Regulation Z Amendments and Interpretations, Circular No. 70-203

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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 75222 C i r c u l a r No. 70-203 A u g u st 27, 1970 REGULATION Z AMENDMENTS AND INTERPRETATIONS To A l l Member B anks an d O th e r s C o n c e rn e d i n t h e E le v e n th F e d e r a l R e s e rv e D i s t r i c t : The Board of Governors of the Federal Reserve System has printed a pamphlet containing the amendments and interpreta­ tions of Regulation Z issued during the period September 12, 1969, t o July 31, 1970.

A copy of this pamphlet is enclosed.

Yours very truly, P . E. C o ld w e ll President E n c lo s u r e This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

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Board of Governors of the Federal Reserve System TRUTH IN LENDING REGULATION Z AMENDMENTS and INTERPRETATIONS This pamphlet contains all amendments and interpretations of Regulation Z issued during the period September 12, 1969, to July 31, 1970. Three interpretations in this pamphlet (§§ 226.404, 226,811 and 226.903) supersede previously issued interpretations.

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TABLE OF CONTENTS AMENDMENTS Page I.

Section 226.8—Credit Other Than Open End—Specific Disclosures § 226.8(p) Agricultural credit — information not determinable............................ Page II. Section 226.9—Right to Rescind Certain Transactions § 226.9(g)(4) Exceptions to the general rule . III. Section 226.12—Exemption of Certain State Regulated Transactions Entire section is am ended.............................. INTERPRETATIONS I.

Section 226.3—Exempted Transactions § 226.302 Credit for business or commercial purposes—more than 4 family units ..........

II. Section 226.4—Determination of Finance Charge § 226.404 Premiums for vendor’s single inter­ est insurance required by creditor III. Section 226.8—Credit Other Than Open End—Specific Disclosures § 226.811 Renewals of n o tes.......................... § 226.812 Advances under open end real es­ tate mortgages for agricultural purposes ........................................... § 226.813 Disclosures on multiple advance loans ................................................. § 226.814 Premiums for insurance added to an existing balance........................ § 226.815 Disclosure for demand loans . . . . § 226.816 Mortgages with demand features . § 226.817 Reduction in annual percentage rate ................................................... IV.

Section 226.9—Right to Rescind Certain Transactions § 226.903 Refinancing and increasing—dis­ closures and effects on the right of rescission....................................

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REGULATION Z AMENDMENTS TRUTH IN LENDING AMENDMENTS TO REGULATION Z Effective November 6, 1969, Section 226.8 is amended by the addition of paragraph (p) as follows:

SECTION 226.8—CREDIT OTHER THAN OPEN END—SPECIFIC DISCLOSURES (p) Agricultural credit—information not de­ terminable. (1) In any transaction subject to this section, if the amount or date of any advance or payment in connection with an extension of credit for agricultural purposes under a written agree­ ment is to be determined by production, seasonal needs, or similar operational factors, and is not determinable at the time of execution of the agree­ ment, disclosures may be made at the creditor’s option in accordance with this paragraph, provided the use of this paragraph is not for the purpose of circumvention or evasion of this Part. (2) If a creditor elects to make disclosures un­ der this paragraph, he shall disclose the following items in accordance with § 226.8(a), which shall constitute compliance with the requirements of § 226.8, and under § 226.9(a) shall constitute “all other material disclosures required under this Part”:

(i) The method of computing the amount of the finance charge including an identification of each component thereof in accordance with § 226.4;

(ii) Any item required to be disclosed under § 226.8(b)(3) which is determinable at the time the disclosures are required to be made under this paragraph.

(iii) The disclosures, as applicable, required under § 226.8(b)(4), (5), (6), and (7) and the items described in § 226.8(e)(1) and (2). (iv) The disclosures, as applicable, required under § 226.8(g) ( 1), (2), (3), (4), (5), (8), and (9).

(3) Disclosures made pursuant to subparagraph (2 )(i), (ii), and (iii) of this paragraph need be made only on the agreement or on a separate statement as specified in § 226.8(a). (4) If a creditor making disclosures pursuant to this paragraph transmits a periodic billing state­ ment of the type described in paragraph (n) of § 226.8, such statement shall be in a form which the customer may retain and shall set forth the date by which, or the period, if any, within which payment must be made in order to avoid late pay­ ment or delinquency charges.

Effective November 6, 1969, Section 226.9(g) (4) is amended as follows:

SECTION 226.9—RIGHT TO RESCIND CERTAIN TRANSACTIONS * * * * * (g) Exceptions to general rule * * * * * (4) Any advance for agricultural purposes made pursuant to either:

(i) Paragraph (j) of § 226.8 under an open end real estate mortgage or similar lien, pro­ vided the disclosure required under paragraph (b) of this section was made at the time the security interest was acquired by the creditor or at any time prior to the first advance made on or following the effective date of this Part, or (ii) Paragraph (p) of § 226.8 under a written agreement, provided the disclosure re­ quired under paragraph (b) of this section was made at the time the written agreement was executed by the customer.

Effective March 12, 1970, Section 226.12 is amended to read as follows:

SECTION 226.12—EXEMPTION OF CERTAIN STATE REGULATED TRANSACTIONS (a) Exemption for State regulated transactions. In accordance with the provisions of Supplement II to Regulation Z (§ 226.12—Supplement), any State may make application to the Board for ex­ emption of any class of transactions within that State from the requirements of Chapter 2 of the Act and the corresponding provisions of this Part: Provided, That (1) Under the law of that State, that class of transactions is subject to requirements substan­ tially similar to those imposed under Chapter 2

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AMENDMENTS REGULATION Z of the Act and the corresponding provisions of this Part; and (2) There is adequate provision for enforce­ ment.

(b) Procedures and criteria. The procedures and criteria under which any State may apply for the determination provided for in paragraph (a) of this section are set forth in Supplement II to Regulation Z (§ 226.12—Supplement). (c) Civil liability. In order to assure that the concurrent jurisdiction of Federal and State courts created in section 130(e) of the Act shall con­ tinue to have substantive provisions to which such jurisdiction shall apply, and generally to aid in implementing the Act with respect to any class of transactions exempted pursuant to paragraph (a) of this section, the Board pursuant to sections 105 and 123 hereby prescribes that: (1) No such exemption shall be deemed to extend to the civil liability provisions of sections 130 and 131; and (2) After an exemption has been granted, the disclosure requirements of the applicable State law shall constitute the disclosure requirements of this Act, except to the extent that such State law imposes disclosure requirements not imposed by this Act. Information required under such State law with the exception of those provisions which impose disclosure requirements not imposed by this Act shall, accordingly, constitute the “in­ formation required under this Chapter” (Chapter 2 of the Act) for the purpose of section 130(a). (d) Exemptions granted. Exemptions granted by the Board to particular classes of credit trans­ actions within specified States are set forth in Supplement III to Regulation Z. □

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REGULATION Z INTERPRETATIONS TRUTH IN LENDING INTERPRETATIONS OF REGULATION Z SECTION 226.3 SECTION 226.302— CREDIT FOR BUSINESS OR COMMERCIAL PURPOSES— MORE THAN 4 FAMILY UNITS Under § 226.3(a), extensions of credit for business or commercial purposes, other than agri­ cultural purposes, are not subject to Regulation Z. The question arises as to whether an extension of credit relating to a dwelling (as defined in § 226.2(p)) which contains more than 4 family housing units is an extension of credit for business or commercial purposes.

Credit extended to an owner of a dwelling con­ taining more than 4 family housing units for the purpose of acquiring, financing, refinancing, im­ proving, or maintaining that dwelling is an exten­ sion of credit for business or commercial pur­ poses.

1/28/70 SECTION 226.4 ♦SECTION 226.404— PREMIUMS FOR VENDOR’S SINGLE INTEREST INSURANCE REQUIRED BY CREDITOR The question arises whether charges or premi­ ums for single interest insurance (Vendor’s Single Interest Insurance) written in connection with a credit transaction may be excluded from the finance charge under § 226.4(a)(6) if the insurer waives subrogation.

If the insurer waives all right of subrogation against the customer in a single interest policy of insurance against loss of or damage to property (which may include coverage for skip, conceal­ ment, conversion, and embezzlement) written in connection with a credit transaction, and the creditor complies with the requirements of § 226.4(a)(6), charges or premiums for such insurance may be excluded from the amount of the finance charge on that transaction. However, if the insurer does not so waive subrogation in such policy of insurance, the charges or premiums shall be included in the finance charge. 1/28/70 * Supersedes interpretation § 226.404 issued 8/1/69.

SECTION 226.8 ♦SECTION 226.811— RENEWALS OF NOTES Any renewal of an extension of credit provid­ ing for payment of the full principal sum on a specified date shall not be considered a refinanc­ ing under § 226.8(j), and no disclosures need be made in connection with such renewal, provided: (i) All disclosures required under this Part were made in connection with the original exten­ sion of credit or a prior renewal thereof; (ii) The amount of the renewal does not exceed the amount of the unpaid balance plus any accrued and unpaid finance charge;

(iii) The annual percentage rate (or rates) previously disclosed is not increased; and (iv) The period for which renewal is made does not exceed by more than 4 days the period of the extension of credit for which disclosures were made.

In instances in which disclosures are required to be made and renewal is made by mail, the creditor may not know whether the customer will reduce his obligation by a payment on principal or, if reduced, the amount of that reduction. The question arises as to what disclosures should be made by mail to the customer in these circum­ stances.

If the creditor knows the amount of the prin­ cipal payment, all disclosures should be made on the basis of the resulting new amount financed. If, however, the creditor does not know whether the customer will reduce his original obligation, or if so, by how much, he should disclose on the assumption that there will be no reduction. In such circumstances, at the creditor’s option, he may make one or more additional disclosures based on one or more examples of graduated principal reduction. For example, if a single pay­

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INTERPRETATIONS REGULATION Z ment note for $1,000 at 7% is proposed to be renewed for $1,000 at 8% for 3 months, in addi­ tion to the other required disclosures, the creditor should disclose an amount financed of $ 1,000 with a finance charge of $20, and may, in addition, disclose that with a principal payment of $300 the amount financed would be $700 with a finance charge of $14, and with a principal payment of $500 the amount financed would be $500 with a finance charge of $10.

1/28/70 * Supersedes interpretation § 226.811 issued 8/1/69 SECTION 226.812— ADVANCES UNDER OPEN END REAL ESTATE MORTGAGES FOR AGRICULTURAL PURPOSES Under § 226.8(p) disclosures are permitted in connection with certain extensions of credit for agricultural purposes which may involve advances under an open end real estate mortgage or similar lien. Section 226.8(j) in part treats advances for agricultural purposes under an open end real es­ tate mortgage or similar lien. The question arises as to the respective application of these paragraphs to such advances.

If an extension of credit involving multiple ad­ vances, whether or not under an open end mort­ gage, meets the tests of § 226.8 (p), disclosures need only be made prior to consummation of the credit transaction and need not be made at the time of each individual advance, even though such advance for agricultural purposes may not meet the tests in § 226.8(j). Conversely, extensions of credit for agricultural purposes involving advances under an open end real estate mortgage or similar lien which do not meet the tests for disclosure under § 226.8(p) are subject to the relevant pro­ visions of § 226.8(j) dealing with such advances. 11/6/69 SECTION 226.813— DISCLOSURES ON MULTIPLE ADVANCE LOANS In connection with construction and other mul­ tiple advance loans under § 226.8(i), which are payable in a single sum or permanently financed by the same creditor at maturity of the construc­ tion phase with interest only payable up to such maturity, and in which either the amount or date of an advance is not determinable, the question arises whether a method might be utilized to estimate the information to be disclosed under § 226.8(b)(2) and (3) and (d)(3). In such cases, at the creditor’s option, required information may be estimated and disclosed as follows:

(1) The following mathematical equations based upon assumed continuous advances may be utilized in estimating the amount of the interest component of the finance charge and the annual percentage rate by substituting the appropriate numerical amounts for the following symbols in the equations:

(1) Symbols L = Amount of loan commitment, r = Stated annual interest rate expressed as a decimal figure, n = Number of interest payments to be made to maturity, m = Number of interest periods (unitperiods) in 1 year.

P = Total amount of any prepaid finance charge under § 226.8(e).

B = Amount of any required deposit bal­ ance under § 226.8(e).

(ii) If interest is computed from the date of each advance on only the amounts advanced: Estimated annual percentage rate = n ( L — 2 P — 2 B ) Estimated interest finance charge = (iii) If interest is computed on the full amount of the commitment without regard for the dates of disbursements or actual amounts disbursed: Estimated annual percentage rate = 2nrL + 2mP n(JL — 2 P — 2 d ) Estimated interest finance charge = m (2) If the equations under subdivision (ii) of paragraph (1) are utilized, the amounts of any required interest payments during the construc­ tion phase may be omitted in making the disclo­ sures required under § 226.8(b)(3); however, if the equations under subdivision (iii) of para­ graph (1) are utilized, then the amount of each scheduled interest payment shall be disclosed as required under § 226.8(b)(3).

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REGULATION Z INTERPRETATIONS (3) In the case of a combination construction loan and permanent financing provided by the same creditor:

(i) The amount of interest finance charge to be paid prior to the due date of the first amorti­ zation payment shall be estimated as prescribed under subdivisions (ii) or (iii) of paragraph (1) as the case may be and shall be treated as pre­ paid finance charge for computational purposes; and (ii) Estimation of the annual percentage rate shall be made without regard to the number of interest only payments to be made, assuming the first payment period to be that interval between the date the finance charge begins to accrue and the date the first amortization payment is due. 4.

Disclosures made in accordance with this interpretation, when made along with the other disclosures required under § 226.8(b) and (d), shall constitute “all other material disclosures required under this Part” referred to under § 226.9(a):

Example I A $20,000 construction loan commitment on which the precise dates or amounts of advances are not determinable. The obligation bears a stated 6% interest rate and interest is to be paid monthly on the amounts advanced, and the total of the amounts advanced under the commitment plus any unpaid interest is due and payable at the end of nine months from the date the finance charge begins to accrue. There is a loan fee of 1% ($200), but there is no required deposit bal­ ance. Substituting these terms for the symbols, the equations become:

(9 X .06 X 20,000) + (2 X 12 X 200) _ 9 X [(20,000 - (2 X 200)] .0884 or 8.84% or 834 % estimated annual percentage rate.

9 X .0 6 X 20,000 2 X 12 450 or $450 estimated interest finance charge component of the finance charge.

If the terms stated in the example were changed so that interest would be computed on the full amount of the commitment from the date the finance charge begins to accrue without regard for the dates of disbursements or actual amounts of funds disbursed, the equations under (iii) above become:

(2 X 9 X .06 X 20,000) + (2 X 12 X 200) _ 9 X [(20,000 - (2 X 200)] .1497 or 14.97% or 15% estimated annual per­ centage rate.

9 X .06 x 20,000 900 or $900 estimated interest finance charge component of the finance charge. This interest would be payable in 9 monthly payments of $100 each.

Example II A $20,000 construction loan followed by per­ manent financing in same amount. Six per cent interest. One point loan fee. Nine months to ma­ turity of construction phase. Nine monthly pay­ ments of interest only during construction phase. Twenty-year maturity on permanent financing to be amortized in 240 equal monthly payments in­ cluding interest and principal. From mortgage amortization tables: Amortization of a $20,000 6% 20-year loan in 240 equal monthly payments including interest and principal requires each monthly payment to be $143.29.

Total of 240 payments = 240 X $143.29 = $34,389.60 Subtract amount of loan principal $20,000.00 Interest finance charge on permanent financing $14,389.60 Add: Estimated interest finance charge on construction phase (pursuant to sub­ division (ii)) 450.00 Add: Loan fee 1 point 200.00 Estimated finance charge $15,039.60 (If the interest on the construction phase is com­ puted on the full amount of the commitment for the full time to maturity without regard for the dates of disbursements or actual amounts dis­ bursed pursuant to subdivision (iii), the estimated interest finance charge for the construction phase would be $900.00 which would result in a total estimated finance charge of $15,489.60.)

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INTERPRETATIONS REGULATION Z Loan fee 1 point prepaid finance charge $ 200.00 For computational purposes con­ sider interest to be paid on con­ struction phase as prepaid (not to be disclosed as prepaid) $ 450.00 Total amount treated as prepaid finance charge for computational purposes $ 650.00 Computational Disclosure Purposes Purposes Amount of loan Deduct total of esti­ mated finance charge treated as prepaid Deduct actual amount of prepaid finance charge Estimated amount fi­ nanced for computa­ tional purposes Amount financed to be disclosed $20,000 $ $20,000 $ $19,350 $19,800 Adjust first payment period (period of con­ struction loan plus period from maturity date of construction loan to due date of first amortization payment) by dividing the period of the construc­ tion loan by 2 and adding the period of time be­ tween the maturity date of the construction loan and the date the first amortization payment is due. 9 months divided by 2 = 4Vi months plus 1 month = 5Vi months From Appendix A (page A2) of Volume I of the Board’s Annual Percentage Rate Tables, read across to 5 months and on the line below opposite 15 days (Vi month) read +9.0. This adjustment should be added to the number of regular amorti­ zation payments to determine the number of pay­ ments in utilizing the Annual Percentage Rate Tables:

240 monthly payments + adjustment 9.0 = 249 Following the directions on page 1 of Volume I : Estimated finance charge $15,039.60 X 100 = $1,503,960 which should be divided by the estimated amount financed for computational purposes:

$1,503,960 -r- 19,350 = $77.72 estimated fi­ nance charge per $100 of estimated amount financed for computational purposes. Refer to page 309M of Volume I, read down number of payments column to 249; read across to 78.71 (which is nearest to $77.72 computed above), and read up to 6.25% which is the esti­ mated annual percentage rate to be disclosed. In the example where the interest on the con­ struction phase is computed on the full amount of the commitment without regard for the dates of advances or actual amounts advanced, the esti­ mated finance charge per $100 of amount financed is $81.96. On page 309M of Volume I, read down to the 249th payment line and across to 82.39 which is the nearest amount to $81.96, and read up to 6.50% which is the estimated annual percentage rate to be disclosed. 1/28/70 SECTION 226.814— PREMIUMS FOR INSURANCE ADDED TO AN EXISTING BALANCE Subsequent to the consummation of a consumer credit transaction the customer may wish to pur­ chase optional insurance in connection with the obligation. Typically, mortgage life and disability insurance may be offered to the customer at some date after consummation under a plan in which the lender will advance the amount of the pre­ mium due and add that amount to the existing unpaid balance of the obligation. Generally, each instalment on the original obligation paid during the period before the next premium is due will be increased proportionately to liquidate the amount of the additional advance plus any finance charge. Additional advances are made automatically for renewal premiums as they become due unless the borrower requests discontinuance of the coverage. The question arises as to the required disclosures. In such cases the insurance agreement may be considered a single separate transaction, and the disclosures required under § 226.8, at the credi­ tor’s option, need be made only prior to the time the agreement is executed and only with respect to the amount of the initial advance. For exam­ ple, a mortgage life and disability insurance plan in which the annual premium advanced was $145 repayable in 12 monthly instalments of $12.61 added to the regular monthly mortgage payments

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REGULATION Z INTERPRETATIONS would be disclosed as an “amount financed” of $145, a “finance charge” of $6.32, and a “total of payments” of $151.32. Additional disclosures as applicable under § 226.8 would, of course, be made. If, as in some cases, only a portion of the advance is liquidated during the premium period with the remainder payable at the end of the mortgage contract, the creditor would likewise calculate the amount of finance charge which would accrue on the advance until paid in full. In some cases the advance is secured by a secu­ rity interest in real property which is used or ex­ pected to be used as the principal residence of the customer. In those cases the premium advance agreement is rescindable under § 226.9, and notice of the right of rescission provided in § 226.9(b) need only be given at the time the agreement is executed. Subsequent advances for renewal premiums are not subject to the right of rescission.

1/28/70 SECTION 226.815— DISCLOSURE FOR DEMAND LOANS Section 226.8(b)(3) requires a creditor to dis­ close the number, amount and due dates or peri­ ods of payments scheduled to repay an extension of credit other than open end and, in appropriate cases, the total of payments. The question arises as to how these requirements should be met in the case of demand loans.

Section 226.4(g) provides that for the purpose of calculating the finance charge and annual per­ centage rate, demand loans are considered to have a one-half year maturity unless the obligation is alternatively payable upon a stated maturity, in which case the stated maturity shall be used. In order to comply with the requirements of § 226.8(b)(3), if no alternative maturity date is specified, the creditor need disclose only the due dates or periods of payments of all scheduled interest payments for the first one-half year. In such cases, the creditor need not disclose the num­ ber, amounts or total of payments or identify any balloon payment. Effective May 1, 1970, creditors shall disclose the fact that the obligation is pay­ able on demand.

If an alternative maturity date is specified, all disclosures required under § 226.8(b)(3) shall be made, using that date.

1/28/70 SECTION 226.816— MORTGAGES WITH DEMAND FEATURES In some cases real estate mortgages are written for a stated period, for example one year, with the provision that they shall be payable on de­ mand after expiration of that period, provided that until such demand is made the principal and interest shall be paid in scheduled periodic instal­ ments until paid in full. The obligation is thus payable according to a specified amortization schedule subject to the holder’s right to demand payment after the stated period. The question arises whether the creditor may make disclosures based on the specified amortiza­ tion schedule or whether disclosures must be made on the basis of the maturity established by the expiration of the stated period. In such cases the creditor may make disclo­ sures based on the specified amortization sched­ ule, provided he discloses clearly and conspicu­ ously that the obligation is payable on demand after the stated period together with the fact that disclosures are made on the basis of the specified amortization schedule. Otherwise, disclosures shall be based upon the earliest date demand for pay­ ment in full may be made under the terms of the mortgage showing the unpaid balance due at that time as a “balloon payment.”

The disclosure requirements of this interpreta­ tion shall become effective May 1, 1970. 1/28/70 SECTION 226.817— REDUCTION IN ANNUAL PERCENTAGE RATE Section 226.8(j) specifies that if any existing extension of credit is refinanced, such transac­ tion shall be considered a new transaction sub­ ject to the disclosure requirements of Regulation Z. The question arises as to whether a reduction in the annual percentage rate applicable to an existing extension of credit, when no other credit terms are changed, constitutes a refinancing under § 226.8 (j).

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INTERPRETATIONS REGULATION Z When no other credit terms are changed, a reduction in the annual percentage rate applica­ ble to an existing extension of credit does not con­ stitute a refinancing under § 226.8(j), and no disclosures are required.

3/31/70 SECTION 226.9 ^SECTION 226.903— REFINANCING AND INCREASING— DISCLOSURES AND EFFECTS ON THE RIGHT OF RESCISSION In some cases the creditor of an obligation will refinance that obligation at the request of a cus­ tomer by permitting the customer to execute a new note, contract, or other document evidencing the transaction under the terms of which one or more of the original credit terms, including the maturity date of the obligation, are changed. Ex­ cept as provided in § 226.811, such refinancing constitutes a new transaction, and all disclosures required under § 226.8 must be made. The ques­ tion arises as to whether that transaction is sub­ ject to the right of rescission under § 226.9 where the obligation is already secured by a security interest in real property which is used or expected to be used as the principal residence of that customer.

If the amount of such new transaction does not exceed the amount of the unpaid balance plus any accrued and unpaid finance charge on the existing obligation, § 226.9 does not apply to the transaction.

If, however, such new transaction is for an increased amount, that is, for an amount in excess of the amount of the unpaid balance plus any accrued and unpaid finance charge on the exist­ ing obligation, § 226.9 applies to the transaction. However, such right of rescission applies only to such excess and does not affect the existing obli­ gation (or related security interest) for the un­ paid balance plus accrued unpaid finance charge. If a transaction is refinanced by a creditor other than the creditor of the existing obligation, the entire transaction is subject to § 226.9. 1/28/70 * Supersedes interpretation § 226.903 issued 6/20/69.