Regulation Z -- Proposed Official Staff Interpretation, Circular No. 78-138

Page 1

F e d e r a l r e s e r v e B a n k o f D a l l a s D A L L A S , T E X A S 7 5 2 2 2 Circular No. 78-138 October 3, 1978 REGULATION Z— PROPOSED OFFICIAL STAFF INTERPRETATION Computation of Annual Percentage Rates For HUD/FHA Section 245 Graduated Payment Mortgages TO ALL MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT:

The Board of Governors of the Federal Reserve System has published for comment a proposed official staff interpretation approving the use of certain tables and accompanying instructions prepared by the U. S. Department of Housing and Urban Development. These tables are intended for use in computing the annual percentage rate on graduated payment mortgages under the HUD/FHA Section 245 Experimental Financing Program.

A copy of the proposed interpretation is printed on the reverse of this circular. However, we have not attached copies of the tables themselves. These tables may be found in the Federal Register, Volume 43, No. 182—Tuesday, September 19, 1978, pages 41995 through 42015. If you are unable to locate a Fed­ eral Register, copies of the tables are available through our Consumer Affairs unit. Comments on the proposed interpretation should be addressed to the Secretary, Board of Governors of the Federal Reserve System, Washington, D. C. 20551. Comments must be received on or before October 19, 1978, and should in­ clude reference to FC-0154.

Any questions on the above interpretation may be directed to our Con­ sumer Affairs unit at Ext. 6171.

Sincerely yours, Robert H. Boykin First Vice President Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For calls placed locally, please use 651 plus the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

Page 2

Extract From Federal Register VOL. 43, NO. 182 Tuesday, September 19, 1978 p. 41993 [6210-01] FEDERAL RESERVE SYSTEM [12 CFR Port 226] [Reg. Z; PC-01543 COMPUTATION OF ANNUAL PERCENTAGE RATES FOR HUD/FHA SECTION 245 GRADU­ ATED PAYMENT MORTGAGES P roposed Official S taff Interpretation AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed official staff inter­ pretation.

SUMMARY: The Board is publishing for comment a proposed official staff interpretation approving the use of certain tables and accompanying instructions prepared by the U.S. De­ partm ent of Housing and Urban De­ velopment to be used to compute the annual percentage rate on graduated payment mortgages under the HUD/ FHA section 245 Experimental Financ­ ing Program. The proposed interpreta­ tion is intended to assist in computa­ tion of the annual percentage rate in such mortgages.

DATE: Comments must be received on or before October 19,1978. ADDRESS: Comments including refer­ ence to FC-0154 to Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. FOR FURTHER INFORMATION CONTACT:

Glenn E. Loney, Section Chief, Divi­ sion of Consumer Affairs, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, 202-452-3867.

SUPPLEMENTARY INFORMATION: (1) In order to assist in the computa­ tion of annual percentage rates in graduated payment mortgages made under the HUD/FHA section 245 Ex­ perimental Financing Program, the Board staff proposes to approve use of tables and accompanying instructions prepared by the Actuarial Division of the U.S. Department of Housing and Urban Development.

The Board staff has reviewed the tables and instructions prepared by HUD and has determined th at they yield accurate annual percentage rates. The staff would appreciate any comments the public might have on this matter, particularly regarding whether the instructions and tables, which are attached to the proposed of­ ficial staff interpretation, are clear, understandable, and easy to use. (2) To aid in the consideration of this matter, interested persons are in­ vited to submit relevant data, com­ ments or arguments. All such materi­ als should be submitted in writing to Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, and should be received not later than October 19, 1978. Such in­ formation will be made available for inspection and copying upon request, except as provided in § 261.6(a) of the Board’s Rules Regarding Availability of Information (12 CFR 261.6(a)). (3) Pursuant to the authority grant­ ed in 15 U.S.C. 1640(f), the Board staff proposes to issue the following official staff interpretation:

M r. C h e st e r C. F o ste r, Acting Director, Actuarial Division, De­ partment of Housing and Urban Devel­ opment, , Washington, D.C. D ear M r. F o ste r: This letter is in re­ sponse to our recent correspondence and conversations concerning proper computa­ tion of the annual percentage rate for grad­ uated payment mortgages made under the Department of Housing and Urban Develop­ ment’s FHA Section 245 Experimental Fi­ nancing Program. You'have requested that the Board staff review and verify that the attached tables, when used in accordance with the attached instructions, yield an ac­ curate annual percentage rate for purposes of Regulation Z.

The staff has reviewed the attached mate­ rials and concludes that, subject to the limi­ tations set forth below, use of the tables in accordance with the Instructions which ac­ company them results in an accurate annual percentage rate.

It should be noted that this approach may be used only when the first payment period, i.e.. the period from the date on which the finance charge begins to accrue to the date of the first payment, falls within the ranges describe in the minor Irregularities provi­ sions of Regulation Z, $ 226.5(d) and Inter­ pretation § 226.503. This means that the first payment must be due not more than 62 days after consummation of the loan in order for use of the tables to yield an accu­ rate annual percentage rate. Use of this method also presumes that the monthly payments have been properly calculated using HUD Handbood 4240.2, dated October 27, 1976. Finally, we note that these tables and instructions cannot be used for gradu­ ated payment plans involving private mort­ gage insurance premiums, unless such insur­ ance premiums are computed in the same manner as the FHA mortgage insurance premiums involved in the Section 245 Grad­ uated Payment Mortgage program. This is an official staff Interpretation of Regulation Z. issued in accordance with § 226.1(d)(2) of the regulation, and it is strictly limited to the situation discussed herein.

Sincerely, N a t h a n ie l E. B u t l e r , Associate Director.

Board of Governors of the Federal Reserve System, September 5, 1978. G r if f ith L. G arw ood, Deputy Secretary of the Board.