finance charge and annual percentage rate more conspicuously for home-
equity plans subject to Sec. 226.5b, only the words finance charge and
annual percentage rate should be accentuated. For example, if the term
total finance charge is used, only finance charge should be emphasized.
The disclosures may be made more conspicuous by, for example:
i. Capitalizing the words when other disclosures are printed in
lower case.
ii. Putting them in bold print or a contrasting color.
iii. Underlining them.
iv. Setting them off with asterisks.
v. Printing them in larger type.
3. Disclosure of figures--exception to more conspicuous rule. For
home-equity plans subject to Sec. 226.5b, the terms annual percentage
rate and finance charge need not be more conspicuous than figures
(including, for example, numbers, percentages, and dollar signs).]
[rtrif]1.[ltrif][4.] Consistent terminology. Language used in
disclosures required in this subpart must be close enough in meaning to
enable the consumer to relate the different disclosures; however, the
language need not be identical.
5(b) Time of disclosures.
5(b)(1) Account-opening disclosures.
5(b)(1)(i) General rule.
1. Disclosure before the first transaction. When disclosures must
be furnished ``before the first transaction,'' account-opening
disclosures must be delivered before the consumer becomes obligated on
the plan. Examples include:
i. Purchases. The consumer makes the first purchase, such as when a
consumer opens a credit plan and makes purchases contemporaneously at a
retail store, except when the consumer places a telephone call to make
the purchase and opens the plan contemporaneously (see commentary to
Sec. 226.5(b)(1)(iii) below).
ii. Advances. The consumer receives the first advance. If the
consumer receives a cash advance check at the same time the account-
opening disclosures are provided, disclosures are still timely if the
consumer can, after receiving the disclosures, return the cash advance
check to the creditor without obligation (for example, without paying
finance charges).
2. Reactivation of suspended account. If an account is temporarily
suspended (for example, [rtrif]for open-end (not home-secured)
plans,[ltrif] because the consumer has exceeded a credit limit, or
because a credit card is reported lost or stolen) and then is
reactivated, no new account-opening disclosures are required.
3. Reopening closed account. If an account has been closed (for
example, [rtrif]for open-end (not home-secured) plans,[ltrif] due to
inactivity, cancellation, or expiration) and then is reopened, new
account-opening disclosures are required. No new account-opening
disclosures are required, however, when the account is closed merely to
assign it a new number (for example, when a credit card is reported
lost or stolen) and the ``new'' account then continues on the same
terms.
4. Converting closed-end to open-end credit. If a closed-end credit
transaction is converted to an open-end credit account under a written
agreement with the consumer, account-opening disclosures under Sec.
226.6 must be given before the consumer becomes obligated on the open-
end credit plan. (See the commentary to Sec. 226.17 on converting
open-end credit to closed-end credit.)
5. Balance transfers. A creditor that solicits the transfer by a
consumer of outstanding balances from an existing account to a new
open-end plan must furnish the disclosures required by Sec. 226.6 so
that the consumer has an opportunity, after receiving the disclosures,
to contact the creditor before the balance is transferred and decline
the transfer. For example, assume a consumer responds to a card
issuer's solicitation for a credit card account subject to Sec. 226.5a
that offers a range of balance transfer annual percentage rates, based
on the consumer's creditworthiness. If the creditor opens an account
for the consumer, the creditor would comply with the timing rules of
this section by providing the consumer with the annual percentage rate
(along with the fees and other required disclosures) that would apply
to the balance transfer in time for the consumer to contact the
creditor and withdraw the request. A creditor that permits consumers to
withdraw the request by telephone has met this timing standard if the
creditor does not affect the balance transfer until 10 days after the
creditor has sent account-opening disclosures to the consumer, assuming
the consumer has not contacted the creditor to withdraw the request.
Card issuers that are subject to the requirements of Sec. 226.5a may
establish procedures that comply with both Sec. Sec. 226.5a and 226.6
in a single disclosure statement.
5(b)(1)(ii) Charges imposed as part of an open-end [(not home-
secured)] plan.
1. Disclosing charges before the fee is imposed. Creditors may
disclose charges imposed as part of an open-end [(not home-secured)]
plan orally or in writing at any time before a consumer agrees to pay
the fee or becomes obligated for the charge, unless the charge is
specified under [rtrif]Sec. 226.6(a)(2) or[ltrif] Sec. 226.6(b)(2).
(Charges imposed as part of an open-end [(not home-secured plan)] that
are not specified under [rtrif]Sec. 226.6(a)(2) or[ltrif] Sec.
226.6(b)(2) may alternatively be disclosed in electronic form; see the
commentary to Sec. 226.5(a)(1)(ii)(A).)
[[Page 43578]]
Creditors must provide such disclosures at a time and in a manner
[rtrif]such[ltrif] that a consumer would be likely to notice them. For
example, if a consumer telephones a [rtrif]creditor[ltrif] [card
issuer] to discuss a particular service, a creditor would meet the
standard if the creditor clearly and conspicuously discloses the fee
associated with the service that is the topic of the telephone call
orally to the consumer. Similarly, a creditor providing marketing
materials in writing to a consumer about a particular service would
meet the standard if the creditor provided a clear and conspicuous
written disclosure of the fee for that service in those same materials.
A creditor that provides written materials to a consumer about a
particular service but provides a fee disclosure for another service
not promoted in such materials would not meet the standard. For
example, if a creditor provided marketing materials promoting payment
by Internet, but included the fee for a replacement card on such
materials with no explanation, the creditor would not be disclosing the
fee at a time and in a manner that the consumer would be likely to
notice the fee.
[rtrif]2. Relationship to rule prohibiting changes in home-equity
plans. Creditors offering home-equity plans subject to Sec. 226.5b are
subject to the rules under Sec. 226.5b(f) restricting changes in
terms. Therefore, even though the rule in Sec. 226.5(b)(1)(ii) permits
certain charges to be disclosed at a time later than account opening, a
home-equity plan creditor would not be permitted to impose a charge for
a feature or service previously not subject to a charge, or to increase
a charge for a feature or service previously subject to a lower charge,
even if the absence of a charge, or the lower charge, had not been
previously disclosed to the consumer.[ltrif]
5(b)(1)(iii) Telephone purchases.
1. Return policies. In order for creditors to provide disclosures
in accordance with the timing requirements of this paragraph, consumers
must be permitted to return merchandise purchased at the time the plan
was established without paying mailing or return-shipment costs.
Creditors may impose costs to return subsequent purchases of
merchandise under the plan, or to return merchandise purchased by other
means such as a credit card issued by another creditor. A reasonable
return policy would be of sufficient duration that the consumer is
likely to have received the disclosures and had sufficient time to make
a decision about the financing plan before his or her right to return
the goods expires. Return policies need not provide a right to return
goods if the consumer consumes or damages the goods, or for installed
appliances or fixtures, provided there is a reasonable repair or
replacement policy to cover defective goods or installations. If the
consumer chooses to reject the financing plan, creditors comply with
the requirements of this paragraph by permitting the consumer to pay
for the goods with another reasonable form of payment acceptable to the
merchant and keep the goods although the creditor cannot require the
consumer to do so.
5(b)(1)(iv) Membership fees.
1. Membership fees. See Sec. 226.5a(b)(2) and related commentary
for guidance on fees for issuance or availability of a credit or charge
card.
2. Rejecting the plan. If a consumer has paid or promised to pay a
membership fee including an application fee excludable from the finance
charge under Sec. 226.4(c)(1) before receiving account-opening
disclosures, the consumer may, after receiving the disclosures, reject
the plan and not be obligated for the membership fee, application fee,
or any other fee or charge. A consumer who has received the disclosures
and uses the account, or makes a payment on the account after receiving
a billing statement, is deemed not to have rejected the plan.
3. Using the account. A consumer uses an account by obtaining an
extension of credit after receiving the account-opening disclosures,
such as by making a purchase or obtaining an advance. A consumer does
not ``use'' the account by activating the account. A consumer also does
not ``use'' the account when the creditor assesses fees on the account
(such as start-up fees or fees associated with credit insurance or debt
cancellation or suspension programs agreed to as a part of the
application and before the consumer receives account-opening
disclosures). For example, the consumer does not ``use'' the account
when a creditor sends a billing statement with start-up fees, there is
no other activity on the account, the consumer does not pay the fees,
and the creditor subsequently assesses a late fee or interest on the
unpaid fee balances. A consumer also does not ``use'' the account by
paying an application fee excludable from the finance charge under
Sec. 226.4(c)(1) prior to receiving the account-opening disclosures.
4. Home-equity plans. Creditors offering home-equity plans subject
to the requirements of Sec. 226.5b are subject to the requirements of
Sec. 226.5b[(g)][rtrif](d) and (e)[ltrif] regarding the collection
[rtrif]and refundability[ltrif] of fees.
5(b)(2) Periodic statements.
Paragraph 5(b)(2)(i).
1. Periodic statements not required. Periodic statements need not
be sent in the following cases:
i. If the creditor adjusts an account balance so that at the end of
the cycle the balance is less than $1--so long as no finance charge has
been imposed on the account for that cycle.
ii. If a statement was returned as undeliverable. If a new address
is provided, however, within a reasonable time before the creditor must
send a statement, the creditor must resume sending statements.
Receiving the address at least 20 days before the end of a cycle would
be a reasonable amount of time to prepare the statement for that cycle.
For example, if an address is received 22 days before the end of the
June cycle, the creditor must send the periodic statement for the June
cycle. (See Sec. 226.13(a)(7).)
2. Termination of draw privileges. When a consumer's ability to
draw on an open-end account is terminated without being converted to
closed-end credit under a written agreement, the creditor must continue
to provide periodic statements to those consumers entitled to receive
them under Sec. 226.5(b)(2)(i), for example, when the draw period of
an open-end credit plan ends and consumers are paying off outstanding
balances according to the account agreement or under the terms of a
workout agreement that is not converted to a closed-end transaction. In
addition, creditors must continue to follow all of the other open-end
credit requirements and procedures in subpart B.
3. Uncollectible accounts. An account is deemed uncollectible for
purposes of Sec. 226.5(b)(2)(i) when a creditor has ceased collection
efforts, either directly or through a third party.
4. Instituting collection proceedings. Creditors institute a
delinquency collection proceeding by filing a court action or
initiating an adjudicatory process with a third party. Assigning a debt
to a debt collector or other third party would not constitute
instituting a collection proceeding.
Paragraph 5(b)(2)(ii).
1. 14-day rule. The 14-day rule for mailing or delivering periodic
statements does not apply if charges (for example, transaction or
activity charges) are imposed regardless of the timing of a periodic
statement. The 14-day rule does apply, for example:
i. If current debits retroactively become subject to finance
charges when the balance is not paid in full by a specified date.
ii. For open-end plans not subject to 12 CFR part 227, subpart C;
12 CFR part
[[Page 43579]]
535, subpart C; or 12 CFR part 706, subpart C, if charges other than
finance charges will accrue when the consumer does not make timely
payments (for example, late payment charges or charges for exceeding a
credit limit). (For consumer credit card accounts subject to 12 CFR
part 227, subpart C; 12 CFR part 535, subpart C; or 12 CFR part 706,
subpart C, see 12 CFR 227.22, 12 CFR 535.22, or 12 CFR 706.22, as
applicable.)
2. Deferred interest transactions. See comment 7(b)-1.iv.
Paragraph 5(b)(2)(iii).
1. Computer malfunction. The exceptions identified in Sec.
226.5(b)(2)(iii) of this section do not extend to the failure to
provide a periodic statement because of computer malfunction.
2. Calling for periodic statements. When the consumer initiates a
request, the creditor may permit, but may not require, consumers to
pick up their periodic statements. If the consumer wishes to pick up
the statement and the plan has a grace period, the statement must be
made available in accordance with the 14-day rule.
5(c) Basis of disclosures and use of estimates.
1. Legal obligation. The disclosures should reflect the credit
terms to which the parties are legally bound at the time of giving the
disclosures.
i. The legal obligation is determined by applicable state or other
law.
ii. The fact that a term or contract may later be deemed
unenforceable by a court on the basis of equity or other grounds does
not, by itself, mean that disclosures based on that term or contract
did not reflect the legal obligation.
iii. The legal obligation normally is presumed to be contained in
the contract that evidences the agreement. But this may be rebutted if
another agreement between the parties legally modifies that contract.
2. Estimates--obtaining information. Disclosures may be estimated
when the exact information is unknown at the time disclosures are made.
Information is unknown if it is not reasonably available to the
creditor at the time disclosures are made. The reasonably available
standard requires that the creditor, acting in good faith, exercise due
diligence in obtaining information. In using estimates, the creditor is
not required to disclose the basis for the estimated figures, but may
include such explanations as additional information. The creditor
normally may rely on the representations of other parties in obtaining
information. For example, the creditor might look to insurance
companies for the cost of insurance.
3. Estimates--redisclosure. If the creditor makes estimated
disclosures, redisclosure is not required for that consumer, even
though more accurate information becomes available before the first
transaction. For example, in an open-end plan to be secured by real
estate, the creditor may estimate the appraisal fees to be charged;
such an estimate might reasonably be based on the prevailing market
rates for similar appraisals. If the exact appraisal fee is
determinable after the estimate is furnished but before the consumer
receives the first advance under the plan, no new disclosure is
necessary.
5(d) Multiple creditors; multiple consumers.
1. Multiple creditors. Under Sec. 226.5(d):
i. Creditors must choose which [rtrif]creditor[ltrif][of them] will
make the disclosures.
ii. A single, complete set of disclosures must be provided, rather
than partial disclosures from several creditors.
iii. All disclosures for the open-end credit plan must be given,
even if the disclosing creditor would not otherwise have been obligated
to make a particular disclosure.
2. Multiple consumers. Disclosures may be made to either obligor on
a joint account. Disclosure responsibilities are not satisfied by
giving disclosures to only a surety or guarantor for a principal
obligor or to an authorized user. In rescindable transactions, however,
separate disclosures must be given to each consumer who has the right
to rescind under Sec. 226.15.
3. Card issuer and person extending credit not the same person.
Section 127(c)(4)(D) of the Truth in Lending Act (15 U.S.C.
1637(c)(4)(D)) contains rules pertaining to charge card issuers with
plans that allow access to an open-end credit plan that is maintained
by a person other than the charge card issuer. These rules are not
implemented in Regulation Z (although they were formerly implemented in
Sec. 226.5a(f)). However, the statutory provisions remain in effect
and may be used by charge card issuers with plans meeting the specified
criteria.
5(e) Effect of subsequent events.
1. Events causing inaccuracies. Inaccuracies in disclosures are not
violations if attributable to events occurring after disclosures are
made. For example, when the consumer fails to fulfill a prior
commitment to keep the collateral insured and the creditor then
provides the coverage and charges the consumer for it, such a change
does not make the original disclosures inaccurate. The creditor may,
however, be required to provide a new disclosure(s) under Sec.
226.9(c).
2. Use of inserts. When changes in a creditor's plan affect
required disclosures, the creditor may use inserts with outdated
disclosure forms. Any insert:
i. Should clearly refer to the disclosure provision it replaces.
ii. Need not be physically attached or affixed to the basic
disclosure statement.
iii. May be used only until the supply of outdated forms is
exhausted.
* * * * *
Sec. 226.5b--Requirements for Home-equity Plans.
1. Coverage. This section applies to all open-end credit plans
secured by the consumer's ``dwelling,'' as defined in Sec.
226.2(a)(19), and is not limited to plans secured by the consumer's
principal dwelling. (See the commentary to Sec. 226.3(a), which
discusses whether transactions are consumer or business-purpose credit,
for guidance on whether a home-equity plan is subject to Regulation Z.)
2. Changes to home-equity plans [entered into on or after November
7, 1989]. Section 226.9(c) applies if, by written agreement under Sec.
226.5b(f)(3)(iii), a creditor changes the terms of a home-equity plan
[--entered into on or after November 7, 1989--] at or before its
scheduled expiration, for example, by renewing a plan on different
terms. A new plan results, however, if the plan is renewed (with or
without changes to the terms) after the scheduled expiration. The new
plan is subject to all open-end credit rules, including Sec. Sec.
226.5b, 226.6, and 226.15.
[3. Transition rules and renewals of preexisting plans. The
requirements of this section do not apply to home-equity plans entered
into before November 7, 1989. The requirements of this section also do
not apply if the original consumer, on or after November 7, 1989,
renews a plan entered into prior to that date (with or without changes
to the terms). If, on or after November 7, 1989, a security interest in
the consumer's dwelling is added to a line of credit entered into
before that date, the substantive restrictions of this section apply
for the remainder of the plan, but no new disclosures are required
under this section.
4. Disclosure of repayment phase--applicability of requirements.
Some plans provide in the initial agreement for a period during which
no further draws may be taken and repayment of the amount borrowed is
made. All of the applicable disclosures in this section must be given
for the repayment phase. Thus, for example, a creditor must
[[Page 43580]]
provide payment information about the repayment phase as well as about
the draw period, as required by Sec. 226.5b(d)(5). If the rate that
will apply during the repayment phase is fixed at a known amount, the
creditor must provide an annual percentage rate under Sec.
226.5b(d)(6) for that phase. If, however, a creditor uses an index to
determine the rate that will apply at the time of conversion to the
repayment phase--even if the rate will thereafter be fixed--the
creditor must provide the information in Sec. 226.5b(d)(12), as
applicable.]
[rtrif]3.[ltrif][5.] Payment terms--applicability of closed-end
provisions and substantive rules. All payment terms that are provided
for in the initial agreement are subject to the requirements of subpart
B and not subpart C of the regulation. Payment terms that are
subsequently added to the agreement may be subject to subpart B or to
subpart C, depending on the circumstances. The following examples apply
these general rules to different situations:
(i) If the initial agreement provides for a repayment phase or for
other payment terms such as options permitting conversion of part or
all of the balance to a fixed rate during the draw period, these terms
must be disclosed pursuant to Sec. Sec. 226.5b and 226.6, and not
under subpart C. Furthermore, the creditor must continue to provide
periodic statements under Sec. 226.7 and comply with other provisions
of subpart B (such as the substantive requirements of Sec. 226.5b(f))
throughout the plan, including the repayment phase.
(ii) If the consumer and the creditor enter into an agreement
during the draw period to repay all or part of the principal balance on
different terms (for example, with a fixed rate of interest) and the
amount of available credit will be replenished as the principal balance
is repaid, the creditor must continue to comply with subpart B. For
example, the creditor must continue to provide periodic statements and
comply with the substantive requirements of Sec. 226.5b(f) throughout
the plan.
(iii) If the consumer and creditor enter into an agreement during
the draw period to repay all or part of the principal balance and the
amount of available credit will not be replenished as the principal
balance is repaid, the creditor must give closed-end credit disclosures
pursuant to subpart C for that new agreement. In such cases, subpart B,
including the substantive rules, does not apply to the closed-end
credit transaction, although it will continue to apply to any remaining
open-end credit available under the plan.
[rtrif]4.[ltrif][6.] Spreader clause. When a creditor holds a
mortgage or deed of trust on the consumer's dwelling and that mortgage
or deed of trust contains a spreader clause (also known as a dragnet or
cross-collateralization clause), subsequent occurrences such as the
opening of an open-end plan are subject to the rules applicable to
home-equity plans to the same degree as if a security interest were
taken directly to secure the plan, unless the creditor effectively
waives its security interest under the spreader clause with respect to
the subsequent open-end credit extensions.
[rtrif]5b(a) Home-equity Document Provided on or with the
Application.
5b(a)(1) In General.
1. Mail and telephone applications. If an application is sent
through the mail, the document required by Sec. 226.5b(a) must
accompany the application. If an application is taken over the
telephone, the document must be delivered or mailed not later than
account opening or three business days following receipt of a
consumer's application by the creditor, whichever is earlier. If an
application is mailed to the consumer following a telephone request,
however, the document must be sent along with the application.
2. General purpose applications. The document required by Sec.
226.5b(a) need not be provided when a general purpose application is
given to a consumer unless (1) the application or materials
accompanying it indicate that it can be used to apply for a home-equity
plan or (2) the application is provided in response to a consumer's
specific inquiry about a home-equity plan. On the other hand, if a
general purpose application is provided in response to a consumer's
specific inquiry only about credit other than a home-equity plan, the
document need not be provided even if the application indicates it can
be used for a home-equity plan, unless it is accompanied by promotional
information about home-equity plans.
3. Publicly-available applications. Some creditors make
applications for home-equity plans, such as take-ones, available
without the need for a consumer to request them. These applications
must be accompanied by the document required by Sec. 226.5b(a), such
as by attaching the document to the application form.
4. Response cards. A creditor may solicit consumers for its home-
equity plan by mailing a response card which the consumer returns to
the creditor to indicate interest in the plan. If the only action taken
by the creditor upon receipt of the response card is to send the
consumer an application form or to telephone the consumer to discuss
the plan, the creditor need not send the document required by Sec.
226.5b(a) with the response card. See comment 5b(a)(1)-1 discussing
mail and telephone applications.
5. Denial or withdrawal of application. Section 226.5b(a)(1)(ii)
provides that for telephone applications and applications received
through an intermediary agent or broker, creditors must deliver or mail
the document required by Sec. 226.5b(a)(1)(i) to the consumer not
later than account opening or three business days following receipt of
a consumer's application by the creditor, whichever is earlier. If the
creditor determines within that three-day period that an application
will not be approved, the creditor need not provide the document.
Similarly, if the consumer withdraws the application within this three-
day period, the creditor need not provide the document.
6. Prominent location. i. When document not given in electronic
form. The document required by Sec. 226.5b(a)(1) must be prominently
located on or with the application. The document is deemed to be
prominently located, for example, if the document is on the same page
as an application. If the document appears elsewhere, it is deemed to
be prominently located if the application contains a clear and
conspicuous reference to the location of the document and indicates
that the document provides information about home-equity lines of
credit.
ii. Form of electronic document provided on or with electronic
applications. Generally, creditors must provide the document required
by Sec. 226.5b(a)(1) in a prominent location on or with a blank
application that is made available to the consumer in electronic form,
such as on a creditor's Internet Web site. (See comment 5b(a)(2)-1)
Creditors have flexibility in satisfying this requirement. Methods
creditors could use to satisfy the requirement include, but are not
limited to, the following examples:
A. The document could automatically appear on the screen when the
application appears;
B. The document could be located on the same Web page as the
application (whether or not they appear on the initial screen), if the
application contains a clear and conspicuous reference to the location
of the document and indicates the document provides information about
home-equity lines of credit.
C. Creditors could provide a link to the electronic document on or
with the
[[Page 43581]]
application as long as consumers cannot bypass the document before
submitting the application. The link would take the consumer to the
document, but the consumer need not be required to scroll completely
through the document; or
D. The document could be located on the same web page as the
application without necessarily appearing on the initial screen,
immediately preceding the button that the consumer will click to submit
the application.
Whatever method is used, a creditor need not confirm that the
consumer has read the document.
7. Intermediary agent or broker. In determining whether or not an
application involves an intermediary agent or broker as discussed in
Sec. 226.5b(a)(1)(ii), creditors should consult the provisions in
comment 19(d)(3)-3.
8. Definition of ``business day''. The general definition of
``business day'' in Sec. 226.2(a)(6)--a day on which the creditor's
offices are open to the public for carrying on substantially all of its
business functions--is used for purposes of Sec. 226.5b(a)(1)(ii). See
comment 2(a)(6)-1.
9. As published. The document required by Sec. 226.5b(a)(1) must
be provided as published by the Board. A creditor may not revise the
document required by Sec. 226.5b(a)(1).
5b(a)(2) Electronic Disclosures.
1. When electronic disclosure must be given. Whether the document
required by Sec. 226.5b(a)(1) must be in electronic form depends upon
the following:
i. If a consumer accesses a home-equity credit line application
electronically (other than as described under ii. below), such as
online at a home computer, the creditor must provide the disclosure
required by Sec. 226.5b(a)(1) in electronic form (such as with the
application form on its Web site) in order to meet the requirement to
provide the disclosure in a timely manner on or with the application.
If the creditor instead mailed a paper disclosure to the consumer, this
requirement would not be met.
ii. In contrast, if a consumer is physically present in the
creditor's office, and accesses a home-equity credit line application
electronically, such as via a terminal or kiosk (or if the consumer
uses a terminal or kiosk located on the premises of an affiliate or
third party that has arranged with the creditor to provide applications
to consumers), the creditor may provide the disclosure in either
electronic or paper form, provided the creditor complies with the
timing, delivery, and retainability requirements of the regulation.
5b(a)(3) Duties of Third Parties.
1. Duties of third parties. The duties under Sec. 226.5b(a)(3) are
those of the third party; the creditor is not responsible for ensuring
that a third party complies with those obligations.
2. Effect of third party delivery of document required by Sec.
226.5b(a)(1). If a creditor determines that a third party has provided
a consumer with the document required by Sec. 226.5b(a)(1), the
creditor need not give the consumer a second copy of the document.
3. Telephone applications taken by third party. For telephone
applications taken by a third party, the third party is not required to
provide the document required by Sec. 226.5b(a)(1). The document
required by Sec. 226.5b(a)(1) must be provided by the creditor not
later than account opening or three business days following receipt of
the consumer's application by the creditor, whichever is earlier, along
with the disclosures required by Sec. 226.5b(b).
5b(b) Home-Equity Disclosures Provided No Later Than Account Opening or
Three Business Days After Application, Whichever is Earlier
5b(b)(1) Timing.
1. Denial or withdrawal of application. Section 226.5b(b)(1)
provides that creditors must deliver or mail disclosures required by
Sec. 226.5b(b) to the consumer not later than account opening or three
business days following receipt of a consumer's application by the
creditor, whichever is earlier. If the creditor determines within the
three-day period that an application will not be approved, the creditor
need not provide the disclosures. Similarly, if the consumer withdraws
the application within this three-day period, the creditor need not
provide the disclosures.
2. Definition of ``business day''. The general definition of
``business day'' in Sec. 226.2(a)(6)--a day on which the creditor's
offices are open to the public for carrying on substantially all of its
business functions--is used for purposes of Sec. 226.5b(b)(1). See
comment 2(a)(6)-1.
5b(b)(2) Form of disclosures; tabular format.
1. Terminology. Section 226.5b(b)(2)(i) generally requires that the
headings, content and format of the tabular disclosures be
substantially similar, but need not be identical, to the applicable
tables in Appendix G-14 to part 226. See Sec. 226.5(a)(2) for
terminology requirements applicable to disclosures provided pursuant to
Sec. 226.5b(b).
2. Other format requirements. See Sec. 226.5b(c)(9) for formatting
requirements applicable to disclosure of certain payment terms in the
table required by Sec. 226.5b(b). See Sec. 226.5b(c)(10)(i)(A)(1) for
formatting requirements applicable to disclosure of variable rates in
the table required by Sec. 226.5b(b). See comments 5b(c)(7)(ii)-1,
5b(c)(9)(ii)-5, 5b(c)(14)-1 and 5b(c)(18)-2 for format requirements
that apply to information that a creditor provides to a consumer upon
request.
3. Highlighting of disclosures. i. In general. See Samples G-14(C),
G-14(D) and G-14(E) for guidance on providing the disclosures described
in Sec. 226.5b(b)(2)(vi) in bold text.
ii. Periodic fees. Section 226.5b(b)(2)(vi)(D) provides that any
periodic fee disclosed pursuant to Sec. 226.5b(c)(12) that is not an
annualized amount must not be disclosed in bold. For example, if a
creditor imposes a $10 monthly maintenance fee for a HELOC account, the
creditor must disclose in the table that there is a $10 monthly
maintenance fee, and that the fee is $120 on an annual basis. In this
example, the $10 fee disclosure would not be disclosed in bold, but the
$120 annualized amount must be disclosed in bold. In addition, if a
creditor must disclose any annual fee in the table, the amount of the
annual fee must be disclosed in bold.
iii. Format requirements under Sec. 226.5b(c)(9). Section
226.5b(b)(2)(vi)(E) provides that if a creditor is required under Sec.
226.5b(c)(9) to provide a disclosure in a format substantially similar
to the format used in any of the applicable tables found in Samples G-
14(C), 14(D) or 14(E), the creditor in making that disclosure must
provide in bold text any terms and phrases that are shown in bold text
with regard to that disclosure in the applicable tables. For example,
Sec. 226.5b(c)(9) provides that a creditor must distinguish payment
terms applicable to the draw period from payment terms applicable to
the repayment period, by using the applicable heading ``Borrowing
Period'' for the draw period and ``Repayment Period'' for the repayment
period in a format substantially similar to the format used in any of
the applicable tables found in Samples G-14(C) and G-14(E). Because the
tables found in Samples G-14(C) and G-14(E) show the heading
``Borrowing Period'' and ``Repayment Period'' in bold text, a creditor
must disclose these headings in bold text. See Sec. 226.5b(c)(9)(i)
and (c)(9)(iii)(D) for other instances in which a creditor may be
required to provide disclosures in a format substantially similar to
the format used in any of the
[[Page 43582]]
applicable tables found in Samples G-14(C), G-14(D) and G-14(E).
iv. Itemized list of fees to open the plan. The total amount of
account-opening fees disclosed under Sec. 226.5b(c)(11) must be
disclosed in bold text. The itemization of those fees also required to
be disclosed under Sec. 226.5b(c)(11) must not be disclosed in bold
text.
4. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 226.5b(b)
disclosures.
5b(b)(3) Disclosures Based on a Percentage.
1. Transaction requirements. Section 226.5b(c)(16) requires a
creditor to disclose in the table required under Sec. 226.5b(b) any
limitations on the number of extensions of credit and the amount of
credit that may be obtained during any time period, as well as any
minimum outstanding balance and minimum draw requirements. If any
amount that must be disclosed under Sec. 226.5b(c)(16) is determined
on the basis of a percentage of another amount, the percentage used and
the identification of the amount against which the percentage is
applied may be disclosed instead of the transaction amount.
[5b(a) Form of Disclosures
5b(a)(1) General.
1. Written disclosures. The disclosures required under this section
must be clear and conspicuous and in writing, but need not be in a form
the consumer can keep. (See the commentary to Sec. 226.6(a)(3) for
special rules when disclosures required under Sec. 226.5b(d) are given
in a retainable form.)
2. Disclosure of annual percentage rate--more conspicuous
requirement. As provided in Sec. 226.5(a)(2), when the term annual
percentage rate is required to be disclosed with a number, it must be
more conspicuous than other required disclosures.
3. Segregation of disclosures. While most of the disclosures must
be grouped together and segregated from all unrelated information, the
creditor is permitted to include information that explains or expands
on the required disclosures, including, for example:
Any prepayment penalty
How a substitute index may be chosen
Actions the creditor may take short of terminating and
accelerating an outstanding balance
Renewal terms
Rebate of fees
An example of information that does not explain or expand on the
required disclosures and thus cannot be included is the creditor's
underwriting criteria, although the creditor could provide such
information separately from the required disclosures.
4. Method of providing disclosures. A creditor may provide a single
disclosure form for all of its home-equity plans, as long as the
disclosure describes all aspects of the plans. For example, if the
creditor offers several payment options, all such options must be
disclosed. (See, however, the commentary to Sec. 226.5b(d)(5)(iii) and
(d)(12)(x) and (xi) for disclosure requirements relating to these
provisions.) If any aspects of a plan are linked together, the creditor
must disclose clearly the relationship of the terms to each other. For
example, if the consumer can only obtain a particular payment option in
conjunction with a certain variable-rate feature, this fact must be
disclosed. A creditor has the option of providing separate disclosure
forms for multiple options or variations in features. For example, a
creditor that offers different payment options for the draw period may
prepare separate disclosure forms for the two payment options. A
creditor using this alternative, however, must include a statement on
each disclosure form that the consumer should ask about the creditor's
other home-equity programs. (This disclosure is required only for those
programs available generally to the public. Thus, if the only other
programs available are employee preferred-rate plans, for example, the
creditor would not have to provide this statement.) A creditor that
receives a request for information about other available programs must
provide the additional disclosures as soon as reasonably possible.
5. Form of electronic disclosures provided on or with electronic
applications. Creditors must provide the disclosures required by this
section (including the brochure) on or with a blank application that is
made available to the consumer in electronic form, such as on a
creditor's Internet Web site. Creditors have flexibility in satisfying
this requirement. Methods creditors could use to satisfy the
requirement include, but are not limited to, the following examples:
i. The disclosures could automatically appear on the screen when
the application appears;
ii. The disclosures could be located on the same web page as the
application (whether or not they appear on the initial screen), if the
application contains a clear and conspicuous reference to the location
of the disclosures and indicates that the disclosures contain rate,
fee, and other cost information, as applicable;
iii. Creditors could provide a link to the electronic disclosures
on or with the application as long as consumers cannot bypass the
disclosures before submitting the application. The link would take the
consumer to the disclosures, but the consumer need not be required to
scroll completely through the disclosures; or
iv. The disclosures could be located on the same web page as the
application without necessarily appearing on the initial screen,
immediately preceding the button that the consumer will click to submit
the application.
Whatever method is used, a creditor need not confirm that the
consumer has read the disclosures.
5b(a)(2) Precedence of Certain Disclosures.
1. Precedence rule. The list of conditions provided at the
creditor's option under Sec. 226.5b(d)(4)(iii) need not precede the
other disclosures.
Paragraph 5b(a)(3).
1. Form of disclosures. Whether disclosures must be in electronic
form depends upon the following:
i. If a consumer accesses a home-equity credit line application
electronically (other than as described under ii. below), such as
online at a home computer, the creditor must provide the disclosures in
electronic form (such as with the application form on its Web site) in
order to meet the requirement to provide disclosures in a timely manner
on or with the application. If the creditor instead mailed paper
disclosures to the consumer, this requirement would not be met.
ii. In contrast, if a consumer is physically present in the
creditor's office, and accesses a home-equity credit line application
electronically, such as via a terminal or kiosk (or if the consumer
uses a terminal or kiosk located on the premises of an affiliate or
third party that has arranged with the creditor to provide applications
to consumers), the creditor may provide disclosures in either
electronic or paper form, provided the creditor complies with the
timing, delivery, and retainability requirements of the regulation.
5b(b) Time of Disclosures
1. Mail and telephone applications. If the creditor sends
applications through the mail, the disclosures and a brochure must
accompany the application. If an application is taken over the
telephone, the disclosures and brochure may be delivered or mailed
within three business days of taking the application. If an application
is mailed to the
[[Page 43583]]
consumer following a telephone request, however, the creditor also must
send the disclosures and a brochure along with the application.
2. General purpose applications. The disclosures and a brochure
need not be provided when a general purpose application is given to a
consumer unless (1) the application or materials accompanying it
indicate that it can be used to apply for a home-equity plan or (2) the
application is provided in response to a consumer's specific inquiry
about a home-equity plan. On the other hand, if a general purpose
application is provided in response to a consumer's specific inquiry
only about credit other than a home-equity plan, the disclosures and
brochure need not be provided even if the application indicates it can
be used for a home-equity plan, unless it is accompanied by promotional
information about home-equity plans.
3. Publicly-available applications. Some creditors make
applications for home-equity plans, such as take-ones, available
without the need for a consumer to request them. These applications
must be accompanied by the disclosures and a brochure, such as by
attaching the disclosures and brochure to the application form.
4. Response cards. A creditor may solicit consumers for its home-
equity plan by mailing a response card which the consumer returns to
the creditor to indicate interest in the plan. If the only action taken
by the creditor upon receipt of the response card is to send the
consumer an application form or to telephone the consumer to discuss
the plan, the creditor need not send the disclosures and brochure with
the response card.
5. Denial or withdrawal of application. In situations where
footnote 10a permits the creditor a three-day delay in providing
disclosures and the brochure, if the creditor determines within that
period that an application will not be approved, the creditor need not
provide the consumer with the disclosures or brochure. Similarly, if
the consumer withdraws the application within this three-day period,
the creditor need not provide the disclosures or brochure.
6. Intermediary agent or broker. In determining whether or not an
application involves an intermediary agent or broker as discussed in
footnote 10a, creditors should consult the provisions in comment 19(b)-
3.
5b(c) Duties of Third Parties
1. Disclosure requirements. Although third parties who give
applications to consumers for home-equity plans must provide the
brochure required under Sec. 226.5b(e) in all cases, such persons need
provide the disclosures required under Sec. 226.5b(d) only in certain
instances. A third party has no duty to obtain disclosures about a
creditor's home-equity plan or to create a set of disclosures based on
what it knows about a creditor's plan. If, however, a creditor provides
the third party with disclosures along with its application form, the
third party must give the disclosures to the consumer with the
application form. The duties under this section are those of the third
party; the creditor is not responsible for ensuring that a third party
complies with those obligations. If an intermediary agent or broker
takes an application over the telephone or receives an application
contained in a magazine or other publication, footnote 10a permits that
person to mail the disclosures and brochure within three business days
of receipt of the application. (See the commentary to Sec. 226.5b(h)
about imposition of nonrefundable fees.)]
5b[(d)][rtrif](c)[ltrif] Content of Disclosures
1. Disclosures given as applicable. The disclosures required under
this section generally need be made only as applicable. Thus, for
example, if negative amortization cannot occur in a home-equity plan, a
reference to it need not be made. Nonetheless, there are exceptions to
this general rule. Specifically, in certain circumstances, a creditor
must state that a balloon payment will not result for payment plans in
which no balloon payment would occur, as set forth in Sec.
226.5b(c)(9)(ii)(B)(3) and (c)(9)(iii)(C)(4). In addition, if there are
no annual or other periodic limitations on changes in the annual
percentage rate, a creditor must state that no annual limitation
exists, as set forth in Sec. 226.5b(c)(10)(i)(A)(5).
2. Duty to respond to requests for information. If the consumer,
prior to the opening of a plan, requests information
[rtrif]described[ltrif][as suggested] in the disclosures (such as
[rtrif]additional information about fees applicable to the plan or the
conditions under which the creditor may make take certain actions with
respect to the plan[ltrif][the current index value or margin]), the
creditor must provide this information as soon as reasonably possible
after the request. [rtrif]See comments 5b(c)(7)(ii)-1, 5b(c)(9)(ii)-5,
5b(c)(14)-1 and 5b(c)(18)-2 for format requirements that apply to
information that a creditor provides to a consumer upon request.[ltrif]
[rtrif]3. Disclosure of repayment phase--applicability of
requirements. Some plans provide in the initial agreement for a period
during which the consumer may make no further draws and must repay all
or a portion of the amount borrowed. All of the applicable disclosures
in this section must be given for the repayment phase. Thus, for
example, a creditor must provide payment information about the
repayment phase as well as about the draw period, as required by Sec.
226.5b(c)(9). To the extent required disclosures are the same for the
draw and repayment phase, the creditor need not repeat such
information, as long as it is clear that the information applies to
both phases.
4. Fixed-rate and -term payment plans during draw period. Home-
equity plans typically offer a variable-rate feature during the draw
period. Specifically, withdrawals on a home-equity plan typically will
access a general-revolving feature to which a variable rate applies.
Nonetheless, some home-equity plans also offer a fixed-rate and -term
payment feature, where a consumer is permitted to repay all or part of
the balance during the draw period at a fixed rate (rather than a
variable rate) and over a specified time period. If a home-equity plan
offers a variable-rate feature and a fixed-rate and -term feature
during the draw period, a creditor generally may not disclose in the
table the terms applicable to the fixed-rate and -term feature in
making the disclosures under Sec. 226.5b(c), except as required under
Sec. 226.5b(c)(18). For example, the creditor would not be allowed to
disclose in the table information about the payment terms and the
annual percentage rate applicable to the fixed-rate and -term payment
feature, under Sec. 226.5b(c)(9) and (c)(10), respectively. In this
case, the creditor would only be allowed to disclose this information
for the variable-rate feature; for the fixed-rate and -term feature,
the creditor would be allowed to disclose in the table only information
specified in Sec. 226.5b(c)(18). The creditor may, however, disclose
additional information relating to the fixed-rate and -term feature
outside of the table. See Sec. 226.5b(b)(2)(v). If a home-equity plan
does not offer a variable-rate feature during the draw period, but only
offers fixed-rate and -term payment features during the draw period, a
creditor must disclose in the table information for the fixed-rate and
-term features when making the disclosures required by Sec. 226.5b(c).
5b(c)(1) Identification Information.
1. Identification of creditor. The creditor making the disclosures
must be identified. Use of the creditor's name is sufficient, but the
creditor may also
[[Page 43584]]
include an address and/or telephone number. In transactions with
multiple creditors, any one of them may make the disclosures; the one
doing so must be identified.
2. Multiple loan originators. In transactions with multiple loan
originators, each loan originator's unique identifier must be
disclosed. For example, in a transaction where a mortgage broker meets
the definition of a loan originator under the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008, Section 1503(3), 12
U.S.C. 5102(3), the identifiers for the broker and for its employee
originator meeting that definition must be disclosed.[ltrif]
[5b(d)(1) Retention of Information.
1. When disclosure not required. The creditor need not disclose
that the consumer should make or otherwise retain a copy of the
disclosures if they are retainable--for example, if the disclosures are
not part of an application that must be returned to the creditor to
apply for the plan.]
[rtrif]5b(c)(4)[ltrif][5b(d)(2)] Conditions for Disclosed Terms.
Paragraph [rtrif]5b(c)(4)(i)[ltrif] [5b(d)(2)(i)]
1. Guaranteed terms. [The requirement that the creditor disclose
the time by which an application must be submitted to obtain the
disclosed terms does not require the creditor to guarantee any terms.]
If a creditor chooses not to guarantee any terms, it must disclose that
all of the terms are subject to change prior to opening the plan. The
creditor also is permitted to guarantee some terms and not others, but
must indicate which terms are subject to change.
[2. Date for obtaining disclosed terms. The creditor may disclose
either a specific date or a time period for obtaining the disclosed
terms. If the creditor discloses a time period, the consumer must be
able to determine from the disclosure the specific date by which an
application must be submitted to obtain any guaranteed terms. For
example, the disclosure might read, ``To obtain the following terms,
you must submit your application within 60 days after the date
appearing on this disclosure,'' provided the disclosure form also shows
the date.]
Paragraph [rtrif]5b(c)(4)(ii)[ltrif][5b(d)(2)(ii)].
1. Relation to other provisions. Creditors should consult the rules
in [rtrif]Sec. 226.5b(d)[ltrif] [Sec. 226.5b(g)] regarding refund of
fees [rtrif]when terms change[ltrif].
[rtrif]5b(c)(5) Refund of Fees Under Sec. 226.5b(e).
1. Relation to other provisions. Creditors should consult the rules
in Sec. 226.5b(e) regarding refund of fees if the consumer rejects the
plan within three business days of receiving the disclosures required
by Sec. 226.5b(b).
[rtrif]5b(c)(7)[ltrif][5b(d)(4)] Possible Actions by Creditor.
Paragraph [rtrif]5b(c)(7)(i)[ltrif][5b(d)(4)(i)].
1. Fees imposed upon termination. This disclosure applies only to
fees (such as penalty or prepayment fees) that the creditor imposes if
it terminates the plan prior to normal expiration. The disclosure does
not apply to fees that are imposed either when the plan expires in
accordance with the agreement or if the consumer terminates the plan
prior to its scheduled maturity. In addition, the disclosure does not
apply to fees associated with collection of the debt, such as
attorneys' fees and court costs, or to increases in the annual
percentage rate linked to the consumer's failure to make payments. The
actual amount of the fee need not be disclosed.
2. Changes [rtrif]to the plan[ltrif] [specified in the initial
agreement]. If changes may occur pursuant to Sec.
226.5b(f)(3)(i)[rtrif]-(v)[ltrif], a creditor must state that
[rtrif]the creditor can make changes to the plan.[ltrif][certain
changes will be implemented as specified in the initial agreement].
[rtrif]Paragraph 5b(c)(7)(ii)[ltrif] [Paragraph 5b(d)(4)(iii)].
1. Disclosure of conditions. [rtrif]A creditor may disclose the
conditions under which a creditor may take certain actions as specified
in Sec. 226.5b(c)(7) either upon the consumer's request (prior to
account opening) or with the disclosures required by Sec.
226.5b(b).[ltrif] In making this disclosure, the creditor may provide a
highlighted copy of the document that contains such information, such
as the contract or security agreement. The relevant items must be
distinguished from the other information contained in the document. For
example, the creditor may provide a cover sheet that specifically
points out which contract provisions contain the information, or may
mark the relevant items on the document itself. As an alternative to
disclosing the conditions in this manner, the creditor may simply
describe the conditions using the language in Sec. [Sec. ]
226.5b(f)(2)(i)-[(iii)][rtrif](iv)[ltrif], [226.5b](f)(3)(i) (regarding
freezing the line when the maximum annual percentage rate is reached),
and [226.5b](f)(3)(vi) or language that is substantially similar. [The
condition contained in Sec. 226.5b(f)(2)(iv) need not be stated.] In
describing [specified] changes that may be implemented during the plan
[rtrif]under Sec. 226.5b(f)(3)(i)-(v)[ltrif], the creditor may provide
a disclosure such as, ``[rtrif]We are allowed to make certain changes
in the terms of the line, such as[ltrif] [Our agreement permits us to
make certain] changes [to the terms of the line] at specified times or
upon the occurrence of specified events [rtrif]as set forth in the
initial agreement[ltrif].'' [rtrif]See comment 5b(c)-2 regarding how
soon after the consumer's request the creditor must disclose this
information to the consumer.[ltrif]
[2. Form of disclosure. The list of conditions under Sec.
226.5b(d)(4)(iii) may appear with the segregated disclosures or apart
from them. If the creditor elects to provide the list of conditions
with the segregated disclosures, the list need not comply with the
precedence rule in Sec. 226.5b(a)(2).]
[rtrif]5b(c)(9)[ltrif][5b(d)(5)] Payment Terms.
[rtrif]1. Balloon payments. i. In general. Section 226.5b(c)(9)(ii)
and (iii) require disclosures of balloon payments. A balloon payment
results if paying the minimum periodic payments does not fully amortize
the outstanding balance by a specified date or time, and the consumer
must repay the entire outstanding balance at such time. The creditor
must not make a disclosure about balloon payments if the final payment
could not be more than twice the amount of other minimum payments under
the plan. The balloon payment disclosures in Sec. 226.5b(c)(9)(ii) and
(iii) do not apply in cases where repayment of the entire outstanding
balance would occur only as a result of termination and acceleration.
ii. Terminology. In disclosing a balloon payment under Sec.
226.5b(c)(9)(ii) and (iii), a creditor must disclose that a balloon
payment ``may'' result if a balloon payment under a payment plan is
possible, even if such a payment is uncertain or unlikely; a creditor
must disclose that a balloon payment ``will'' result if a balloon
payment will occur under a payment plan, such as a payment plan with
interest-only payments during the draw period and no repayment period.
[rtrif]2. Disclosing balloon payment when one payment plan is
disclosed. If under the payment plan, paying only the minimum periodic
payments may not repay any of the principal or may repay less than the
outstanding balance by the end of the plan, the creditor must disclose
information about the balloon payment twice in the table--under Sec.
226.5b(c)(9)(ii)(A) and (c)(9)(iii)(C)(4). See the row ``Balloon
Payment'' in the ``Borrowing and Repayment Terms'' section of Sample G-
14(D) for guidance on how to comply with the requirements in Sec.
226.5b(c)(9)(ii)(A). See the first paragraph in the ``Sample Payments
on a $80,000 Balance'' section
[[Page 43585]]
of Sample G-14(D) for guidance on how to comply with the requirements
in Sec. 226.5b(c)(9)(iii)(C)(4).
3. Disclosing balloon payments when two payment plans are
disclosed. If under at least one of the payment plans, paying only the
minimum periodic payments may not repay any of the principal or may
repay less than the outstanding balance by the end of the plan, the
creditor must disclose information about the balloon payment three
times in the table--under Sec. 226.5b(c)(9)(ii)(B)(1),
(c)(9)(ii)(B)(3), and (c)(9)(iii)(C)(4). See the row ``Balloon
Payment'' in the ``Borrowing and Repayment Terms'' section of Sample G-
14(C) for guidance on how to comply with the requirements in Sec.
226.5b(c)(9)(ii)(B)(1). See the rows ``Plan A'' and ``Plan B'' in the
``Payment Plans'' section of Sample G-14(C) for guidance on how to
comply with the requirements in Sec. 226.5b(c)(9)(ii)(B)(3). See the
``Plan A vs. Plan B'' part of the ``Plan Comparison: Sample Payments on
an $80,000 Balance'' section of Sample G-14(C) for guidance on how to
comply with the requirements in Sec. 226.5b(c)(9)(iii)(C)(4).[ltrif]
Paragraph [rtrif]5b(c)(9)(i)[ltrif][5b(d)(5)(i)].
1. Length of the plan. [The combined length of the draw period and
any repayment period need not be stated. If the length of the repayment
phase cannot be determined because, for example, it depends on the
balance outstanding at the beginning of the repayment period, the
creditor must state that the length are determined by the size of the
balance. If the length of the plan is indefinite (for example, because
there is no time limit on the period during which the consumer can take
advances), the creditor must state that fact.] [rtrif]i. If a maturity
date is set forth for the plan, the length of the plan, the length of
the draw period and the length of any repayment period are definite.
The length of the plan must be based on the maturity date of the plan,
regardless of whether the outstanding balance will be paid off before
or after the maturity date. For example, assume that a plan has a draw
period of 10 years and a maturity date of 20 years. If the outstanding
balance on the plan is not paid off by the maturity date, the creditor
will extend the maturity date of the plan and require the consumer to
make minimum payments until the outstanding balance is repaid. In this
example, the creditor must disclose the length of the plan as 20 years,
the draw period as 10 years and the repayment period as 10 years, even
though in some cases the maturity date of the plan may be extended in
the future.
ii. If the plan does not have a maturity date and the length of the
repayment period cannot be determined at the time the disclosures
required by Sec. 226.5b(b) must be given because the length of the
plan and the length of the repayment period depend on the balance
outstanding at the beginning of the repayment period or the balance at
the time of the last advance during the draw period, the creditor must
state that the length of the plan and the length of the repayment
period is determined by the size of the balance outstanding at the
beginning of the repayment period or the balance at the time of the
last advance during the draw period, as applicable. The following
examples illustrate this rule:
A. Assume the plan has no maturity date, the draw period is 10
years, and the minimum payment during the repayment period is 1.5
percent of the outstanding balance at the time of the last advance
during the draw period. In this example, the creditor would disclose
that the lengths of the plan and the repayment period are determined by
the size of the outstanding balance at the time of the last advance
during the draw period.
B. Assume the length of the draw period is 10 years and the length
of the repayment period will be 15 years if the balance at the
beginning of the repayment period is less than $20,000 and 30 years if
the balance is $20,000 or more. In this example, the creditor must
disclose that the length of the plan will be 25 or 40 years depending
on the outstanding balance at the beginning of the repayment period. In
addition, the creditor must disclose that the repayment period will be
15 years if the balance is less than $20,000 and 30 years if the
balance is $20,000 or more. The creditor may not simply disclose that
the repayment period is determined by the size of the balance. See
Sample G-14(E) for guidance on how to disclose this information.
iii. If the length of the plan is indefinite (for example, because
there is no time limit on the period during which the consumer can take
advances), the creditor must state that fact.[ltrif]
2. Renewal provisions. If, under the credit agreement, a creditor
retains the right to review a line at the end of the specified draw
period and determine whether to renew or extend the draw period of the
plan, the possibility of renewal or extension--regardless of its
likelihood--should be ignored for purposes of the disclosures. For
example, if an agreement provides that the draw period is five years
and that the creditor may renew the draw period for an additional five
years, the possibility of renewal should be ignored and the draw period
should be considered five years.
[rtrif]3. Format. Under Sec. 226.5b(c)(9)(i), if the length of the
plan is definite, a creditor must disclose the length of the plan, the
length of the draw period and the length of any repayment period in a
format substantially similar to the format used in any of the
applicable tables found in Samples G-14(C) and G-14(D) . (See comment
5b(c)(9)(i)-1 for guidance on determining whether the length of the
plan is definite.) Sample G-14(D) shows the format a creditor must use
for plans that have a definite length and have a draw period but no
repayment period. Sample G-14(C) shows the format a creditor must use
for plans that have a definite length and have a draw period and a
repayment period. For example, in Sample G-14(C), the length of a plan
is 20 years, and the length of the draw period and repayment period are
10 years each. As shown in Sample G-14(C), the length of the plan must
be disclosed as 20 years, along with a statement indicating that this
period is divided into two periods. In this example, the length of the
draw period must be disclosed as ``Years (1-10)'' and the length of the
repayment period must be disclosed as ``Years (11-20).'' The length of
the draw period and repayment period must be included with the headings
``Borrowing Period'' (for the draw period) and ``Repayment Period''
(for the repayment period), respectively, each time these headings are
used. See Sec. 226.5b(c)(9) for when the headings must be used.
4. Length of the plan and the length of the draw period are the
same. If the length of the plan and the length of the draw period are
the same, a creditor will be deemed to satisfy the requirement to
disclose the length of plan by disclosing the length of the draw
period.[ltrif]
Paragraph [rtrif]5b(c)(9)(ii)[ltrif][5b(d)(5)(ii)].
1. Determination of the minimum periodic payment. This disclosure
[must reflect][rtrif]of[ltrif] how the minimum periodic payment is
determined [, but] [rtrif]must[ltrif] [need only] describe
[rtrif]only[ltrif] the principal and interest components of the
payment. Other charges that may be part of the payment (as well as the
balance computation method) [rtrif]must not be[ltrif] [may, but need
not, be] described under this provision. [rtrif]In addition, this
disclosure must not include a description of any floor payment amount,
where the payment will not go below this amount.[ltrif]
[rtrif]2. Multiple payment plans. If a creditor only offers two
payment plans (other than fixed-rate and -term
[[Page 43586]]
payment plans unless those are the only payment plans offered during
the draw period), both of those payment options must be disclosed in
the table required by Sec. 226.5b(b). If a creditor offers more than
two payment options (other than fixed-rate and -term payment plans
unless those are the only payment plans offered during the draw
period), the creditor pursuant to Sec. 226.5b(c)(9)(ii)(B) must only
disclose two of the payment plans in the table required by Sec.
226.5b(b). The following would be considered two payment plans: The
draw period is 10 years and the consumer has the choice between two
repayment periods--10 and 20 years. The two payment plans would be (1)
a 10 year draw period and a 10 year repayment period, and (2) a 10 year
draw period and a 20 year repayment period.
3. Statement about additional payment plans not disclosed in table.
Section 226.5b(c)(9)(ii)(B) provides that if a creditor offers more
than the two payment plans described in the table required by Sec.
226.5b(b)(2)(i) (other than fixed-rate and -term payment plans unless
those are the only payment plans offered during the draw period), the
creditor must disclose that other payment plans are available, and the
consumer should ask the creditor for additional details about these
other payment plans. This disclosure is required only if the creditor
offers additional payment plans available to that consumer. If the only
other payment plans available are employee preferred-rate plans, for
example, the creditor must provide this statement only if the consumer
would qualify for the employee preferred-rate plans.[ltrif]
[2. Fixed rate and term payment options during draw period. If the
home-equity plan permits the consumer to repay all or part of the
balance during the draw period at a fixed rate (rather than a variable
rate) and over a specified time period, this feature must be disclosed.
To illustrate, a variable-rate plan may permit a consumer to elect
during a ten-year draw period to repay all or a portion of the balance
over a three-year period at a fixed rate. The creditor must disclose
the rules relating to this feature including the period during which
the option can be selected, the length of time over which repayment can
occur, any fees imposed for such a feature, and the specific rate or a
description of the index and margin that will apply upon exercise of
this choice. For example, the index and margin disclosure might state:
``If you choose to convert any portion of your balance to a fixed rate,
the rate will be the highest prime rate published in the `Wall Street
Journal' that is in effect at the date of conversion plus a margin.''
If the fixed rate is to be determined according to an index, it must be
one that is outside the creditor's control and is publicly available in
accordance with Sec. 226.5b(f)(1). The effect of exercising the option
should not be reflected elsewhere in the disclosures, such as in the
historical example required in Sec. 226.5b(d)(12)(xi).]
[3] [rtrif]4[ltrif]. Balloon payments. [rtrif]See comments
5b(c)(9)-1 through -3 for guidance on disclosing balloon payments under
Sec. 226.5b(c)(9)(ii).[ltrif] [In programs where the occurrence of a
balloon payment is possible, the creditor must disclose the possibility
of a balloon payment even if such a payment is uncertain or unlikely.
In such cases, the disclosure might read, ``Your minimum payments may
not be sufficient to fully repay the principal that is outstanding on
your line. If they are not, you will be required to pay the entire
outstanding balance in a single payment.'' In programs where a balloon
payment will occur, such as programs with interest-only payments during
the draw period and no repayment period, the disclosures must state
that fact. For example, the disclosure might read, ``Your minimum
payments will not repay the principal that is outstanding on your line.
You will be required to pay the entire outstanding balance in a single
payment.'' In making this disclosure, the creditor is not required to
use the term ``balloon payment.'' The creditor also is not required to
disclose the amount of the balloon payment. (See, however, the
requirement under Sec. 226.5b(d)(5)(iii).) The balloon payment
disclosure does not apply in cases where repayment of the entire
outstanding balance would occur only as a result of termination and
acceleration. The creditor also need not make a disclosure about
balloon payments if the final payment could not be more than twice the
amount of other minimum payments under the plan.]
[rtrif]5. Consumer's request for additional information on other
payment plans. If the creditor offers any other payment plans than the
two payment plans disclosed in the table required under Sec. 226.5b(b)
(except for fixed-rate and -term payment plans unless those are the
only payment plans offered during the draw period), and a consumer
requests additional information about this other plan prior to account
opening, the creditor must disclose an additional table under Sec.
226.5b(b) to the consumer with the terms of the other payment plan
described in the table. If the creditor offers multiple payment plans
that were not disclosed in the table required under Sec. 226.5b(b),
only one payment plan may be disclosed on each additional table given
to the consumer. For example, if a creditor offers two payment plans
that were not disclosed in the table required under Sec. 226.5b(b),
the creditor must provide the consumer, upon request, two additional
tables--one table for each payment plan. See comment 5b(c)-2 regarding
how soon after the consumer's request the creditor must disclose this
information to the consumer.
6. Reverse mortgages. Reverse mortgages, also known as reverse
annuity or home-equity conversion mortgages, in addition to permitting
the consumer to obtain advances, may involve the disbursement of
monthly advances to the consumer for a fixed period or until the
occurrence of an event such as the consumer's death. Repayment of the
reverse mortgage (generally a single payment of principal and accrued
interest) may be required to be made at the end of the disbursements
or, for example, upon the death of the consumer. In disclosing these
plans, creditors must apply the following rules, as applicable:
i. If the reverse mortgage has a specified period for advances and
disbursements but repayment is due only upon occurrence of a future
event such as the death of the consumer, the creditor must assume that
disbursements will be made until they are scheduled to end. The
creditor must assume repayment will occur when disbursements end (or
within a period following the final disbursement which is not longer
than the regular interval between disbursements). This assumption
should be used even though repayment may occur before or after the
disbursements are scheduled to end. In such cases, the creditor may
include a statement such as ``The disclosures assume that you will
repay the line at the time the borrowing period and our payments to you
end. As provided in your agreement, your repayment may be required at a
different time.'' The single payment should be considered the ``minimum
periodic payment'' and consequently would not be treated as a balloon
payment. The examples of the minimum payment under Sec.
226.5b(c)(9)(iii) should assume the consumer borrows the full credit
line (as disclosed in Sec. 226.5b(c)(17)) at the beginning of the draw
period.
ii. If the reverse mortgage has neither a specified period for
advances or disbursements nor a specified repayment date and these
terms will be determined solely by reference to future events,
including the consumer's death,
[[Page 43587]]
the creditor may assume that the draws and disbursements will end upon
the consumer's death (estimated by using actuarial tables, for example)
and that repayment will be required at the same time (or within a
period following the date of the final disbursement which is not longer
than the regular interval for disbursements). Alternatively, the
creditor may base the disclosures upon another future event it
estimates will be most likely to occur first. (If terms will be
determined by reference to future events which do not include the
consumer's death, the creditor must base the disclosures upon the
occurrence of the event estimated to be most likely to occur first.)
iii. In making the disclosures, the creditor must assume that all
draws and disbursements and accrued interest will be paid by the
consumer. For example, if the note has a non-recourse provision
providing that the consumer is not obligated for an amount greater than
the value of the house, the creditor must nonetheless assume that the
full amount to be drawn or disbursed will be repaid. In this case,
however, the creditor may include a statement such as ``The disclosures
assume full repayment of the amount advanced plus accrued interest,
although the amount you may be required to pay is limited by your
agreement.''
iv. Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. The creditor must disclose the appreciation
feature, including describing how the creditor's share will be
determined, any limitations, and when the feature may be exercised.
[ltrif]
Paragraph [rtrif]5b(c)(9)(iii)[ltrif][5b(d)(5)(iii)].
1. Minimum periodic payment examples. [rtrif]A creditor must
provide examples for each payment option disclosed in the table
pursuant to Sec. 226.5b(c)(9)(ii). In calculating the payment
examples, a creditor must take into account any significant terms
related to each payment option, such as any payment caps or payment
floor amounts. (A creditor must take payment floor amounts into account
when calculating the payment examples even though the creditor may not
disclose that payment floor in the table when describing how minimum
payments will be calculated. See comment 5b(c)(9)(ii)-1.) For example,
assume that under a payment plan, the monthly payment for the draw
period will be calculated as the interest accrued during that month, or
$50, whichever is greater. In the table described in Sec. 226.5b(b), a
creditor must disclose that the minimum monthly payment during the draw
period only covers interest. The creditor must not disclose in the
table the payment floor of $50. Nonetheless, the creditor must take
into account this $50 payment floor in calculating the disclosures
shown as part of the payment examples.[ltrif] In disclosing the payment
example[rtrif]s[ltrif], the creditor [rtrif]must assume that the
consumer borrows the full credit line (as disclosed in Sec.
226.5b(c)(17)) at the beginning of the draw period and that this
advance is reduced according to the terms of the plan. The creditor
must not assume that an additional advance is taken at any time,
including at the beginning of any repayment period. A creditor must
assume that the annual percentage rate used to calculate each payment
example required by Sec. 226.5b(c)(9)(iii) will remain the same during
the draw period and any repayment period as specified in Sec.
226.5b(c)(9)(iii)(A)(3) even if that annual percentage rate is a
variable rate under the plan. [ltrif] [ may assume that the credit
limit as well as the outstanding balance is $10,000 if such an
assumption is relevant to calculating payments. (If the creditor only
offers lines of credit for less than $10,000, the creditor may assume
an outstanding balance of $5,000 instead of $10,000 in making this
disclosure.)] The example[rtrif]s[ltrif] should reflect the payment
comprised only of principal and interest. [rtrif]The sample payments in
the table showing the first minimum periodic payment for the draw
period and any repayment period, and the balance outstanding at the
beginning of any repayment period, must be rounded to the nearest whole
dollar.[ltrif][Creditors may provide an additional example reflecting
other charges that may be included in the payment, such as credit
insurance premiums.] Creditors may assume that all months have an equal
number of days, that payments are collected in whole cents, and that
payments will fall on a business day even though they may be due on a
non-business day. [For variable-rate plans, the example must be based
on the last rate in the historical example required in Sec.
226.5b(d)(12)(xi), or a more recent rate. In cases where the last rate
shown in the historical example is different from the index value and
margin (for example, due to a rate cap), creditors should calculate the
rate by using the index value and margin. A discounted rate may not be
considered a more recent rate in calculating this payment example for
either variable- or fixed-rate plans.]
[2. Representative examples. In plans with multiple payment options
within the draw period or within any repayment period, the creditor may
provide representative examples as an alternative to providing examples
for each payment option. The creditor may elect to provide
representative payment examples based on three categories of payment
options. The first category consists of plans that permit minimum
payment of only accrued finance charges (interest only plans). The
second category includes plans in which a fixed percentage or a fixed
fraction of the outstanding balance or credit limit (for example, 2% of
the balance or 1/180th of the balance) is used to determine the minimum
payment. The third category includes all other types of minimum payment
options, such as a specified dollar amount plus any accrued finance
charges. Creditors may classify their minimum payment arrangements
within one of these three categories even if other features exist, such
as varying lengths of a draw or repayment period, required payment of
past due amounts, late charges, and minimum dollar amounts. The
creditor may use a single example within each category to represent the
payment options in that category. For example, if a creditor permits
minimum payments of 1%, 2%, 3% or 4% of the outstanding balance, it may
pick one of these four options and provide the example required under
Sec. 226.5b(d)(5)(iii) for that option alone.
The example used to represent a category must be an option commonly
chosen by consumers, or a typical or representative example. (See the
commentary to Sec. 226.5b(d)(12) (x) and (xi) for a discussion of the
use of representative examples for making those disclosures. Creditors
using a representative example within each category must use the same
example for purposes of the disclosures under Sec. 226.5b(d)(5)(iii)
and (d)(12)(x) and (xi).) Creditors may use representative examples
under Sec. 226.5b(d)(5) only with respect to the payment example
required under paragraph (d)(5)(iii). Creditors must provide a full
narrative description of all payment options under Sec.
226.5b(d)(5)(i) and (ii).
3. Examples for draw and repayment periods. Separate examples must
be given for the draw and repayment periods unless the payments are
determined the same way during both periods. In setting forth payment
examples for any repayment period under this section (and the
historical example under Sec. 226.5b(d)(12)(xi)), creditors should
assume a $10,000 advance is taken at the beginning of the draw period
and is reduced according to the terms of the plan. Creditors should
[[Page 43588]]
not assume an additional advance is taken at any time, including at the
beginning of any repayment period.]
[rtrif]2. Balloon payments. See comments 5b(c)(9)-1 through -3 for
guidance on disclosing balloon payments under Sec.
226.5b(c)(9)(iii)(D).
3. [ltrif][4.] Reverse mortgages. [rtrif]See comment 5b(c)(9)(ii)-6
for guidance on providing the payment examples required under Sec.
226.5b(c)(9)(iii) for reverse mortgages.[ltrif] [Reverse mortgages,
also known as reverse annuity or home-equity conversion mortgages, in
addition to permitting the consumer to obtain advances, may involve the
disbursement of monthly advances to the consumer for a fixed period or
until the occurrence of an event such as the consumer's death.
Repayment of the reverse mortgage (generally a single payment of
principal and accrued interest) may be required to be made at the end
of the disbursements or, for example, upon the death of the consumer.
In disclosing these plans, creditors must apply the following rules, as
applicable:
i. If the reverse mortgage has a specified period for advances and
disbursements but repayment is due only upon occurrence of a future
event such as the death of the consumer, the creditor must assume that
disbursements will be made until they are scheduled to end. The
creditor must assume repayment will occur when disbursements end (or
within a period following the final disbursement which is not longer
than the regular interval between disbursements). This assumption
should be used even though repayment may occur before or after the
disbursements are scheduled to end. In such cases, the creditor may
include a statement such as ``The disclosures assume that you will
repay the line at the time the draw period and our payments to you end.
As provided in your agreement, your repayment may be required at a
different time.'' The single payment should be considered the ``minimum
periodic payment'' and consequently would not be treated as a balloon
payment. The example of the minimum payment under Sec.
226.5b(d)(5)(iii) should assume a single $10,000 draw.
ii. If the reverse mortgage has neither a specified period for
advances or disbursements nor a specified repayment date and these
terms will be determined solely by reference to future events,
including the consumer's death, the creditor may assume that the draws
and disbursements will end upon the consumer's death (estimated by
using actuarial tables, for example) and that repayment will be
required at the same time (or within a period following the date of the
final disbursement which is not longer than the regular interval for
disbursements). Alternatively, the creditor may base the disclosures
upon another future event it estimates will be most likely to occur
first. (If terms will be determined by reference to future events which
do not include the consumer's death, the creditor must base the
disclosures upon the occurrence of the event estimated to be most
likely to occur first.)
iii. In making the disclosures, the creditor must assume that all
draws and disbursements and accrued interest will be paid by the
consumer. For example, if the note has a non-recourse provision
providing that the consumer is not obligated for an amount greater than
the value of the house, the creditor must nonetheless assume that the
full amount to be drawn or disbursed will be repaid. In this case,
however, the creditor may include a statement such as ``The disclosures
assume full repayment of the amount advanced plus accrued interest,
although the amount you may be required to pay is limited by your
agreement.''
iv. Some reverse mortgages provide that some or all of the
appreciation in the value of the property will be shared between the
consumer and the creditor. The creditor must disclose the appreciation
feature, including describing how the creditor's share will be
determined, any limitations, and when the feature may be exercised.]
[rtrif]5b(c)(10)[ltrif][5b(d)(6)] Annual Percentage Rate.
[rtrif]1. Rates disclosed. The only rates that may be disclosed in
the table required by Sec. 226.5b(b) are annual percentage rates
determined under Sec. 226.14(b). Periodic rates must not be disclosed
in the table.
2. Rate changes set forth in initial agreement. This paragraph
requires disclosure of the rate changes set forth in the initial
agreement, as discussed in Sec. 226.5b(f)(3)(i), that are applicable
to the payment plans disclosed pursuant to Sec. 226.5b(c)(9). For
example, this paragraph requires disclosure of preferred-rate
provisions, where the rate will increase upon the occurrence of some
event, such as the borrower-employee leaving the creditor's employ or
the consumer closing an existing deposit account with the creditor. The
creditor must disclose the preferred rate that applies to the plan, and
the rate that would apply if the event is triggered, such as the
borrower-employee leaving the creditor's employ or the consumer closing
an existing deposit account with the creditor. If the preferred rate
and the rate that would apply if the event is triggered are variable
rates, the creditor must disclose those rates based on the applicable
index or formula, and disclose other information required by Sec.
226.5b(c)(10)(i).
3. Rates applicable to payment plans disclosed. A creditor is only
required to disclose the rates applicable to the payment plans that are
disclosed in Sec. 226.5b(c)(9). If the creditor offers other payment
plans than the ones disclosed in the table required under Sec.
226.5b(b), and a consumer requests additional information about those
other plans, the creditor must disclose the annual percentage rates
applicable to those other plans (as well as other information) when
disclosing those other payment plans to the consumer. See comment
5b(c)(9)(ii)-5 and comment 5b(c)(18)-2 for the information a creditor
must provide to a consumer that requests additional information about
other payment plans offered by the creditor.[ltrif]
[1. Preferred-rate plans. If a creditor offers a preferential
fixed-rate plan in which the rate will increase a specified amount upon
the occurrence of a specified event, the creditor must disclose the
specific amount the rate will increase.]
[rtrif]Paragraph 5b(c)(10)(i) Disclosures for Variable-rate Plans.
1. Variable-rate accounts--definition. For purposes of Sec.
226.5b(c)(10)(i), a variable-rate account exists when rate changes are
part of the plan and are tied to an index or formula. (See the
commentary to Sec. 226.6(a)(4)(ii)-1 for examples of variable-rate
plans.)
2. Variable-rate accounts--fact that the rate varies and how the
rate will be determined. In describing how the applicable rate will be
determined, the creditor must identify in the table described in Sec.
226.5b(b) the type of index used and the amount of any margin. In
describing the index, a creditor may not include in the table details
about the index. For example, if a creditor uses a prime rate, the
creditor must disclose the rate as a ``prime rate'' and may not
disclose in the table other details about the prime rate, such as the
fact that it is the highest prime rate published in the Wall Street
Journal two business days before the closing date of the statement for
each billing period. Except as permitted by Sec.
226.5b(c)(10)(i)(A)(6), a creditor may not disclose in the table the
current value of the index (such as that the prime rate is currently
7.5 percent). See Samples G-14(C), G-14(D) and G-14(E) for guidance on
how to disclose the fact that the applicable rate varies and how it is
determined.
[[Page 43589]]
3. Rate during any repayment period. If a creditor uses an index to
determine the rate that will apply at the time of conversion to the
repayment phase--even if the rate will thereafter be fixed--the
creditor must provide the information in Sec. 226.5b(c)(10)(i), as
applicable.
4. Limitations on increases in rates. The creditor must disclose in
the table required by Sec. 226.5b(b) any limitations on increases in
the annual percentage rate, including the minimum and maximum annual
percentage rate that may be imposed under each payment plan disclosed
under Sec. 226.5b(c)(9)(ii). For example, a creditor must disclose any
rate limitations that occur every two years, annually or on less than
an annual basis. If the creditor bases its rate limitation on 12
monthly billing cycles, such a limitation must be treated as an annual
cap. Rate limitations imposed on more or less than an annual basis must
be stated in terms of a specific amount of time. For example, if the
creditor imposes rate limitations on only a semiannual basis, this must
be expressed as a rate limitation for a six-month time period. If the
creditor does not impose annual or other periodic limitations on rate
increases, the fact must be stated in the table described in Sec.
226.5b(b).
5. Maximum limitations on increases in rates. The maximum annual
percentage rate that may be imposed under each payment option disclosed
under Sec. 226.5b(c)(9)(ii) over the term of the plan (including the
draw period and any repayment period provided for in the initial
agreement) must be provided in the table described in Sec. 226.5b(b).
If separate overall limitations apply to rate increases resulting from
events such as leaving the creditor's employ, those limitations also
must be stated. Limitations do not include legal limits in the nature
of usury or rate ceilings under state or federal statutes or
regulations.
6. Sample forms. Samples G-14(C), G-14(D) and G-14(E) provide
illustrative guidance on the variable-rate rules.
Paragraph 5b(c)(10)(ii) Introductory Initial Rate.
1. Preferred rates. If a creditor offers a preferred rate that will
increase a specified amount upon the occurrence of a specified event
other than the expiration of a specific time period, such as the
borrower-employee leaving the creditor's employ, the preferred rate is
not an introductory rate under Sec. 226.5b(C)(10)(ii), but must be
disclosed in accordance with Sec. 226.5b(C)(10). See comment
5b(C)(10)-2.
2. Immediate proximity. i. In general. If the term ``introductory''
is in the same phrase as the introductory rate, it will be deemed to be
in immediate proximity of the listing. For example, a creditor that
uses the phrase ``introductory APR X percent'' has used the word
``introductory'' within the same phrase as the rate. (See Samples G-
14(C) and G-14(E) for guidance on how to disclose clearly and
conspicuously the expiration date of the introductory rate and the rate
that will apply after the introductory rate expires, if an introductory
rate is disclosed in the table.)
ii. More than one introductory rate. If more than one introductory
rate may apply to a particular balance in succeeding periods, the term
``introductory'' need only be used to describe the first introductory
rate. For example, if a creditor offers an introductory rate of 8.99%
on the plan for six months, and an introductory rate of 10.99% for the
following six months, the term ``introductory'' need only be used to
describe the 8.99% rate.
3. Rate that applies after introductory rate expires. If the
initial rate is an introductory rate, the creditor must disclose the
introductory rate, how long the introductory rate will remain in
effect, and the rate that would otherwise apply to the plan. Where the
rate that would otherwise apply is fixed, the creditor must disclose
the rate that will apply after the introductory rate expires. Where the
rate that would otherwise apply is variable, the creditor must disclose
the rate based on the applicable index or formula, and disclose the
other variable-rate disclosures required under Sec.
226.5b(c)(10)(i).[ltrif]
[rtrif]5b(c)(11)[ltrif][5b(d)(7)] Fees Imposed by Creditor
[rtrif]and Third Parties to Open the Plan[ltrif].
1. Applicability. [rtrif]Section 226.5b(c)(11) applies only to one-
time fees imposed by the creditor or third parties to open the plan.
The fees referred to in Sec. 226.5b(c)(11) include items such as
application fees, points, appraisal or other property valuation fees,
credit report fees, government agency fees, and attorneys' fees. Annual
fees or other periodic fees that may be imposed for the availability of
the plan would not be disclosed under Sec. 226.5b(c)(11), but must be
disclosed under Sec. 226.5b(c)(12). A creditor must not state the
amount of any property insurance premiums in the table, even in cases
where property insurance is required by the creditor.[ltrif] [The fees
referred to in section 226.5b(d)(7) include items such as application
fees, points, annual fees, transaction fees, fees to obtain checks to
access the plan, and fees imposed for converting to a repayment phase
that is provided for in the original agreement. This disclosure
includes any fees that are imposed by the creditor to use or maintain
the plan, whether the fees are kept by the creditor or a third party.
For example, if a creditor requires an annual credit report on the
consumer and requires the consumer to pay this fee to the creditor or
directly to the third party, the fee must be specifically stated. Third
party fees to open the plan that are initially paid by the consumer to
the creditor may be included in this disclosure or in the disclosure
under Sec. 226.5b(d)(8).]
2. Manner of describing itemized fees. [rtrif]Section 226.5b(d)(11)
provides that if the dollar amount of a one-time account opening fee is
not known at the time the disclosures under Sec. 226.5b(b) are
delivered or mailed, a creditor must provide a range for such fee. If a
range is shown, the highest amount of the fee in that range must assume
that the consumer will borrow the full credit line at account opening.
The lowest amount of the fee in the range must be the lowest amount of
the fee that may be imposed.[ltrif] [Charges may be stated as an
estimated dollar amount for each fee, or as a percentage of a typical
or representative amount of credit. The creditor may provide a stepped
fee schedule in which a fee will increase a specified amount at a
specified date. (See the discussion contained in the commentary to
Sec. 226.5b(f)(3)(i).)]
3. Fees not required to be disclosed. Fees that are not imposed to
open [, use, or maintain] a plan, such as fees for researching an
account, photocopying, paying late, stopping payment, having a check
returned, exceeding the credit limit, or closing out an account, do not
have to be disclosed under this section. Credit report and
[rtrif]property valuation[ltrif] [appraisal] fees imposed to
investigate whether a condition permitting a freeze continues to
exist--as discussed in [rtrif]226.5b(g)(3)(iv) and accompanying
commentary[ltrif] [the commentary to Sec. 226.5b(f)(3)(vi)]--are not
required to be disclosed under this section [or Sec. 226.5b(d)(8)].
4. Rebates of [rtrif]account opening fees[ltrif][closing costs]. If
[rtrif] one-time fees for account opening [ltrif] [closing costs] are
imposed they must be disclosed, regardless of whether such costs may be
rebated later (for example, rebated to the extent of any interest paid
during the first year of the plan).
[5. Terms used in disclosure. Creditors need not use the terms
finance charge or other charge in describing the fees imposed by the
creditor under this section or those imposed by third
[[Page 43590]]
parties, as applicable, under section 226.5b(d)(8).]
[rtrif]5. Disclosure of itemized list of fees to open a plan. A
creditor will be deemed to provide the itemization of the account-
opening fees clearly and conspicuously if the creditor provides this
information in a bullet format as shown in Samples G-14(C), G-14(D) and
G-14(E).[ltrif]
[rtrif]5(b)(c)(12) Fees Imposed by the Creditor for Availability of
the Plan.
1. Fee to obtain access devices. The fees referred to in Sec.
226.5b(c)(12) include fees to obtain access devices, such as fees to
obtain checks or credit cards to access the plan. For example, a fee to
obtain checks or a credit card on the account must be disclosed in the
table as a fee for issuance or availability under Sec. 226.5b(c)(12).
This fee must be disclosed even if the fee is optional; that is, if the
fee is charged only if the consumer requests checks or a credit card.
2. Fees kept by third party. The fees referred to in Sec.
226.5b(c)(12) include any fees that are imposed by the creditor for the
availability of the plan, whether the fees are kept by the creditor or
a third party. For example, if a creditor requires an annual credit
report on the consumer and requires the consumer to pay this fee to the
creditor or directly to the third party, the fee must be disclosed
under Sec. 226.5b(c)(12).
3. Waived or reduced fees. If fees required to be disclosed under
Sec. 226.5b(c)(12) are waived or reduced for a limited time, the
introductory fees or the fact of fee waivers may be provided in the
table in addition to the required fees if the creditor also discloses
how long the reduced fees or waivers will remain in effect.
5b(c)(13) Fees Imposed by the Creditor for Early Termination of the
Plan by the Consumer.
1. Applicability. This disclosure applies to fees (such as penalty
or prepayment fees) that the creditor imposes if the consumer
terminates the plan prior to its scheduled maturity. This disclosure
includes waived account-opening fees for the plan, if the creditor will
impose those costs on the consumer if the consumer terminates the plan
within a certain amount of time after account opening. The disclosure
does not apply to fees that the creditor may impose in lieu of
termination under comment 5b(f)(2)-2. The disclosure also does not
apply to fees that are imposed when the plan expires in accordance with
the agreement or that are associated with collection of the debt if the
creditor terminates the plan, such as attorneys' fees and court costs.
5b(c)(14) Statement about Other Fees.
1. Disclosure of additional information upon request. A creditor
generally must include in the table required by Sec. 226.5b(b) a
statement that the consumer may receive, upon request, additional
information about fees applicable to the plan. Alternatively, a
creditor may provide additional information about fees applicable to
the plan along with the table required by Sec. 226.5b(b). In that
case, the creditor must disclose in the table that is required by Sec.
226.5b(b) that additional information about fees applicable to the plan
is enclosed with the table. In providing additional information about
fees to a consumer upon the consumer's request prior to account opening
(or along with the table required under Sec. 226.5b(b)), a creditor
must disclose the penalty and transaction fees that are required to be
disclosed under Sec. 226.6(a)(2)(x) through (xiv) and a statement that
other fees may apply. A creditor must use a tabular format to disclose
the additional information about fees that is provided upon request or
provided with the table required by Sec. 226.5b(b). See comment 5b(c)-
2 regarding how soon after the consumer's request the creditor must
disclose this information to the consumer.[ltrif]
[5b(d)(8) Fees Imposed by Third Parties to Open a Plan.
1. Applicability. Section 226.5b(d)(8) applies only to fees imposed
by third parties to open the plan. Thus, for example, this section does
not require disclosure of a fee imposed by a government agency at the
end of a plan to release a security interest. Fees to be disclosed
include appraisal, credit report, government agency, and attorneys'
fees. In cases where property insurance is required by the creditor,
the creditor either may disclose the amount of the premium or may state
that property insurance is required. For example, the disclosure might
state, ``You must carry insurance on the property that secures this
plan.''
2. Itemization of third-party fees. In all cases creditors must
state the total of third-party fees as a single dollar amount or a
range except that the total need not include costs for property
insurance if the creditor discloses that such insurance is required. A
creditor has two options with regard to providing the more detailed
information about third party fees. Creditors may provide a statement
that the consumer may request more specific cost information about
third party fees from the creditor. As an alternative to including this
statement, creditors may provide an itemization of such fees (by type
and amount) with the early disclosures. Any itemization provided upon
the consumer's request need not include a disclosure about property
insurance.
3. Manner of describing fees. A good faith estimate of the amount
of fees must be provided. Creditors may provide, based on a typical or
representative amount of credit, a range for such fees or state the
dollar amount of such fees. Fees may be expressed on a unit cost basis,
for example, $5 per $1,000 of credit.
4. Rebates of third party fees. Even if fees imposed by third
parties may be rebated, they must be disclosed. (See the commentary to
Sec. 226.5b(d)(7).)]
[rtrif]5b(c)(15)[ltrif][5b(d)(9)] Negative Amortization.
1. Disclosure required. In transactions where the minimum payment
will not or may not be sufficient to cover the interest that accrues on
the outstanding balance, the creditor must disclose that negative
amortization will or may occur. This disclosure is required whether or
not the unpaid interest is added to the outstanding balance upon which
interest is computed. A disclosure is not required merely because a
loan calls for non-amortizing or partially amortizing payments.
[rtrif]A creditor will be deemed to meet the requirements of Sec.
226.5b(c)(15) by providing the following disclosure, as applicable:
``Your minimum payment may cover/covers only part of the interest you
owe each month and none of the principal. The unpaid interest will be
added to your loan amount, which over time will increase the total
amount you are borrowing and cause you to lose equity in your
home.''[ltrif]
[rtrif]5b(c)(16)[ltrif] [5b(d)(10)] Transaction Requirements.
1. Applicability. A limitation on automated teller machine usage
need not be disclosed under this paragraph unless that is the only
means by which the consumer can obtain funds.
[rtrif]5b(c)(18) Statements About Fixed-Rate and -Term Payment
Plans.
1. Disclosure of fixed-rate and -term payment plans in the table.
See comment 5b(c)-4 regarding disclosure of terms relating to fixed-
rate and -term payment plans during the draw period in the table
required by Sec. 226.5b(b).
2. Disclosure of additional information upon request. A creditor
generally must disclose in the table required by Sec. 226.5b(b) a
statement that the consumer may receive, upon request, further details
about the fixed-rate and -term payment plans. Alternatively, a creditor
may provide additional detail about the fixed-rate and -term payment
plans with the table required by Sec. 226.5b(b). In that case, the
[[Page 43591]]
creditor must state that information about the fixed-rate and -term
payment plans are provided along with the table required by Sec.
226.5b(b). In disclosing additional information about the fixed-rate
and -term payment plans upon a consumer's request prior to account
opening (or along with the table required by Sec. 226.5b(b)), a
creditor must disclose in the form of a table (1) the information
described by Sec. 226.5b(c) applicable to the fixed-rate and -term
payment plans, and (2) any fees imposed related to the use of the
fixed-rate and -term payment plans, such as fees to exercise the fixed-
rate and -term payment plans or to convert a balance under a fixed-rate
and -term payment feature to a variable-rate feature under the HELOC
plan. See comment 5b(c)-2 regarding how soon after the consumer's
request the creditor must disclose this information to the consumer.
5b(c)(19) Required Insurance, Debt Cancellation, or Debt Suspension
Coverage.
1. Content. See Samples G-14(D) and G-14(E) for guidance on how to
comply with the requirements in Sec. 226.5b(c)(19).[ltrif]
[5b(d)(12) Disclosures for Variable-Rate Plans.
1. Variable-rate provisions. Sample forms in appendix G-14 provide
illustrative guidance on the variable-rate rules.
Paragraph 5b(d)(12)(iv).
1. Determination of annual percentage rate. If the creditor adjusts
its index through the addition of a margin, the disclosure might read,
``Your annual percentage rate is based on the index plus a margin.''
The creditor is not required to disclose a specific value for the
margin.
Paragraph 5b(d)(12)(viii).
1. Preferred-rate provisions. This paragraph requires disclosure of
preferred-rate provisions, where the rate will increase upon the
occurrence of some event, such as the borrower-employee leaving the
creditor's employ or the consumer closing an existing deposit account
with the creditor.
2. Provisions on conversion to fixed rates. The commentary to Sec.
226.5b(d)(5)(ii) discusses the disclosure requirements for options
permitting the consumer to convert from a variable rate to a fixed
rate.
Paragraph 5b(d)(12)(ix).
1. Periodic limitations on increases in rates. The creditor must
disclose any annual limitations on increases in the annual percentage
rate. If the creditor bases its rate limitation on 12 monthly billing
cycles, such a limitation should be treated as an annual cap. Rate
limitations imposed on less than an annual basis must be stated in
terms of a specific amount of time. For example, if the creditor
imposes rate limitations on only a semiannual basis, this must be
expressed as a rate limitation for a six-month time period. If the
creditor does not impose periodic limitations (annual or shorter) on
rate increases, the fact that there are no annual rate limitations must
be stated.
2. Maximum limitations on increases in rates. The maximum annual
percentage rate that may be imposed under each payment option over the
term of the plan (including the draw period and any repayment period
provided for in the initial agreement) must be provided. The creditor
may disclose this rate as a specific number (for example, 18%) or as a
specific amount above the initial rate. For example, this disclosure
might read, ``The maximum annual percentage rate that can apply to your
line will be 5 percentage points above your initial rate.'' If the
creditor states the maximum rate as a specific amount above the initial
rate, the creditor must include a statement that the consumer should
inquire about the rate limitations that are currently available. If an
initial discount is not taken into account in applying maximum rate
limitations, that fact must be disclosed. If separate overall
limitations apply to rate increases resulting from events such as the
exercise of a fixed-rate conversion option or leaving the creditor's
employ, those limitations also must be stated. Limitations do not
include legal limits in the nature of usury or rate ceilings under
state or federal statutes or regulations.
3. Form of disclosures. The creditor need not disclose each
periodic or maximum rate limitation that is currently available.
Instead, the creditor may disclose the range of the lowest and highest
periodic and maximum rate limitations that may be applicable to the
creditor's home-equity plans. Creditors using this alternative must
include a statement that the consumer should inquire about the rate
limitations that are currently available.
Paragraph 5b(d)(12)(x).
1. Maximum rate payment example. In calculating the payment
creditors should assume the maximum rate is in effect. Any discounted
or premium initial rates or periodic rate limitations should be ignored
for purposes of this disclosure. If a range is used to disclose the
maximum cap under Sec. 226.5b(d)(12)(ix), the highest rate in the
range must be used for the disclosure under this paragraph. As an
alternative to making disclosures based on each payment option, the
creditor may choose a representative example within the three
categories of payment options upon which to base this disclosure. (See
the commentary to Sec. 226.5b(d)(5).) However, separate examples must
be provided for the draw period and for any repayment period unless the
payment is determined the same way in both periods. Creditors should
calculate the example for the repayment period based on an assumed
$10,000 balance. (See the commentary to Sec. 226.5b(d)(5) for a
discussion of the circumstances in which a creditor may use a lower
outstanding balance.)
2. Time the maximum rate could be reached. In stating the date or
time when the maximum rate could be reached, creditors should assume
the rate increases as rapidly as possible under the plan. In
calculating the date or time, creditors should factor in any discounted
or premium initial rates and periodic rate limitations. This disclosure
must be provided for the draw phase and any repayment phase. Creditors
should assume the index and margin shown in the last year of the
historical example (or a more recent rate) is in effect at the
beginning of each phase.
Paragraph 5b(d)(12)(xi).
1. Index movement. Index values and annual percentage rates must be
shown for the entire 15 years of the historical example and must be
based on the most recent 15 years. The example must be updated annually
to reflect the most recent 15 years of index values as soon as
reasonably possible after the new index value becomes available. If the
values for an index have not been available for 15 years, a creditor
need only go back as far as the values have been available and may
start the historical example at the year for which values are first
available.
2. Selection of index values. The historical example must reflect
the method of choosing index values for the plan. For example, if an
average of index values is used in the plan, averages must be used in
the example, but if an index value as of a particular date is used, a
single index value must be shown. The creditor is required to assume
one date (or one period, if an average is used) within a year on which
to base the history of index values. The creditor may choose to use
index values as of any date or period as long as the index value as of
this date or period is used for each year in the example. Only one
index value per year need be shown, even if the plan provides for
adjustments to the annual percentage rate or payment more than once in
a year. In such cases, the creditor can assume that the index rate
remained
[[Page 43592]]
constant for the full year for the purpose of calculating the annual
percentage rate and payment.
3. Selection of margin. A value for the margin must be assumed in
order to prepare the example. A creditor may select a representative
margin that it has used with the index during the six months preceding
preparation of the disclosures and state that the margin is one that it
has used recently. The margin selected may be used until the creditor
annually updates the disclosure form to reflect the most recent 15
years of index values.
4. Amount of discount or premium. In reflecting any discounted or
premium initial rate, the creditor may select a discount or premium
that it has used during the six months preceding preparation of the
disclosures, and should disclose that the discount or premium is one
that the creditor has used recently. The discount or premium should be
reflected in the example for as long as it is in effect. The creditor
may assume that a discount or premium that would have been in effect
for any part of a year was in effect for the full year for purposes of
reflecting it in the historical example.
5. Rate limitations. Limitations on both periodic and maximum rates
must be reflected in the historical example. If ranges of rate
limitations are provided under Sec. 226.5b(d)(12)(ix), the highest
rates provided in those ranges must be used in the example. Rate
limitations that may apply more often than annually should be treated
as if they were annual limitations. For example, if a creditor imposes
a 1% cap every six months, this should be reflected in the example as
if it were a 2% annual cap.
6. Assumed advances. The creditor should assume that the $10,000
balance is an advance taken at the beginning of the first billing cycle
and is reduced according to the terms of the plan, and that the
consumer takes no subsequent draws. As discussed in the commentary to
Sec. 226.5b(d)(5), creditors should not assume an additional advance
is taken at the beginning of any repayment period. If applicable, the
creditor may assume the $10,000 is both the advance and the credit
limit. (See the commentary to Sec. 226.5b(d)(5) for a discussion of
the circumstances in which a creditor may use a lower outstanding
balance.)
7. Representative payment options. The creditor need not provide an
historical example for all of its various payment options, but may
select a representative payment option within each of the three
categories of payments upon which to base its disclosure. (See the
commentary to Sec. 226.5b(d)(5).)
8. Payment information. The payment figures in the historical
example must reflect all significant program terms. For example,
features such as rate and payment caps, a discounted initial rate,
negative amortization, and rate carryover must be taken into account in
calculating the payment figures if these would have applied to the
plan. The historical example should include payments for as much of the
length of the plan as would occur during a 15-year period. For example:
If the draw period is 10 years and the repayment period is
15 years, the example should illustrate the entire 10-year draw period
and the first 5 years of the repayment period.
If the length of the draw period is 15 years and there is
a 15-year repayment phase, the historical example must reflect the
payments for the 15-year draw period and would not show any of the
repayment period. No additional historical example would be required to
reflect payments for the repayment period.
If the length of the plan is less than 15 years, payments
in the historical example need only be shown for the number of years in
the term. In such cases, however, the creditor must show the index
values, margin and annual percentage rates and continue to reflect all
significant plan terms such as rate limitations for the entire 15
years.
A creditor need show only a single payment per year in the example,
even though payments may vary during a year. The calculations should be
based on the actual payment computation formula, although the creditor
may assume that all months have an equal number of days. The creditor
may assume that payments are made on the last day of the billing cycle,
the billing date or the payment due date, but must be consistent in the
manner in which the period used to illustrate payment information is
selected. Information about balloon payments and remaining balance may,
but need not, be reflected in the example.
9. Disclosures for repayment period. The historical example must
reflect all features of the repayment period, including the appropriate
index values, margin, rate limitations, length of the repayment period,
and payments. For example, if different indices are used during the
draw and repayment periods, the index values for that portion of the 15
years that reflect the repayment period must be the values for the
appropriate index.
10. Reverse mortgages. The historical example for reverse mortgages
should reflect 15 years of index values and annual percentage rates,
but the payment column should be blank until the year that the single
payment will be made, assuming that payment is estimated to occur
within 15 years. (See the commentary to Sec. 226.5b(d)(5) for a
discussion of reverse mortgages.)
5b(e) Brochure
1. Substitutes. A brochure is a suitable substitute for the Board's
home-equity brochure if it is, at a minimum, comparable to the Board's
brochure in substance and comprehensiveness. Creditors are permitted to
provide more detailed information than is contained in the Board's
brochure.
2. Effect of third-party delivery of brochure. If a creditor
determines that a third party has provided a consumer with the required
brochure pursuant to section 226.5b(c), the creditor need not give the
consumer a second brochure.]
5b[(g)][rtrif](d)[ltrif] Refund of Fees
1. Refund of fees required. If any disclosed term, including any
term provided upon request pursuant to section
226.5b[rtrif](c)[ltrif][(d)], changes between the time the early
disclosures are provided to the consumer and the time the plan is
opened, and the consumer [as a result] decides to not enter into the
plan, a creditor must refund all fees paid by the consumer [in
connection with the application]. All fees, including credit-report
fees and appraisal fees, must be refunded whether such fees are paid to
the creditor or directly to third parties. A consumer is entitled to a
refund of fees under these circumstances whether or not terms are
guaranteed by the creditor under section
226.5b[rtrif](c)(4)(i)[ltrif][(d)(2)(i)].
2. Variable-rate plans. The right to a refund of fees does not
apply to changes in the annual percentage rate resulting from
fluctuations in the index value in a variable-rate plan. Also, if the
maximum annual percentage rate is [expressed as] an amount over the
initial rate, the right to refund of fees would not apply to changes in
the cap resulting from fluctuations in the index value.
3. Changes in terms. If a term, such as [rtrif]a fee[ltrif] [the
maximum rate], is stated as a range in the early disclosures
[rtrif]required under Sec. 226.5b(b)[ltrif], and the term ultimately
applicable to the plan falls within that range, a change does not occur
for purposes of this section. If, however, no range is used and the
term is changed (for example, a rate cap of 6 rather than 5 percentage
points over the initial rate), the change would permit the consumer to
obtain a refund of fees. If a fee imposed by the creditor is stated in
the early disclosures as an estimate and the fee changes, the consumer
could
[[Page 43593]]
elect to not enter into the agreement and would be entitled to a refund
of fees. [On the other hand, if fees imposed by third parties are
disclosed as estimates and those fees change, the consumer is not
entitled to a refund of fees paid in connection with the application.
Creditors must, however, use the best information reasonably available
in providing disclosures about such fees.]
4. Timing of refunds and relation to other provisions. The refund
of fees must be made as soon as reasonably possible after the creditor
is notified[rtrif], after a term has changed,[ltrif] that the consumer
is not entering into the plan [because of the changed term,] or that
the consumer wants a refund of fees. The fact that an application fee
may be refunded to some applicants under this provision does not render
such fees finance charges under section 226.4(c)(1) of the regulation.
5b[(h)] [rtrif](e)[ltrif] Imposition of Nonrefundable Fees
1. Collection of fees after consumer receives disclosures. A fee
may be collected after the consumer receives the disclosures
[rtrif]required under this section[ltrif] [and brochure] and before the
expiration of three [rtrif]business[ltrif] days, although the fee must
be refunded if, within three [rtrif]business[ltrif] days of receiving
the required information, the consumer decides not to enter into the
agreement. In such a case, the consumer must be notified that the fee
is refundable for three [rtrif]business[ltrif] days. The notice must be
clear and conspicuous and in writing, and [rtrif]must [ltrif] [may] be
included with the disclosures required under Sec.
226.5b[(d)][rtrif](b)[ltrif] [or as an attachment to them]. If
disclosures [rtrif]required under Sec. 226.5b(b)[ltrif] [and brochure]
are mailed to the consumer, [rtrif]Sec. 226.5b(e)[ltrif] [footnote
10d] of the regulation provides that a nonrefundable fee may not be
imposed until six business days after the mailing.
2. Collection of fees before consumer receives disclosures. An
application fee may be collected before the consumer receives the
disclosures [rtrif]required under Sec. 226.5b(b)[ltrif] [and brochure]
(for example, when an application contained in a magazine is mailed in
with an application fee) provided that [it] [rtrif]the fee[ltrif]
remains refundable until three business days after the consumer
receives the section 226.5b[rtrif](b)[ltrif] disclosures. No other fees
except a refundable membership fee may be collected until after the
consumer receives the disclosures required under section
226.5b[rtrif](b)[ltrif].
3. Relation to other provisions. A fee collected before disclosures
[rtrif]required under Sec. 226.5b(b)[ltrif] are provided may become
nonrefundable except that, under section 226.5b[(g)][rtrif](d)[ltrif],
it must be refunded if [rtrif]a term changes and[ltrif] the consumer
elects not to enter into the plan [because of a change in terms]. (Of
course, all fees must be refunded if the consumer later rescinds under
section 226.15.)
[rtrif]4. Definition of ``Business Day''. For purposes Sec.
226.5b(e), the more precise definition of business day (meaning all
calendar days except Sundays and specified federal holidays) under
Sec. 226.2(a)(6) applies. See comment 2(a)(6)-2.[ltrif]
5b(f) Limitations on home-equity plans.
Paragraph 5b(f)(2)(ii).
[rtrif]1. Under this paragraph, a creditor may not terminate and
accelerate a home-equity plan, or take the lesser actions of
permanently suspending advances or reducing the credit limit, imposing
a penalty rate of interest, or adding or increasing a fee (as permitted
under comment 5b(f)(2)-2, unless the consumer's required minimum
payment is not received by the creditor within 30 days after the due
date for that payment. This paragraph does not prohibit a creditor from
imposing a late-payment fee disclosed in the agreement, or from
temporarily suspending advances or reducing the credit limit for a
``default of any material obligation'' (as permitted under Sec.
226.5b(f)(3)(vi)(C)), for a delinquency of 30 days or fewer.
2. A creditor may not take any action under this paragraph unless
the creditor complies with notice requirements under Sec. 226.9(j)(3),
which requires notice of the action taken and the reasons for the
action and, if applicable, notice of an increased annual percentage
rate (under Sec. 226.9(i)(1)) or notice of any other change in terms,
such as the addition or increase of a fee (under Sec. 226.9(c)(1)).
This section does not override any state or other law that requires a
right to cure notice, or otherwise places a duty on the creditor before
it can terminate a plan and accelerate the balance.[ltrif]
[1. Failure to meet repayment terms. A creditor may terminate a
plan and accelerate the balance when the consumer fails to meet the
repayment terms provided for in the agreement. However, a creditor may
terminate and accelerate under this provision only if the consumer
actually fails to make payments. For example, a creditor may not
terminate and accelerate if the consumer, in error, sends a payment to
the wrong location, such as a branch rather than the main office of the
creditor. If a consumer files for or is placed in bankruptcy, the
creditor may terminate and accelerate under this provision if the
consumer fails to meet the repayment terms of the agreement. This
section does not override any state or other law that requires a right
to cure notice, or otherwise places a duty on the creditor before it
can terminate a plan and accelerate the balance.]
* * * * *
[rtrif]Paragraph 5b(f)(2)(iv)
1. ``Federal law'' under this provision is limited to any federal
statute, its implementing regulation, and official interpretations
issued by the regulatory agency with authority to implement the statute
or regulation.[ltrif]
* * * * *
Paragraph 5b(f)(3).
1. Scope of provision. In general, a creditor may not change the
terms of a plan after it is opened. For example, a creditor may not
increase any fee or impose a new fee once the plan has been opened,
even if the fee is charged by a third party, such as a credit reporting
agency, for a service. The change-of-terms prohibition applies to all
features of a plan, not only those required to be disclosed under this
section. [For example, this provision applies to charges imposed for
late payment, although this fee is not required to be disclosed under
Sec. 226.5b(d)(7).]
2. [Charges not covered] [rtrif]Certain tax and insurance
charges.[ltrif] [There are three charges not covered by this
provision.] A creditor may pass on increases in taxes since such
charges are imposed by a governmental body and are beyond the control
of the creditor. In addition, a creditor may pass on increases in
premiums for property insurance that are excluded from the finance
charge under Sec. 226.4(d)(2), since such insurance provides a benefit
to the consumer independent of the use of the line and is often
maintained notwithstanding the line. A creditor also may pass on
increases in premiums for credit insurance that are excluded from the
finance charge under Sec. 226.4(d)(1), since the insurance is
voluntary and provides a benefit to the consumer.
[rtrif]3. Certain default-related charges. This provision does not
prohibit a creditor from passing on to the consumer bona fide and
reasonable costs incurred by the creditor for collection activity after
default, to protect the creditor's interest in the property securing
the plan, or to foreclose on the securing property. These costs might
include, among others, attorneys' fees, court costs, property repairs,
payment of overdue taxes, or paying sums secured by a lien with
priority over the lien securing the
[[Page 43594]]
home-equity plan. The requirement that these costs be ``bona fide and
reasonable'' means that the creditor must actually incur the costs and
that the amount of the costs must be reasonably related to the services
related to debt collection, collateral protection or foreclosure. A
creditor may pass these costs on to the consumer only if the creditor
incurs these costs due to the consumer's default on an obligation under
the agreement for the plan.[ltrif]
Paragraph 5b(f)(3)(i).
1. Changes provided for in agreement. A creditor may provide in the
initial agreement that further advances may be prohibited or the credit
line reduced during any period in which the maximum annual percentage
rate is reached. A creditor may provide for other specific changes to
take place upon the occurrence of specific events. Both the triggering
event and the resulting modification must be stated with specificity.
For example, in home-equity plans for employees, the agreement could
provide that a specified higher rate or margin will apply if the
borrower's employment with the creditor ends, [rtrif]or upon the
occurrence of some other triggering event. However, the agreement would
not be permitted to provide for a rate or margin higher than the one
that would have been available to the consumer in the absence of
special circumstances such as employment with the creditor (unless the
triggering event is a circumstance that would permit the rate to be
increased as a penalty under Sec. 226.5b(f)(2) and comment 5b(f)(2)-
2)).[ltrif] A contract could contain a stepped-rate or stepped-fee
schedule providing for specified changes in the rate or the fees on
certain dates or after a specified period of time. A creditor also may
provide in the initial agreement that it will be entitled to a share of
the appreciation in the value of the property as long as the specific
appreciation share and the specific circumstances which require the
payment of it are set forth. A contract may permit a consumer to switch
among minimum-payment options during the plan.
* * * * *
Paragraph 5b(f)(3)(iv).
1. Beneficial changes. After a plan is opened, a creditor may make
changes that unequivocally benefit the consumer. Under this provision,
a creditor may offer more options to consumers, as long as existing
options remain. For example, a creditor may offer the consumer the
option of making lower monthly payments or could increase the credit
limit. Similarly, a creditor wishing to extend the length of the plan
on the same terms may do so. Creditors are permitted to temporarily
reduce the rate or fees charged during the plan (though change-in-terms
notice [rtrif]would[ltrif] [may] be required under Sec.
226.9(c)[rtrif](1)[ltrif] when the rate or fees are returned to their
original level [rtrif], unless these features are explained on the
account-opening disclosure statement required under Sec. 226.6
(including an explanation of the terms upon resumption). Also, as long
as the 45-day advance notice timing requirement of Sec. 226.9(c)(1) is
met, notice of the increase in the rate or fees may be included with a
notice to the consumer that the rate or fees are being reduced.[ltrif]
Creditors also may offer an additional means of access to the line,
even if fees are associated with using the device, provided the
consumer retains the ability to use prior access devices on the
original terms.
Paragraph 5b(f)(3)(v).
1. Insignificant changes. A creditor is permitted to make
insignificant changes after a plan is opened. This rule accommodates
operational and similar problems, such as changing the address of the
creditor for purposes of sending payments. It does not permit a
creditor to change a term such as a fee charged for late payments.
2. Examples of insignificant changes. Creditors may make minor
changes to features such as the billing cycle date, the payment due
date (as long as the consumer does not have a diminished grace period
if one is provided), and the day of the month on which index values are
measured to determine changes to the rate for variable-rate plans. A
creditor also may change its rounding practice in accordance with the
tolerance rules set forth in Sec. 226.14 (for example, stating an
exact APR is 14.3333 percent as 14.3 percent, even if it had previously
been stated as 14.33 percent.) A creditor may change the balance
computation method it uses only if the change produces an insignificant
difference in the finance charge paid by the consumer. For example, a
creditor may switch from using the average-daily-balance method
(including new transactions) to the daily balance method (including new
transactions). [rtrif]A creditor may also eliminate a means of access
to the line, as long as one or more access devices available at account
opening remain available to the consumer on the original terms. For
example, a creditor could eliminate the option of accessing a plan via
credit card, but only if the creditor originally offered access to the
plan via check or a credit card, and the option of accessing the
account via check remains, based on the terms in the initial agreement.
A creditor may not change the original terms on which an existing
access device is available under this provision, although such change
may be permitted as a ``beneficial change'' under Sec.
226.5b(f)(3)(iv).[ltrif]
Paragraph 5b(f)(3)(vi).
1. Suspension of credit or reduction of credit limit. A creditor
may prohibit additional extensions of credit or reduce the credit limit
in the circumstances specified in this section of the regulation. In
addition, as discussed under Sec. 226.5b(f)(3)(i), a creditor may
contractually reserve the right to take such actions when the maximum
annual percentage rate is reached. A creditor may not take these
actions under other circumstances, unless the creditor would be
permitted to terminate the line and accelerate the balance as described
in section 226.5b(f)(2). The creditor's right to reduce the credit
limit does not permit reducing the limit below the amount of the
outstanding balance if this would require the consumer to make a higher
payment.
[2. Temporary nature of suspension or reduction. Creditors are
permitted to prohibit additional extensions of credit or reduce the
credit limit only while one of the designated circumstances exists.
When the circumstance justifying the creditor's action ceases to exist,
credit privileges must be reinstated, assuming that no other
circumstance permitting such action exists at that time.]
[3. Imposition of fees. If not prohibited by state law, a creditor
may collect only bona fide and reasonable appraisal and credit-report
fees if such fees are actually incurred in investigating whether the
condition permitting the freeze continues to exist. A creditor may not,
in any circumstances, charge a fee to reinstate a credit line that has
been suspended or reduced once the condition has been determined not to
exist.]
[4. Reinstatement of credit privileges. Creditors are responsible
for ensuring that credit privileges are restored as soon as reasonably
possible after the condition that permitted the creditor's action
ceases to exist. One way a creditor can meet this responsibility is to
monitor the line on an ongoing basis to determine when the condition
ceases to exist. The creditor must investigate the condition frequently
enough to assure itself that the condition permitting the freeze
continues to exist. The frequency with which the creditor must
investigate to determine whether a condition continues to exist depends
upon the specific condition permitting the freeze. As an alternative to
such
[[Page 43595]]
monitoring, the creditor may shift the duty to the consumer to request
reinstatement of credit privileges by providing a notice in accordance
with Sec. 226.9(c)(3). A creditor may require a reinstatement request
to be in writing if it notifies the consumer of this requirement on the
notice provided under Sec. 226.9(c)(3). Once the consumer requests
reinstatement, the creditor must promptly investigate to determine
whether the condition allowing the freeze continues to exist. Under
this alternative, the creditor has a duty to investigate only upon the
consumer's request.]
[5.][rtrif]2.[ltrif] Suspension of credit privileges following
request by consumer. A creditor may honor a specific request by a
consumer to suspend credit privileges [rtrif]or reduce the credit
limit[ltrif]. If the consumer later requests that the creditor
reinstate credit privileges, the creditor must do so provided no other
circumstance justifying a suspension [rtrif]or credit limit
reduction[ltrif] exists at that time. [rtrif]If a circumstance
justifying a suspension or credit limit reduction exists at that time
and the creditor therefore does not reinstate credit privileges, the
creditor must comply with the notice requirements of Sec. 226.9(j)(1)
or (j)(3), as applicable.[ltrif] If two or more consumers are obligated
under a plan and each has the ability to take advances, the agreement
may permit any of the consumers to direct the creditor not to make
further advances [rtrif]or to reduce the credit limit[ltrif]. A
creditor may require that all persons obligated under a plan request
reinstatement.
[6.][rtrif]4.[ltrif] Significant decline defined[rtrif]--safe
harbors[ltrif]. What constitutes a significant decline for purposes of
Sec. 226.5b(f)(3)(vi)(A) will vary according to individual
circumstances. [rtrif]At a minimum, this means that compliance with
this provision requires the creditor to assess the value of the
property based on specific characteristics of the property. For plans
with a combined loan-to-value ratio at origination of 90 percent or
higher, a five (5) percent reduction in the property value would
constitute a significant decline under Sec. 226.5b(f)(3)(vi)(A). For
plans with a combined loan-to-value ratio at origination of under 90
percent, a decline in value would be significant under Sec.
226.5b(f)(3)(vi)(A)[ltrif] if the value of the dwelling declines such
that the initial difference between the credit limit and the available
equity (based on the property's [appraised] value for purposes of the
plan) is reduced by 50 percent. For example, assume that a house with a
first mortgage of $50,000 is [appraised] [rtrif]valued[ltrif] at
origination at $100,000 and the credit limit is $30,000. The difference
between the credit limit and the available equity is $20,000, half of
which is $10,000. The creditor could prohibit further advances or
reduce the credit limit if the value of the property declines from
$100,000 to $90,000. [This provision does not require a creditor to
obtain an appraisal before suspending credit privileges, although a
significant decline must occur before suspension can occur.]
[rtrif]5. Property valuation tools. Section 226.5b(f)(3)(vi)(A)
does not require a creditor to obtain an appraisal before suspending
credit privileges or reducing the credit limit, although a significant
decline must occur before a creditor suspends advances or reduces the
credit limit. If not prohibited by state law, property valuation
methods other than an appraisal that may be appropriate to use under
this provision include, but are not limited to, automated valuation
models, tax assessment valuations, and broker price opinions. Any
property valuation method must, however, consider specific
characteristics of the property, such as square footage and number of
rooms, and not merely estimate the value based on property values or
re-sale prices generally in a particular geographic area.[ltrif]
[7.][rtrif]6.[ltrif] Material change in financial circumstances.
Two conditions must be met for Sec. 226.5b(f)(3)(vi)(B) to apply.
First, there must be a ``material change'' in the consumer's financial
circumstances[, such as a significant decrease in the consumer's
income]. [rtrif]Ways in which this first condition may be met include,
but are not limited to, demonstration of a significant decrease in the
consumer's income, or credit report information showing late payments
or nonpayments on the part of the consumer, such as delinquencies,
defaults, or derogatory collections or public records related to the
consumer's failure to pay other obligations according to their
terms.[ltrif] Second, as a result of this change, the creditor must
have a reasonable belief that the consumer will be unable to fulfill
the payment obligations of the plan. [rtrif]In all cases, the creditor
must have a basis to support the creditor's reasonable belief that the
consumer will be unable to fulfill the repayment obligations of the
plan.[ltrif] A creditor may[, but does not have to,] rely on[rtrif],
for example, the consumer's failure to pay other debts, such as
significant delinquencies, defaults, or derogatory collections or
public records[ltrif] [specific evidence (such as the failure to pay
other debts)] in concluding that the second part of the test has been
met. [rtrif]However, late payments of 30 days or fewer, by themselves,
would not be sufficient to satisfy the second part of the test. The
payment failures that may serve as evidence under either prong of the
two-part test must have occurred within a reasonable time from the date
of the creditor's review of the consumer's credit performance. In all
cases, a payment failure will be deemed to have occurred within a
reasonable time from the date of the creditor's review if it occurred
within six months of the creditor's suspending advances or reducing the
credit limit, and the consumer has not brought the account or other
obligation current as of the time of the review.[ltrif] A creditor may
prohibit further advances or reduce the credit limit under this section
if a consumer files for or is placed in bankruptcy.
[8.][rtrif]7.[ltrif] Default of a material obligation. Creditors
[rtrif]must[ltrif] [may] specify events that would qualify as a default
of a material obligation under Sec. 226.5b(f)(3)(vi)(C). For example,
a creditor may provide that default of a material obligation will exist
if the consumer moves out of the dwelling or permits an intervening
lien to be filed that would take priority over future advances made by
the creditor.
[9.][rtrif]8.[ltrif] Government limits on the annual percentage
rate. Under Sec. 226.5b(f)(3)(vi)(D), a creditor may prohibit further
advances or reduce the credit limit if, for example, a state usury law
is enacted which prohibits a creditor from imposing the agreed-upon
annual percentage rate.
[rtrif]9. Suspensions and credit limit reductions required by
federal law. ``Federal law'' under this provision is limited to any
federal statute, its implementing regulation, and official
interpretations issued by the regulatory agency with authority to
implement the statute or regulation. A creditor may prohibit either a
single advance or multiple advances, depending on what the applicable
federal law requires.[ltrif]
[rtrif]5b(g) Reinstatement of Credit Privileges.[ltrif]
1. Temporary nature of suspension or reduction. Creditors are
permitted to prohibit additional extensions of credit or reduce the
credit limit [rtrif]under Sec. 226.5b(f)(3)(i) and (f)(3)(vi)[ltrif]
only while one of the designated circumstances exists. When the
circumstance justifying the creditor's action ceases to exist, the
creditor must reinstate the consumer's credit privileges, assuming that
no other circumstance permitting the creditor's action exists at that
time.
2. Imposition of fees to reinstate a credit line. A creditor may
not, in any circumstances, charge a fee to reinstate
[[Page 43596]]
a credit line [rtrif]that has been suspended or reduced under
paragraphs 226.5b(f)(3)(i) or (f)(3)(vi)[ltrif] once [the]
[rtrif]no[ltrif] condition [rtrif]permitting the suspension or
reduction[ltrif] [has been determined not to] exist[rtrif]s[ltrif].
[rtrif]Paragraph 5b(g)(1).[ltrif]
1. Creditor responsibility for restoring credit privileges.
Creditors are responsible for ensuring that credit privileges are
restored as soon as reasonably possible after the condition that
permitted the creditor's action ceases to exist and [rtrif]no other
condition permitting a freeze or credit limit reduction exists at that
time.[ltrif] One way [rtrif]in which[ltrif] a creditor can meet this
obligation is to monitor the line on an ongoing basis to determine when
the condition permitting the freeze or credit limit reduction ceases to
exist. The creditor must investigate the condition frequently enough to
assure itself that the condition permitting the freeze or credit limit
reduction continues to exist. The frequency with which the creditor
must investigate to determine whether a condition continues to exist
depends upon the specific condition permitting the freeze. As an
alternative to [such] [rtrif]ongoing[ltrif] monitoring, the creditor
may shift the duty to the consumer to request reinstatement of credit
privileges. [A creditor may require a reinstatement request to be in
writing if it notifies the consumer of this requirement on the notice
provided under Sec. 226.9(c)(3). Once the consumer requests
reinstatement, the creditor must promptly investigate to determine
whether the condition allowing the freeze continues to exist. Under
this alternative, the creditor has a duty to investigate only upon the
consumer's request.]
[rtrif]Paragraph 5b(g)(2)(i).
1. Disclosure of consumer obligation to request reinstatement. The
creditor may shift the duty to the consumer to request reinstatement
if, pursuant to Sec. 226.9(j)(1), the creditor discloses that the
consumer must request reinstatement.[ltrif]
[rtrif] Paragraph 5b(g)(2)(ii).
1. Creditor responsibility to investigate reinstatement
requests.[ltrif] Once the consumer requests reinstatement, the creditor
must promptly investigate to determine whether the condition allowing
the [freeze continues to] [rtrif]suspension or credit limit
reduction[ltrif] exist[rtrif]s[ltrif]. The investigation should verify
that the information on which the creditor relied to take action in
fact pertained to the specific property securing the affected plan (as
with a property valuation) or to the specific consumer (as with a
credit report). To investigate whether a significant decline in
property value exists under Sec. 226.5b(f)(3)(vi)(A), the creditor
should reassess the value of the property securing the line based on an
updated property valuation meeting the standards in comment
5b(f)(3)(vi)-5. To investigate whether a material change in the
consumer's financial circumstances exists under Sec.
226.5b(f)(3)(vi)(B), the creditor should obtain and evaluate
information sufficient to assess whether the original finding on which
action was based was accurate or, if accurate, remains current.[ltrif]
[rtrif]Paragraph 5b(g)(3).
1. Duty to provide documentation of property value. The creditor
has a duty to provide to the consumer, upon request, a copy of
documentation supporting the property value on which the creditor
relied to suspend advances or reduce the credit limit due to a
significant decline in the value of the property securing the line
under Sec. 226.5b(f)(vi)(A), or to continue suspension or reduction of
an account due to a significant decline in the property value under
Sec. 226.5b(f)(vi)(A).
2. Appropriate documentation of property value. Appropriate
documentation supporting the property value on which the action was
based under this paragraph would include, as applicable, a copy of the
appraisal report or a copy of any written evidence of an automated
valuation model, tax assessment value, broker price opinion, or other
valuation method used that clearly and conspicuously shows the property
value specific to the subject property and factors considered to obtain
the value.[ltrif]
* * * * *
[5b(g)][rtrif]5b[(d)][ltrif]
* * * * *
[5b(h)][rtrif]5b[(e)][ltrif]
* * * * *
Sec. 226.6--Account-opening Disclosures.
6(a) Rules affecting home-equity plans.
[rtrif]1. Fixed-rate and -term payment plans during draw period.
Under some home-equity plans, a creditor will permit the consumer to
repay all or part of the balance during the draw period at a fixed rate
(rather than a variable rate) and over a specified time period. To
illustrate, a variable-rate plan may permit a consumer to elect during
a ten-year draw period to repay all or a portion of the balance over a
three-year period at a fixed rate. A creditor generally may not
disclose the terms applicable to this feature in the account-opening
table required under Sec. 226.6(a)(2), except as required under Sec.
226.6(a)(2)(xix). A creditor must, however, disclose fixed-rate and -
term payment features in the account-opening table if they are the only
payment plans offered during the draw period of the plan. (See Sec.
226.6(a)(2).) Even though a creditor generally may not disclose the
terms of fixed-rate and -term payment plans in the account-opening
table, the creditor must disclose information about these payment plans
as required by Sec. 226.6(a)(3), (a)(4) and (a)(5). For example, a
creditor must disclose fee and rate information related to these
features under Sec. 226.6(a)(3) and (a)(4), and information about
payment and other terms related to these features under Sec.
226.6(a)(5)(v).
2. Disclosures for the repayment period. The creditor must provide
the disclosures under Sec. 226.6 for both the draw and repayment
phases when giving the disclosures under Sec. 226.6. To the extent
required disclosures are the same for the draw and repayment phases,
the creditor need not repeat such information, as long as it is clear
that the information applies to both phases.
6(a)(1) Form of disclosures; tabular format.
1. Relation to tabular disclosures required under Sec. 226.5b(b).
The commentary to Sec. 226.5b(b) and (c) regarding format and content
requirements are also applicable to disclosures required by Sec.
226.6(a)(2), except for the following:
i. A creditor may not disclose above the account-opening table a
statement that the consumer has applied for a home-equity line of
credit.
ii. A creditor may not disclose below the account-opening table an
identification of any disclosed term that is subject to change prior to
opening the plan.
iii. A creditor may not disclose in the account-opening table a
statement about the right to a refund of fees pursuant to Sec.
226.5b(d) and (e).
iv. A creditor must disclose the account number as part of the
identification information required by Sec. 226.6(a)(2)(i)(A).
v. With respect to the statements about the conditions under which
the creditor may take certain actions, such as terminating the plan, a
creditor must indicate in the account-opening table that information
about the conditions is provided in the account-opening disclosures or
agreement, as applicable.
vi. A creditor must disclose in the account-opening table the
payment terms applicable to the plan that will apply to the consumer at
account opening (and may not disclose payment terms for two possible
payment plans as allowed under Sec. 226.5b(c)(9)(ii)(B)).
[[Page 43597]]
viii. A creditor must disclose in the account-opening table the
total of all one-time fees imposed by the creditor and third parties to
open the plan, and may not disclose the highest amount of possible fees
as allowed under Sec. 226.5b(c)(11). In addition, a creditor must
disclose in the account-opening table an itemization of all one-time
fees imposed by the creditor and third parties to open the plan, and
may not disclose a range for those fees, as otherwise allowed under
Sec. 226.5b(c)(11). A creditor also must include in the account-
opening table a cross-reference from the disclosure of the total of
one-time fees for opening an account, indicating that the itemization
of the fees is located elsewhere in the table.
ix. A creditor must include in the account-opening table the
following fees (that are not required to be disclosed in the table
under Sec. 226.5b(b)): Late-payment fees; over-the-limit fees;
transaction charges; returned-payment fees; and fees for failure to
comply with transaction limitations.
x. A creditor must include in the account-opening table a statement
that other fees are located elsewhere in the table, and a statement
that information about other fees is included in the account-opening
disclosures or agreement, as applicable.
xi. A creditor must include in the account-opening table a
statement that information about the fixed-rate and -term payment plans
is disclosed in the account-opening disclosures or agreement, as
applicable.
xii. A creditor must include below the account-opening table an
explanation of whether or not a grace period exists for all features on
the account.
xiii. A creditor must include below the account-opening table the
name of the balance computation method used for each feature of the
account and state that an explanation of the balance computation
method(s) is provided in the account-opening disclosures or agreement,
as applicable.
xiv. A creditor must state below the account-opening table that
consumers' billing rights are provided in the account-opening
disclosures or agreement, as applicable.
xv. A creditor may not disclose below the account-opening table a
statement that the consumer may be entitled to a refund of all fees
paid if the consumer decides not to open the plan; and a cross
reference to the ``Fees'' section in the table described in paragraph
(b)(2)(i) of this section.
xvi. A creditor must disclose below the account-opening table a
statement that the consumer should confirm that the terms disclosed in
the table are the same terms for which the consumer applied.
xvii. The applicable forms providing safe harbors for account-
opening tables are under Appendix G-15 to part 226.
2. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to Sec. 226.6(a)
disclosures.
3. Terminology. Section 226.6(a)(1)(i) generally requires that the
headings, content and format of the tabular disclosures be
substantially similar, but need not be identical, to the applicable
tables in appendix G-15 to part 226; but see Sec. 226.5(a)(2) for
terminology requirements applicable to disclosures provided pursuant to
Sec. 226.6(a).
6(a)(2) Required disclosures for account-opening table for home-
equity plans.
1. Fixed-rate and -term payment plans. See comment 6(a)-1 for
guidance on disclosing information related to fixed-rate and -term
payment plans.
Paragraph 6(a)(2)(vii) Fees imposed by the creditor and third
parties to open the plan.
1. Manner of disclosure. A creditor must disclose in the account-
opening table the total of all one-time fees imposed by the creditor
and third parties to open the plan, and may not disclose the highest
amount of possible fees as allowed under Sec. 226.5b(c)(11) for the
disclosure table required under Sec. 226.5b(b). In addition, a
creditor must disclose in the account-opening table an itemization of
all one-time fees imposed by the creditor and third parties to open the
plan, and may not disclose a range for those fees, as otherwise allowed
under Sec. 226.5b(c)(11) for the disclosure table required under Sec.
226.5b(b).
Paragraph 6(a)(2)(x) Late-payment fee.
1. Applicability. The disclosure of the fee for a late payment
includes only those fees that will be imposed for actual, unanticipated
late payments. (See the commentary to Sec. 226.4(c)(2) for additional
guidance on late-payment fees. See Samples G-15(B), G-15(C) and G-15(D)
for guidance on how to disclose clearly and conspicuously the late-
payment fee.)
Paragraph 6(a)(2)(xi) Over-the-limit fee.
1. Applicability. The disclosure of fees for exceeding a credit
limit does not include fees for other types of default or for services
related to exceeding the limit. For example, no disclosure is required
of fees for reinstating credit privileges or fees for the dishonor of
checks on an account that, if paid, would cause the credit limit to be
exceeded. (But see Sec. 226.9(j)(2) for limitations on these fees.)
See Samples G-15(B), G-15(C), and G-15(D) for guidance on how to
disclose clearly and conspicuously the over-the-limit fee.
Paragraph 6(a)(2)(xii) Transaction charges.
1. Charges imposed by person other than creditor. Charges imposed
by a third party, such as a seller of goods, shall not be disclosed in
the table under this section; the third party would be responsible for
disclosing the charge under Sec. 226.9(d)(1).
2. Foreign transaction fees. A transaction charge imposed by the
creditor for use of the home-equity plan includes any fee imposed by
the creditor for transactions in a foreign currency or that take place
outside the United States or with a foreign merchant. (See comment
4(a)-4 for guidance on when a foreign transaction fee is considered
charged by the creditor.) See Sample G-15(D) for guidance on how to
disclose a foreign transaction fee for use of a credit card where the
same foreign transaction fee applies for purchases and cash advances in
a foreign currency, or that take place outside the United States or
with a foreign merchant.
Paragraph 6(a)(2)(xxi) Grace period.
1. Grace period. Creditors must state any conditions on the
applicability of the grace period. A creditor that offers a grace
period on all types of transactions for the account and conditions the
grace period on the consumer paying his or her outstanding balance in
full by the due date each billing cycle, or on the consumer paying the
outstanding balance in full by the due date in the previous and/or the
current billing cycle(s) will be deemed to meet these requirements by
providing the following disclosure, as applicable: ``Your due date is
[at least] ------ days after the close of each billing cycle. We will
not charge you interest on your account if you pay your entire balance
by the due date each month.''
2. No grace period. Creditors may use the following language to
describe that no grace period is offered, as applicable: ``We will
begin charging interest on [applicable transactions] on the date the
transaction is posted to your account.''
Paragraph 6(b)(2)(xxii) Balance computation method.
1. Form of disclosure. In cases where the creditor uses a balance
computation method that is identified by name in the regulation, the
creditor must disclose below the table only the name of the method. In
cases where the creditor uses a balance computation method that is not
identified by name in the regulation, the disclosure below the table
must clearly explain the method in as much
[[Page 43598]]
detail as set forth in the descriptions of balance computation methods
in Sec. 226.5a(g). The explanation need not be as detailed as that
required for the disclosures under Sec. 226.6(a)(4)(i)(D). (See the
commentary to Sec. 226.5a(g) for guidance on particular methods.)
2. Content. See Samples G-15(B), G-15(C) and G-15(D) for guidance
on how to disclose the balance computation method where the same method
is used for all features on the account.
6(a)(3) Disclosure of charges imposed as part of home-equity
plans[ltrif] [6(a)(1) Finance charge.]
[rtrif]1. Fixed-rate and -term payment plans. See comment 6(a)-1
for guidance on disclosing information related to fixed-rate and -term
payment plans.[ltrif]
[Paragraph 6(a)(1)(i).]
[rtrif]2.[ltrif][1.] When finance charges accrue. Creditors are not
required to disclose a specific date when [rtrif]a cost that is a
finance charge under Sec. 226.4[ltrif] [finance charges] will begin to
accrue. [Creditors may provide a general explanation such as that the
consumer has 30 days from the closing date to pay the new balance
before finance charges will accrue on the account.]
[rtrif]3.[ltrif][2.] Grace periods. In disclosing [rtrif]in the
account agreement or disclosure statement[ltrif] whether or not a grace
period exists, the creditor need not use [``free period,'' ``free-ride
period,'' ``grace period'' or] any [other] particular descriptive
phrase or term. [rtrif]However, the descriptive phrase or term must be
sufficiently similar to the disclosures provided pursuant to Sec.
226.6(a)(2)(xxi) to satisfy a creditor's duty to provide consistent
terminology under Sec. 226.5(a)(2).[ltrif] [For example, a statement
that ``the finance charge begins on the date the transaction is posted
to your account'' adequately discloses that no grace period exists. In
the same fashion, a statement that ``finance charges will be imposed on
any new purchases only if they are not paid in full within 25 days
after the close of the billing cycle'' indicates that a grace period
exists in the interim.]
[rtrif]4. No finance charge imposed below certain balance.
Creditors are not required to disclose under Sec. 226.6(a)(3) the fact
that no finance charge is imposed when the outstanding balance is less
than a certain amount or the balance below which no finance charge will
be imposed.
Paragraph 6(a)(3)(ii).
1. Failure to use the plan as agreed. Late-payment fees, over-the-
limit fees, and fees for payments returned unpaid are examples of
charges resulting from consumers' failure to use the plan as agreed.
2. Examples of fees that affect the plan. Examples of charges the
payment, or nonpayment, of which affects the consumer's account are:
i. Access to the plan. Fees for using a credit card at the
creditor's ATM to obtain a cash advance, fees to obtain additional
checks or credit cards including replacements for lost or stolen cards,
fees to expedite delivery of checks or credit cards or other credit
devices, application and membership fees, and annual or other
participation fees identified in Sec. 226.4(c)(4).
ii. Amount of credit extended. Fees for increasing the credit limit
on the account, whether at the consumer's request or unilaterally by
the creditor.
iii. Timing or method of billing or payment. Fees to pay by
telephone or via the Internet.
3. Threshold test. If the creditor is unsure whether a particular
charge is a cost imposed as part of the plan, the creditor may at its
option consider such charges as a cost imposed as part of the plan for
purposes of the Truth in Lending Act.
Paragraph 6(a)(3)(iii)(B).
1. Fees for package of services. A fee to join a credit union is an
example of a fee for a package of services that is not imposed as part
of the plan, even if the consumer must join the credit union to apply
for credit. In contrast, a membership fee is an example of a fee for a
package of services that is considered to be imposed as part of a plan
where the primary benefit of membership in the organization is the
opportunity to apply for credit, and the other benefits offered (such
as a newsletter or a member information hotline) are merely incidental
to the credit feature.
6(a)(4) Disclosure of rates for home-equity plans.
1. Fixed-rate and -term payment plans. See comment 6(a)-1 for
guidance on disclosing information related to fixed-rate and -term
payment plans.
Paragraph 6(a)(4)(i)(B).[ltrif] [Paragraph 6(a)(1)(ii)]
1. Range of balances. [rtrif]Creditors are not required to disclose
the range of balances[ltrif][The range of balances disclosure is
inapplicable]:
i. If only one periodic interest rate may be applied to the entire
account balance.
ii. If only one periodic interest rate may be applied to the entire
balance for a feature (for example, cash advances), even though the
balance for another feature (purchases) may be subject to two rates (a
1.5% monthly periodic interest rate on purchase balances of $0--$500,
and a 1% periodic interest rate for balances above $500). In this
example, the creditor must give a range of balances disclosure for the
purchase feature.
[rtrif] Paragraph 6(a)(4)(i)(D).
1. Explanation of balance computation method. Creditors do not
provide a sufficient explanation of a balance computation method by
using a shorthand phrase such as ``previous balance method'' or the
name of a balance computation method listed in Sec. 226.5a(g). (See
Model Clauses G-1 in appendix G to part 226. See Sec.
226.6(a)(2)(xxii) regarding balance computation descriptions required
to be disclosed below the account-opening table required by Sec.
226.6(a)(1).)
2. Allocation of payments. Creditors may, but need not, explain how
payments and other credits are allocated to outstanding balances.
Paragraph 6(a)(4)(ii) Variable-rate accounts.[ltrif]
[rtrif]1.[ltrif][2.] Variable-rate disclosures--coverage.
i. Examples. This section covers open-end credit plans under which
rate changes are specifically set forth in the account agreement and
are tied to an index or formula. A creditor would use variable-rate
disclosures for plans involving rate changes such as the following:
A. Rate changes that are tied to [rtrif]Treasury bill rates[ltrif]
[the rate the creditor pays on its six-month certificates of deposit].
B. Rate changes that are tied to [rtrif]the prime
rate[ltrif][Treasury bill rates].
C. Rate changes that are tied to [rtrif]the Federal Reserve
discount rate.[ltrif] [changes in the creditor's commercial lending
rate.]
ii. [rtrif]The following is an example of open-end plans that
permit the rate to change and are not considered variable rate: Rate
changes that are triggered by a specific event such as an[ltrif] [An]
open-end credit plan in which the employee receives a lower rate
contingent upon employment[rtrif], and the rate increases upon
termination of employment.[ltrif] [(that is, with the rate to be
increased upon termination of employment) is not a variable-rate plan.]
[3. Variable-rate plan--rate(s) in effect. In disclosing the
rate(s) in effect at the time of the account-opening disclosures (as is
required by Sec. 226.6(a)(1)(ii)), the creditor may use an insert
showing the current rate; may give the rate as of a specified date and
then update the disclosure from time to time, for example, each
calendar month; or may disclose an estimated rate under Sec. 226.5(c).
4. Variable-rate plan--additional disclosures required. In addition
to disclosing the rates in effect at the time
[[Page 43599]]
of the account-opening disclosures, the disclosures under Sec.
226.6(a)(1)(ii) also must be made.
5. Variable-rate plan--index. The index to be used must be clearly
identified; the creditor need not give, however, an explanation of how
the index is determined or provide instructions for obtaining it.]
[rtrif]2.[ltrif][6.] Variable-rate plan--circumstances for
increase.
i. [rtrif]The following are examples that comply with the
requirement to disclose circumstances under which the rate(s) may
increase:[ltrif][Circumstances under which the rate(s) may increase
include, for example:]
A. [rtrif] ``The Treasury bill rate increases.''[ltrif][An increase
in the Treasury bill rate.]
B. [rtrif] ``The prime rate increases.'' [ltrif][An increase in the
Federal Reserve discount rate.]
ii. [rtrif]Disclosing the frequency with which the rate may
increase includes disclosing when the increase will take effect; for
example:[ltrif][The creditor must disclose when the increase will take
effect; for example:]
A. ``An increase will take effect on the day that the Treasury bill
rate increases.'' [or]
B. ``An increase in the [rtrif]prime rate[ltrif] [Federal Reserve
discount rate] will take effect on the first day of the creditor's
billing cycle.''
[rtrif]3.[ltrif][7.] Variable-rate plan--limitations on increase.
In disclosing any limitations on rate increases, limitations such as
the maximum increase per year or the maximum increase over the duration
of the plan must be disclosed. [When there are no limitations, the
creditor may, but need not, disclose that fact. (A maximum interest
rate must be included in dwelling-secured open-end credit plans under
which the interest rate may be changed. See Sec. 226.30 and the
commentary to that section.)] Legal limits such as usury or rate
ceilings under State or Federal statutes or regulations need not be
disclosed. Examples of limitations that must be disclosed include:
i. ``The rate on the plan will not exceed 25% annual percentage
rate.''
ii. ``Not more than \1/2\% increase in the annual percentage rate
per year will occur.''
[rtrif]4.[ltrif][8.] Variable-rate plan--effects of increase.
Examples of effects of rate increases that must be disclosed include:
i. Any requirement for additional collateral if the annual
percentage rate increases beyond a specified rate.
ii. Any increase in the scheduled minimum periodic payment amount.
[9. Variable-rate plan--change-in-terms notice not required. No
notice of a change in terms is required for a rate increase under a
variable-rate plan as defined in comment 6(a)(1)(ii)-2.]
[rtrif]5.[ltrif][10.] Discounted variable-rate plans. In some
variable-rate plans, creditors may set an initial interest rate that is
not determined by the index or formula used to make later interest rate
adjustments. Typically, this initial rate is lower than the rate would
be if it were calculated using the index or formula.
i. For example, a creditor may calculate interest rates according
to a formula using the six-month Treasury bill rate plus a 2 percent
margin. If the current Treasury bill rate is 10 percent, the creditor
may forgo the 2 percent spread and charge only 10 percent for a limited
time, instead of setting an initial rate of 12 percent, or the creditor
may disregard the index or formula and set the initial rate at 9
percent.
ii. When creditors [rtrif]disclose in the account-opening
disclosures an[ltrif] [use an] initial rate that is not calculated
using the index or formula for later rate adjustments, the [account-
opening] disclosure [statement] should reflect:
A. The initial rate (expressed as a periodic rate and a
corresponding annual percentage rate), together with a statement of how
long the initial rate will remain in effect;
B. The current rate that would have been applied using the index or
formula (also expressed as a periodic rate and a corresponding annual
percentage rate); and
C. The other variable-rate information required in [rtrif]Sec.
226.6(a)(4)(ii).[ltrif] [Sec. 226.6(a)(1)(ii).]
[rtrif]Paragraph 6(a)(4)(iii) Rate changes not due to index or
formula.
1. Events that cause the initial rate to change.
i. Changes based on expiration of time period. If the initial rate
will change at the expiration of a time period, creditors must identify
the expiration date and the fact that the initial rate will end at that
time.
ii. Changes based on specified contract terms. If the account
agreement provides that the creditor may change the initial rate upon
the occurrence of specified event or events, the creditor must identify
the event or events. Examples include imposing a penalty rate in lieu
of terminating the account, as allowed under comment 5b(f)(2)-2, or the
termination of an employee preferred rate when the employment
relationship is terminated.
2. Rate that will apply after initial rate changes.
i. Increased margins. If the initial rate is based on an index and
the rate may increase due to a change in the margin applied to the
index, the creditor must disclose the increased margin. If more than
one margin could apply, the creditor may disclose the highest margin.
ii. Risk-based pricing. In some plans, the amount of the rate
change depends on how the creditor weighs the occurrence of events
specified in the account agreement that authorize the creditor to
change rates, as well as other factors. For example, a creditor may
specify that a penalty rate may apply in lieu of termination of the
account, as allowed under comment 5b(f)(2)-2. In these cases, a
creditor must state the increased rate that may apply. At the
creditor's option, the creditor may state the possible rates as a
range, or state only the highest rate that could be assessed. The
creditor must disclose the period for which the increased rate will
remain in effect, such as ``until you make three timely payments,'' or
if there is no limitation, the fact that the increased rate may remain
indefinitely.
3. Effect of rate change on balances. Creditors must disclose
information to consumers about the balance to which the new rate will
apply and the balance to which the current rate at the time of the
change will apply.[ltrif]
[iii. In disclosing the current periodic and annual percentage
rates that would be applied using the index or formula, the creditor
may use any of the disclosure options described in comment 6(a)(1)(ii)-
3.
11. Increased penalty rates. If the initial rate may increase upon
the occurrence of one or more specific events, such as a late payment
or an extension of credit that exceeds the credit limit, the creditor
must disclose the initial rate and the increased penalty rate that may
apply. If the penalty rate is based on an index and an increased
margin, the issuer must disclose the index and the margin. The creditor
must also disclose the specific event or events that may result in the
increased rate, such as ``22% APR, if 60 days late.'' If the penalty
rate cannot be determined at the time disclosures are given, the
creditor must provide an explanation of the specific event or events
that may result in the increased rate. At the creditor's option, the
creditor may disclose the period for which the increased rate will
remain in effect, such as ``until you make three timely payments.'' The
creditor need not disclose an increased rate that is imposed when
credit privileges are permanently terminated.
Paragraph 6(a)(1)(iii).
1. Explanation of balance computation method. A shorthand
[[Page 43600]]
phrase such as ``previous balance method'' does not suffice in
explaining the balance computation method. (See Model Clauses G-1 [and
G-1(A)] to part 226.)
2. Allocation of payments. Creditors may, but need not, explain how
payments and other credits are allocated to outstanding balances. For
example, the creditor need not disclose that payments are applied to
late charges, overdue balances, and finance charges before being
applied to the principal balance; or in a multifeatured plan, that
payments are applied first to finance charges, then to purchases, and
then to cash advances. (See comment 7-1 for definition of multifeatured
plan.)
Paragraph 6(a)(1)(iv).
1. Finance charges. In addition to disclosing the periodic rate(s)
under Sec. 226.6(a)(1)(ii), creditors must disclose any other type of
finance charge that may be imposed, such as minimum, fixed,
transaction, and activity charges; required insurance; or appraisal or
credit report fees (unless excluded from the finance charge under Sec.
226.4(c)(7)). Creditors are not required to disclose the fact that no
finance charge is imposed when the outstanding balance is less than a
certain amount or the balance below which no finance charge will be
imposed.
6(a)(2) Other charges.
1. General; examples of other charges. Under Sec. 226.6(a)(2),
significant charges related to the plan (that are not finance charges)
must also be disclosed. For example:
i. Late-payment and over-the-credit-limit charges.
ii. Fees for providing documentary evidence of transactions
requested under Sec. 226.13 (billing error resolution).
iii. Charges imposed in connection with residential mortgage
transactions or real estate transactions such as title, appraisal, and
credit-report fees (see Sec. 226.4(c)(7)).
iv. A tax imposed on the credit transaction by a state or other
governmental body, such as a documentary stamp tax on cash advances
(See the commentary to Sec. 226.4(a)).
v. A membership or participation fee for a package of services that
includes an open-end credit feature, unless the fee is required whether
or not the open-end credit feature is included. For example, a
membership fee to join a credit union is not an ``other charge,'' even
if membership is required to apply for credit. For example, if the
primary benefit of membership in an organization is the opportunity to
apply for a credit card, and the other benefits offered (such as a
newsletter or a member information hotline) are merely incidental to
the credit feature, the membership fee would be disclosed as an ``other
charge.''
vi. Charges imposed for the termination of an open-end credit plan.
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(a)(2)-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.]
[rtrif] 6(a)(5) Additional disclosures for home-equity
plans.[ltrif] [6(a)(3) Home-equity plan information.]
[rtrif]Paragraph 6(a)(5)(i) Voluntary credit insurance, debt
cancellation or debt suspension.
1. Timing. Under Sec. 226.4(d), disclosures required to exclude
the cost of voluntary credit insurance or debt cancellation or debt
suspension coverage from the finance charge must be provided before the
consumer agrees to the purchase of the insurance or coverage. Creditors
comply with Sec. 226.6(a)(5)(i) if they provide those disclosures in
accordance with Sec. 226.4(d). For example, if the disclosures
required by Sec. 226.4(d) are provided at application, creditors need
not repeat those disclosures at account opening.[ltrif]
[1. Additional disclosures required. For home-equity plans,
creditors must provide several of the disclosures set forth in Sec.
226.5b(d) along with the disclosures required under Sec. 226.6.
Creditors also must disclose a list of the conditions that permit the
creditor to terminate the plan, freeze or reduce the credit limit, and
implement specified modifications to the original terms. (See comment
5b(d)(4)(iii)-1.)
2. Form of disclosures. The home-equity disclosures provided under
this section must be in a form the consumer can keep, and are governed
by Sec. 226.5(a)(1). The segregation standard set forth in Sec.
226.5b(a) does not apply to home-equity disclosures provided under
Sec. 226.6.
3. Disclosure of payment and variable-rate examples. i. The
payment-example disclosure in Sec. 226.5b(d)(5)(iii) and the variable-
rate information in Sec. 226.5b(d)(12)(viii), (d)(12)(x), (d)(12)(xi),
and (d)(12)(xii) need not be provided with the disclosures under Sec.
226.6 if the disclosures under Sec. 226.5b(d) were provided in a form
the consumer could keep; and the disclosures of the payment example
under Sec. 226.5b(d)(5)(iii), the maximum-payment example under Sec.
226.5b(d)(12)(x) and the historical table under Sec. 226.5b(d)(12)(xi)
included a representative payment example for the category of payment
options the consumer has chosen.
ii. For example, if a creditor offers three payment options (one
for each of the categories described in the commentary to Sec.
226.5b(d)(5)), describes all three options in its early disclosures,
and provides all of the disclosures in a retainable form, that creditor
need not provide the Sec. 226.5b(d)(5)(iii) or (d)(12) disclosures
again when the account is opened. If the creditor showed only one of
the three options in the early disclosures (which would be the case
with a separate disclosure form rather than a combined form, as
discussed under Sec. 226.5b(a)), the disclosures under Sec.
226.5b(d)(5)(iii), (d)(12)(viii), (d)(12)(x), (d)(12)(xi) and
(d)(12)(xii) must be given to any consumer who chooses one of the other
two options. If the Sec. 226.5b(d)(5)(iii) and (d)(12) disclosures are
provided with the second set of disclosures, they need not
[[Page 43601]]
be transaction-specific, but may be based on a representative example
of the category of payment option chosen.
4. Disclosures for the repayment period. The creditor must provide
disclosures about both the draw and repayment phases when giving the
disclosures under Sec. 226.6. Specifically, the creditor must make the
disclosures in Sec. 226.6(a)(3), state the corresponding annual
percentage rate, and provide the variable-rate information required in
Sec. 226.6(a)(1)(ii) for the repayment phase. To the extent the
corresponding annual percentage rate, the information in Sec.
226.6(a)(1)(ii), and any other required disclosures are the same for
the draw and repayment phase, the creditor need not repeat such
information, as long as it is clear that the information applies to
both phases.]
[rtrif]Paragraph 6(a)(5)(ii)[ltrif] [6(a)(4)] Security interests.
1. General. Creditors are not required to use specific terms to
describe a security interest, or to explain the type of security or the
creditor's rights with respect to the collateral.
2. Identification of property. Creditors sufficiently identify
collateral by type by stating, for example, [rtrif]your home.[ltrif]
[motor vehicle or household appliances. (Creditors should be aware,
however, that the federal credit practices rules, as well as some state
laws, prohibit certain security interests in household goods.)] The
creditor may, at its option, provide a more specific identification
(for example, [rtrif]the address of property securing the line of
credit.[ltrif] [a model and serial number.)]
3. Spreader clause. If collateral for preexisting credit with the
creditor will secure the plan being opened, the creditor must disclose
that fact. (Such security interests may be known as ``spreader'' or
``dragnet'' clauses, or as ``cross-collateralization'' clauses.) The
creditor need not specifically identify the collateral; a reminder such
as ``collateral securing other loans with us may also secure this
loan'' is sufficient. At the creditor's option, a more specific
description of the property involved may be given.
[4. Additional collateral. If collateral is required when advances
reach a certain amount, the creditor should disclose the information
available at the time of the account-opening disclosures. For example,
if the creditor knows that a security interest will be taken in
household goods if the consumer's balance exceeds $1,000, the creditor
should disclose accordingly. If the creditor knows that security will
be required if the consumer's balance exceeds $1,000, but the creditor
does not know what security will be required, the creditor must
disclose on the initial disclosure statement that security will be
required if the balance exceeds $1,000, and the creditor must provide a
change-in-terms notice under Sec. 226.9(c) at the time the security is
taken. (See comment 6(a)(4)-2.)
5. Collateral from third party. Security interests taken in
connection with the plan must be disclosed, whether the collateral is
owned by the consumer or a third party.]
[rtrif]Paragraph[ltrif] 6(a)(5)[rtrif](iii)[ltrif] Statement of
billing rights.
1. [rtrif]Model forms.[ltrif] See the commentary to Model Forms
[rtrif]G-3 and G-4 [ltrif] [G-3, G-3(A), G-4, and G-4(A)].
[rtrif]Paragraph 6(a)(5)(iv) Possible creditor actions.
1. Disclosure. Creditors must disclose under Sec. 226.6(a)(5)(iv)
a list of the conditions that permit the creditor to terminate the
plan, freeze or reduce the credit limit, and implement specified
modifications to the original terms. (See comment 5b(c)(7)(i).)
Paragraph 6(a)(5)(v) Additional information on fixed-rate and -term
payment plans.
1. Fixed-rate and -term payment plans. See comment 6(a)-1 for
guidance on disclosing information related to fixed-rate and -term
payment plans.[ltrif]
* * * * *
Sec. 226.7--Periodic Statement.
7(a) Rules affecting home-equity plans.
7(a)(1) Previous balance.
1. Credit balances. If the previous balance is a credit balance, it
must be disclosed in such a way so as to inform the consumer that it is
a credit balance, rather than a debit balance.
2. Multifeatured plans. In a multifeatured plan, the previous
balance may be disclosed either as an aggregate balance for the account
or as separate balances for each feature (for example, a previous
balance for purchases and a previous balance for cash advances). If
separate balances are disclosed, a total previous balance is optional.
3. Accrued finance charges allocated from payments. Some open-end
credit plans provide that the amount of the finance charge that has
accrued since the consumer's last payment is directly deducted from
each new payment, rather than being separately added to each statement
and reflected as an increase in the obligation. In such a plan, the
previous balance need not reflect finance charges accrued since the
last payment.
7(a)(2) Identification of transactions.
1. Multifeatured plans. [In identifying transactions under Sec.
226.7(a)(2) for multifeatured plans, creditors may, for example, choose
to arrange transactions by feature (such as disclosing sale
transactions separately from cash advance transactions) or in some
other clear manner, such as by arranging the transactions in general
chronological order.][rtrif] Creditors may, but are not required to,
arrange transactions by feature (such as disclosing purchase
transactions separately from cash advance transactions). Pursuant to
Sec. 226.7(a)(6), however, creditors must group all fees and all
interest separately from transactions and may not disclose any fees or
interest charges with transactions.[ltrif]
2. Automated teller machine (ATM) charges imposed by other
institutions in shared or interchange systems. A charge imposed on the
cardholder by an institution other than the card issuer for the use of
the other institution's ATM in a shared or interchange system, and
included by the terminal-operating institution in the amount of the
transaction, need not be separately disclosed on the periodic
statement.
7(a)(3) Credits.
1. Identification--sufficiency. The creditor need not describe each
credit by type (returned merchandise, rebate of finance charge, etc.)--
``credit'' would suffice--except if the creditor is using the periodic
statement to satisfy the billing-error correction notice requirement.
(See the commentary to Sec. 226.13(e) and (f).)[rtrif] Credits may be
distinguished from transactions in any way that is clear and
conspicuous, for example, by use of debit and credit columns or by use
of plus signs and/or minus signs.[ltrif]
2. Format. A creditor may list credits relating to credit
extensions [rtrif]made to the consumer[ltrif] under the plan
([rtrif]such as[ltrif] payments[rtrif] or[ltrif] rebates[, etc.])
together with other types of credits (such as deposits to a checking
account), as long as the entries are identified so as to inform the
consumer which type of credit each entry represents.
3. Date. If only one date is disclosed (that is, the crediting date
as required by the regulation), no further identification of that date
is necessary. More than one date may be disclosed for a single entry,
as long as it is clear which date represents the date on which credit
was given.
4. Totals. A total of amounts credited during the billing cycle is
not required.
7(a)(4) Periodic rates.
1. Disclosure of periodic [rtrif]interest[ltrif] rates--whether or
not actually applied. Except as provided in Sec. 226.7(a)(4)(ii), any
periodic [rtrif]interest[ltrif] rate that may be used to compute
finance charges [(and its corresponding annual percentage rate)]
[rtrif], expressed as and
[[Page 43602]]
labeled ``Annual Percentage Rate,''[ltrif] must be disclosed whether or
not it is applied during the billing cycle. For example:
i. If the consumer's account has both a purchase feature and a cash
advance feature, the creditor must disclose the [rtrif]annual
percentage[ltrif] rate for each, even if the consumer only makes
purchases [rtrif](or cash advances)[ltrif] on the account during the
billing cycle.
ii. If the [rtrif]annual percentage[ltrif] rate varies (such as
when it is tied to a particular index), the creditor must disclose each
[rtrif]annual percentage [ltrif] rate in effect during the cycle for
which the statement was issued.
2. Disclosure of periodic [rtrif]interest[ltrif] rates required
only if imposition possible. [With regard to the periodic rate
disclosure (and its corresponding annual percentage rate), only rates]
[rtrif]With regard to disclosure of periodic rates (expressed as annual
percentage rates), only annual percentage rates[ltrif] that could have
been imposed during the billing cycle reflected on the periodic
statement need to be disclosed. For example:
i. If the creditor is changing [rtrif]annual percentage[ltrif]
rates effective during the next billing cycle (because of a variable-
rate plan), the [rtrif]annual percentage[ltrif] rates required to be
disclosed under Sec. 226.7(a)(4) are only those in effect during the
billing cycle reflected on the periodic statement. For example, if the
[rtrif]annual percentage[ltrif] [monthly] rate applied during May was
[1.5] [rtrif]8.0[ltrif]%, but the creditor will increase the rate to
[1.8%] [rtrif]11.0%[ltrif] effective June 1, [1.5%] [rtrif]8.0%[ltrif]
[(and its corresponding annual percentage rate)] is the only required
disclosure under Sec. 226.7(a)(4) for the periodic statement
reflecting the May account activity.
ii. If [rtrif]annual percentage[ltrif] rates applicable to a
particular type of transaction changed after a certain date and the old
rate is only being applied to transactions that took place prior to
that date, the creditor need not continue to disclose the old rate for
those consumers that have no outstanding balances to which that rate
could be applied.
3. Multiple rates--same transaction. If two or more periodic rates
are applied to the same balance for the same type of transaction (for
example, if the [finance] [rtrif]interest[ltrif] charge consists of a
monthly periodic [rtrif]interest[ltrif] rate of 1.5% applied to the
outstanding balance and a required credit life insurance component
calculated at 0.1% per month on the same outstanding balance),
[rtrif]creditors must disclose the periodic interest rate, expressed as
an 18% annual percentage rate and the range of balances to which it is
applicable. Costs attributable to the credit life insurance component
must be disclosed as a fee under Sec. 226.7(a)(6)(iii). (See comment
7(a)(6)-2.) [the creditor may do either of the following:
i. Disclose each periodic rate, the range of balances to which it
is applicable, and the corresponding annual percentage rate for each.
(For example, 1.5% monthly, 18% annual percentage rate; 0.1% monthly,
1.2% annual percentage rate.)
ii. Disclose one composite periodic rate (that is, 1.6% per month)
along with the applicable range of balances and the corresponding
annual percentage rate.
4. Corresponding annual percentage rate. In disclosing the annual
percentage rate that corresponds to each periodic rate, the creditor
may use ``corresponding annual percentage rate,'' ``nominal annual
percentage rate,'' ``corresponding nominal annual percentage rate,'' or
similar phrases.
5. Rate same as actual annual percentage rate. When the
corresponding rate is the same as the annual percentage rate disclosed
under Sec. 226.7(a)(7), the creditor need disclose only one annual
percentage rate, but must use the phrase ``annual percentage rate.'']
[rtrif]4. Fees. Creditors that identify fees in accordance with
Sec. 226.7(a)(6)(iii) need not identify the periodic rate at which a
fee would accrue if the fee remains unpaid. For example, assume a fee
is imposed for a late payment in the previous cycle and that the fee,
unpaid, would be included in the purchases balance and accrue interest
at the rate for purchases. The creditor need not separately disclose
that the purchase rate applies to the portion of the purchases balance
attributable to the unpaid fee.[ltrif]
[6][rtrif]5.[ltrif]. Range of balances. See comment 6(a)(4)(i)(B)-1
[6(a)(1)(ii)-1]. A creditor is not required to adjust the range of
balances disclosure to reflect the balance below which only a minimum
charge applies.
7(a)(5) Balance on which finance charge computed.
[1. Limitation to periodic rates. Section 226.7(a)(5) only requires
disclosure of the balance(s) to which a periodic rate was applied and
does not apply to balances on which other kinds of finance charges
(such as transaction charges) were imposed. For example, if a consumer
obtains a $1,500 cash advance subject to both a 1% transaction fee and
a 1% monthly periodic rate, the creditor need only disclose the balance
subject to the monthly rate (which might include portions of earlier
cash advances not paid off in previous cycles).]
[2][rtrif]1[ltrif]. Split rates applied to balance ranges. If split
rates were applied to a balance because different portions of the
balance fall within two or more balance ranges, the creditor need not
separately disclose the portions of the balance subject to such
different rates since the range of balances to which the rates apply
has been separately disclosed. For example, a creditor could disclose a
balance of $700 for purchases even though a monthly periodic rate of
1.5% applied to the first $500, and a monthly periodic rate of 1% to
the remainder. This option to disclose a combined balance does not
apply when the [finance] [rtrif]interest[ltrif] charge is computed by
applying the split rates to each day's balance (in contrast, for
example, to applying the rates to the average daily balance). In that
case, the balances must be disclosed using any of the options that are
available if two or more daily rates are imposed. (See comment 7(a)(5)-
4.)
[3][rtrif]2[ltrif]. Monthly rate on average daily balance.
Creditors may apply a monthly periodic rate to an average daily
balance.
[4][rtrif]3[ltrif]. Multifeatured plans. In a multifeatured plan,
the creditor must disclose a separate balance (or balances, as
applicable) to which a periodic rate was applied for each feature or
group of features subject to different periodic rates or different
balance computation methods. Separate balances are not required,
however, merely because a grace period is available for some features
but not others. A total balance for the entire plan is optional. This
does not affect how many balances the creditor must disclose--or may
disclose--within each feature. (See, for example,
comment[rtrif]s[ltrif] 7(a)(5)-4[rtrif]and 7(a)(4)-5[ltrif].)
[5][rtrif]4[ltrif]. Daily rate on daily balances. i. If the finance
charge is computed on the balance each day by application of one or
more daily periodic [rtrif]interest[ltrif] rates, the balance on which
the [finance] [rtrif]interest[ltrif] charge was computed may be
disclosed in any of the following ways for each feature:
ii. If a single daily periodic [rtrif]interest[ltrif] rate is
imposed, the balance to which it is applicable may be stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. The sum of the daily balances during the billing cycle.
[[Page 43603]]
D. The average daily balance during the billing cycle, in which
case the creditor [shall] [rtrif]may, at its option,[ltrif] explain
that the average daily balance is or can be multiplied by the number of
days in the billing cycle and the periodic rate applied to the product
to determine the amount of [the finance charge] [rtrif]interest[ltrif].
iii. If two or more daily periodic [rtrif]interest[ltrif] rates may
be imposed, the balances to which the rates are applicable may be
stated as:
A. A balance for each day in the billing cycle.
B. A balance for each day in the billing cycle on which the balance
in the account changes.
C. Two or more average daily balances, each applicable to the daily
periodic [rtrif]interest[ltrif] rates imposed for the time that those
rates were in effect[rtrif].[ltrif] [, as long as the creditor]
[rtrif]The creditor may, at its option,[ltrif] explain[s] that [the
finance charge] [rtrif]interest[ltrif] is or may be determined by [(1)]
multiplying each of the average balances by the number of days in the
billing cycle (or if the daily rate varied during the cycle, by
multiplying by the number of days the applicable rate was in effect),
[(2)] multiplying each of the results by the applicable daily periodic
rate, and [(3)] adding these products together.
[6. Explanation of balance computation method. See the commentary
to 6(a)(1)(iii).]
[7][rtrif]5[ltrif]. Information to compute balance. In connection
with disclosing the [finance] [rtrif]interest[ltrif] charge balance,
the creditor need not give the consumer all of the information
necessary to compute the balance if that information is not otherwise
required to be disclosed. For example, if current purchases are
included from the date they are posted to the account, the posting date
need not be disclosed.
[8][rtrif]6[ltrif]. Non-deduction of credits. The creditor need not
specifically identify the total dollar amount of credits not deducted
in computing the finance charge balance. Disclosure of the amount of
credits not deducted is accomplished by listing the credits (Sec.
226.7(a)(3)) and indicating which credits will not be deducted in
determining the balance (for example, ``credits after the 15th of the
month are not deducted in computing the [finance]
[rtrif]interest[ltrif] charge.'').
[9][rtrif]7[ltrif]. Use of one balance computation method
explanation when multiple balances disclosed. Sometimes the creditor
will disclose more than one balance to which a periodic rate was
applied, even though each balance was computed using the same balance
computation method. For example, if a plan involves purchases and cash
advances that are subject to different rates, more than one balance
must be disclosed, even though the same computation method is used for
determining the balance for each feature. In these cases, one
explanation [rtrif]or a single identification of the name (as permitted
under Sec. 226.7(a)(5)) [ltrif] of the balance computation method is
sufficient. Sometimes the creditor separately discloses the portions of
the balance that are subject to different rates because different
portions of the balance fall within two or more balance ranges, even
when a combined balance disclosure would be permitted under comment
7(a)(5)-2. In these cases, one explanation [rtrif] or a single
identification of the name (as permitted under Sec.
226.7(a)(5))[ltrif] of the balance computation method is also
sufficient (assuming, of course, that all portions of the balance were
computed using the same method).
[7(a)(6) Amount of finance charge and other charges.
Paragraph 7(a)(6)(i).
1. Total. A total finance charge amount for the plan is not
required.
2. Itemization--types of finance charges. Each type of finance
charge (such as periodic rates, transaction charges, and minimum
charges) imposed during the cycle must be separately itemized; for
example, disclosure of only a combined finance charge attributable to
both a minimum charge and transaction charges would not be permissible.
Finance charges of the same type may be disclosed, however,
individually or as a total. For example, five transaction charges of $1
may be listed separately or as $5.]
3. Itemization--different periodic rates. Whether different
periodic rates are applicable to different types of transactions or to
different balance ranges, the creditor may give the finance charge
attributable to each rate or may give a total finance charge amount.
For example, if a creditor charges 1.5% per month on the first $500 of
a balance and 1% per month on amounts over $500, the creditor may
itemize the two components ($7.50 and $1.00) of the $8.50 charge, or
may disclose $8.50.
4. Multifeatured plans. In a multifeatured plan, in disclosing the
amount of the finance charge attributable to the application of
periodic rates no total periodic rate disclosure for the entire plan
need be given.
5. Finance charges not added to account. A finance charge that is
not included in the new balance because it is payable to a third party
(such as required life insurance) must still be shown on the periodic
statement as a finance charge.
6. Finance charges other than periodic rates. See comment
6(a)(1)(iv)-1 for examples.
7. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since
the consumer's last payment is directly deducted from each new payment,
rather than being separately added to each statement and therefore
reflected as an increase in the obligation. In such a plan, no
disclosure is required of finance charges that have accrued since the
last payment.
8. Start-up fees. Points, loan fees, and similar finance charges
relating to the opening of the account that are paid prior to the
issuance of the first periodic statement need not be disclosed on the
periodic statement. If, however, these charges are financed as part of
the plan, including charges that are paid out of the first advance, the
charges must be disclosed as part of the finance charge on the first
periodic statement. However, they need not be factored into the annual
percentage rate. (See Sec. 226.14(c)(3).)
Paragraph 7(a)(6)(ii).
1. Identification. In identifying any other charges actually
imposed during the billing cycle, the type is adequately described as
late charge or membership fee, for example. Similarly, closing costs or
settlement costs, for example, may be used to describe charges imposed
in connection with real estate transactions that are excluded from the
finance charge under Sec. 226.4(c)(7), if the same term (such as
closing costs) was used in the initial disclosures and if the creditor
chose to itemize and individually disclose the costs included in that
term. Even though the taxes and filing or notary fees excluded from the
finance charge under Sec. 226.4(e) are not required to be disclosed as
other charges under Sec. 226.6(a)(2), these charges may be included in
the amount shown as closing costs or settlement costs on the periodic
statement, if the charges were itemized and disclosed as part of the
closing costs or settlement costs on the initial disclosure statement.
(See comment 6(a)(2)-1 for examples of other charges.)
2. Date. The date of imposing or debiting other charges need not be
disclosed.
3. Total. Disclosure of the total amount of other charges is
optional.
4. Itemization--types of other charges. Each type of other charge
(such as late-payment charges, over-the-credit-limit charges, and
membership fees) imposed during the cycle must be separately
[[Page 43604]]
itemized; for example, disclosure of only a total of other charges
attributable to both an over-the-credit-limit charge and a late-payment
charge would not be permissible. Other charges of the same type may be
disclosed, however, individually or as a total. For example, three fees
of $3 for providing copies related to the resolution of a billing error
could be listed separately or as $9.
7(a)(7) Annual percentage rate.
1. Plans subject to the requirements of Sec. 226.5b. For home-
equity plans subject to the requirements of Sec. 226.5b, creditors are
not required to disclose an effective annual percentage rate. Creditors
that state an annualized rate in addition to the corresponding annual
percentage rate required by Sec. 226.7(a)(4) must calculate that rate
in accordance with Sec. 226.14(c).
2. Labels. Creditors that choose to disclose an annual percentage
rate calculated under Sec. 226.14(c) and label the figure as ``annual
percentage rate'' must label the periodic rate expressed as an
annualized rate as the ``corresponding APR,'' ``nominal APR,'' or a
similar phrase as provided in comment 7(a)(4)-4. Creditors also comply
with the label requirement if the rate calculated under Sec. 226.14(c)
is described as the ``effective APR'' or something similar. For those
creditors, the periodic rate expressed as an annualized rate could be
labeled ``annual percentage rate,'' consistent with the requirement
under Sec. 226.7(b)(4). If the two rates represent different values,
creditors must label the rates differently to meet the clear and
conspicuous standard under Sec. 226.5(a)(1).]
[rtrif]7(a)(6) Charges imposed.
1. Examples of charges. See commentary to Sec. 226.6(a)(3).
2. Fees. Costs attributable to periodic rates other than interest
charges shall be disclosed as a fee. For example, if a consumer obtains
credit life insurance that is calculated at 0.1% per month on an
outstanding balance and a monthly interest rate of 1.5% applies to the
same balance, the creditor must disclose the dollar cost attributable
to interest as an ``interest charge'' and the credit insurance cost as
a ``fee.''
3. Total fees for calendar year to date.
i. Monthly statements. Some creditors send monthly statements but
the statement periods do not coincide with the calendar month. For
creditors sending monthly statements, the following comply with the
requirement to provide calendar year-to-date totals.
A. A creditor may disclose a calendar-year-to-date total at the end
of the calendar year by aggregating fees for 12 monthly cycles,
starting with the period that begins during January and finishing with
the period that begins during December. For example, if statement
periods begin on the 10th day of each month, the statement covering
December 10, 2011, through January 9, 2012, may disclose the year-to-
date total for fees imposed from January 10, 2011, through January 9,
2012. Alternatively, the creditor could provide a statement for the
cycle ending January 9, 2012, showing the year-to-date total for fees
imposed January 1, 2011, through December 31, 2011.
B. A creditor may disclose a calendar-year-to-date total at the end
of the calendar year by aggregating fees for 12 monthly cycles,
starting with the period that begins during December and finishing with
the period that begins during November. For example, if statement
periods begin on the 10th day of each month, the statement covering
November 10, 2011, through December 9, 2011, may disclose the year-to-
date total for fees imposed from December 10, 2010, through December 9,
2011.
ii. Quarterly statements. Creditors issuing quarterly statements
may apply the guidance set forth for monthly statements to comply with
the requirement to provide calendar year-to-date totals on quarterly
statements.
4. Minimum charge in lieu of interest. A minimum charge imposed if
a charge would otherwise have been determined by applying a periodic
rate to a balance except for the fact that such charge is smaller than
the minimum must be disclosed as a fee. For example, assume a creditor
imposes a minimum charge of $1.50 in lieu of interest if the calculated
interest for a billing period is less than that minimum charge. If the
interest calculated on a consumer's account for a particular billing
period is 50 cents, the minimum charge of $1.50 would apply. In this
case, the entire $1.50 would be disclosed as a fee; the periodic
statement would reflect the $1.50 as a fee, and $0 in interest.
5. Adjustments to year-to-date totals. In some cases, a creditor
may provide a statement for the current period reflecting that fees or
interest charges imposed during a previous period were waived or
reversed and credited to the account. Creditors may, but are not
required to, reflect the adjustment in the year-to-date totals. If an
adjustment is made, creditors are not required to provide an
explanation about the reason for the adjustment. Such adjustments would
not affect the total fees or interest charges imposed for the current
statement period.
6. Acquired accounts. An institution that acquires an account or
plan must include, as applicable, fees and charges imposed on the
account or plan prior to the acquisition in the aggregate disclosures
provided under Sec. 226.7(a)(6) for the acquired account or plan.
Alternatively, the institution may provide separate totals reflecting
activity prior and subsequent to the account or plan acquisition. For
example, a creditor that acquires an account or plan on August 12 of a
given calendar year may provide one total for the period from January 1
to August 11 and a separate total for the period beginning on August
12.
7. Account replacement. A creditor that replaces a consumer's plan
with another home equity line of credit plan with the consumer must
include, as applicable, fees and charges imposed for that portion of
the calendar year prior to the replacement in the aggregate disclosures
provided pursuant to Sec. 226.7(a)(6) for the new plan. For example,
assume a consumer has incurred $125 in fees for the calendar year to
date for a plan, which is then replaced by a home equity line of credit
plan also provided by the creditor. In this case, the creditor must
reflect the $125 in fees incurred prior to the replacement in the
calendar year-to-date totals provided for the new home equity line of
credit plan. Alternatively, the institution may provide two separate
totals reflecting activity prior and subsequent to the replacement of
the plan.
7(a)(7) Change-in-terms and increased penalty rate summary.
1. Location of summary tables. If a change-in-terms notice required
by Sec. 226.9(c)(1) is provided on or with a periodic statement, a
tabular summary of key changes must appear on the front of any page of
the statement. Similarly, if a notice of a rate increase due to
delinquency or default or as a penalty required by Sec. 226.9(i) is
provided on or with a periodic statement, information required to be
provided about the increase, presented in a table, must appear on the
front of any page of the statement.[ltrif]
7(a)(8) Grace period.
1. Terminology. [Although the creditor is required to indicate any
time period the consumer may have to pay the balance outstanding
without incurring additional finance charges, no specific wording is
required, so long as the language used is consistent with that used on
the account-opening disclosure statement. For example, ``To avoid
additional finance charges, pay the new balance before --------------''
would suffice.] [rtrif] In describing the grace period, the language
used must be consistent with that used on the account-opening
[[Page 43605]]
disclosure statement. (See Sec. Sec. 226.5(a)(2)(i) and
226.6(a)(2)(xxi))[ltrif]
7(a)(9) Address for notice of billing errors.
1. Terminology. The periodic statement should indicate the general
purpose for the address for billing-error inquiries, although a
detailed explanation or particular wording is not required.
2. Telephone number. A telephone number, e-mail address, or Web
site location may be included, but the mailing address for billing-
error inquiries, which is the required disclosure, must be clear and
conspicuous. The address is deemed to be clear and conspicuous if a
precautionary instruction is included that telephoning or notifying the
creditor by e-mail or Web site will not preserve the consumer's billing
rights, unless the creditor has agreed to treat billing error notices
provided by electronic means as written notices, in which case the
precautionary instruction is required only for telephoning.
7(a)(10) Closing date of billing cycle; new balance.
1. Credit balances. See comment 7(a)(1)-1.
2. Multifeatured plans. In a multifeatured plan, the new balance
may be disclosed for each feature or for the plan as a whole. If
separate new balances are disclosed, a total new balance is optional.
3. Accrued finance charges allocated from payments. Some plans
provide that the amount of the finance charge that has accrued since
the consumer's last payment is directly deducted from each new payment,
rather than being separately added to each statement and therefore
reflected as an increase in the obligation. In such a plan, the new
balance need not reflect finance charges accrued since the last
payment.
* * * * *
Sec. 226.9--Subsequent Disclosure Requirements.
* * * * *
9(c) Change in terms.
9(c)(1) Rules affecting home-equity plans.
1. Changes initially disclosed. [rtrif]Except as provided in Sec.
226.9(i), no[ltrif] [No] notice of a change in terms need be given if
the specific change is set forth initially, such as[:][rtrif]a[ltrif]
rate increase[s] under a properly disclosed variable-rate plan[, a rate
increase that occurs when an employee has been under a preferential
rate agreement and terminates employment, or an increase that occurs
when the consumer has been under an agreement to maintain a certain
balance in a savings account in order to keep a particular rate and the
account balance falls below the specified minimum]. The rules in Sec.
226.5b(f) relating to home-equity plans limit the ability of a creditor
to change the terms of such plans.
2. State law issues. Examples of issues not addressed by Sec.
226.9(c) because they are controlled by state or other applicable law
include:
i. The types of changes a creditor may make. (But see Sec.
226.5b(f)[rtrif].[ltrif])
ii. How changed terms affect existing balances, such as when a
periodic rate is changed and the consumer does not pay off the entire
existing balance before the new rate takes effect.
3. Change in billing cycle. Whenever the creditor changes the
consumer's billing cycle, it must give a change-in-terms notice if the
change [either] affects any of the terms required to be disclosed under
Sec. 226.6(a) [or increases the minimum payment], unless an exception
under Sec. 226.9(c)(1)[(ii)][rtrif](iv)[ltrif] applies[; for example,
the creditor must give advance notice if the creditor initially
disclosed a 25-day grace period on purchases and the consumer will have
fewer days during the billing cycle change].
9(c)(1)(i) Written notice required.
1. Affected consumers. Change-in-terms notices need only go to
those consumers who may be affected by the change. [For example, a
change in the periodic rate for check overdraft credit need not be
disclosed to consumers who do not have that feature on their
accounts.][rtrif]For example, a change in the balance computation
method, from average-daily-balance to daily-balance (permissible under
Sec. 226.5b(f)(3)(v) as an ``insignificant change'') need not be
disclosed to consumers for whose accounts the balance computation
method will not change. If a single credit account involves multiple
consumers that may be affected by the change, the creditor should refer
to Sec. 226.5(d) to determine the number of notices that must be
given.[ltrif]
2. Timing--effective date of change. The rule that the notice of
the change in terms be provided at least [15][rtrif]45[ltrif] days
before the change takes effect permits mid-cycle changes when there is
clearly no retroactive effect, such as [the imposition of a transaction
fee][rtrif]increasing the credit limit or extending the length of the
plan[ltrif]. Any change in the balance computation method, in contrast,
would need to be disclosed at least [15][rtrif]45[ltrif] days prior to
the billing cycle in which the change is to be implemented.
3. Timing--advance notice not required. Advance notice of
[15][rtrif]45[ltrif] days is not necessary--that is, a notice of change
in terms is required, but it may be mailed or delivered as late as the
effective date of the change [--in two circumstances:
i. If there is an increased periodic rate or any other finance
charge attributable to the consumer's delinquency or default.
ii. If][rtrif]if[ltrif] the consumer agrees to the particular
change. This provision is intended [rtrif]solely[ltrif] for use in the
unusual instance [when a consumer substitutes collateral or when the
creditor can advance additional credit only if a change relatively
unique to that consumer is made, such as the consumer's providing
additional security or][rtrif]when the consumer and the creditor
specifically agree to the change in writing before the effective date
of the change, as permitted under Sec. 226.5b(f)(3)(iii), such as
on[ltrif] paying an increased minimum payment amount. [Therefore, the
following are not ``agreements'' between the consumer and the creditor
for purposes of Sec. 226.9(c)(1)(i): The consumer's general acceptance
of the creditor's contract reservation of the right to change terms;
the consumer's use of the account (which might imply acceptance of its
terms under state law); and the consumer's acceptance of a unilateral
term change that is not particular to that consumer, but rather is of
general applicability to consumers with that type of account.]
4. Form of change-in-terms notice. [rtrif] Except if the tabular
format requirement under Sec. 226.9(c)(1)(iii) applies, a[ltrif][A]
complete new set of the initial disclosures containing the changed term
complies with Sec. 226.9(c)(1)(i) if the change is highlighted in some
way on the disclosure statement, or if the disclosure statement is
accompanied by a letter or some other insert that indicates or draws
attention to the term change.
[5. Security interest change--form of notice. A copy of the
security agreement that describes the collateral securing the
consumer's account may be used as the notice, when the term change is
the addition of a security interest or the addition or substitution of
collateral.]
[rtrif]5[ltrif][6]. Changes to home-equity plans[ entered into on
or after November 7, 1989]. Section 226.9(c)(1) applies when, by
written agreement under Sec. 226.5b(f)(3)(iii), a creditor changes the
terms of a home-equity plan [--entered into on or after November 7,
1989--] at or before its scheduled expiration, for example, by renewing
a plan on terms different from those of the original plan. In
disclosing the change:
[[Page 43606]]
i. If the index is changed, the maximum annual percentage rate is
increased (to the limited extent permitted by Sec. 226.30), or a
variable-rate feature is added to a fixed-rate plan, the creditor must
include the disclosures required by Sec. 226.5b(c)(9)(iii) and
(c)(10)(i)(A)(6), unless these disclosures are unchanged from those
given earlier.
ii. If the minimum payment requirement is changed, the creditor
must include the disclosures required by Sec. 226.5b(c)(9)(iii) (and,
in variable-rate plans, the disclosures required by Sec.
226.5b(c)(10)(i)(A)(6))[rtrif].[ltrif] [unless the disclosures given
earlier contained representative examples covering the new minimum
payment requirement. (See the commentary to Sec. 226.5b(c)(9)(iii) and
(c)(10)(i)(A)(6) for a discussion of representative examples.)]
iii. When the terms are changed pursuant to a written agreement as
described in Sec. 226.5b(f)(3)(iii), the advance-notice requirement
does not apply.
[rtrif]9(c)(1)(ii) Charges not covered by Sec. 226.6(a)(1) and
(a)(2).
1. Applicability. Generally, if a creditor increases any component
of a charge, or introduces a new charge (assuming in either case that
such action is permitted under Sec. 226.5b(f)), that is imposed as
part of the plan under Sec. 226.6(a)(3) but is not required to be
disclosed as part of the account-opening summary table under Sec.
226.6(a)(2), the creditor may either, at its option, provide at least
45 days' written advance notice before the change becomes effective to
comply with the requirements of Sec. 226.9(c)(1)(i), or provide notice
orally or in writing, or electronically if the consumer requests the
service electronically, of the amount of the charge to an affected
consumer before the consumer agrees to or becomes obligated to pay the
charge, at a time and in a manner that a consumer would be likely to
notice the disclosure. (See the commentary under Sec. 226.5(a)(1)(iii)
regarding disclosure of such changes in electronic form.) For example,
a fee for expedited delivery of a credit card is a charge imposed as
part of the plan under Sec. 226.6(a)(3) but is not required to be
disclosed in the account-opening summary table under Sec. 226.6(a)(2).
If a creditor adds expedited delivery of a credit card as a new
service, the new service and the accompanying fee would be permissible
under Sec. 226.5b(f)(3)(iv) as a beneficial change. In these
circumstances, the creditor may provide written advance notice of the
change to affected consumers at least 45 days before the change becomes
effective. Alternatively, the creditor may provide oral or written
notice, or electronic notice if the consumer requests the service
electronically, of the amount of the charge to an affected consumer
before the consumer agrees to or becomes obligated to pay the charge,
at a time and in a manner that the consumer would be likely to notice
the disclosure. (See comment 5(b)(1)(ii)-1 for examples of disclosures
given at a time and in a manner that the consumer would be likely to
notice them.)
9(c)(1)(iii) Disclosure requirements.
9(c)(1)(iii)(A) Changes to terms described in account-opening
table.
1. Changing margin for calculating a variable rate. If a creditor
is changing a margin used to calculate a variable rate, the creditor
must disclose the amount of the new rate (as calculated using the new
margin) in the table described in Sec. 226.9(c)(1)(iii)(B), and
include a reminder that the rate is a variable rate. For example, if a
creditor is changing the margin for a variable rate that uses the prime
rate as an index, the creditor must disclose in the table the new rate
(as calculated using the new margin) and indicate that the rate varies
with the market based on the prime rate. (See Sec. 226.5b(f) for
restrictions on a creditor's right to change terms.)
2. Changing index for calculating a variable rate. If the creditor
is changing the index pursuant to Sec. 226.5b(f)(3)(ii), the creditor
must disclose the amount of the new rate (as calculated using the new
index) and indicate that the rate varies and the how the rate is
determined, as explained in Sec. 226.6(a)(2)(vi)(A). For example, if a
creditor is changing from using a prime rate to using the LIBOR in
calculating a variable rate, the creditor would disclose in the table
the new rate (using the new index) and indicate that the rate varies
with the market based on the LIBOR.
3. Changing from a variable rate to a non-variable rate. If a
creditor is changing from a variable rate to a non-variable rate, the
creditor must disclose the amount of the new rate (that is, the non-
variable rate) in the table. (See Sec. 226.5b(f) for restrictions on a
creditor's right to change terms.)
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing from a non-variable rate to a variable rate, the
creditor must disclose the amount of the new rate (the variable rate
using the index and margin), and indicate that the rate varies with the
market based on the index used, such as the prime rate or the LIBOR.
(See Sec. 226.5b(f) for restrictions on a creditor's right to change
terms.)
5. Changes in the penalty rate, the triggers for the penalty rate,
or how long the penalty rate applies. If a creditor is changing the
amount of the penalty rate, the creditor must also redisclose the
triggers for the penalty rate and the information about how long the
penalty rate applies even if those terms are not changing. Likewise, if
a creditor is changing the triggers for the penalty rate, the creditor
must redisclose the amount of the penalty rate and information about
how long the penalty rate applies. If a creditor is changing how long
the penalty rate applies, the creditor must redisclose the amount of
the penalty rate and the triggers for the penalty rate, even if they
are not changing. (See Sec. 226.5b(f) for restrictions on a creditor's
right to change terms.)
6. Changes in fees. If a creditor is changing part of how a fee
that is disclosed in a tabular format under Sec. 226.6(a)(2) is
determined, the creditor must redisclose all relevant information
related to that fee regardless of whether this other information is
changing. For example, if a creditor currently charges a cash advance
fee of ``Either $5 or 3% of the transaction amount, whichever is
greater. (Max: $100),'' and the creditor is only changing the minimum
dollar amount from $5 to $10, the issuer must redisclose the other
information related to how the fee is determined. The creditor in this
example would disclose the following: ``Either $10 or 3% of the
transaction amount, whichever is greater. (Max: $100).'' (See Sec.
226.5b(f) for restrictions on a creditor's right to change terms.)
7. Combining a notice described in Sec. 226.9(c)(1)(iii) with a
notice described in Sec. 226.9(i). If a creditor is required to
provide a notice described in Sec. 226.9(c)(1)(iii) and a notice
described in Sec. 226.9(i) to a consumer, the creditor may combine the
two notices. This would occur if penalty pricing has been triggered,
and other terms are changing on the consumer's account at the same
time. (See Sec. 226.5b(f) for restrictions on a creditor's right to
change terms.)
8. Content. Sample G-25 contains an example of how to comply with
the requirements in Sec. 226.9(c)(1)(iii) when the following terms are
being changed: (i) the balance computation method is being changed from
average-daily-balance to daily-balance; and (ii) the credit limit is
being increased.
9. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 226.9(c)(1)(iii)(A)(1).
10. Terminology. See Sec. 226.5(a)(2) for terminology requirements
applicable to
[[Page 43607]]
disclosures required under Sec. 226.9(c)(1)(iii)(A)(1).
11. Opt-out disclosure. If a consumer has a right to opt out of one
change (such as an increase in the credit limit), but not another being
made at the same time (such as a change in the balance computation
method), the notice should indicate that the consumer has ``the right
to opt out of some of these changes,'' and refer to additional
information specifying which change the opt-out right applies
to.[ltrif]
[9(c)(1)(iii) Notice to restrict credit.
1. Written request for reinstatement. If a creditor requires the
request for reinstatement of credit privileges to be in writing, the
notice under Sec. 226.9(c)(1)(iii) must state that fact.
2. Notice not required. A creditor need not provide a notice under
this paragraph if, pursuant to the commentary to Sec. 226.5b(f)(2), a
creditor freezes a line or reduces a credit line rather than
terminating a plan and accelerating the balance.]
9(c)(1)[rtrif](iv)[ltrif][(ii)] Notice not required.
1. Changes not requiring notice. The following are examples of
changes that do not require a change-in-terms notice:
[i. A change in the consumer's credit limit.]
[rtrif]i.[ltrif][ii.] A change in the name of the [rtrif]home
equity credit[ltrif][credit card or credit card] plan.
[rtrif]ii.[ltrif][iii.] The substitution of one insurer for
another.
[iv. A termination or suspension of credit privileges. (But see
Sec. 226.5b(f).)]
[rtrif]iii[ltrif][v.] Changes arising merely by operation of law[;
for example, if the creditor's security interest in a consumer's car
automatically extends to the proceeds when the consumer sells the car].
[rtrif]iv. Suspension of credit privileges, reduction of a credit
limit under Sec. Sec. 226.5b(f)(2), 226.5b(f)(3)(i), or
226.5b(f)(3)(vi), or termination of an account under Sec. 226.5b(f)(2)
do not require notice under paragraph (c)(1)(i) of this section, but
must be disclosed pursuant to paragraph (j) of this section.[ltrif]
2. Skip features. If a home-equity plan allows consumers to skip or
reduce one or more payments during the year, or involves temporary
reductions in finance charges [rtrif](permissible as beneficial changes
under Sec. 226.5b(f)(3)(iv))[ltrif], no notice of the change in terms
is required either prior to the reduction or upon resumption of the
higher rates or payments if these features are explained on the
[rtrif]account-opening[ltrif][initial] disclosure statement (including
an explanation of the terms upon resumption). [For example, a merchant
may allow consumers to skip the December payment to encourage holiday
shopping, or a teachers' credit union may not require payments during
summer vacation.] Otherwise, the creditor must give notice prior to
resuming the original schedule or rate, even though no notice is
required prior to the reduction. The change-in-terms notice may be
combined with the notice offering the reduction. For example, the
periodic statement reflecting the reduction or skip feature may also be
used to notify the consumer of the resumption of the original schedule
or rate, either by stating explicitly when the higher payment or
charges resume, or by indicating the duration of the skip option.
Language such as ``You may skip your October payment,'' or ``We will
waive your finance charges for January,'' may serve as the change-in-
terms notice. [rtrif]However, a creditor offering a temporary reduction
in an interest rate must provide a notice in accordance with the timing
requirements of Sec. 226.9(c)(1)(i) and the content and format
requirements of Sec. 226.9(c)(1)(iii)(A) and (B) prior to resuming the
original rate.[ltrif]
[rtrif]3. Changing from a variable rate to a non-variable rate. If
a creditor is changing a rate applicable to a consumer's account from a
variable rate to a non-variable rate, the creditor must provide a
notice as otherwise required under Sec. 226.9(c)(1) even if the
variable rate at the time of the change is higher than the non-variable
rate. (See comment 9(c)(1)(iii)(A)-3.) (See Sec. 226.5b(f) for
restrictions on a creditor's right to change terms.)
4. Changing from a non-variable rate to a variable rate. If a
creditor is changing a rate applicable to a consumer's account from a
non-variable rate to a variable rate, the creditor must provide a
notice as otherwise required under Sec. 226.9(c)(1) even if the non-
variable rate is higher than the variable rate at the time of the
change. (See comment 9(c)(1)(iii)(A)-4.) (See Sec. 226.5b(f) for
restrictions on a creditor's right to change terms.)[ltrif]
* * * * *
9(g) Increase in rates due to delinquency or default or as a
penalty[rtrif]--rules affecting open-end (not home-secured)
plans[ltrif].
* * * * *
[rtrif]9(i) Increase in rates due to delinquency or default or as a
penalty--rules affecting home-equity plans.
1. Affected consumers. If a single credit account involves multiple
consumers that may be affected by the change, the creditor should refer
to Sec. 226.5(d) to determine the number of notices that must be
given.
2. Combining a notice described in Sec. 226.9(i)(1) with a notice
described in Sec. 226.9(c)(1). If a creditor is required to provide
notices pursuant to both Sec. 226.9(c)(1) and (i)(1) to a consumer,
the creditor may combine the two notices. This would occur when penalty
pricing has been triggered, and other terms are changing on the
consumer's account at the same time. (See Sec. 226.5b(f) for
restrictions on a creditor's right to change terms.)
3. Content. Model Clause G-26 contains an example of how to comply
with the requirements in Sec. 226.9(i)(3)(i) when the rate on a
consumer's account is being increased to a penalty rate as described in
Sec. 226.9(i)(1)(ii). (See Sec. 226.5b(f) for restrictions on a
creditor's right to change terms.)
4. Clear and conspicuous standard. See comment 5(a)(1)-1 for the
clear and conspicuous standard applicable to disclosures required under
Sec. 226.9(i).
5. Terminology. See Sec. 226.5(a)(2) for terminology requirements
applicable to disclosures required under Sec. 226.9(i).
* * * * *
[rtrif]9(j) Notices of Action Taken for Home-equity Plans
Paragraph 9(j)(1)
1. Statement of action taken. The notice under Sec. 226.9(j)(1)
must state the specific action taken, such as whether the creditor
suspended advances or reduced the credit limit. If the creditor reduced
the credit limit, the notice must state the new credit limit. The
statement of action taken under this section must include the date the
action taken was effective.
2. Statement of specific reasons for action taken. A creditor must
disclose the principal reasons for prohibiting additional extensions of
credit or reducing the credit limit for a home-equity plan under Sec.
226.5b(f)(3)(i) or (f)(3)(vi). In addition to any information specified
in comments 9(j)(1)-3, -4, and -5, as applicable, compliance with this
provision requires stating the reason under the regulation permitting
the action, such as that the maximum annual percentage has been
reached, the property securing the plan has declined significantly, or
the consumer's financial circumstances have materially changed.
3. Disclosure of specific reasons for action taken based on a
significant decline in property value. When a creditor prohibits credit
extensions or reduces a credit limit because the value of the property
securing the plan has significantly declined under
[[Page 43608]]
Sec. 226.5b(f)(3)(vi)(A), compliance with the requirement to disclose
the specific reasons for the action taken is met by disclosing--
i. the value of the property obtained by the creditor;
ii. the type of valuation method used to obtain the property value;
and
iii. a statement that the consumer has a right to a copy of
documentation. supporting the property value on which the action was
based.
4. Disclosure of specific reasons for action taken based on a
material change in the consumer's financial circumstances. When a
creditor prohibits credit extensions or reduces a credit limit because
the consumer's financial circumstances have materially changed such
that the creditor has a reasonable belief that the consumer will be
unable to meet the repayment obligations of the plan under Sec.
226.5b(f)(3)(vi)(B), compliance with the requirement to disclose the
specific reasons for the action taken is met by disclosing the type of
information concerning the consumer's financial circumstances on which
the creditor relied, such as information about the consumer's income,
credit report information, or some other indicia of the consumer's
financial circumstances, as applicable.
5. Specific reasons in other cases. When a creditor takes action
due to a consumer's default of a material obligation under Sec.
226.5b(f)(3)(vi)(C), compliance with the requirement to disclose the
specific reasons for the action taken is met by disclosing the material
obligation under the agreement on which the consumer defaulted. When a
creditor takes action under Sec. 226.5b(f)(3)(vi)(D) through (G), the
creditor need disclose only the regulatory reason for the action. For
example, if action was taken because a federal law required the action
(pursuant to proposed Sec. 226.5b(f)(3)(vi)(G)), the creditor need
disclose only that the line action was taken because federal law
required the action.
6. Method of request for reinstatement. If a creditor requires the
consumer to request reinstatement of credit privileges under Sec.
226.5b(g)(1)(ii), the notice under Sec. 226.9(j)(1) must state the
method or methods by which the consumer may request reinstatement. For
example, if a creditor requires the request for reinstatement of credit
privileges to be in writing, the notice under Sec. 226.9(j)(1) must
state that fact. The notice must also state the address to which the
consumer should send the written request.
7. Timing of notice. The creditor must mail or deliver the notice
required under Sec. 226.9(j)(1) within three business days after the
action is taken. The general definition of ``business day'' in Sec.
226.2(a)(6)--a day on which the creditor's offices are open to the
public for carrying on substantially all of its business functions--is
used for purposes of Sec. 226.9(j)(1). See comment 2(a)(6)-1.
Paragraph 9(j)(2)
1. Imposition of fees. If a creditor reduces the credit limit under
Sec. Sec. 226.5b(f)(3)(i) or (f)(3)(vi), the creditor may not charge
the consumer a fee for exceeding the new credit limit until after the
consumer has received notice of the action taken under Sec.
226.9(j)(1). Similarly, if a creditor suspends future advances on the
account, the creditor may not charge the consumer a fee for any
advances that the creditor denies until after the consumer has received
notice of the action taken under Sec. 226.9(j)(1). These limitations
apply to fees disclosed in the original agreement for the plan.
Imposing denied advance fees or over-the-limit fees not disclosed in
the original agreement would be permitted only if an exception to the
general limitations on changing home-equity plan terms under Sec.
226.5b(f) applies.
2. Receipt of notice. For purposes of when a creditor may impose a
fee for a denied advance or exceeding the credit limit after suspending
advances on a line or reducing the credit limit, the consumer will be
deemed to have received a notice required under Sec. 226.9(j)(1)
mailed by the creditor after midnight on the third business day
following mailing of the notice. The more precise definition of
business day (meaning all calendar days except Sundays and specified
federal holidays) applies. See comment 2(a)(6)-2.
Paragraph 9(j)(3)
1. Statement of action taken. The notice under Sec. 226.9(j)(3)
must disclose whether the creditor has terminated the plan and is
accelerating the balance, and, if so, the date on which payment of the
balance is due. If, pursuant to comment 5b(f)(2)-2, the creditor has
suspended advances or reduced the credit limit, the notice must state
this fact. If the creditor is reducing the credit limit, the notice
must disclose the new credit limit. In all cases, the notice must
include the date on which the action taken was effective.
2. Statement of specific reasons for action taken.
i. A creditor must disclose the principal reasons for action taken
on a home-equity plan under Sec. 226.5b(f)(2). In addition to any
information specified in comments 9(j)(3)-2.ii, as applicable,
compliance with the requirement to disclose the specific reasons for
the action requires stating the reason under the regulation permitting
the action, such as that the consumer failed to make a required minimum
payment within 30 days after the due date for that payment (pursuant to
Sec. 226.5b(f)(2)(ii)).
ii. When a creditor takes action due to fraud or material
misrepresentation by the consumer under Sec. 226.5b(f)(2)(i), the
creditor need only disclose that the action was taken due to either, as
applicable, fraud or misrepresentation by the consumer; the creditor is
not required to specify in the notice the nature of the fraud or
misrepresentation. When a creditor takes action due to the consumer's
action or inaction that adversely affects the creditor's interest in
the property securing the plan under Sec. 226.5b(f)(2)(iii), the
creditor should include in the notice the consumer's action or inaction
that jeopardizes the creditor's interest in the property securing the
account, such as failing to pay property taxes or allowing a new
superior lien on the property.
3. Timing of notice. The creditor must mail or deliver the notice
required under Sec. 226.9(j)(3) within three business days after the
action is taken. The general definition of ``business day'' in Sec.
226.2(a)(6)--a day on which the creditor's offices are open to the
public for carrying on substantially all of its business functions--is
used for purposes of Sec. 226.9(j)(3). See comment 2(a)(6)-1.
Paragraph 9(j)(4)
1. Notice of action taken under Sec. 226.5b(f)(2) other than
termination and acceleration, suspension, and reduction. If, pursuant
to comment 5b(f)(2)-2, a creditor takes action under Sec. 226.5b(f)(2)
other than termination and acceleration, suspension of advances, or
reduction of the credit limit, such as imposing fees or raising the
interest rate applicable to the account, the creditor must comply with
the notice requirements of Sec. 226.9(c)(1) (for fee changes) or (i)
(for rate changes), as applicable.
* * * * *
Sec. 226.14 Determination of Annual Percentage Rate.
14(a) General rule.
1. Tolerance. The tolerance of [frac18]th of 1 percentage point
above or below the annual percentage rate applies to any required
disclosure of the annual percentage rate. The disclosure of the annual
percentage rate is required in
[[Page 43609]]
Sec. Sec. 226.5a, 226.5b, 226.6, 226.7, 226.9, 226.15, 226.16, and
226.26.
2. Rounding. The regulation does not require that the annual
percentage rate be calculated to any particular number of decimal
places; rounding is permissible within the [frac18]th of 1 percent
tolerance. For example, an exact annual percentage rate of 14.33333%
may be stated as 14.33% or as 14.3%, or even as 14 [frac14]%; but it
could not be stated as 14.2% or 14%, since each varies by more than the
permitted tolerance.
3. Periodic rates. No explicit tolerance exists for any periodic
rate as such; a disclosed periodic rate may vary from precise accuracy
(for example, due to rounding) only to the extent that its annualized
equivalent is within the tolerance permitted by Sec. 226.14(a).
Further, a periodic rate need not be calculated to any particular
number of decimal places.
4. Finance charges. The regulation does not prohibit creditors from
assessing finance charges on balances that include prior, unpaid
finance charges; state or other applicable law may do so, however.
5. Good faith reliance on faulty calculation tools. The regulation
relieves a creditor of liability for an error in the annual percentage
rate or finance charge that resulted from a corresponding error in a
calculation tool used in good faith by the creditor. Whether or not the
creditor's use of the tool was in good faith must be determined on a
case-by-case basis, but the creditor must in any case have taken
reasonable steps to verify the accuracy of the tool, including any
instructions, before using it. Generally, the safe harbor from
liability is available only for errors directly attributable to the
calculation tool itself, including software programs; it is not
intended to absolve a creditor of liability for its own errors, or for
errors arising from improper use of the tool, from incorrect data
entry, or from misapplication of the law.
14(b) Annual percentage rate--in general.
1. Corresponding annual percentage rate computation. For [purposes
of Sec. Sec. 226.5a, 226.5b, 226.6, 226.7(a)(4) or (b)(4), 226.9,
226.15, 226.16, and 226.26,] [rtrif]open-end credit under Subpart B of
Regulation Z,[ltrif] the annual percentage rate is determined by
multiplying the periodic rate by the number of periods in the year.
[This computation reflects the fact that, in such disclosures, the rate
(known as the corresponding annual percentage rate) is prospective and
does not involve any particular finance charge or periodic balance.]
[14(c) Optional effective annual percentage rate for periodic
statements for creditors offering open-end plans subject to the
requirements of Sec. 226.5b.
1. General rule. The periodic statement may reflect (under Sec.
226.7(a)(7)) the annualized equivalent of the rate actually applied
during a particular cycle; this rate may differ from the corresponding
annual percentage rate because of the inclusion of, for example, fixed,
minimum, or transaction charges. Sections 226.14(c)(1) through (c)(4)
state the computation rules for the effective rate.
2. Charges related to opening, renewing, or continuing an account.
Sections 226.14(c)(2) and (c)(3) exclude from the calculation of the
effective annual percentage rate finance charges that are imposed
during the billing cycle such as a loan fee, points, or similar charge
that relates to opening, renewing, or continuing an account. The
charges involved here do not relate to a specific transaction or to
specific activity on the account, but relate solely to the opening,
renewing, or continuing of the account. For example, an annual fee to
renew an open-end credit account that is a percentage of the credit
limit on the account, or that is charged only to consumers that have
not used their credit card for a certain dollar amount in transactions
during the preceding year, would not be included in the calculation of
the annual percentage rate, even though the fee may not be excluded
from the finance charge under Sec. 226.4(c)(4). (See comment 4(c)(4)-
2.) This rule applies even if the loan fee, points, or similar charges
are billed on a subsequent periodic statement or withheld from the
proceeds of the first advance on the account.
3. Classification of charges. If the finance charge includes a
charge not due to the application of a periodic rate, the creditor must
use the annual percentage rate computation method that corresponds to
the type of charge imposed. If the charge is tied to a specific
transaction (for example, 3 percent of the amount of each transaction),
then the method in Sec. 226.14(c)(3) must be used. If a fixed or
minimum charge is applied, that is, one not tied to any specific
transaction, then the formula in Sec. 226.14(c)(2) is appropriate.
4. Small finance charges. Section 226.14(c)(4) gives the creditor
an alternative to Sec. 226.14(c)(2) and (c)(3) if small finance
charges (50 cents or less) are involved; that is, if the finance charge
includes minimum or fixed fees not due to the application of a periodic
rate and the total finance charge for the cycle does not exceed 50
cents. For example, while a monthly activity fee of 50 cents on a
balance of $20 would produce an annual percentage rate of 30 percent
under the rule in Sec. 226.14(c)(2), the creditor may disclose an
annual percentage rate of 18 percent if the periodic rate generally
applicable to all balances is 1[frac12] percent per month.
5. Prior-cycle adjustments. i. The annual percentage rate reflects
the finance charges imposed during the billing cycle. However, finance
charges imposed during the billing cycle may relate to activity in a
prior cycle. Examples of circumstances when this may occur are:
A. A cash advance occurs on the last day of a billing cycle on an
account that uses the transaction date to figure finance charges, and
it is impracticable to post the transaction until the following cycle.
B. An adjustment to the finance charge is made following the
resolution of a billing error dispute.
C. A consumer fails to pay the purchase balance under a deferred
payment feature by the payment due date, and finance charges are
imposed from the date of purchase.
ii. Finance charges relating to activity in prior cycles should be
reflected on the periodic statement as follows:
A. If a finance charge imposed in the current billing cycle is
attributable to periodic rates applicable to prior billing cycles (such
as when a deferred payment balance was not paid in full by the payment
due date and finance charges from the date of purchase are now being
debited to the account, or when a cash advance occurs on the last day
of a billing cycle on an account that uses the transaction date to
figure finance charges and it is impracticable to post the transaction
until the following cycle), and the creditor uses the quotient method
to calculate the annual percentage rate, the numerator would include
the amount of any transaction charges plus any other finance charges
posted during the billing cycle. At the creditor's option, balances
relating to the finance charge adjustment may be included in the
denominator if permitted by the legal obligation, if it was
impracticable to post the transaction in the previous cycle because of
timing, or if the adjustment is covered by comment 14(c)-5.ii.B.
B. If a finance charge that is posted to the account relates to
activity for which a finance charge was debited or credited to the
account in a previous billing cycle (for example, if the finance charge
relates to an adjustment such as the resolution of a billing error
dispute, or an unintentional posting error, or a
[[Page 43610]]
payment by check that was later returned unpaid for insufficient funds
or other reasons), the creditor shall at its option:
1. Calculate the annual percentage rate in accordance with ii.A. of
this paragraph, or
2. Disclose the finance charge adjustment on the periodic statement
and calculate the annual percentage rate for the current billing cycle
without including the finance charge adjustment in the numerator and
balances associated with the finance charge adjustment in the
denominator.
14(c)(1) Solely periodic rates imposed.
1. Periodic rates. Section 226.14(c)(1) applies if the only finance
charge imposed is due to the application of a periodic rate to a
balance. The creditor may compute the annual percentage rate either:
i. By multiplying each periodic rate by the number of periods in
the year; or
ii. By the ``quotient'' method. This method refers to a composite
annual percentage rate when different periodic rates apply to different
balances. For example, a particular plan may involve a periodic rate of
1[frac12] percent on balances up to $500, and 1 percent on balances
over $500. If, in a given cycle, the consumer has a balance of $800,
the finance charge would consist of $7.50 (500 x .015) plus $3.00 (300
x .01), for a total finance charge of $10.50. The annual percentage
rate for this period may be disclosed either as 18% on $500 and 12
percent on $300, or as 15.75 percent on a balance of $800 (the quotient
of $10.50 divided by $800, multiplied by 12).
14(c)(2) Minimum or fixed charge, but not transaction charge,
imposed.
1. Certain charges not based on periodic rates. Section
226.14(c)(2) specifies use of the quotient method to determine the
annual percentage rate if the finance charge imposed includes a certain
charge not due to the application of a periodic rate (other than a
charge relating to a specific transaction). For example, if the
creditor imposes a minimum $1 finance charge on all balances below $50,
and the consumer's balance was $40 in a particular cycle, the creditor
would disclose an annual percentage rate of 30 percent (\1/40\ x 12).
2. No balance. If there is no balance to which the finance charge
is applicable, an annual percentage rate cannot be determined under
Sec. 226.14(c)(2). This could occur not only when minimum charges are
imposed on an account with no balance, but also when a periodic rate is
applied to advances from the date of the transaction. For example, if
on May 19 the consumer pays the new balance in full from a statement
dated May 1, and has no further transactions reflected on the June 1
statement, that statement would reflect a finance charge with no
account balance.
14(c)(3) Transaction charge imposed.
1. Transaction charges. i. Section 226.14(c)(3) transaction charges
include, for example:
A. A loan fee of $10 imposed on a particular advance.
B. A charge of 3 percent of the amount of each transaction.
ii. The reference to avoiding duplication in the computation
requires that the amounts of transactions on which transaction charges
were imposed not be included both in the amount of total balances and
in the ``other amounts on which a finance charge was imposed'' figure.
In a multifeatured plan, creditors may consider each bona fide feature
separately in the calculation of the denominator. A creditor has
considerable flexibility in defining features for open-end plans, as
long as the creditor has a reasonable basis for the distinctions. For
further explanation and examples of how to determine the components of
this formula, see Appendix F to part 226.
2. Daily rate with specific transaction charge. Section
226.14(c)(3) sets forth an acceptable method for calculating the annual
percentage rate if the finance charge results from a charge relating to
a specific transaction and the application of a daily periodic rate.
This section includes the requirement that the creditor follow the
rules in Appendix F to part 226 in calculating the annual percentage
rate, especially the provision in the introductory section of Appendix
F which addresses the daily rate/transaction charge situation by
providing that the ``average of daily balances'' shall be used instead
of the ``sum of the balances.''
14(d) Calculations where daily periodic rate applied.
1. Quotient method. Section 226.14(d) addresses use of a daily
periodic rate(s) to determine some or all of the finance charge and use
of the quotient method to determine the annual percentage rate. Since
the quotient formula in Sec. 226.14(c)(1)(ii) and (c)(2) cannot be
used when a daily rate is being applied to a series of daily balances,
Sec. 226.14(d) provides two alternative ways to calculate the annual
percentage rate--either of which satisfies the provisions of Sec.
226.7(a)(7).
2. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and the
application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.]
* * * * *
Appendix F [--Optional Annual Percentage Rate Computations for
Creditors Offering Open-End Plans Subject to the Requirements of Sec.
226.5b] [rtrif][Reserved][ltrif]
[1. Daily rate with specific transaction charge. If the finance
charge results from a charge relating to a specific transaction and
the application of a daily periodic rate, see comment 14(c)(3)-2 for
guidance on an appropriate calculation method.]
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
1. Permissible changes. Although use of the model forms and
clauses is not required, creditors using them properly will be
deemed to be in compliance with the regulation with regard to those
disclosures. Creditors may make certain changes in the format or
content of the forms and clauses and may delete any disclosures that
are inapplicable to a transaction or a plan without losing the act's
protection from liability[rtrif].[ltrif] [, except]
[rtrif]However,[ltrif] formatting changes may not be made to
[rtrif]the following[ltrif] model forms [rtrif], model
clauses,[ltrif] and samples in [rtrif]Appendices G and H:[ltrif] G-
2[(A)], G-3[(A)], G-4[(A)], G-10(A)-(E), [rtrif]G-14(A)-(E), G-
15(A)-(D),[ltrif] G-17(A)-(D), G-18(A) (except as permitted pursuant
to Sec. 226.7(b)(2)), G-18(B)-(C), G-19, G-20, [and] G-21[rtrif],
G-22(A)-(B), G-23(A)-(B), G-24(A) (except as permitted pursuant to
Sec. 226.7(a)(2)), G-25, and G-26; and H-4(B) through H-4(L), H-
17(A) through (D), H-19(A)-(I), and H-20 through H-22[ltrif]. The
rearrangement of the model forms and clauses may not be so extensive
as to affect the substance, clarity, or meaningful sequence of the
forms and clauses. Creditors making revisions with that effect will
lose their protection from civil liability. Except as otherwise
specifically required, acceptable changes include, for example:
i. Using the first person, instead of the second person, in
referring to the borrower.
ii. Using ``borrower'' and ``creditor'' instead of pronouns.
iii. Rearranging the sequences of the disclosures.
iv. Not using bold type for headings.
v. Incorporating certain state ``plain English'' requirements.
vi. Deleting inapplicable disclosures by whiting out, blocking
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out,
leaving blanks, checking a box for applicable items, or circling
applicable items. (This should permit use of multipurpose standard
forms [rtrif]for transactions not secured by real property or a
dwelling[ltrif].)
[vii. Using a vertical, rather than a horizontal, format for the
boxes in the closed-end disclosures.]
* * * * *
Appendix G--Open-End Model Forms and Clauses
1. Model[s] G-1 [and G-1(A)]. The model disclosures in G-1 [and
G-1(A)] (different
[[Page 43611]]
balance computation methods) may be used in both the account-opening
disclosures under Sec. 226.6 and the periodic disclosures under
Sec. 226.7. As is clear from the models given, ``shorthand''
descriptions of the balance computation methods are not sufficient,
except where Sec. 226.7(b)(5) applies. [For creditors using model
G-1, the phrase ``a portion of'' the finance charge should be
included if the total finance charge includes other amounts, such as
transaction charges, that are not due to the application of a
periodic rate.] If unpaid interest or finance charges are subtracted
in calculating the balance, that fact must be stated so that the
disclosure of the computation method is accurate. [Only model G-1(b)
contains a final sentence appearing in brackets, which reflects the
total dollar amount of payments and credits received during the
billing cycle. The other models do not contain this language because
they reflect plans in which payments and credits received during the
billing cycle are subtracted. If this is not the case, however, the
language relating to payments and credits should be changed, and the
creditor should add either the disclosure of the dollar amount as in
model G-1(b) or an indication of which credits (disclosed elsewhere
on the periodic statement) will not be deducted in determining the
balance. (Such an indication may also substitute for the bracketed
sentence in model G-1(b).) (See the commentary to Sec. 226.7(a)(5)
and (b)(5).) For open-end plans subject to the requirements of Sec.
226.5b, creditors may, at their option, use the clauses in G-1 or G-
1(A).]
2. Model[s] G-2 [and G-2(A)]. [rtrif]This[ltrif] [These]
model[s] contain[rtrif]s[ltrif] the notice of liability for
unauthorized use of a credit card. [For home-equity plans subject to
the requirements of Sec. 226.5b, at the creditor's option, a
creditor either may use G-2 or G-2(A). For open-end plans not
subject to the requirements of Sec. 226.5b, creditors properly use
G-2(A).]
3. Models G-3[, G-3(A),] [rtrif]and[ltrif] G-4 [and G-4(A)].
i. These set out models for the long-form billing-error rights
statement (for use with the account-opening disclosures and as an
annual disclosure or, at the creditor's option, with each periodic
statement) and the alternative billing-error rights statement (for
use with each periodic statement), respectively. [For home-equity
plans subject to the requirements of Sec. 226.5b, at the creditor's
option, a creditor either may use G-3 or G-3(A), and for creditors
that use the short form, G-4 or G-4(A). For open-end (not home-
secured) plans that not subject to the requirements of Sec. 226.5b,
creditors properly use G-3(A) and G-4(A).] Creditors must provide
the billing-error rights statements in a form substantially similar
to the models in order to comply with the regulation. The model
billing-rights statements may be modified in any of the ways set
forth in the first paragraph to the commentary on appendices G and
H. The models may, furthermore, be modified by deleting inapplicable
information, such as:
A. The paragraph concerning stopping a debit in relation to a
disputed amount, if the creditor does not have the ability to debit
automatically the consumer's savings or checking account for
payment.
B. The rights stated in the special rule for credit card
purchases and any limitations on those rights.
ii. The model billing rights statements also contain optional
language that creditors may use. For example, the creditor may:
A. Include a statement to the effect that notice of a billing
error must be submitted on something other than the payment ticket
or other material accompanying the periodic disclosures.
B. Insert its address or refer to the address that appears
elsewhere on the bill.
C. Include instructions for consumers, at the consumer's option,
to communicate with the creditor electronically or in writing.
iii. Additional information may be included on the statements as
long as it does not detract from the required disclosures. For
instance, information concerning the reporting of errors in
connection with a checking account may be included on a combined
statement as long as the disclosures required by the regulation
remain clear and conspicuous.
* * * * *
[rtrif]12. Models G-22(A) and G-22(B). These model clauses
illustrate the disclosures required under Sec. 226.5b(g)(2)(v).
They inform the consumer that the consumer's reinstatement request
has been received and that the creditor has investigated the
request. They contain sample language for explaining the results of
a reinstatement investigation in which the creditor found that a
reason for suspension of advances or reduction of the credit limit
still exists. Clauses in Model G-22(A) illustrate how a notice may
explain that the same reason or reasons originally supporting the
suspension or reduction still exist. Clauses in Model G-22(B)
illustrate how a creditor may explain that a new reason or reasons
for account suspension or reduction exist. Models G-22(A) and G-
22(B) do not contain sample clauses for all reasons in which a
creditor may temporarily suspend or reduce a home-equity plan. A
creditor may comply with the disclosure requirements of Sec.
226.5b(g)(2)(v) by using language substantially similar to the
language in the model clauses or by substituting applicable reasons
for the action not represented in these model clauses, as long as
the information required to be disclosed is clear and conspicuous.
13. Models G-23(A) and G-23(B). These model clauses illustrate
the disclosures required under Sec. 226.9(j)(1) and (j)(3).
i. Clauses in Model G-23(A) contain information regarding
information required by Sec. 226.9(j)(1) regarding the nature of
the action taken on the home-equity plan under Sec. 226.5b(f)(3)(i)
and (f)(3)(vi) and the specific reasons for the action taken. In
particular, they illustrate language for a notice in which the
creditor temporarily suspends advances or reduces a credit limit due
to a significant decline in the value of the property securing the
plan under Sec. 226.5b(f)(3)(vi)(A); a material change in the
consumer's financial circumstances such that the creditor has a
reasonable belief that the consumer will be unable to meet the
repayment terms of the plan under Sec. 226.5b(f)(3)(vi)(B)); and
the consumer's default of a material obligation under the plan under
Sec. 226.5b(f)(3)(vi)(C)). Model G-23(A) clauses also contain
information regarding the consumer's rights when the creditor
requires the consumer to request reinstatement under Sec.
226.5b(g)(1)(ii).
ii. Clauses in Model G-23(B) contain information required under
Sec. 226.9(j)(3) regarding the nature of the action taken on the
account under Sec. 226.5b(f)(2) and the specific reasons for the
action taken. In particular, they illustrate language for a notice
in which the creditor takes action on an account due to the
consumer's failure to meet the repayment terms of the plan under
Sec. 226.5b(f)(2)(ii) and the consumer's action or inaction that
adversely affected the creditor's interest in the property securing
the plan under Sec. 226.5b(f)(2)(iii). Model clauses for the notice
when a creditor takes action due to a consumer's fraud or material
misrepresentation under Sec. 226.5b(f)(2)(i) are not included
because a creditor need disclose only that the consumer's fraud or
misrepresentation is the reason for the action; if the creditor does
not include this information.
iii. A creditor may comply with the disclosure requirements of
Sec. 226.9(j)(1) and (j)(3) by using language substantially similar
to the language in the model clauses or by substituting applicable
reasons for the action not represented in these model clauses, as
long as the information required to be disclosed is clear and
conspicuous.
14. Models G-14(A) and G-14(B), Samples G-14(C), G-14(D), and G-
14(E), Model G-15(A), and Samples G-15(B), G-15(C), and G-15(D).
i. Models G-14(A) and G-14(B) and Samples G-14(C), G-14(D), and
G-14(E) illustrate, in the tabular format, the disclosures required
under Sec. 226.5b to be provided within three business days after a
consumer makes an application for a home equity line of credit
(HELOC). Model G-15(A) and Samples G-15(B), G-15(C), and G-15(D)
illustrate, in the tabular format, the disclosures required under
Sec. 226.6(a)(1) and (a)(2) for HELOC account-opening disclosures.
ii. Except as otherwise permitted, disclosures must be
substantially similar in sequence and format to Models G-14(A), G-
14(B), and G-15(A). While proper use of the model forms will be
deemed in compliance with the regulation, creditors offering HELOCs
are permitted to use headings other than those in the forms if they
are clear and concise and are substantially similar to the headings
contained in model forms, except that the terms ``Borrowing
Period,'' ``Repayment Period,'' ``Balloon Payment,'' and ``Annual
Percentage Rate'' (or ``APR''), must be used as applicable. In
addition, in relation to required insurance, or debt cancellation or
suspension coverage, if applicable, the term ``Required'' and the
name of the product must be used, and for headings that must be used
to describe the grace period, or lack of grace period, the terms
``Paying Interest'' or ``How to Avoid Paying Interest'' must be
used, as applicable.
iii. Model G-14(A) and Sample G-14(C) provide guidance for
creditors that offer two or more HELOC plans and that, accordingly,
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are required under Sec. 226.5b to disclose two HELOC plans and, if
the creditor offers more than two plans, a statement that the
consumer should ask for details about other plans that the creditor
offers. Sample G-14(C) illustrates two plans, one (``Plan B'') with
a balloon payment at the end of the repayment period and the other
(``Plan A'') with no balloon payment, and shows the required
disclosures about the balloon payment, as well as the required
disclosures stating which plan results in the lesser and which
results in the greater amount of interest.
iv. Model G-14(B) and Samples G-14(D) and G-14(E) provide
guidance for creditors that offer only one HELOC plan. Sample G-
14(D) illustrates a plan with an interest-only draw period of 10
years, no repayment period (i.e., the consumer is required to pay
the outstanding balance in full in a single payment at the end of
the draw period), and a balloon payment. Sample G-14(E) illustrates
a plan in which the length of the repayment period depends upon the
outstanding balance at the end of the draw period, and in which no
balloon payment will occur.
v. Among the account-opening disclosure samples, Sample G-15(B)
corresponds to early disclosure Sample G-14(C), and illustrates the
situation where the consumer has chosen Plan B (the plan with a
balloon payment) shown in Sample G-14(C). Account-opening disclosure
Sample G-15(C) corresponds to early disclosure Sample G-14(D),
showing the plan with an interest-only draw period, no repayment
period, and a balloon payment. Account-opening disclosure Sample G-
15(D) corresponds to early disclosure Sample G-14(E), showing the
plan in which the length of the repayment period depends upon the
outstanding balance at the end of the draw period, and in which no
balloon payment will occur.
vi. Samples G-14(C), G-14(E), G-15(B), and G-15(D) illustrate
plans with discounted introductory APRs, and show the required use
of the term ``introductory'' (``intro'' is also permissible, but is
not shown in the samples) in immediate proximity to the term
``APR.'' Samples G-14(D) and G-15(C) illustrate plans without
discounted introductory APRs. All of the samples illustrate plans
with variable-rate APRs, and show required use of the term
``variable rate'' in underlined text.
vii. The samples do not contain all possible required
disclosures. For example, the models show the format for disclosure
of limits on number of credit transactions, limits on amount of
credit borrowed, minimum APR, payment limitations, and negative
amortization, but the samples do not show this information. Also,
the account-opening disclosure samples show certain account-opening,
penalty, and transaction fees in the table detailing fees, but the
fees shown in the samples do not constitute an exhaustive list of
all the fees in these categories that may have to be disclosed.
viii. Although creditors are not required to use a certain paper
size in disclosing the Sec. Sec. 226.5b or 226.6(a)(1) and (2)
disclosures, Samples G-14(C), G-14(D), G-14(E), G-15(B), G-15-(C),
and G-15(D) are each designed to be printed on two 8\1/2\ x 14 inch
sheets of paper. A creditor may use a smaller sheet of paper, such
as an 8\1/2\ x 11 inch sheet of paper. A creditor must disclose the
table on consecutive pages and may not include any intervening
information between portions of the table. In addition, the
following formatting techniques were used in presenting the
information in the sample tables to ensure that the information is
readable:
A. A readable font style and font size (10-point Arial font
style, except for annual percentage rates shown in 16-point type).
B. Sufficient spacing between lines of the text.
C. Adequate spacing between paragraphs when several pieces of
information were included in the same row of the table, as
appropriate.
D. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 10-point
type.
E. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text.
F. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
ix. While the Board is not requiring creditors to use the above
formatting techniques in presenting information in the table (except
for the 10-point and 16-point font requirement), the Board
encourages creditors to consider these techniques when deciding how
to disclose information in the table, to ensure that the information
is presented in a readable format.
x. Creditors are allowed to use color, shading and similar
graphic techniques with respect to the table, so long as the table
remains substantially similar to the model and sample forms in
Appendix G.
15. Samples G-24(A), G-24(B), G-24(C), G-25, and G-26. Samples
G-24(A), G-24(B), and G-24(C) are intended as a compliance aid to
illustrate front sides of a periodic statement, and how periodic
statements for HELOC plans might be designed to comply with the
requirements of Sec. 226.7. The samples contain information that is
not required by Regulation Z. The samples also present information
in additional formats that are not required by Regulation Z.
i. Creditors are not required to use a certain paper size in
disclosing the Sec. 226.7 disclosures. However, Samples G-24(B) and
G-24(C) are designed to be printed on two 8 x 14 inch sheets of
paper.
ii. The summary of account activity presented on Samples G-24(B)
and G-24(C) is not itself a required disclosure, although the
previous balance and the new balance, presented in the summary, must
be disclosed in a clear and conspicuous manner on periodic
statements.
iii. Additional information not required by Regulation Z may be
presented on the statement. The information need not be located in
any particular place or be segregated from disclosures required by
Regulation Z. Any additional information must be presented
consistent with the creditor's obligation to provide required
disclosures in a clear and conspicuous manner.
iv. Samples G-24(B) and G-24(C) demonstrate two examples of ways
in which transactions could be presented on the periodic statement.
Sample G-24(B) presents transactions grouped by type and Sample G-
24(C) presents transactions in a list in chronological order.
Neither of these approaches to presenting transactions is required;
a creditor may present transactions differently, such as in a list
grouped by authorized user or other means.
v. Samples G-24(B) and G-24(C) also illustrate how change-in-
terms notices and rate increases notices would be required to
appear, if given on a periodic statement. Sample G-24(B) provides an
example of a rate increase notice on a periodic statement; Sample G-
24(C) provides an example of a change-in-terms notice on a periodic
statement. Change-in-terms notices and rate increase notices may
alternatively be given separately from periodic statements, provided
the formatting requirements of Sec. 226.9(c)(1) and (i) are
followed; Sample G-25 provides an example of a change-in-terms
notice, and Sample G-26 provides an example of a rate increase
notice.
By order of the Board of Governors of the Federal Reserve
System, July 24, 2009.
Robert deV. Frierson,
Deputy Secretary of the Board.
Note: The following appendix will not appear in the Code of
Federal Regulations.
BILLING CODE 6210-01-P
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[GRAPHIC] [TIFF OMITTED] TP26AU09.027
[FR Doc. E9-18121 Filed 8-25-09; 8:45 am]
BILLING CODE 6210-01-C