Proposed Amendments to Regulation Z, Proposed Interpretation of Regulation Z, Circular No. 78-50

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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. 78-50 May 2, 1978 PROPOSED AMENDMENTS TO REGULATION Z Deferral of Action on Proposal To Simplify Certain Disclosure Requirements PROPOSED INTERPRETATION OF REGULATION Z Disclosure Requirements for Variable Debt Payments TO ALL BANKS, OTHER CREDITORS, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT:

The Board of Governors of the Federal Reserve System has announced it is deferring action on proposals published in May 1977, forwarded to you under our Circular No. 77-60 dated May 22, 1977, for the simplification of the disclosure requirements of Regulation Z, T ru th -in -L en d in g . The proposals concerned itemi­ zation of the finance charge and downpayment, itemization of certain fees to ex­ clude them from the finance charge and identification of the method of computing unearned finance charges upon prepayment.

In another matter, the Board proposed for public comment a revised in­ terpretation of its Regulation Z—T ruth-in-L ending—to cover all cases in which a debt is repaid in payments of varying amounts.

The Board asked for comment by May 24, 1978.

Regulation Z requires creditors to disclose the schedule of payments re ­ quired to settle a debt. This poses a problem w here payments a re of different amounts. This may occur when non-credit items (such as premiums for creditconnected insurance) are remitted to the creditor on a monthly basis or where parts of the finance charge (such as mortgage guarantee insurance premiums) vary over the life of the debt because they a re computed on the decreasing unpaid balance of the debt.

The Board proposed in specified types of transactions to permit c re d ­ itors to disclose the number of payments, the amounts of the first and last payments and the fact that the payment will increase or decrease as the case may be. In all This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

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- 2 other cases of variable payments, the full schedule of payments may be set forth on the reverse of the disclosure statement, or on a separate page. This would expand the coverage of the existing interpretation to all types of transactions in which the indebtedness is repaid in varying amounts. Printed on the following pages is the text of the Board's proposal as it appeared in the FEDERAL REGISTER.

Comments on the proposed interpretation 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-0152. Sincerely yours, Robert H . Boykin First Vice President

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Extract From FEDERAL REGISTER, VOL. 43, NO. 79, Monday, April 24, 1978 pp. 17363 - 17364 f 6210- 01] FEDERAL RESERVE SYSTEM [12 CFR P art 226] [R eg. Z; D o cket No. R -0152] TRUTH IN LENDING Disclosure o f V ary in g P ay m en ts Scheduled to R opay th e In d eb ted n ess AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed revised interpreta­ tion.

SUMMARY: This proposed revised in­ terpretation would permit additional methods of disclosing the payments scheduled to repay the indebtedness as required by § 226.8(b)(3) of Regula­ tion Z in consumer credit transactions in which the amounts of those pay­ ments vary. In any such transaction, creditors could disclose the entire pay­ ment schedule on the reverse of the disclosure statement or on a separate page or pages, or, in certain transac­ tions described in the interpretation, creditors could provide the customer with an abbreviated disclosure that in­ dicates the progression of the pay­ ment amounts. In addition, a number of conflicting public information let­ ters and official staff interpretations would be rescinded.

DATES: Comments must be received on or before May 24,1978. ADDRESS: Secretary, Board of Gov­ ernors of the Federal Reserve System, Washington, D.C. 20551. FOR FURTHER INFORMATION CONTACT:

Anne Geary, Chief Staff Attorney, Division of Consumer Affairs. Board of Governors of the Federal Reserve System, Washington, D.C. 20551, 202-452-2761.

SUPPLEMENTARY INFORMATION: (1) In response to a number of inquir­ ies regarding the proper method of disclosure of the payments scheduled to repay the indebtedness in transac­ tions in which the amounts of such payments vary, the Board is proposing to revise Interpretation $226,808. if adopted by the Board, this interpreta­ tion would facilitate compliance with the requirement of § 226.8(b)(3) that creditors disclose the number,- amount and due dates or periods of payments. The disclosure method would be chosen by the creditor. The creditor could, in any transac­ tion which the amounts scheduled to repay the indebtedness vary, provide the customer with a complete pay­ ment schedule on the reverse of the disclosure statement or on a separate page or pages (conspicuously refer­ enced in the disclosure statement), notwithstanding the requirement of § 226.8(a) that all disclosures be made on one side of a single page. The Board solicits comments on whether the disclosure of a complete payment schedule on the reverse of the statement or a separate page would detract from the value of the disclosures to customers. The Board also wishes to know if providing such a schedule would involve operational difficulties in computing the payments for disclosure purposes, particularly for creditors that engage in transac­ tions in which the amounts collected from the customer include non-credit items, such as credit life and disability insurance premiums which are ex­ cluded from the amount financed. In addition, the interpretation would provide that in certain transactions (which are described briefly below), the creditor could give the customer an abbreviated schedule of payments which would disclose the number of payments, the amount of certain pay­ ments, and a description of the vari­ ation in the payment amounts. Those transactions are: (a) Transactions in which a level amount is collected from the custom­ er, and that level amount includes varying charges, such as credit life and disability insurance premiums that are not financed but remitted to the insur­ er as they become due, and which are therefore not part of the amount fi­ nanced or finance charge (Example I). (b) Transactions in which each pay­ ment includes an equal amount to be applied to reduction of the unpaid principal balance and a finance charge that varies because it is computed by application of a rate to the decreasing unpaid principal balance (Example II, Transaction A). This is the transaction addressed by the present Interpreta­ tion S 226.808.

(c) Transactions similar to the trans­ actions described in (b) but with irreg­ ular first and last payments (Example II, Transaction B).

(d) Transaction in which the pay­ ments vary annually or more frequent­ ly because a finance charge (such as certain mortgage guarantee insurance premiums) is computed by application of a rate to the decreasing unpaid principal balance (Example III). The board solicits comment on whether abbreviated schedules should be permitted in other types of transac­ tions. Central to this issue is whether an abbreviated schedule will provide the customer with sufficient informa­ tion concerning the progression of the payment amounts. Thus, transactions with payments that vary in unusual patterns or at lengthy intervals would not appear to be proper subjects for such treatment. It should again be pointed out that creditors could give a complete payment schedule in any transaction with varying payments. The Board solicits comment on whether or not the abbreviated pay­ ment schedules authorized by the in­ terpretation would provide customers with sufficient information as to the amounts of the payments. As presently provided in the inter­ pretation, creditors that disclose in ac­ cordance with the examples could not take advantage of the exemption for purchase money loans for dwellings or sales of dwellings from the disclosure requirements of §§ 226.8(b)(3), 226.8(c)(8)' and 226.8(d)(3) (total of payments, deferred payment price and total finance charge disclosures). The proposed interpretation also provides that creditors could disregard deviations in the pattern of the pay­ ment amounts caused by the fewer days in February than in other months when disclosing in accordance with the three examples. The Board solicits comment on whether this should be permitted and whether creditors should be permitted to ignore similar minor deviations. A number of public information let­ ters and official staff interpretations would be affected by this interpreta­ tion. The following interpretations would be rescinded; comments are so­ licited on whether others should also be rescinded.

Public inform ation letters *834 ’Final paragraph only.

Letters 632, 735 and 850 deal with the disclosure of optional, cancellable Official itaJT interpretations PC-0003 PC-0026 PC-0030 PC-0031 PC-0104

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credit life and disability insurance pre­ miums. They conflict with the position of the proposed interpretation that charges not included in the amount fi­ nanced or the finance charge may not be included in the payments scheduled to repay the indebtedness. The last paragraph of Letter 834 also misstates that position. The remaining letters conflict in some way with the pro­ posed interpretation.

(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 May 24, 1978. The comments will be made available for inspection and copying upon re­ quest, except as provided in § 261.6(a) of the Board’s Rules Regarding Avail­ ability’ of Information (12 CFR Part 261.6(a)).

(3) Pursuant to the authority grant­ ed in 15 U.S.C. 1604 (1968), the Board proposes to revise Regulation Z, 12 CFR 226.808, to read as follows: § 226.808 D isclo su re o f v ary in g p aym ents scheduled to rep ay th e Indebtedness. (a) Section 226.8(B)(3) requires the creditor to disclose, among other things, the “number, amount, and the due dates or periods of payments scheduled to repay the indebtedness.” The Payments scheduled to repay the indebtedness include only the amount financed and the finance charge. The question arises how these require­ ments may be met in transactions in which the amounts of such payments vary.

(b) In such transactions, a creditor may satisfy the requirements of § 226.8(b)(3) with respect to the number, amount, and due dates or pe­ riods of payments by disclosing the re­ quired information on the reverse of the disclosure statement or on a sepa­ rate page(s), notwithstanding the re­ quirements of § 226.8(a) concerning lo­ cation of disclosures: Provided, That the following notice appears with the other required disclosures: “NOTICE: See [reverse side] [accompanying statement] for the schedule of pay­ ments.”

(c) Alternatively, if a transaction is of a type described below, a creditor may disclose in accordance with the applicable example.

EXAMPLE I A tra n sa c tio n in w h ich a level su m is col­ lected fro m th e cu sto m e r each m o n th . I n ­ clu d ed in th e a m o u n t co llected from th e cu sto m e r a re ch a rg e s w hich a re n o t p a rt o f th e a m o u n t fin an ced o r th e fin a n c e 'c h a rg e (su ch as c e rta in c re d it life a n d disab ility in ­ su ra n c e p rem iu m s) an d w hich c o n stan tly d ecrease because th e y a re b ased on th e u n p aid p rin cip al b alance. A s th e se ch arg es decrease, th e am o u n ts sch ed u led to rep ay th e in d eb ted n ess c o n sta n tly Increase. T h e am o u n t collected each m o n th fro m th e cu sto m e r is $50.

T h e c re d it life in su ran ce prem iu m s decline fro m $1.50 in m o n th 1 to $0.10 in m o n th 12.

T h e am o u n ts th a t rep ay th e in d eb ted n ess in crease fro m $48.50 in m o n th 1 to $49.90 in m o n th 12.

T h e c re d ito r m ay disclose th a t th e re w ill be 12 m o n th ly p ay m en ts to rep ay th e in d eb ted ­ ness, th a t th e first p ay m en t w ill be $48.50, an d th a t th e p ay m en ts w ill in crease, w ith a la s t p ay m en t of $49.90. A t th e c re d ito r’s op tio n , th e c red ito r m ay disclose th e a m o u n t co llected from th e custom er, $50, as a d d itio n al in fo rm atio n u n d e r § 226.6(c). EXAM PLE I I A tra n sa c tio n in w hich th e a m o u n t of e a c h p ay m en t sch ed u led to rep ay th e in ­ d eb ted n ess (o th e r th a n a firs t o r la s t p ay ­ m e n t) includes an equ al a m o u n t to be a p ­ p lied to p rin cip al a n d a fin an ce ch arg e com ­ p u te d by ap p licatio n o f a ra te to th e d e­ creasin g u n p aid p rin cip al balance. Transaction A T h e p rin cip al p o rtio n of each m o n th ly pay ­ m e n t is $125 an d th e fin an ce ch arg e p o r­ tio n of th e m o n th ly p ay m en ts declines fro m $30 in m o n th 1 to $1.25 in m o n th 24. T h e p a y m e n t in m o n th 1 is $155 ($125 p rin ­ cipal, $30 fin an ce charge).

T h e p ay m en t in m o n th 24 is $126.25 ($125 prin cip al, $1.25 fin an ce charge). T h e c re d ito r m ay disclose th a t th e re w ill be 24 m o n th ly pay m en ts, th a t th e first p ay ­ m e n t w ill be $155. a n d th a t th e p ay m en ts w ill decrease, w ith a la st p ay m en t of $126.25.

Transaction B T h e firs t an d la s t p ay m en ts are irreg u lar, a n d each of th e in terv en in g p ay m en ts in ­ cludes a p rin cip al p o rtio n of $120 an d a fi­ n an ce ch arg e p o rtio n w h ich d eclines fro m $29.25 in m o n th 2 to $2.85 tn m o n th 23. T h e p ay m en t in m o n th 1 is $93 because th e firs t p a y m e n t p eriod is s h o rt ($75 p rin ci­ pal, $18 fin an ce charge).

T h e p ay m en t in m o n th 2 is $149.25 ($120 p rin cip al, $29.25 fin an ce charge). T h e p ay m en t in m o n th 23 is $122.85 ($120 p rin cip al, $2.85 fin an ce charg e). T h e p ay m en t in m o n th 24 is $286.65 ($285 p rin cip al, $1.65 fin an ce ch arg e). T h e c re d ito r m ay disclose th a t (i) th e re will be 24 m o n th ly p ay m en ts, (ii) th e firs t p a y ­ m e n t will be $93, (iii) th e second p ay m en t w ill be $149.25, (iv) th e follow ing p ay m en ts w ill decrease to a tw e n ty -th ird p ay m en t of $122.85, a n d (v) th e la st p ay m en t w ill be $286.65.

EX A U PLE I I I A tra n sa c tio n in w hich th e p ay m en ts sch ed u led to rep ay th e ind eb ted n ess vary a n n u a lly o r m o re fre q u e n tly because a fi­ n an ce ch arg e (su ch as m o rtg ag e in su ran ce p rem iu m s) is co m p u ted by th e ap p licatio n o f a ra te (s) to th e d ecreasin g u n p a id p rin ci­ p a l balance.

E a c h m o n th ly p ay m en t includes a p o rtio n fo r p rin cip al an d fin an ce ch arg es ex clu ­ sive of m o rtg ag e in su ran ce prem ium s ($250) an d a p o rtio n fo r m o rtg ag e in su r­ an ce p rem iu m s ($25 ea c h m o n th in y ear 1 a n d d eclinin g once a y ear u n til no p rem i­ u m s a re du e in y ear 30). P ay m en ts 1 th ro u g h 12 a re $275 ($250 p rin ­ cip al an d fin an ce ch arg es exclusive o f m o rtg ag e In su ran ce prem ium s). P a y m e n ts 349 th ro u g h 360 a re $250 ($250 p rin cip al an d fin an ce ch arg es, n o m o rt­ gage In su ran ce prem ium s).

T h e c re d ito r m ay disclose th a t th e re w ill be 360 m o n th ly p ay m en ts, th a t th e firs t p ay ­ m e n t w ill be $275, an d th a t th e p ay m en ts w ill d ecrease once a y e a r w ith a la s t p a y ­ m e n t o f $250.

I f disclosures a re m ade in accordance w ith E xam ples I, II, o r III, th e ex cep tio n s p ro ­ vided u n d e r p a ra g ra p h s (b)(3), (c)(8), a n d (d)(3) o f § 226.8 sh a ll n o t apply. A ny irre g u la rity in th e u p w ard o r dow n­ w ard p rogression in th e p a y m e n t am o u n ts resu ltin g fro m th e few er days in F e b ru a ry th a n in o th e r m o n th s m ay be d isreg ard ed if disclosures a re m ade in accordance w ith E x ­ am ples I, II, o r III.

By order of the Board of Governors. April 18, 1978.

T h e o d o r e E. A l l is o n , Secretary of the Board.

[F R D oc. 78-10997 F iled 4-21-78; 8:45 am ]