Proposed Revisions to the Official Staff Commentary on Regulation Z (Truth in Lending), Notice 97-121

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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 75265-5906 Notice 97-121 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Proposed Revisions to the Official Staff Commentary on Regulation Z (Truth in Lending) DETAILS The Board of Governors of the Federal Reserve System has requested public com­ ment on proposed revisions to the Official Staff Commentary on Regulation Z (Truth in Lend­ ing). The commentary applies and interprets the requirements of the regulation. The proposed revisions:

• address increased rates for credit card accounts triggered by events such as late payments or exceeding credit limits;

• provide guidance on “same-as-cash” transactions in open-end plans; • address how creditors may determine whether credit is an open-end plan or a closed-end transaction; and • discuss issues such as the treatment of annuity costs in reverse mortgage transac­ tions and transaction fees imposed on checking accounts with overdraft protection. The Board must receive comments by January 20, 1998. Please address comments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551. All comments should refer to Docket No. R-0992.

ROBERT D. McTEER, JR.

P R ES ID EN T AND CH IE F EX E C U TIV E OFFICER December 23, 1997 For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected])

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ATTACHMENT A copy of the Board’s notice as it appears on pages 64769-75, Vol. 62, No. 236 of the Federal Register dated December 9, 1997, is attached. MORE INFORMATION For more information regarding Regulation Z, please contact Eugene Coy at (214) 922-6201. For additional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254.

Sincerely yours,

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Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 64769 FEDERAL RESERVE SYSTEM 12CFR Part 226 [Regulation Z; Docket No. R-0992] Truth in Lending AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed rule; official staff interpretation.

SUMMARY: The Board is publishing for com m ent proposed revisions to the official staff com mentary to Regulation Z (Truth in Lending). The com mentary applies and interprets the requirem ents of Regulation Z. The proposed update addresses increased rates for credit card accounts triggered by events such as late paym ents or exceeding credit limits. It provides guidance on “same-as-cash” transactions in open-end plans. It also addresses how creditors m ay determ ine w hether credit is an open-end plan or a closed-end transaction. In addition, the proposed update discusses issues such as the treatm ent of annuity costs in reverse mortgage transactions and transaction fees im posed on checking accounts w ith overdraft protection. DATES: Comments m ust be received on or before January 20, 1998. ADDRESSES: Comments should refer to Docket No. R-0992, and may be m ailed to W illiam W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551. Comments also may be delivered to Room B-2222 of the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard station in the Eccles Building courtyard on 20th Street, N.W. (between Constitution Avenue and C Street) at any time. Comments may be inspected in Room M P-500 of the M artin Building between 9:00 a.m. and 5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board’s Rules Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: For Subparts A and B (open-end credit), Jane E. Ahrens, Senior Attorney, or Obrea O. Poindexter, Staff Attorney; for Subparts A, C, and E (closed-end credit and reverse mortgages), Ms. Ahrens or James A. Michaels, Senior Attorney, or M ichael E. Hentrel, Staff Attorney; Division of Consumer and Com munity Affairs, Board of Governors of the Federal Reserve System, at (202) 452­ 3667 or 452-2412; for users of Telecom m unications Device for the Deaf (TDD) only, Diane Jenkins at (202) 452— 3544.

SUPPLEMENTARY INFORMATION: I. Background The purpose of the Truth in Lending Act (TILA; 15 U.S.C. 1601 et seq.) is to prom ote the informed use of consum er credit by providing for disclosures about its terms and cost. The act requires creditors to disclose the cost of credit as a dollar am ount (the finance charge) and as an annual percentage rate (the APR). Uniformity in creditors’ disclosures is intended to assist consum ers in com parison shopping. The TILA requires additional disclosures for loans secured by a consum er’s hom e and perm its consumers to rescind certain transactions that involve their principal dwelling. The act is im plem ented by the Board’s Regulation Z (12 CFR Part 226). The Board’s official staff commentary (12 CFR Part 226 (Supp. I)) interprets the regulation, and provides guidance to creditors in applying the regulation to specific transactions. The commentary is a substitute for individual staff interpretations; it is updated periodically to address significant questions that arise. The Board expects to adopt revisions to the com mentary in final form in M arch 1998; to the extent the revisions im pose new requirem ents on creditors, com pliance w ould be optional until October 1, 1998, the effective date for mandatory compliance.

II. Proposed Revisions Subpart A — General Section 226.2—Definitions and Rules of Construction 2(a) D efinitions 2(a)(2) A dvertisem ent Comment 2(a)(2)-l is revised to address com m unications to consumers about existing accounts. In response to requests for guidance, the proposed com ment provides examples of com m unications that are and are not advertisements.

2(a)(18) D ow npaym ent Proposed com ment 2(a)(18)-3 gives guidance on how a creditor discloses the dow npaym ent in a credit sale if a trade-in is involved and if the am ount of the existing lien on the trade-in exceeds its value. The com ment clarifies that creditors should disclose zero and not a negative amount.

2(a)(20) O pen-end Credit The Board has been asked by Attorneys General of several states to provide additional guidance concerning how to determ ine w hether credit is an open-end plan or a closed-end transaction. The Attorneys General are concerned that some retailers selling big-ticket items have established questionable “revolving charge accounts” to finance the purchase of such items, resulting in consumers making major purchases w ithout adequate inform ation about the true cost of the transactions. Proposed comment 2(a)(20)-3 includes factors that creditors, particularly those engaged in credit sales, should consider in determ ining the difference between an open-end plan and a closed-end transaction. Proposed com ment 2(a)(20)-5 clarifies w hen a line of credit is not self-replenishing.

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64770 Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 2(a)(24) Residential Mortgage Transaction Com ment 2(a)(24)-5 is revised for clarity. No substantive change is intended.

Proposed com m ent 2(a)(24)-7 clarifies that the definition of a residential mortgage transaction includes a loan for financing the construction of a prim ary dwelling on land already ow ned by the consumer.

Section 226.4—Finance Charge 4(a) Definition 4(a)(2) Special Rule: Closing A gent Charges Comment 4(a)(2)—2 is revised to address charges to conduct a closing for a real estate-secured transaction. Creditors may exclude from the finance charge a lum p-sum settlement or closing fee that includes a charge for conducting or attending a closing if the lum p-sum fee is prim arily for services listed in § 226.4(c)(7), even if the lum p-sum fee includes incidental costs for services that are otherwise considered finance charges. The com m ent clarifies that charges for conducting or attending the closing are finance charges and may not be excluded from the finance charge unless the charge is incidental to the lum p-sum fee.

4(b) Exam ples o f Finance Charges Paragraph 4(b)(2) Comment 4(b)(2)—1 is revised to clarify that a service charge on a checking or other transaction account w ith a credit feature is a finance charge only if the charge on the account exceeds the charge for a sim ilar account w ithout a credit feature. 4(d) Insurance Comment 4(d)—11 is revised for clarification. Under § 226.4(d), amounts paid for insurance or debt cancellation coverage may be excluded from the finance charge if the creditor discloses the fee or prem ium for the initial term of coverage, among other conditions. Comment 4 (d )-ll contains examples of w hat constitutes the initial term of coverage, and also gives creditors, in certain circumstances, the option of providing the cost disclosure for one year of coverage if it is clearly labeled as such.

The proposed revision clarifies that the initial term of coverage is based on the period that the insurer or creditor is initially obligated to provide. It also clarifies that the fact that a consum er is perm itted to cancel the coverage at any tim e does not signify that creditor may treat the initial term of coverage for purposes of this regulation as the period covered by the consum er’s first paym ent. W here the fee or prem ium for the coverage is assessed periodically and the consum er is under no obligation to continue making the payments, creditors have the option of providing disclosures on the basis of one year of coverage. Creditors also have this option if the initial term of the insurance is not clear.

Subpart B—O pen-end Credit Section 226.5a—Credit and Charge Card Applications and Solicitations 5a(b) Required Disclosures 5a(b)( 1) A nnual Percentage Rate Proposed com ment 5a(b)(l)-7 clarifies that if the APR will increase upon a stated event (such as the consum er’s making a late paym ent or exceeding the credit limit), the card issuer m ust disclose the increased rate, along w ith the condition for increasing the rate. Providing only a general description of the condition, such as stating that the rate will increase if the consum er “fails to rem ain in good standing,” is not an adequate description.

5a(b)(9) Late-Paym ent Fee Proposed com m ent 5a(b)(9)-2 addresses cross references to the APR disclosure required under § 226.5a(b)(l), where the APR will increase due to a late payment.

5a(b)(10) Over-the-Limit Fee Proposed com m ent 5a(b)(10)-2 addresses cross references to the APR disclosure required under § 226.5a(b)(l), w here the APR will increase if the credit lim it is exceeded.

Section 226.6—Initial Disclosure Statement 6(a) Finance Charge 6(a)(2) A nnual Percentage Rate Proposed com m ent 6(a)(2)-ll clarifies that if the APR w ill increase upon a stated event (such as the consum er’s making a late paym ent or exceeding the credit limit), the card issuer m ust include the increased rate in the disclosures required under § 226.6(a)(2), along w ith the condition that will trigger the increase.

Section 226.7—Periodic Statement Some creditors offer open-end plans w ith a deferred paym ent feature that allows consumers to avoid finance charges if the purchase balance is paid by a certain date. An example of these “same as cash” features w ould perm it a consum er purchasing a $500 item in January to avoid any finance charge on the purchase if the $500 balance is paid by M arch 31. Proposed com ment 7-3 gives guidance on same-as-cash transactions. To ease compliance, three cross-references to the proposed com ment are added to provisions of § 226.7 addressing balances to which periodic rates are applied, the am ount of the finance charge, and free-ride periods. Comment is requested on whether to add a sim ilar cross-reference under § 226.5(b)(2), w hich addresses the timing of periodic statements for openend plans offering free-ride periods. Section 226.14—Determination of A nnual Percentage Rate 14(c) A nnual Percentage Rate for Periodic Statem ents Revisions to two com ments are proposed. Comment 14(c)—5 addresses the calculation of the APRs for m ultifeatured plans that charge transaction fees in addition to periodic rates. In response to requests for guidance, the com m ent clarifies that creditors may separately consider each feature in calculating the denominator. M ultifeatured plans are defined to include plans w ith features such as purchases, cash advances, or overdraft checking, or plans w ith groups of transactions w ith different pricing structures. (See com m ent 7-1). Creditors m ay disclose APRs separately for each feature or may state a composite APR for the w hole plan. Some creditors offer cash advances w ith fees that vary if the cash advance is obtained by check, at a proprietary ATM, or at a foreign financial institution. They treat each fee structure as a “feature.” A ppendix F gives instructions for calculating the APR w hen the finance charge includes interest and transaction fees. Appendix F requires creditors to include in the denominator: (1) the balance subject to a transaction fee, plus (2) the balance subject to periodic rates, less the am ount of the balance subject to a transaction charge. The appendix is silent on calculating the denom inator when separate features are involved. Comment 14(c)-5 clarifies that separate features m ay be considered in calculating the denom inator. The proposal does not attem pt to define “feature” for purposes of the APR calculation. Comment is requested on how to retain flexibility for creditors in defining features of an open-end plan w hile guarding against distinctions among account services that artificially lower the APR on a consum er’s periodic statement. An example of distinctions that serve to lower the APR is the situation where the creditor treats as individual features each possible

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Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 64771 m ethod of obtaining a cash advance, even though there are no real differences in pricing or operational characteristics. Comment is also requested on whether a creditor should separately disclose the balances related to each feature under § 226.7(e), if features are treated separately for purposes of calculating the denom inator in the APR computation.

Com ment 14(c)-10 addresses the treatm ent of fees im posed on transactions that occur late in a billing cycle and are impracticable to post until the following billing cycle. The com m ent w ould be revised to provide broader guidance for calculating the APR w hen finance charges posted in the billing cycle include charges relating to activity in prior cycles, such as adjustm ents relating to error resolution. It is intended to provide uniform ity and simplify com pliance for the variety of circum stances under w hich adjustments may occur. For instances in w hich adjustm ents from prior cycles would produce a negative APR in the current cycle, the com ment incorporates the calculation rule from § 226.14(c)(3)—the APR should never be less than the APR corresponding to the periodic rate im posed on the account. Subpart C—Closed-end Credit Section 226.18—Content of Disclosures 18(g) Paym ent Schedule Proposed com m ent 18(g)-4 clarifies the requirem ents for disclosing the tim ing of payments. It explains that creditors m ust include the calendar date w hen the beginning paym ent is due and clarifies that reference to the occurrence of a particular event, for example, disclosing that the first paym ent is due “30 days after the com pletion of construction,” is not sufficient. If a precise date is unknow n, the creditor m ust estimate a date and label the disclosure as an estimate. Subpart E—Special Rules for Certain Home Mortgage Transactions Section 226.33—Requirements for Reverse Mortgages 33(c) Projected Total Cost o f Credit 33(c)(1) Costs to Consumer Under § 226.33, the disclosed cost of a reverse mortgage transaction m ust contain all costs and charges paid by the consumer, including the cost of any annuity, w hether the annuity purchase is mandatory or voluntary or w hether it is m ade through the creditor or a third party. In im plem enting this rule, the Board stated its belief that the Congress intended a broad application of the terms “costs and charges.” (60 FR 15468, M arch 24, 1995.) Proposed com m ent 33(c)(l)-2 provides further guidance for determ ining w hen an annuity is purchased as part of a reverse mortgage transaction.

III. Form of Comment Letters Comment letters should refer to Docket No. R-0992, and, w hen possible, should use a standard typeface w ith a type size of 10 or 12 characters per inch. This w ill enable the Board to convert the text to m achine-readable form through electronic scanning, and will facilitate autom ated retrieval of com ments for review. Also, if accom panied by an original docum ent in paper form, com ments m ay be subm itted on 3 V2 inch or 5V4 inch com puter diskettes in any IBMcom patible DOS-based format. List of Subjects in 12 CFR Part 226 Advertising, Banks, banking, Consumer protection, Credit, Federal Reserve System, Mortgages, Reporting and recordkeeping requirem ents, Truth in lending.

Text o f Proposed Revisions Certain conventions have been used to highlight the proposed revisions to the text of the staff commentary. New language is show n inside bold-faced arrows, w hile language that w ould be deleted is set off w ith bold-faced brackets. Comments are num bered to com ply w ith new Federal Register publication rules.

For the reasons set forth in the preamble, the Board proposes to am end 12 CFR Part 226 as follows: PART 226—TRUTH IN LENDING (REGULATION Z) 1. The authority citation for part 226 continues to read as follows: A uthority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).

2. In Supplem ent I to Part 226, under Section 226.2— Definitions and Rules o f Construction, the following am endm ents w ould be made: a. Under Paragraph 2(a)(2) Advertisem ent., paragraph 1. w ould be revised;

b. Under Paragraph 2(a)(18) Downpaym ent., a new paragraph 3. would be added;

c. Under Paragraph 2(a)(20) O pen-end credit., paragraphs 3. and 5. w ould be revised; and d. Under Paragraph (2)(a)(24) Residential mortgage transaction., paragraph 5. w ould be revised and a new paragraph 7. would be added. The additions and revisions would read as follows:

* * * * * Supplement I—Official Staff Interpretations * * * * * Subpart A— General * * * * *

§226.2 Definitions and Rules of Construction.

2(a) Definitions.

2(a)(2) Advertisem ent.

1. Coverage. Only comm ercial messages that prom ote consum er credit transactions requiring disclosures are advertisements. Messages inviting, offering, or otherwise announcing generally to prospective customers that availability of credit transactions, w hether in visual, oral, or print m edia, are covered by the regulation. i. Examples include:

A. Messages in a new spaper, magazine, leaflet, prom otional flyer, or catalog. B. A nnouncem ents on radio, television, or public address system.

C. Direct m ail literature or other printed material on any exterior or interior sign. D. Point-of-sale displays. E. Telephone solicitations. F. Price tags that contain credit information.

G. Letters sent to customers as part of an organized solicitation of business. H. Messages on checking account statem ents offering auto loans at a stated annual percentage rate.

I. Com m unications prom oting a new openend plan or closed-end transaction. ii. The term does not include: A. Direct personal contacts, such as followup letters, cost estimates for individual consum ers, or oral or w ritten com m unication relating to the negotiation of a specific transaction.

B. Informational material, for example, interest rate and loan term memos, distributed only to business entities. C. Notices required by federal or state law, if the law m andates that specific information be displayed and only the inform ation so m andated is included in the notice. D. News articles the use of which is controlled by the news medium . E. Market research or educational materials that do not solicit business. ►F . Com munications about an existing account (for example, a prom otion in connection w ith an existing credit card account)."^ * * * * * 2(a)(18) D ownpaym ent.

* * * * * ► 3. Effect o f existing liens. In a credit sale, the “ dow npaym ent” m ay only be used to reduce the cash price. For example, w hen the existing lien on an autom obile to be traded in exceeds the value of the automobile, creditors m ust disclose a zero rather than a negative num ber. To illustrate, assume a consum er owes $10,000 on an existing autom obile loan and that the trade-in value

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64772 Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules of the autom obile is only $8,000, leaving a $2,000 deficit. The creditor should disclose a dow npaym ent of $0, not -$2,000.-^ * * * * * 2(a)(20] O pen-end credit.

* * * * * 3. R epeated transactions. U nder this criterion, the creditor m ust reasonably contem plate repeated transactions. This m eans that the credit plan m ust be usable from time to tim e and the creditor m ust legitim ately expect that there w ill be repeat business rather than a one-time credit extension. The creditor m ust expect repeated dealings w ith the consum er under the credit plan as a w hole and need not believe the consum er w ill reuse a particular feature of the plan.

►i . Factors. Each credit plan m ay differ, and no one factor w ill determ ine w hether a creditor reasonably contem plates repeated transactions. Some of the factors to be considered in determ ining w hether a creditor could reasonably contem plate repeated transactions are:

A. W hether the line of credit is lim ited to the purchase of a certain product if it is a product that consum ers w ould not likely purchase in m ultiples. The greater the variety of products available for purchase under the credit line, the m ore likely it is that the creditor reasonably contem plates repeated transactions. Some creditors m ay not offer a variety of products for purchase, but given the nature of the creditor’s products or services, it is nonetheless likely that consum ers w ill make repeated purchases—as in the case of gasoline com panies that issue credit cards.

B. W hether the creditor establishes a line of credit for the purpose of enabling the consum er to purchase a designated item. It is more likely that a creditor reasonably contem plates repeated transactions if a consum er m ay use the credit to purchase any one of a num ber of items. For example, if a retailer of pianos establishes a line of credit for the purpose of the consum er purchasing a piano, it is unlikely that the creditor can reasonably contem plate repeated transactions.

C. If the creditor establishes a line of credit to finance the consum er’s purchase of a designated item, the am ount of the transaction relative to the credit m ade available to the consum er. The larger the am ount of the transaction, the less likely it is that the creditor reasonably contem plates repeated transactions. For example, if a retailer of satellite dishes makes credit of $5,000 available to a consum er for the purchase of a satellite dish, and the cost of the satellite dish is $4,500, it is not likely the creditor contem plates repeated transactions. The fact that the retailer sells other products that are nom inal in am ount (compared w ith the cost of the m ajor purchase) is not a sufficient basis to contem plate repeated transactions.

D. The extent to w hich a creditor reasonably solicits customers w ith its line of credit to make additional purchases under the credit line. For example, if a hom e im provem ent contractor issues a private label credit card w ith a $10,000 lim it to a consum er paying for roof repairs in the am ount of $9,000, and sends m onthly solicitations for alum inum siding, the creditor does not reasonably contem plate repeated transactions.

E.

W hether the creditor has inform ation on consum ers w ith the credit line show ing that consum ers have m ade repeat purchases. The m ore inform ation that show s that consum ers have m ade repeat purchases, the more likely it is that the creditor reasonably contem plates repeated transactions.

ii. S t a n d a r d A standard based on reasonable belief by a creditor necessarily includes some margin for judgm ental error. The fact that a particular consum er does not return for further credit extensions does not prevent a plan from having been properly characterized as open-end. For exam ple, if m uch of the custom er base of a clothing store makes repeat purchases, the fact that some consum ers use the plan only once w ould not affect the characterization of the store’s plan as open-end credit. The criterion regarding repeated transactions is a question of fact to be decided in the context of the creditor’s type of business and the creditor’s relationship w ith the consum er. For example: A. It w ould be more reasonable for a thrift institution chartered for the benefit of its m embers to contem plate repeated transactions w ith a m em ber than for a seller of alum inum siding to make the same assum ption about its customers. B. It w ould be more reasonable for a bank to make advances from a line of credit for the purchase of an autom obile than for an autom obile dealer to sell a car under an open-end plan.

* * * * * 5. Reusable line. i. The total am ount of credit that m ay be extended during the existence of an open-end plan is unlim ited because available credit is generally replenished as earlier advances are repaid. A line of credit is self-replenishing even though the plan itself has a fixed expiration date, as long as during the plan’s existence the consum er m ay use the line, repay, and reuse the credit. ►H o w e v e r, a line of credit generally is not self-replenishing w here the initial line of credit is less than, or not m uch m ore than, the am ount of an item purchased to open the credit line or, based on the m inim um m onthly payments, the principal reduction is so nom inal that the credit line is not reusable for an extended period of t im e .^ The creditor m ay verify credit inform ation such as the consum er’s continued incom e and em ploym ent status or inform ation for security purposes. This criterion of unlim ited credit distinguishes open-end credit from a series of advances m ade pursuant to a closed-end credit loan comm itm ent.

ii. For example:

A.

U nder a closed-end comm itm ent, the creditor m ight agree to lend a total of $10,000 in a series of advances as needed by the consumer. W hen a consum er has borrow ed the full $10,000, no m ore is advanced under that particular agreement, even if there has been repaym ent of a portion of the debt. iii. This criterion does not m ean that the creditor m ust establish a specific credit lim it for the line of credit or that the line of credit m ust always be replenished to its original amount. The creditor m ay reduce a credit lim it or refuse to extend new credit in a particular case due to changes in the economy, the creditor’s financial condition, or the consum er’s creditw orthiness. (The rules in § 226.5b(f), however, lim it the ability of a creditor to suspend credit advances for hom e equity plans.) W hile consum ers should have a reasonable expectation of obtaining credit as long as they rem ain current and w ithin any present credit limits, further extensions of credit need not be an absolute right in order for the plan to m eet the self­ replenishing criterion.

* * * * * 2(a)(24) Residential mortgage transaction. * * * * * 5. A cquisition. ►! . A residential mortgage transaction finances the acquisition of a consum er’s principal dwelling. The term does not include a transaction involving a consum er’s principal dwelling if the consum er had previously purchased and acquired some title to the dwelling, even though the consum er had not acquired full legal title.

ii. Examples of transactions involving a previously acquired dwelling include the financing of a balloon paym ent due under a land sale contract and an extension of credit m ade to a joint ow ner of property to buy out the other joint ow ner’s interest. In these instances, disclosures are not required under § 226.18(q) or § 226.19(a) (assumability policies and early disclosures for residential mortgage transactions). However, the rescission rules of §§ 226.15 and 226.23 do apply to these new transactions. iii. In other cases, the disclosure and rescission rules do not apply. For example, w here a buyer enters into a written agreement w ith the creditor holding the seller’s mortgage allowing the buyer to assum e the mortgage where the buyer previously purchased the property and agreed w ith the seller to make the mortgage payments, § 226.20(b) does not apply (assum ptions involving residential mortgages). ^ [A transaction is not “to finance the acquisition” of the consum er’s principal dwelling (and therefore is not a residential mortgage transaction) if the consum er had previously purchased the dwelling and acquired some title to the dwelling, even though the consum er has not acquired full legal title. Thus, the following types of transactions are not a residential mortgage transactions:

• The financing of a balloon paym ent due under a land sale contract. • An extension of credit m ade to a joint ow ner of property to buy out the other joint ow ner’s interest.

As a result, in giving the disclosures for these transactions several provisions of the regulations are not applicable, for example, the exceptions to the right of rescission (§§ 226.23(f)(1) and 226.15(f)(1), the early disclosure requirem ent (§ 226.19(a)), and the disclosure concerning assumability (§ 226.18(q)). In the following situation, by contrast, since the transaction is not a residential mortgage transaction, no disclosures are required by § 226.20(b) and therefore the right of rescission does not apply:

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Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 64773 • A w ritten agreement betw een a creditor holding a seller’s mortgage and the buyer of T*' the property w hich allows the buyer to assum e the mortgage, w here the buyer previously purchased the property and agreed w ith the seller to make the mortgage payments.

* * * * * 4(b) E xam ples o f finance charges. * * * * * Paragraph 4(b)(2).

1.

Checking account charges.^-A checking or transaction account charge im posed in connection w ith a credit feature is a finance charge under § 226.4(b)(2) to the extent the charge exceeds the charge for a similar account w ithout a credit feature. If a charge for an account w ith a credit feature does not exceed the charge for an account w ithout a credit feature, the charge is not a finance charge under § 226.4(b)(2). To illustrate: i.

A $5 service charge is im posed on an account w ith an overdraft line of credit, w hile a $3 service charge is im posed on an account w ithout a credit feature; the $2 difference is a finance charge. ii. A $5 service charge is im posed for each item that results in an overdraft on an account w ith an overdraft line of credit, w hile a $25 service charge is im posed for paying or returning the item on a sim ilar account w ithout a credit feature; the $5 charge is not a finance charge. -^[T he checking or transaction account charges discussed in § 226.4(b)(2) include, for example, the following situations: • An account w ith an overdraft line of credit incurs a $4.50 service charge, w hile an account w ithout a credit feature has a $2.50 service charge; the $2.00 difference is a finance charge. If the difference is not related to account activity, however, it m ay be excludable as a participation fee. (See the com m entary to § 226.4(c)(4).) • A service charge of $5.00 for each item that triggers an overdraft credit line is a finance charge. However, a charge im posed uniform ly for any item that overdraws a checking account, regardless of w hether the items are paid or returned and w hether the account has a credit feature or not, is not a finance charge.] * * * * * 4(d) Insurance and debt cancellation coverage.

* * * * * 11.

Initial term. i. The initial term of the insurance ►o r debt cancellation-^ coverage determ ines the period for w hich a prem ium am ount ►o r fee-^ m ust be disclosed, ►u n l e s s the one-year option discussed under com m ent 4(d)-12 is available. For purposes of § 226.4(d), the initial term is the period for w hich the insurer or creditor is obligated to provide coverage, even though the consum er may be allowed to cancel the coverage before that term expires. ii. For example:

A. The initial term of a property insurance policy on an autom obile that is w ritten for one year is one year even though m onthly prem ium s are paid and the term of the credit transaction is four years.

B. The initial term of an insurance policy is the full term of the credit transaction if the consum er pays or finances a single prem ium in advance.-^ [In some cases the initial term is clear, for example a property insurance policy on an autom obile w ritten for one year (even though the term of the credit transaction is four years) or a credit life insurance policy for the term of the credit transaction purchased by paying or financing a single prem ium . In other cases, however, it may not be clear w hat the initial term of the insurance is, for example, w hen the consum er agrees to pay a prem ium that is assessed periodically and the consum er is under no obligation to continue m aking the payments. In cases such as this, the cost disclosure m ay be m ade on the basis of a prem ium for one year of insurance coverage. The prem ium m ust be clearly labeled as being for one year.] ►1 2 . Initial term; alternative, i. A creditor has the option of providing cost disclosures on the basis of one year of insurance or debt cancellation coverage instead of a longer initial term (provided the prem ium or fee is clearly labeled as being for one year) if: A. The initial term is not clear, or B.

The consum er has agreed to pay a prem ium or fee that is assessed periodically but the consum er is under no obligation to continue the coverage after making the initial payment.

ii. For example:

A.

A credit life insurance policy providing coverage for a 30-year mortgage loan has an initial term of 30 years even though prem ium paym ents are m ade m onthly and the consum er is not required to continue the coverage after making the initial payment. The creditor has the option of making disclosures on the basis of coverage for oneyear.-^ * * * * * 4.

In Supplem ent I to Part 226, under Section 226.5a— Credit and Charge Card A pplications and Solicitations, the following am endm ents would be made: a. Under Paragraph 5a(b)(l) A nnual Percentage Rate., a new paragraph 7. is added;

b. Under Paragraph 5a(b)(9) Late Paym ent Fee., a new paragraph 2. is added; and c. Under Paragraph 5a(b)(10) Overthe-Lim it Fee., a new paragraph 2. is added.

The additions would read as follows: * * * * * Subpart B— Open End Credit * * * * * § 226.5a Credit and Charge Card Applications and Solicitations. * * * * * 5a(b) Required Disclosures. 5a(b)( 1) A n n u a l Percentage Rate. * * * * * ►7 . Increased penalty rates. If the initial rate w ill increase upon the occurrence of a specified event such as a late paym ent or an extension of credit that exceeds the credit limit, the card issuer m ust disclose along w ith the initial rate the increased penalty rate that w ould apply. The issuer m ust also disclose the specific condition or conditions for imposing the increased rate, such as “ 22% APR, if 60 days late.” The issuer may disclose the period for w hich the increased rate will rem ain in effect, such as “until you make three timely paym ents.” A creditor need not disclose an increased rate that is im posed w hen credit privileges are perm anently term inated.-^ * * * * * 5a(b)(9) Late P aym ent Fee. * * * * * ►2 . Increased penalty rates. If the annual percentage rate will increase as a result of late payments, the disclosures under § 226.5a(b)(9) m ust include a reference to the disclosures required under § 226.5a(b)(l).-^ 5a(b)(10) Over-the-Limit Fee. * * * * * ►2 . Increased p en a lty rates. If the annual percentage rate will increase as a result of the cardholder’s exceeding the credit limit, the disclosures under § 226.5a(b)(10) m ust ►7 . Construction on previously acquired vacant land. A residential mortgage transaction includes a loan to finance the construction of a consum er’s principal dwelling on a vacant lot previously acquired by the consum er."^ * * * * * 3.

In Supplem ent I to Part 226, under Section 226.4— Finance Charge, the following am endm ents w ould be made: a. Under Paragraph 4(a)(2)., paragraph 2. w ould be revised; b. Under Paragraph 4(b)(2)., paragraph 1. w ould be revised; and c. U nder Paragraph 4(d) Insurance and debt cancellation coverage., paragraph 11. w ould be revised; paragraph 12. w ould be redesignated as paragraph 13.; and a new paragraph 12. w ould be added.

The revisions and additions would read as follows:

* * * * * 226.4 Finance Charge.

4(a) Definition.

/_r ' * * * * * 4(a)(2) Special rule: closing agent charges. * * * * * 2.

R equired closing agent. If the creditor requires the use of a closing agent, fees charged by the closing agent are included in the finance charge only if the creditor requires the particular service, requires the im position of the charge, or retains a portion of the charge. Fees charged by a third-party closing agent may be otherw ise excluded from the finance charge under § 226.4. For example, a fee that w ould be paid in a comparable cash transaction m ay be excluded under § 226.4(a)[;]^. A charge for conducting or attending a closing is a finance charge and m ay be excluded only if the charge is included in and incidental to -^ a lum p-sum fee for real estate closing costs [may be] excluded under § 226.4(c)(7). * * * * *

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64774 Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules include a reference to the disclosures required under § 226.5a(b)(l).-^ * * * * * 5. In Supplem ent I to Part 226, Section 226.6— Initial Disclosure Statem ent, under Paragraph 6(a)(2)., a new paragraph 11. w ould be added to read as follows:

* * * * * Section 226.6— Initial Disclosure Statem ent * * * * * 6(a) Finance charge.

* * * * * Paragraph 6(a)(2).

* * * * * ►l l . Increased p en a lty rates. If the annual percentage rate w ill increase upon the occurrence of a specified event such as a late paym ent or an extension of credit that exceeds the credit limit, the creditor m ust disclose along w ith the initial rate the increased penalty rate that w ould apply. The issuer m ust also disclose the specific condition for im posing the increased rate, such as “22% APR, if 60 days late.” The issuer may disclose the period for w hich the increased rate will rem ain in effect. A creditor need not disclose an increased rate that is im posed w hen credit privileges are perm anently term inated.-^ * * * * * 6. In Supplem ent I to Part 226, under Section 226.7— Periodic Statem ent, the following am endm ents w ould be made: a. Under introductory text, a new paragraph 3. w ould be added; b. Under Paragraph 7(e) Balance on which finance charge com puted., a new paragraph 10. w ould be added; c. Under Paragraph 7(f) A m o u n t o f finance charge., a new paragraph 9. w ould be added; and d. U nder Paragraph 7(j) Free-ride period., a new paragraph 2. w ould be added.

The additions would read as follows: * * * * * § 226.7 Periodic Statement.

* * * * * ►3 . Sam e-as-cash transactions. Some creditors offer a deferred paym ent feature for purchases in w hich consum ers avoid finance charges if the purchase balance is paid in full by a certain date. For exam ple, no finance charge is im posed on a $500 purchase m ade in January if the $500 balance is paid by M arch 31.

i.

Balances subject to periodic rates. Under § 226.7(e), creditors m ust disclose the balances subject to periodic rates during a billing cycle. The deferred paym ent balance ($500 in this example) is not subject to a periodic rate for billing cycles betw een the date of purchase and the paym ent due date. Periodic statem ents sent for those billing cycles should not include the deferred paym ent balance in the balance disclosed u nder § 226.7(e). At the creditor’s option, this am ount may be disclosed on periodic statem ents provided it is identified by a term other than the term used to identify the balance disclosed under § 226.7(e). ii. A m o u n t o f finance charge. U nder § 226.7(f), creditors m ust disclose finance charges im posed during a billing cycle. For some same-as-cash purchases, the creditor may impose a finance charge from the date of purchase if the deferred paym ent balance ($500 in this example) is not paid in full by the due date, but w ill not impose finance charges for billing cycles betw een the date of purchase and the paym ent due date. Periodic statem ents for billing cycles preceding the paym ent due date should not include in the finance charge disclosed under § 226.7(f) the am ounts a consum er m ay owe if the deferred paym ent balance is not paid in full by the paym ent due date. In this example, the February periodic statem ent should not identify as finance charges interest attributable to the $500 January purchase. At the creditor’s option, this am ount m ay be disclosed on periodic statem ents provided it is identified by a term other than “finance charge.”

iii. Free-ride period. Assum ing m onthly billing cycles ending at m onth-end and a free-ride period ending on the 25th of the following m onth, here are two exam ples illustrating how a creditor may com ply with the requirem ent to disclose the free-ride period applicable to a deferred paym ent balance ($500 in this example), and w ith the 14-day rule for mailing or delivering periodic statem ents before imposing finance charges (see §226.5):

A. The creditor could include the $500 purchase on the periodic statem ent reflecting account activity for February and sent on M arch 1 and identify M arch 31 as the paym ent due date for the $500 purchase. (The creditor could also identify M arch 31 as the paym ent due date for any other am ounts due on M arch 25.) B. The creditor could include the $500 purchase on the periodic statem ent reflecting activity for M arch and sent on April 1 and identify April 25 as the paym ent due date for the $500 purchase, perm itting the consum er to avoid finance charges if the $500 is paid in full by April 25.-^ * * * * * 7(e) Balance on which finance charge com puted.

* * * * * ►1 0 . Sam e-as-cash transactions. See com m ent 7-3(i).-^ 7(f) A m o u n t o f finance charge. * * * * * ►9 . Sam e-as-cash transactions. See com m ent 7-3 (ii).-^ * * * * * 7(j) Free-ride period.

* * * * * ►2 . Sam e-as-cash transactions. See com m ent 7 -3 (iii) .^ * * * * * 7. In Supplem ent I to Part 226, Section 226.14— Determination o f A nnual Percentage Rate, under Paragraph 14(c) A nnual percentage rate fo r periodic statem ents., paragraph 5. and paragraph 10. would revised to read as follows:

* * * * * §226.14 Determination of Annual Percentage Rate.

* * * * * 14(c) A nnual percentage rate fo r periodic statem ents.

* * * * * 5. Transaction charges, i. Section 226.14(c)(3) transaction charges include, for example:

A. A loan fee of $10 im posed on a particular advance.

B. A charge of 3% of the am ount of each transaction.

ii.

The reference to avoiding duplication in the com putation requires that the amounts of transactions on w hich transaction charges were im posed not be included both in the am ount of total balances and in the “other am ounts on w hich a finance charge was im posed” figure. ►I n a m ultifeatured plan, creditors m ay separately consider each bona fide feature in the calculation of the denom inator.-^ For further explanation and exam ples of how to determ ine the com ponents of this formula, see appendix F. * * * * * 10.

Prior-cycle adjustm ents, i. The annual percentage rate reflects the finance charges im posed during the billing cycle. However, finance charges im posed during the billing cycle m ay relate to activity in a prior cycle. Exam ples of circum stances w hen this m ay occur are:

A. A cash advance that occurs on the last day of a billing cycle on an account that uses the transaction date to figure finance charges, and it is impracticable to post the transaction until the following cycle.

B. An adjustm ent to the finance charge is m ade following the resolution of a billing error dispute.

C. A consum er fails to pay the purchase balance under a deferred paym ent feature by the paym ent due date, and finance charges are im posed from the date of purchase. 11. Finance charges relating to activity in prior cycles should be reflected in the annual percentage rate for the billing cycle in w hich the charges are posted. If the creditor uses the quotient m ethod to calculate the annual percentage rate, the num erator w ould include the am ount of any transaction charges plus any other finance charges posted during the billing cycle. Balances relating to the finance charge adjustm ent m ay be included in the denom inator if perm itted by the legal obligation, the transaction was impracticable to post in the previous cycle due to its timing, or the charge relates to an adjustm ent such as the resolution of a billing error dispute or an unintentional posting error. An annual percentage rate calculated under this paragraph shall not be less than the highest rate determ ined by m ultiplying each periodic rate im posed during the billing cycle by the num ber of periods in a year.-^ [Transactions at end o f billing cycle. The annual percentage rate reflects transactions and charges im posed during the billing cycle. However, it may be impracticable to post a transaction that occurs at the end of a billing cycle until the following cycle, such as a cash advance that occurs on the last day of a billing cycle and is posted to the account in the following cycle. A card issuer that uses the date of the

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Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 64775 transaction to figure finance charges should calculate the annual percentage rate as follows for the billing cycle in w hich the transaction and charges are posted: 1. The denom inator is calculated as if the transaction occurred on the first day of the billing cycle; and ii.

The num erator includes the am ount of the transaction charge plus all finance charges derived from the application of the periodic rate to the am ount of the transaction (including all charges from a prior cycle).] * * * * * 8. In Supplem ent I to Part 226, Section 226.18— Content o f Disclosures, under Paragraph 18(g) P aym ent schedule., the 18(g) heading w ould be revised, and a new paragraph 4. would be added to read as follows: * * * * * Subpart C— Closed End Credit * * * * *

§226.18 Content of Disclosures.

* * * * * [Paragraph] 18(g) P aym ent schedule. * * * * * ►4 . Tim ing o f paym ents. Creditors m ust disclose w hen paym ents are due, including the calendar date that the beginning paym ent is due. For example, a creditor m ay disclose that paym ents are due “m onthly beginning on ]uly 1, 1998.” A reference to the occurrence of a particular event, for example, disclosing that the first paym ent is due “ 30 days after the com pletion of construction,” is not sufficient. If the beginning-paym ent date is unknow n, the creditor m ust use an estim ated date and label the disclosure as an estim ate pursuant to § 2 26.17(c).^ * * * * * 9. In Supplem ent I to Part 226, Section 226.33— Requirem ents for Reverse Mortgages, under Paragraph 33(c)(1) Costs to consumer, in paragraph 2., a new sentence is added at the end of the paragraph to read as follows: * * * * * Subpart E— Special Rules for Certain Home Mortgage Transactions § 226.33 Requirements for Reverse Mortgages.

* * * * * 33(c) Projected total cost o f credit. Paragraph 33(c)(1) Costs to consum er. * * * * * 2. A n n u ity costs. * * * ►F o r example, this includes the costs of an annuity that a creditor offers, arranges, assists the consum er in purchasing, or that the creditor is aware the consum er is purchasing as a part of the tra n s a c tio n .^ * * * * * By order of the Board of Governors of the Federal Reserve System, acting through the Secretary of the Board under delegated authority, December 1, 1997. William W. Wiles, Secretary o f the Board.

[FR Doc. 97-31896 Filed 12-8-97; 8:45 am] BILLING CODE 6210-01-P