Proposed Changes to the Official Staff Commentary on Regulation Z -- Truth in Lending, Circular No. 84-123
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FEDERAL RESERVE BANK OF DALLAS Station K, Dallas, Texas 7 5 2 2 2 TO:
ATTENTION:
SUBJECT:
SUMMARY:
ATTACHMENTS:
MORE INFORMATION:
ADDITIONAL COPIES:
Circular No. 84-123 December 21, 1984 All member banks and others concerned in the Eleventh Federal Reserve D is tric t Chief Executive Officer Proposed changes to the Official Staff Conmentary on Regulation Z — Truth in Lending The Board of Governors of the Federal Reserve System has published proposed changes to the o f f ic ia l s t a f f commentary on i t s Regulation Z.
The commentary is designed to provide guidance to creditors in applying the regulation to sp ecific transactions.
The commentary is periodically updated to address s ig n ific a n t questions that a r is e , including new material and changes in existing m aterial.
This notice contains the proposed fourth general update. Interested parties are invited to submit th e ir comments to Mr. William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, Washington, D.C., 20551.
Comments are due by January 31, 1985, and should refer to TIL-1.
Board's press release and the material as published in the Federal Register Legal Department, Extension 6171 Public Affairs Department, Extension 6289 Banks and others are encouraged to use the following incoming WATS numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (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])
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FEDERAL RESERVE press release For immediate release November 29, 1984 The Federal Reserve Board today published for comment proposed changes to the o f f ic ia l s t a f f commentary on Regulation Z — Truth in Lending. The changes pertain to questions th a t have arisen about the regulation, and include new in te rp r e ta tio n s and changes to ex istin g in te r p r e ta tio n s . Comment is requested January 31, 1985.
The Board's notice is attached.
-0- Attachment
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FEDERAL RESERVE SYSTEM 12 CFR Part 226 [Reg. Z; TIL-1] TRUTH IN LENDING Proposed Update to O fficial S ta ff Commentary AGENCY:
Board of Governors of the Federal Reserve System. ACTION:
Proposed o f f ic ia l s t a f f in te rp re ta tio n . SUMMARY:
The Board is publishing for comment proposed changes to the o f f ic i a l s t a f f commentary to Regulation Z (Truth in Lending). The commentary applies and in te rp re ts the requirements of Regulation Z and is a s u b s titu te for individual s t a f f in te rp reta tio n s of the regulation. The proposed revisions address a variety of questions th a t have arisen about the regulation, and include new material and changes in e x istin g m aterial. DATE:
Comments must be received on or before January 31, 1985. ADDRESS:
Comments should be mailed to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, or delivered to Room B-2223, 20th and C S tr e e ts , N.W., Washington, D.C. between 8:45 a.m. and 5:15 p.m. weekdays.
Comments should include a reference to TIL-1. Comments may be inspected in Room B-1122 between 8:45 a.m. and 5:15 p.m. weekdays. FOR FURTHER INFORMATION:
Contact the following attorneys in the Division of Consumer and Community A ffa irs, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, at (202) 452-2412 or (202) 452-3867: Subpart A - - Lynn Goldfaden, Gerald Hurst Subpart B - - Richard Garabedian, Adrienne Hurt Subpart C - - Rugenia S ilv er, Susan Werthan
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- 2 - SUPPLEMENTARY INFORMATION:
(1) General.
The Truth in Lending Act (15 U.S.C.
1601 et seq .) governs consumer c redit transactions and is implemented by the Board's Regulation Z (12 CFR Part 226).
Effective October 13, 1981, an o f f i c i a l s t a f f commentary (TIL-1, Supp. I to 12 CFR Part 226) was published to in te rp re t the regulation.
The commentary is designed to provide guidance to c reditors in applying the regulation to sp ec ific tra n sac tio n s. The commentary is updated periodically to address s ig n ific a n t questions that a r is e . There have been three general updates so fa r - - the f i r s t in September 1982 (47 FR 41338), the second in April 1983 (48 FR 14882), and the th ird in April 1984 (49 FR 13482). There was also a limited update concerning fees for the use of automated t e l l e r machines, which was adopted in October 1984 (49 FR 40560). This notice contains the proposed fourth general update.
It is expected th a t i t will be adopted in final form in March 1985 with optional compliance until the uniform e ffe c tiv e date of October 1 for mandatory compliance. Certain conventions have been used to highlight the proposed rev isions. New language is shown inside bold-faced arrows, while language that would be deleted is set off with brackets.
(2) Proposed re v is io n s .
Following is a b rie f description of the proposed revisions to the commentary:
SUBPART A - General SECTION 226.2 -- Definitions and Rules of Construction 2(a) Definitions 2(a)(15) ‘‘Credit Card11 Comment 2 ( a ) (15)-2 would be revised to make cle ar th a t certain types of access devices th at are used at wholesale petroleum d is trib u tio n terminals - whether or not c re d it is involved - - are not considered c re d it cards under Regulation Z.
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- 3 - 2(a)(17) “C reditor11 Paragraph 2 (a )(1 7 )( i ) Comment 2 ( a ) (17)(i) - 8 would be added to explain how the numerical t e s t s for determining who is a "creditor" should be applied to loans made by employee savings plans.
It provides th a t the numerical t e s t should be applied to the plan as a whole rather than to the individual account. 2 ( a ) (20) "Open-End Credit"
Comment 2 ( a ) (20)-5 would be revised to correct a potential contra diction caused by the language "specific approval for each extension." Because " v erific a tio n " of c red it information - - which is permissible under the open-end cre d it d e fin itio n - - necessarily involves "approval" i f a c re d it extension is not denied a f t e r verifying the c re d it information, the "specific approval" language may be confusing.
The proposal would, th e re fo re , delete th a t language. The comment would continue to mean, however, th a t while c reditors may verify c red it information on an open-end c re d it plan before authorizing additional c re d it extensions, they may not undertake a c t i v i t i e s such as requiring a new application for each additional c re d it extension, without jeopardizing a program's s ta tu s as an open-end c re d it plan.
SECTION 226.4 - - Finance Charge 4(a) D efinition The f i r s t sentence of comment 4 ( a ) -3 would be revised to c la rify which charges by th ir d p a rtie s are excluded from the finance charge. The revision makes c le ar t h a t , in order to be excluded, the charge must be imposed on the consumer rather than the c re d ito r and the c re d ito r must not retain the charge.
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- 4 - SUBPART B - Open-End Credit SECTION 226.7 — Periodic Statement 7(h) Other Charges Comment 7(h)-4 would be added to make c le ar th a t , in disclosing “other charges" on the periodic statement, c re ditors have the f l e x i b i l i t y to disclo se them individually or as a t o t a l , as long as the charges are s t i l l itemized and id e n tifie d by type.
SECTION 226.9 - - Subsequent Disclosure Requirements 9(d) Finance Charge Imposed at Time of Transaction Comment 9 (d )-l would be t o t a l l y rewritten since the ban on c re d it card surcharges expired on February 27, 1984. Revised comment 9(d )-l would make c le a r th a t a finance charge, such as a c re d it card surcharge, imposed by a person other than the card issuer for using a c re d it card, must be disclosed to consumers p rio r to t h e i r being committed to purchasing property or services, in order to s a tis fy the § 226.9(d)(1) requirement th a t the amount of th a t finance charge be disclosed p rior to i t s imposition. For example, the charge must be disclosed to the consumer p rio r to the consumer's having dinner at a re s ta u ra n t, or staying overnight at a hotel. SECTION 226.12 - - Special Credit Card Provisions 12(a) Issuance of Credit Cards Paragraph 12(a)(1) Comment 1 2 (a)(1)-8 would be added to make c le a r th a t card issuers may issue, without a sp ec ific request from the consumer, a personal i d e n t i f i c a tio n number (PIN) to e x istin g cardholders, provided the PIN cannot be used by i t s e l f to obtain c r e d it.
This in te rp re ta tio n d iff e r s from a proposed i n te r p r e ta tio n under Regulation E th a t prohibits such PIN issuance. The d iffe re n t
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- 5 treatment is based on the d efin itio n of an access device in Regulation E. Under Regulation E a PIN is an access device in all cases, even when i t cannot be used alone to i n i t i a t e an EFT; in c o n tra st, a PIN issued to e xisting card holders th at cannot be used by i t s e l f to obtain cre d it is not a c redit card under Regulation Z.
The rule regarding access devices is more r e s t r i c t i v e in part because of the consumer's p o te n tia lly greater ris k . See Question 5-4.5 in the proposed update to the o f f ic i a l s t a f f commentary to Regulation E (published elsewhere in th is Federal Register is su e ). SECTION 226.15 - - Right of Rescission 15(a) Consumer's Right to Rescind Paragraph 15(a)(1) Comment 1 5 (a)(1 )-2 would be revised to re f le c t the amendment to the Truth in Lending Act in Pub. L. 98-479 which permanently exempts from the right of rescission individual tran sactions made on an open-end line of cre d it in accordance with a previously established cre d it lim it. References Reference to § 205 of Pub. L. 98-479 would be added to the References section to r e f le c t the permanent exemption from the right of rescission for individual c re d it extensions made on an open-end c re d it lin e . SUBPART C - CLOSED-END CREDIT SECTION 226.17 — General Disclosure Requirements 17(a) Form of Disclosures Paragraph 17(a)(1) The l a s t example in comment 17 (a )(1)-5 regarding due-on-sale clauses would be deleted consistent with the proposed change in position in comment 1 8 (q )-l.
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- 6 - SECTION 226.18 - - Content of Disclosures 18(f) Variable Rate Comment 1 8 (f)-5 would be revised to add recent federal adjustable rate mortgage regulations to the l i s t of variable rate regulations for which footnote 43 to section 226.18(f) may be used.
Under the proposal, creditors making disclosures in accord with the rules issued by the Department of Housing and Urban Development (49 FR 23580) need not make the variable rate disclosures required by section 226.18(f).
Comment 18(f)-5 would also be revised to re fle c t a new c ita tio n to the variable rate regulation of the Federal Home Loan Bank Board. The revision is technical and re fle c ts no substantive change in the comment. Comment 18( f )-8 would be revised to c la rify the application of the discounted variable rate rules to two types of variable rate tra n s a c tio n s . F i r s t , a paragraph would be added to explain that transactions in which the only difference between the i n i t i a l rate and the index rate at consummation r e s u lts from a change in the index are not discounted tra n s a c tio n s . Second, material would be added to address plans th a t have a b u ilt- in delay between index changes and implementation of those changes. In calculating a composite annual percentage rate for these plans, cre d ito rs may use an index value p rio r to consummation as long as i t incorporates the same delay used for l a t e r ra te adjustments.
18(k) Prepayment Comment 18(k)-2 would be revised to delete the example regarding student loans with loan fees, in order to make the comment more consistent with comment 18(k)-3.
Comment 18(k)-2 i l l u s t r a t e s transactions that may require disclosures under both section 226.18(k)(1), regarding penalties for prepayment
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- 7 of simple in te r e s t tra n sac tio n s, and section 226.18(k)(2 ), regarding rebates fo r prepayment of precomputed tra n s a c tio n s . Comment 18(k)-3 c l a r i f i e s that prepaid finance charges do not require rebate d isclosures. Since loan fees in student loans are normally prepaid finance charges, the continued use of that type of transaction as an example of a loan requiring a rebate disclosure is inappropriate and may cause confusion.
The deletion of the example is a technical revision and does not a ffe c t the substance of e ith e r comment. 18(q) Assumption Policy The substance of comment 18(q)-1 would be deleted and replaced by a new provision which reverses the rule on assumption policy disclosure. When uncertainty ex ists as to the assumability of the obligation, a negative rather than affirm ative disclosure would be required. It is believed th a t under such circumstances, a negative disclosure would be less misleading to consumers. Since th is change would reverse the current position on assumption d isclo su re s, i t would be applied p rospectively.
SECTION 226.23 - - Right of Rescission 23(f) Exempt Transactions Comment 23(f)-8 would be added to c la rify the application of the right of rescission to closed-end c re d it transactions a risin g from the conversion of an open-end c re d it account.
Where consummation of both the closed-end and open-end cre d it occurs at the time the consumer enters into the open-end agreement, the closed-end disclosures may be delayed until conversion, as provided by comment 17(b)-2.
Proposed comment 23( f )-8 would make c le a r th a t , i f the c re d ito r has previously complied with the rescission requirements on the open-end account, no new right of rescission applies on the conversion of an account secured by the consumer's principal dwelling.
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- 8 - List of Subjects in 12 CFR Part 226 Advertising; Banks, banking; Consumer protection; Credit; Federal Reserve System; Finance; Penalties; Truth in lending. (3) Text of re v is io n s > The proposed revisions to the commentary (TIL-1, Supplement I to 12 CFR Part 226) read as follows: SUPPLEMENT I - O fficial S ta ff Commentary - TIL-1 SUBPART A - General * * * * * SECTION 226.2 -- Definitions and Rules of Construction 2(a) Definitions * * * * * 2(a)(15) “Credit Card"
* * * * * 2.
Examples.
Examples of c re d it cards include: ° A card th a t guarantees checks or sim ila r instruments, i f the asset account is also tie d to an overdraft lin e or i f the instrument d ire c tly accesses a line of c re d it ° A card th a t accesses both a c re d it and an asset account (th a t i s , a d e b it-c re d it card) ° An id e n tific a tio n card th a t permits the consumer to defer payment on a purchase ° An id e n tifi c a tio n card indicating loan approval th a t is presented to a merchant or to a lender, whether or not the consumer signs a separate promissory note for each c re d it extension
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- 9 - In contrast, cre d it card does not include, for example [ . a > : ° A 4 check guarantee or debit card with no c redit feature or agreement, even i f the c re d ito r occasionally honors an inadvertent o v e rd ra ftf .] *° Any card key th at must be used in order to gain access to a wholesale d is trib u tio n f a c i l i t y to obtain petroleum products for business purposes, and the use of which is required without regard to payment terms. 4 * * * * * 2 (a )(17) "Creditor"
* ★ * ★ * Paragraph 2 (a )(17 )(i ) * * * * * ►8 .
Loans from employee savings plans.
Some employee savings plans permit p a rtic ip a n ts to borrow money up to a c ertain percentage of t h e i r account balances.
In such cases, the numerical t e s t s should be applied to the plan as a whole rather than to the individual accounts, even i f the loan amount is determined by reference to the balance in an individual account and the repayments are credited to the individual account.4 * * * * * 2 (a )(20) "Open-End Credit"
* * * * * 5.
Reusable l i n e .
The to t a l amount of c re d it th a t may be extended during the existence of an open-end plan is unlimited because available cre d it is generally replenished as e a r l i e r advances are repaid. A line of c re d it is s e lf-re p le n ish in g even though the plan i t s e l f has a fixed expiration date, as long as during the p la n 's existence the consumer may use the lin e , repay, and reuse the c re d it
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- 10 - [without sp ecific approval for each extension (beyond v e rific a tio n , for example, o f j ¥.
The c re d ito r may verify * cre d it information such as the consumer's continued income and employment status or CofJ information for security purposes [)J.
This c rite rio n of unlimited c redit distinguishes open-end c redit from a series of advances made pursuant to a closed-end c redit loan commitment.*** * * * * * SECTION 226.4 - - Finance Charge * * * * * 4(a) Definition * * * * * 3.
Charges by t h ir d p a r t i e s .
Charges imposed by someone other than the c re d ito r fo r services th at are not required by the c re d ito r are not finance charges*, provided the charges are imposed on the consumer rather than on the c re d ito r by the th ir d party, and the c re d ito r does not retain the charge*. For example:
° A fee charged by a loan broker to a consumer, provided the c re d ito r does not require the use of a broker (even i f the c re d ito r knows of the loan broker's involvement or compensates the broker) o A tax imposed by a s t a t e or other governmental body on the c redit tra n sac tio n th a t is payable by the consumer (even i f the tax is collected by the c re d ito r) * * * * * SUBPART B - OPEN-END CREDIT * * * * * SECTION 226.7 -- Periodic Statement * * * * *
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- 11 - * * * * * SECTION 226.7 — Periodic Statement * * * * * 7(h) Other Charges * * * * * ►4 .
Itemization -- types of "other charges11.
Each type of "other charge"
(such as la te payment charges, over-the-credit-1im it charges, ATM fees that are not finance charges, and membership fees) imposed during the cycle must be separately itemized; for example, disclosure of only a to ta l of "other charges" a ttr ib u ta b le to both an over-th e-credit-1im it charge and a la te payment charge would not be permissible.
"Other charges" of the same type may be disclosed, however, individually or as a t o t a l .
For example, three ATM fees of $1 may be l i s t e d separately or as $3.« * * * * * SECTION 226.9 - - Subsequent Disclosure Requirements * * * * * 9(d) Finance Charge Imposed at Time of Transaction 1.
fBan on c re d it card surcharges.
15 USC 1666f provides th a t until February 27, 1984, no s e l l e r in any sales transaction may impose a surcharge on a cardholder who e le c ts to use a cre d it card instead of paying by cash, check, or sim ilar means.] ► Disclosure p rio r to imposition. The requirement th a t the amount of a finance charge imposed at the time of honoring a consumer's cre d it card be disclosed p rio r to i t s imposition requires a person imposing such a cre d it card surcharge to disclose i t s existence p rio r to the consumer's becoming obligated to purchase property or s e r v ic e s . 4
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- 12 - * * * * * 12(a) Issuance of Credit Cards Paragraph 1 2 (a)(1) * * * * * ►8 .
Unsolicited issuance of PINs.
A card issuer may issue to existing c re d it cardholders, without a sp ec ific request, personal id e n tific a tio n numbers (PINs), thus allowing consumers to use t h e i r e xisting credit cards at automated t e l l e r machines, provided the PINs cannot be used alone to obtain c r e d i t . 4 * * * * * SECTION 226.15 - - Right of Rescission * * * * * 15(a) Consumer's Right to Rescind Paragraph 15(a)(1) * * * * * 2.
Exceptions.
Although the consumer generally has the right to rescind with each transaction on the account, section 125(e) of the act provides an exception: [u n til September 30, 1985,] the c re d ito r need not provide the right to rescind at the time of each cre d it extension made under an open-end cre d it plan secured by the consumer's principal dwelling to the extent that the c re d it extended is in accordance with a previously established cre d it lim it for the plan. This limited rescission option is available whether or not the plan existed prio r to the e ffe c tiv e date of the a c t.
[The consumer will have the right to rescind each extension made a f t e r September 30, 1985 under such a secured open-end c re d it plan, whether th a t plan was established before or a f t e r that d a te .J SECTION 226.12 - - Special Credit Card Provisions * * * * *
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- 13 - References S ta t u t e :
§§ 113,125, [and]*^* 130 ► , and the Housing and Community Development Technical Amendments Act of 1984, (Sec. 205, Pub. L. 98-479)* * * * * * 1981 Changes:
Section 226.15 re fle c ts the statutory amendments of 1980, pro viding for a limited right of rescission [ f o r a three-year t r i a l period] when individual c red it extensions are made in accordance with a previously established' cred it lim it for an open-end c re d it plan. ►The 1980 amendments provided th a t th is limited rescission right be available for a three-year t r i a l period. However, Pub. L. 98-479 now permanently exempts such individual c re d it extensions from the right of rescission.**** * * * * * SUBPART C - CLOSED-END CREDIT SECTION 226.17 — General Disclosure Requirements 17(a) Form of Disclosure * * * * * Paragraph 17(a)(1) * * * * * 5.
Directly r e l a te d .
The segregated disclosures may, at the c r e d i t o r 's option, include any information th a t is d ire c tly related to those d isclosures. Directly related information includes, for example, the following:*** C° A statement th a t a due-on-sale clause is contained in the loan document. For example, the disclosure given under section 226.18(q) may s t a t e , "Someone buying your home may, subject to conditions in the due-on-sale clause contained in the loan document, assume the remainder of the mortgage on the original term s."J * * * * *
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- 14 - * * * * * 18(f) Variable Rate * * * * * 5.
Other v a ria b le -ra te re g u lations.
Transactions in which the c re d ito r is required to comply with and has complied with v a ria b le -ra te regulations of other federal agencies are exempt from the requirements of section 226.18(f), by v irtue of footnote 43.
Those v a ria b le -ra te regulations include the adjustable mortgage loan instrument regulation issued by the Federal Home Loan Bank Board ►(1 2 CFR 545.33),« [(12 CFR 545.6 -2 (a )) and] the a d ju sta b le -ra te mortgage regulation issued by the Comptroller of the Currency (12 CFR 29) *and the a d ju sta b le -ra te mortgage regulations issued by the Department of Housing and Urban Development (24 CFR 203 and 24 CFR 234)4.
The exception in footnote 43 is also available to c re d ito rs that are required by s ta t e law to comply with the federal v a ria b le -ra te regulations noted above and to creditors that are authorized by t i t l e VIII of the Depository In s titu tio n s Act of 1982 (Pub. L. 97-320) to make loans in accordance with those regulations. Creditors using t h i s exception should comply with the timing requirements of those regulations rather than the timing requirements of Regulation Z in making the v a ria b le -ra te disclosures.
* * * * * 8.
Discounted v a ria b le -ra te tr a n s a c tio n s . In some v a ria b le -ra te tra n s a c tio n s , c red ito rs may set an i n i t i a l in te r e s t rate that is not determined by the index or formula used to make l a t e r in te r e s t rate adjustments. Typically, th is i n i t i a l rate is lower than the rate would be i f i t were calculated using the index or formula.
For example, a c re d ito r may calculate in te r e s t rates according to a formula using the six-month Treasury b ill rate plus a 2 percent margin. If the current Treasury b ill rate is 10 percent, the c re d ito r may forego the 2 SECTION 226.18 - - Content of Disclosures
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- 15 percent spread and charge only 10 percent for a limited time, instead of s e tt in g an i n i t i a l rate of 12 percent.
o When cred ito rs use an i n i t i a l rate that is not calculated using the index or formula for l a te r rate adjustments, the disclosures should re fle c t a composite annual percentage rate based on the i n i t i a l rate for as long as i t is applied and, for the remainder of the term, the rate th a t would have been applied using the index or formula at the time of consummation.
H h e rate at consummation need not be used i f a contract provides for a delay in the implementation of changes in an index value. For example, i f the contract specifies that payment changes are based on the index value in e ffe c t 45 days before the change date, creditors may use the index value 45 days before consummation in calculating a composite annual percentage ra te .* o The e ffect of the multiple rates must also be reflected in the calculation and disclosure of the finance charge, to ta l of payments, and payment schedule.
° If a loan contains a rate or payment cap th a t would prevent the i n i t i a l ra te or payment, at the time of the f i r s t adjustment, from changing to the rate determined by the index or formula at consummation, the effe c t of th a t rate or payment cap should be reflected in the disclosures. ° Because these transactions involve irr e g u la r payment amounts, an annual percentage rate tolerance of 1/4 of 1 percent applies, in accordance with section 226.22(a)(3) of the regulation.
° Examples of discounted v a ria b le -ra te transactions include: - - A 30-year loan for $100,000 with no prepaid finance charges and rates determined by the Treasury b ill rate plus 2 percent. Rate and payment adjustments are made annually.
Although the Treasury b ill rate at
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- 16 the time of consummation is 10 percent, the c re d ito r sets the rate fo r one year at 9 percent, instead of 12 percent according to the formula.
The disclosures should r e fle c t a composite annual percentage ra te of 11.63 percent based on 9 percent for one year and 12 percent for 29 y e ars.
Reflecting those two rate lev els, the payment schedule should show 12 payments of $804.62 and 348 payments of $1,025.31. The finance charge should be $226,463.32 and the to ta l of payments $366,463.32.
- - Same loan as above, except with a 2 percent rate cap on periodic adjustments.
The disclosures should re fle c t a composite annual percentage rate of 11.53 percent based on 9 percent for the f i r s t y e ar, 11 percent for the second year, and 12 percent for the remaining 28 y e ars.
Reflecting those three rate le v e ls, the payment schedule should show 12 payments of $804.62, 12 payments of $950.09, and 336 payments of $1,024.34.
The finance charge should be $265,234.76, and the to ta l of payments $365,234.76.
►This paragraph does not apply to v a ria b le -ra te loans in which the i n i t i a l rate is set according to the index or formula used for l a t e r adjustments, but is not set at the value of the index or formula at consummation. For example, i f a c re d ito r commits to an i n i t i a l rate based on the formula on a date p rio r to consummation, but the index has moved during the period between th at time and consummation, a c re d ito r may base i t s disclosures on the i n i t i a l ra te .* * * * * * 18(k) Prepayment * * * * *
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- 17 - 2.
Rebate-penalty d is c lo su re .
A single transaction may involve both a precomputed finance charge and a finance charge computed by application of a rate to the unpaid balance (for example, [sim ple-interest student loans with loan fees ancQ mortgages with mortgage-guarantee insurance). In these cases, disclosures about both prepayment rebates and penalties are required. Sample form H-15 in appendix H i l l u s t r a t e s a mortgage transaction in which both rebate and penalty disclosures are necessary.
* * * * * 18(q) Assumption Policy 1.
Policy statem ent.
[Because a c r e d ito r 's assumption policy may be based on a variety of circumstances not determinable at the time the disclosure is made, the c re d ito r may use phrases such as "subject to conditions" or "under certain circumstances" in complying with section 226.18(q). The provision requires only th a t the consumer be told whether or not a subsequent purchaser might be allowed to assume the obligation on i t s original terms and does not contemplate any explanation of the c r i t e r i a or conditions for assumability. However, the cred ito r may s ta t e that a due-on-sale clause is contained in the loan document. (See comment 17(a) (l) -5 regarding d ire c tly related information.))) Mn making the disclosure required by th is section, i f uncertainty e xists as to whether a subsequent purchaser will be allowed to assume the obligation on i t s original terms, the c re d ito r should s ta t e th a t the obligation cannot be assumed on i t s original terms.
For example, i f the obligation is subject to a due-on-sale clause, i t is viewed as being nonassumable for purposes of complying with th is section.
However, i f the only uncertainty pertains to a determination of the creditworthiness of the subsequent purchaser, the obligation is viewed as being assumable and an affirm ative disclosure is app ro p ria te .4
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- 18 - * * * * * * * * * * 23(f) Exempt Transactions * * * * * ►8 .
Converting open-end to closed-end c r e d it. Under certain s ta t e laws, consum mation of a closed-end c re d it transaction may occur at the time a consumer enters into the i n i t i a l open-end c redit agreement. As provided in the commentary to section 226.17(b), closed-end c re d it disclosures may be delayed under these circumstances un til the conversion of the open-end account to a closed-end tra n sac tio n .
In accounts secured by the consumer's principal dwelling, no new right of rescission a rises at the time of conversion, assuming th a t the right of rescission was previously provided on the open-end account pursuant to section 226.15.4 * * * * * Board of Governors of the Federal Reserve System, November 28, 1984. SECTION 226.23 - - Right of Rescission (signed) William W. Wiles Wi1liam W. Wiles Secretary of the Board