Proposed Amendment to Interpretation of Regulation Z, Circular No. 78-77
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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 DALLAS. TEXAS 7 5 2 2 2 Circular No. 78-77 June 8, 1978 PROPOSED AMENDMENT TO INTERPRETATION OF REGULATION Z Minor Irregularities—Maximum Irregular Period Limits TO ALL BANKS, OTHER CREDITORS, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System proposed for comment an amendment to an interpretation of Regulation Z, "Truth in Lending," that would facilitate the computation of the annual percentage rate for graduated payment mortgages.
The Board requested comment by June 26.
Graduated payment mortgages, and other real estate mortgages, may involve one payment period that is different (longer or shorter) from others. The proposed amendment would apply to all mortgages with a minor variation in a pay ment period and that have a maturity of 15 years or more, with monthly payments. Graduated payment mortgages have been developed by the Federal Housing Administration to assist young people, and others, to buy homes. Under them, mortgage payments increase annually during the first five or ten years of the mortgage. The proposed amendment (to Interpretation 226.503 of Regulation Z) would simplify the use of annual percentage rate computation tables prepared by FHA for use when homes are bought on its graduated payment mortgage plan. Printed on the reverse of this circu lar is the text of the Board's order as it appeared in the F ed era l R e g is te r . All comments should be directed to the Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. All material submitted should include Docket No. R-0164. Sincerely yours, Robert H . Boykin First Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])
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Extract From FEDERAL REGISTER, VOL. 43, NO. 106 T h u rsd a y , June 1, 1978 pp. 23726 - 23727 [6210-01] FEDERAL RESERVE SYSTEM [1 2 CFR P art 226] [R eg. Z: D o ck et N o. R -0164] MINOR IRREGULARITIES— MAXIMUM IRREGULAR PERIOD LIMITS R evised In terp retatio n s AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed revised interpreta tion.
SUMMARY: This proposed revised in terpretation would expand the current "minor irregularities” provisions of Regulation Z which permit certain ir regular payment amounts and pay ment periods to be considered regular for purposes of calculating the annual percentage rate on consumer credit transactions. It provides that in most real property transactions with a term of 15 years or more, an irregular first period of up to 62 days may be treated as though it were a regular period. The proposed rule is intended to sim plify computation of the annual per centage rate in long-term real proper ty transactions involving unequal pay ments, including graduated payment mortgages.
DATE: Comments must be received on or before June 26,1978. ADDRESS: Secretary, Board of Gov ernors of the Federal Reserve System, Washington, D.C. 20551. F O R F U R T H E R 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.
SUP PLEMENTARY INFORMATION: (1) In an effort to 'simplify computa tion of annual percentage rates in graduated payment mortgages, such as those made under the HUD/FHA Sec tion 245 Experimental Financing Pro gram, the Board is proposing to revise Interpretation § 226.503. That inter pretation currently allows first pay ment periods of up to 50 days to be treated as if they were regular for pur poses of the annual percentage rate calculation, only in transactions longer than 1 year which are otherwise pay able in equal monthly instalments. Since graduated payment mortgages, by their very nature, involve unequal instalments, creditors offering them cannot now take advantage of the minor irregularities provision. The Board believes this requirement that the obligation be otherwise pay able in equal instalments may appro priately be relaxed in the case of most long-term real property transactions, even if the instalments are unequal. Moreover, it believes that in such transactions allowing a first period of up to 62 days to be considered regular will have only a minor effect on the annual percentage rate. It therefore proposes to allow such a longer period to be treated as regular. There are two limitations on the type of real property transaction that qualifies for this, special rule regarding irregularities. The transaction must be for a term of at least 15 years, and it must be otherwise payable in monthly instalments. These limitations are in cluded to insure that use of this provi sion will not result in major deviations from the true annual percentage rate. The Board is permitted by g 107 of the Truth in Lending Act (15 U.S.C. 1606) to allow variances in the annual percentage rate.
The Board would like to receive any comments the public might have on this proposal. In particular, the Board believes comments on the following issues would be helpful. 1. Are the restrictions placed on the use of this amendment appropriate? Are any additional restrictions neces sary? Should any of the proposed re strictions be made less severe, more strict, or eliminated? For example, the amendment applies only to real prop erty transactions whose terms are 15 years or more. Could that minimum eligible term be increased, decreased, or eliminated, without seriously dis torting the annual percentage rate? 2. To assure less distortion in the rate calculation, would it be advisable or necessary to limit this amendment to apply to those mortgage credit plans that require the customer to pay interest for the irregular portion of the first payment period? 3. Does this adjustment achieve the desired result as stated above? (2) To aid in the consideration of this matter by the Board, interested persons are invited to submit relevant data, views, comments, or arguments. Any such material should be submit ted in writing to the Secretary, Board of Governors of the Federal Reserve System. Washington, D.C. 20551, to be received not later than June 26, 1978, and should include the docket number R-0164. The material submitted will be zpade available for inspection and copying upon request, except as pro vided 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. 1064 (1968), the Board proposes to revise Regulation Z, 12 CFR Part 226.503 by adding the fol lowing at the end thereof: fi 226.604 Minor irregularities—maximum irregular period limits. Notwithstanding the above or the language in § 226.5(d) that limits the minor irregularities provisions to transactions that are "otherwise pay able in equal instalments scheduled at equal intervals,” the following rule may be applied to real property trans actions.
An initial payment period of 62 days or less may be trated as though it were regular if:
(1) The term of the obligation (the date from which the finance charge begins to accrue to the date of the final payr. ent) is at least 15 wears. and (2) The obligation is otherwise pay able in monthly instalments. By order of the Board of Governors, May 19,1978.
G r if f it h L. G a r w o o d , D e p u ty S e c r e ta ry o f th e B o a rd . [P R D oc. 78-15144 P iled 5-31-78; 8:45 am ]