Interpretation of provisions in Truth in Lending Regulation Z including changes in previously issued interpretations

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For Immediate release» January 2V),, L970, Hie Board of Governors of the Pccktcol Reserve System today iouuod eight i n t e r p r e t a t i o n s of proviaIOIKI In ito Truth in Lending Regulation Z Including three changes in interprets!tone Issued previously, I n t e r p r e t a t i o n s issued today r e l a t e tot Premiums for vendor's single i n t e r e s t ittsurance fequifed by creditor (nmendmimt to previous I n t e r p r e t a t i o n ) , Credit for business or coww^reial purp©8ml*«inore than 4 family housing u n i t s .

Renown l.r. of notes (amendment to previous i n t e r p r e t a t i o n ) Disclosures on multiple advance loans. Premiums for insurance added to an existing biilonce. Discloauro Tor demand loans, Mortgages with demand features• Refinancing and iner t\-ininfc»- d isc loRureis nnd e f f e c t s on t> e right of rtmciaoion (amendment to previous interpretation)<: A copy of onch i n t e r p r e t a t i o n is at t ocited.

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TITUS 12 - JAMS AND BANKING CHATO i t * PEDBRAt" JtESERVE SYSTEM SUBCHAPTER A - BOARD OF GOVERNORS OP THK FEDERAL RlJHERVE BVSTKM [Reg. 1\ I'AR'l' 226 - tim'M IN LENDING Miscellaneoua Interpretations Interpretation 0 M6.404 its 'amended to read aa tollows: 5 226.404 'rem 1 um;i for vendor's ainRlu intero/it Inaur'aticp require^ by, crcd iter The question ariaea whether charges or premium!} for a Ingle interest Insurance (Vendor's Single Interest Insurance) written in connection with « credit transaction may be exfiiudad from tho finance charge arnica* § 226.4(a) (t>) if the insurer waives subrogation.

If the insurer waives a l l right of subrogation agaimit the cuotomcr in n single interest policy o£ insurance against losa cf: or damage to property (which may include coverage for skip, concealment* conversion, and embezzlement) written in connection with ft credit transaction, <m<! the creditor complies with the requirements of § 226.4(a)(6), ehargoii or premiums for ouch inourance may bo excluded from che amount of the finance chavga on that transaction, However, if the ingurar does not BQ wa),ve 9ulm>£;at:i.on in such policy of inouriince, the charges oi* premium^ shall bis included in the finance charge, (Interprets and applies 15 U.S.G, 1605)

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§ 226.302 Credit. for. business, or. conmeretal purponers more “than é Lomsly. hoi sing units : ay

Under § 226.3(8), extensions of eredit for business oF coer tal purposes, other than ogrioultural purposes, are not subject te: Reguleeton te : The question ariges as to whether an extension of credit: relating to 2 dvelling : (as defined in § 226.2(p)) which contains more then 4 fom ly houring units te a on extension of eredit for business or commaretal purposes. | . . .

Credit extended to an owner of a dwelling contivining more than 4 family. housing units for the purpose of acquiring, finanelag, rofinaneiug, improving, or maintaining that dual Ling fa an axteuaion of credit for business or commeretal purposes.

(interprets und applies 15 U.6.¢, 1604)

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Interpretation 0 226,811 Is Amended to road as fellows; S 226.011 Renewals of not6a Any renewal of an eHteneion o£ credit providing lot naynent of the full nrincipnl am on a specified date ohatl not; he (jctioidered a refivianci.iy under § 226. (j), and no diociosureiJ need be made in emmeefcioi;! With euch renewal, provided:

(l) All disclosures required under ehie ?arfc ^ere !iade in connection with the original 6*tension o | credit •"f a otiov renewal thereof;

(iO The arnount of the .renewal does not exceed the amount of. the unpaid bulriuce iluo any accrued ami unpaid finance change; (iii) The annual percentage rata (or rates) ririwloue ly diociosed is not* increasedj and (ivN The period for which renewal io uade dooa not exceed by nor® than 4 days the oariod c/f the extension of credit, for which iliccloourcc were «dc. In instances in which diaciopurec ate required to be r»ade and renewal lu madei by mail, the creditor may not know whether che cu;.i ;omer vi 11 reduce hid obligation by a payment on principal or, if reduced, the ai.ounr of that reduction. The question arises ae So what dieelosureo ahould be iiede by all to the euefcoier in he&e circu\ atanceo.

If the creditor knows the amount of the principal payment, all dieclosures should be Made on the basis of the resulting m«w amount financed. If, however, he creditor dofiti not Know whether tho euatower v>ill reduce hits original obligation, or if so, by how tnueh, he should diiicloue otii :.he ausuuptlon that there will be no reduction. In Ouch ftircuivEtanceo, at the crm'litoru option, he » ay t>.aJte one or --are additional diocloouree baeed on our or mori! oxmi-'jlei;. of graduated

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•irinclpal reduction.

For example, if a single payment not® for $1,000 nt 1°L in proponed to bft renewed for $1,000 at 8% Coi? 3 monclto, in Hi'dittoo fto die others : • \ .' y y required dincloauves, the creditor should disclose an avmmt; financed o£ $1,(300 witli o finance charge of $20, and r^ay, in addition, dlscloea that with a |JEihcipfll payment oi! $300 the amount Mnanced would be $700 with a ftMuce chiirtui of $14 > inul with «i 'irlnciiul payment of $500 the a\ ount; financed would be $31?) with 0 finance charge of §10, (Interprets and aqplieis 15 U.S.G, 1639)

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4 226,813 Disclosures on multiple advatice Joans

In connection with construction ‘and othar. mul tiptoe advance. Loan under § 226,8(1) which are payable in a single sum or permanently: Financed : by the same creditor at maturity of the construction phage with intere t

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 digclosdd under § 226.8(b)(2) and (3) and (d) (3).

In such casea,at the creditor's option, required {aformation may be estimated and disclosed as follows: oh |

(1) The following mathematical equations based upon assumed cont lnuous advances -may bo utilised in estlinatiag the amount of the interest component of the finance charge and the annual percentage rate. by subotd= tuting the approprfate numerical amounts for the following symbola in the: equationg: |

(i) Symbols;

1 = Amount of loan commltinent,

Stated annual interest rate expressed as a decimal figure.

Fd

¥

n = Number of interest payments toa be made to maturity. m * Number of interest perieda Cunit-periods) ina 1 years

2 = Total amount of any prepaid finance charge under § 2726,8(a).

Amount of any required daposit balance under § 226.8(a).

fond ti

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(11) If Interest la computed from the date of each advance on only t;h« omounto advanced;

Entimated annual percentage rate * nri. !• 2fflP n(L -*2P - 2D) Estimated Intwesfc finance charge * nclt 2m (Hi) If interest la computed on t'he full amount of the commitiiii-nt without regard for tha da tea of dlsbui'iiOHianCB ov actual, amount a disbursed:

Estimated annual percentage rata » 2nrl, + SmP n(IT" 2P - 29) Estimated Interest finance charge « nri. w (?) If the equations under subdivision (It) of paragraph (1) are utilised, the amounts of any required Interest payuuntu tiki ring the cooatiruct ion phase may bo ovuitto . in making the dlaeloHures required under § 226.8(b)(3); however, if the equations under subdivision (ill) of paragraph (1) are utilized, then th«i amount of each scheduled interest payment shall be disclosed as required under § 226.13(b) (3). (3) In the case of a combination construction loan and permanent financing provided by the same creditors (l) 'fhe amount of interest finance charge to be paid prior to the i!y« dates of the first amortization payment flhall be eatljn$fced as proa* cribed under subdivisions (ii) or (iii) of paragraph (V) as the c m o may be and nhalL bo treated as prepaid finluwfi charge fox* computational purposes } and

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-3- (It) Estimation df the annual percentage r a t e shall be made without tiftgatd to the number of interest only paymenta to be made, nanuming< the f i r s t payment period to be that tntervnl between the date the finance charge begins to accrue and the date the f i r s t amortisation payment:, io duo» 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 $?.0,Q00 construction loan commitment on which the precise dates or amounts of advances ore not determinable. 'Ihe obligation bears a stated b% interest rate and Interest is to be paid monthly on Use amounts advanced, and the total of the amounts advanced under the* commitment plus any unpaid Interest is due and payable at the end of nin® racmtha from the date the finance charge begins to accrue, There la a llowi foe of \% ($200), but there ia mo required deposit balance.

Substituting theae torma for the symbolG, the equations become:

(9 x .06 x ?,0,000)-K 2 JL.U.XJSM1. - .0884 or 8.84% ot 8-3/4% ') k {(20,000 - (? x 200) J not limited annual pareentage r a t e .

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S) k ,06 x 20j000 » 450 or $450 eatimeted Interest finance charge component 1 x 12 of the finance charge.

If the terms atated In the exomple were changed ao that interest would he computed on the full amount of the commitment from the date the 111 nance chergo begins to accrue without regard for the dutea of dltaburgemcnta or actual awounta of funds disbursed;, the equations under (iii) above become:

l!? x 9 x ,06 X 20,000VH 2 x U X 200) .* .1407 or 14.97" or 15.X. estimated 9 H [(20,000 - (2 H 200)) annual purcentngo rate, 1> 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 cinch., Example XI A $20,000 construction loan followed by pertmiienr. financing In Jifiivso amount. Sis per cent interest, One point loan foe. Nine wont ha to maturity of construction phase. Nine monthly payments of interest only during construction phase. Twenty-year maturity on permanent financing to bo. amortized in 240 equal monthly payments including interest and principal. From mortgage amortization tables;

Amortization of n $20,000 6% 20->year loan in 2,40 equal monthly payments including interest and principal requires each monthly payments to be $143.29.

Total of 240 payments a 240 x 9143.29 » $34,339,60 Subtract amount of loan principal $20,000,00 Interest finance charge on permanent financing $14,309,60

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aS

Add: Eetimated faiterest Finance charge on construction phase (pursuant

to subdivision (i1)) 450,09 Add: Loan fee 1 point emo 8) .00- Estimated finance charge $15,034, 60°

(Lf the interest on the construction phase la computed an. the

full amount of the commitment for the full tine to maturity without vegdrd -

for the dates of disbursements or actual anounts dtubuessd purauant to’ aube division (ili), the estimated interest finance charge for the ‘conseructlon phase would be $900.00 which would result in a total estimated finance : charge of $15,489,60,)

Loan fee 1 point prepaid finance charge § 200.00

For computational purposes consider Interest ta ba paid on construction phase as prepaid

(not to be disclosed ag prepaid). Borer cent 202.00 Total amount treated ag prepaid finanee charge for computational purposes $ 650.00 Computational Disclosure nnd AE POSES... a Wk pones Amount of loan $30,000 “$9000

Deduct total of estimated finance charge treeted ag prepaid $ = 650

Deduct actual amount of

prepaid fimance charge a 8 200 Estimated amount financed

for computational purpegea $19,350

Amount Financed to be dlaclosad

‘oe _ ceiasl

“ oo oc pa)

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-6-

Ac just first payment perted (period of eonatruct lon Loan: plus’ period from maturity date of construction loan to dua date of fivat amort zation payment) by dividing the period of the construction Loan by 2 and adding tha period. of time between the-maturity data of tlie construction. loan and the date the first amortisation payment ia cue, .

9 months divided by 2 = 4 1/2 mantha plus 1 menth #5.

centage Rate T bles, read acrosa to 4 months and on. the Line below opposit 15 days (1/2 month) read + 9.0, ‘This adjustment ahould be added to the number of regular amortization paymenta to determine the nunber of paymente in utilizing the Annual Percentage Rate Tables: | | 240 monthly payments + adjustment 9.0 # 249° Following the directions on “age 1 of Volante 1: Fetimated finance charge $15,039.60 x 100 » $1,505,960 which should be divided by the estimated amount financed for computational purposes: | $1,503,960 4 19,350 = $77.72 estimated finance charge per $100 of estimated mmount financed for computational purposes. . Refer to page 309K of Volume 1, read down numberof payments colum to 249; read across to 78,71 (which is nearest ta $77.72 computed ubove), and read up to 6,25% which is the cutimated annual percentage rate to be disclosed, ‘ |

In the example where the interest on the construction phage de.

computed on the full amount of the commitment without regard for the dates -

of advances or actual amounts advanced, the estimated finance charge. per

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-?- $100 of amount financed la $01.96.

On page M9M of Vol una t . reiid down to the. 249th payment line and across to $32,39 which Is the ftoarafit amount to $1)1.96, and road up to 6,30% which is the osi. inmtod annual, percerttttga rote to bo. diacLosed, '(Irttctprots and Applies 15 U.S.O, 1638 and 1,5 U.S.C. J,(j39)

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4 226,(U4 Premiums fir ingurmice tuldod tortn tyxlatinft balance Subsequent to tho canaummotidn of <i consumer credit trerioflction tho customer inoy wish to purchase optional insurance in connection with tho obligation, typically, mortgage life and disability insurance may be offered to the; cuBtower at aome date after consummation under n p1on in which the lender will fulvnnco tho simount of tho premium due and odd chat amount Co the existing, unpaid balance of tho obligation. 'Generally, each instalment on the original obliftQtion pnid during the period before the tteXfc-premium ia due will be Increased proportionately to liquidate the mnount of the edditionoi advance plus any finance charge, Additional-advances flrc mode automatically for renewal premium® na they become due unions the borrower requests discontinuance of the coverage.

The question nrioeg as to the srequired"disclosurea. In auch cases the insurance Agreement mny be considered o oingle sepnrote transaction, and the disclosures required under £ 226.8, at the creditor's option, need be made only prior to the time tho agreement ifl executed and only with respect to the amount of the Initlnl advance. For fjuimple, a mortgage life end disability insurance plan in which the Annual premium advanced w..is $145 repayable in 12 monthly instalments of $12.61 edded to the regular monthly mortgage payments would be dioclosed ns on "amount financed" of $145, a "finance ehatge" of $6.112, and o "total of payments" of $151.32. Additional diaeloflurefs ae applicable under 8 226,8 v?oul<l, of course, be mode, If, aa in some coses, only a portion of the ndvmice is liquidated during the premium period with the remainder payable ufc the end of the mortgage contract, the creditor would likewlao calculate tho amount of finance chnrge which would accrue on the advance until paid in full.

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orineipal reduction, Por entamplay’ Lf a vingle paynent note for $1,000 at 7% fe proposed to be renewed for $1509) at 8% for. 3 months, ta addition to. the other required AMoclooures, the ereditor should discloge an arount financed of $1,000. with a €Lnance charge of $29, and way, (x addition, diactose that with a principal. payrent of $390 the apount financed would-be $75) with a finance charge of $14, end with a orineinal payment of $590 the a ount financed would be $597 with 1 finance charge of $1),

(Interprets and soplies 15 U.9.6..1639)

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§ 726.815 Disclosure for demand Loans

Section 226.8(b) (3) requires a. graditor to disclose the num amount and die datea or periods of: paynenta acheduled to repay. of credit other than open end and, in appropriate casa, the total of payments, The question arisea-as to how these requirements whould be mot in the case of cemand loans.

Section 226.4(g) provides that For the purpose of calculating the finance charge and annual percentage rate, demand loan. are considered to have a one+half year maturity unlesa the oblLipation is alvernatively payable upon a stated maturity, in which case the: stated maturity shall be used.

In order te comply with the requilrementa of § 226,8(b) (3), LE no alternative maturity date Ls specified, the creditor need disclose only tha cue dutes or pertods of paymenta of all seneduied interest payments for the

first ene-half year, In such eases, the creditor need not disclose the

number, amounts or total of paymenta or identify any balloon payment, Effective May 1, 1970, creditors shall diaclose the facet that the obligation is payable on demand, |

[£ an alternative maturity date is apeclfited, all disclosures required under § 226.8(b) (5) shall be made, using chat date,

(Interprets and applies 18 U.S.C, 1639)

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§ 226,816 Mortgages witfo demand f e a t u r e In soma cases r e a l e s t a t e mortgages ate written for a stated period, for example one year, with the -provision that they shall he payable on demand a f t e r expiration of that perlod>'provided that until auch demand In made the principal and Interest shall be paid In (Scheduled periodic Instalments until paid in f u l l .

The obligation ie thus payable according to a specified amortization schedule subject to the holder's right; to demand payment a f t e r the stated period.

The question arises whether the creditor may make disclosures based on the specified amortissaLion 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 disclosures based on the specified amortization schedule, provided he discloses clearly and conspicuously that the obligation la payable en demand a f t e r the stated period together with the fact that disclosures are made on the basis of the specified amortisation schedule, Otherwise, dincloouiHa ohall be '-baaed upon the earliest date demand for payment in f u l l 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 thi.8 interpretation shall become effective May 1, 1970.

(Interprets and applies 13 U,S,C. 1639)

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Interpretation 8 226.903 la amended l*.p reaci as fo'.liowo! 9 226,903 Refinancing and ittcrefl3fnB*Ydlaclfliaures and ef i'ectB on the right.of reaclssion In some cases the creditor of an obligation wi1A refinance that obligation at tho request of n customer t»y permitting!.the cur.corner to execute a new note, coutract, or other document nvldenoLug the transaction under the terms of which one or more o-iE the original credit terms, including the maturity date of tho obligation, ore changed, Except as 1/ provided in 8 226.811.- ouch refinancing conatltutas a nev transaction, end all disclosures required under 8 226,3 must he made. 'ihe question arises as to whether that transaction ia subject to tho right of rescission under 3 226,9 where the obligation is already necured by a .security Interest in real property which ifi uaed or expected to be uued aa the principal residence of that customer.

If the amount of such new transaction, does not exceed the mnount of the unpaid balance plus any accrued and unpaid 'finance charge on the existing obligation, 9 226,9 does not apply to the transaction. If, hoi,'ever, fiach new transaction ia for an increased amount, that isa for an amount in excess of the amount of tho unpaid balance pluo any accrued and unpaid finance charge on the existing obligation, 9 226,9 applies to the transaction. However, fiuch right of rescission applies only co such exceB3 and does not affect the existing obligation (or related security interest) for the unpaid balance pluo accrued unpaid finance charge.

y The underscored language was inserted to conform this interpretation to interpretation 8 226.811, as emended.

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*2"

If a transaction- is refinanced by & creditor other than th« creditor of the existing obligation, the entire transaction lis subject to B 226.9.

(Interprata and applies 15 U.8.C.

1639) Dated nt Washington, D, C., l:he 28th day of January, 1970. By order of the Board of Goveirnors, (SEAL) (Signed) Kenneth A. Kenyon Kenneth A. Kenyon, Deputy Secretary.