[Federal Register: March 6, 1997 (Volume 62, Number 44)]
[Rules and Regulations]
[Page 10193-10199]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr97-3]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-0942]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
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SUMMARY: The Board is publishing revisions to the official staff
commentary to Regulation Z (Truth in Lending). The commentary applies
and interprets the requirements of Regulation Z. The update provides
guidance on issues relating to the treatment of certain fees paid in
connection with mortgage loans. It addresses new tolerances for
accuracy in disclosing the amount of the finance charge and other
affected cost disclosures. In addition, the update discusses issues
such as the treatment of debt cancellation agreements and a creditor's
duties if providing periodic statements via electronic means.
DATES: This rule is effective February 28, 1997. Compliance is optional
until October 1, 1997.
FOR FURTHER INFORMATION CONTACT: Jane E. Ahrens or James A. Michaels,
Senior Attorneys, or Sheilah A. Goodman or Manley Williams, Staff
Attorneys, Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System, at (202) 452-3667 or 452-2412;
for users of Telecommunications Device for the Deaf (TDD) only, contact
Dorothea Thompson 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 promote the informed use of consumer credit by requiring
disclosures about its terms and cost. The act requires creditors to
disclose the cost of credit as
[[Page 10194]]
a dollar amount (the finance charge) and as an annual percentage rate
(the APR). Uniformity in creditors' disclosures is intended to assist
consumers in comparison shopping. The TILA requires additional
disclosures for loans secured by a consumer's home and permits
consumers to rescind certain transactions that involve their principal
dwelling. The act is implemented 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 updated periodically to address significant questions
that arise; it is a substitute for individual staff interpretations.
    In November, the Board published proposed amendments to the
commentary to Regulation Z (61 FR 60223, November 27, 1996). The Board
received about 30 comments. Most of the comments were from financial
institutions, mortgage lenders, insurance providers, and other
creditors (or their representatives); about a half dozen were from
consumer representatives and lawyers. Overall, commenters generally
supported the proposed amendments. Views were mixed on a few comments,
and some commenters expressed concerns about issues not addressed in
the proposal. Except as discussed below, the commentary is being
adopted as proposed; some technical suggestions or concerns raised by
commenters are addressed. Compliance is optional until October 1, 1997,
the effective date for mandatory compliance.
    The revisions mainly incorporate guidance given in the
supplementary information that accompanied September 1996 amendments to
Regulation Z implementing the Truth in Lending Act Amendments of 1995
(Pub. L. 104-29, 109 Stat. 271). The rulemaking clarified the treatment
of fees typically associated with real estate-related lending, and
revised tolerances for finance charge calculations for loans secured by
real estate or dwellings (61 FR 49237, September 19, 1996). It also
addressed the treatment of fees charged in connection with debt
cancellation agreements.
II. Commentary Revisions
Supplement I--Official Staff Interpretations
Subpart A--General
Section 226.4--Finance Charge
4(a) Definition
4(a)(1) Charges by Third Parties
    Comment 4(a)(1)-1 illustrates the general rule that amounts charged
by a third party are included in the finance charge if the creditor
requires the use of a third party, even if the consumer may choose the
service provider.
    Comment 4(a)(1)-2 addresses the treatment of annuity premiums
associated with some reverse mortgages. The proposal treated the cost
of the premiums as a finance charge when the purchase of an annuity is
effectively required incident to the credit. Commenters expressed
concern about uncertainties that could result from such a test; the
``effectively required'' standard has been deleted for clarity.
4(a)(2) Special Rule; Closing Agent Charges
    Comment 4(a)(2)-1 is revised and a new comment 4(a)(2)-2 is added
to address commenters requests for further guidance about the treatment
of charges by third-party closing agents when the creditor requires the
use of a closing agent. Comment 4(a)(2)-2 provides examples of the
types of fees charged by a closing agent that may be excluded from the
finance charge, even though the creditor requires the use of a closing
agent.
4(a)(3) Special Rule; Mortgage Broker Fees
    Two comments addressing the treatment of mortgage broker fees were
proposed. These comments are adopted with some modification for
clarity, and a third comment is added. Under the 1995 Amendments,
mortgage broker fees paid by the borrower are finance charges unless
otherwise excluded. Comment 4(a)(3)-1 clarifies that mortgage brokers
fees may be excluded from the finance charge if the fee would be
excluded when charged by the creditor. To illustrate the rule, the
comment discusses certain application fees as an example of fees
charged by mortgage brokers that could be excluded from the finance
charge.
    New comment 4(a)(3)-2 addresses the scope of the special rule for
mortgage broker fees. Commenters requested that the scope be clarified;
some suggested defining the term ``mortgage broker.'' Instead, the
Board has clarified that the special rule for mortgage broker fees
applies to consumer credit transactions secured by real property or a
dwelling. The Board believes this interpretation carries out the
purposes of the 1995 Amendments, and simplifies compliance by using
existing definitions in the regulation rather than adding a new one.
    Comment 4(a)(3)-3, redesignated from the proposal and revised for
clarity, addresses the treatment of compensation paid by the creditor
to a mortgage broker.
4(c) Charges Excluded From the Finance Charge
Paragraph 4(c)(5)
    Comment 4(c)(5)-2, adopted substantially as proposed, addresses the
treatment of finance charges paid by a noncreditor seller on a
consumer's behalf before loan closing; it clarifies that disclosures
should reflect the payment if the consumer is not legally bound to the
creditor for the amount paid.
4(d) Insurance and Debt Cancellation Coverage
4(d)(3) Voluntary Debt Cancellation Fees
    The comments are adopted as proposed, with minor revisions for
clarity. Several commenters, including a credit insurance provider,
disagreed with the Board's interpretation of section 226.4(d)(3), which
in their view is not consistent with the TILA. These commenters
objected to the proposed comments on the same grounds.
    Comment 4(d)(3)-2 clarifies that although debt cancellation
coverage and credit insurance are treated similarly for purposes of
cost disclosures under the TILA, state law governs whether a creditor
may represent that debt cancellation coverage is insurance. A provider
of credit insurance commented that creditors should be permitted to
disclose debt cancellation fees as insurance premiums only if the
coverage is regulated by the state as insurance. Regulation Z does not
provide a definition of insurance for purposes of the TILA, and under
Sec. 226.2(b)(3) the term's meaning is determined by state law--which
may or may not take account of the extent to which the particular
product is regulated by the state. Consequently, the comments are
adopted substantially as proposed.
4(e) Certain Security Interest Charges
    Section 226.4(e) excludes certain security interest charges paid to
public officials from the finance charge if the amounts are itemized
and disclosed. A
[[Page 10195]]
new Sec. 226.4(e)(3) was added to implement a provision in the 1995
Amendments which excludes from the finance charge taxes levied on
security instruments or on documents evidencing indebtedness that must
be paid to record the security instrument. Comments 4(e)-1 (adopted
substantially as proposed) and -2 are revised to reflect the recent
amendment to Sec. 226.4(e)(3).
Subpart B--Open-end Credit
Section 226.5--General Disclosure Requirements
5(b) Time of Disclosures
5(b)(2) Periodic Statements
Paragraph 5(b)(2)(ii)
    An addition to comment 5(b)(2)(ii)-3 is made to clarify that
periodic statements may be provided electronically, for example, via
home banking systems. Commenters generally supported the proposal and
encouraged the Board to provide further guidance on how to adapt
current rules to the way electronic disclosures may be used. A review
is now underway that will seek to adapt current rules under the Board's
Truth in Lending and other consumer protection regulations to the way
electronic disclosures may be provided and retained, responding to
technological developments in the way financial service transactions
are conducted via electronic means.
Subpart C--Closed-end Credit
Section 226.17--General Disclosure Requirements
17(c) Basis of Disclosures and Use of Estimates
Paragraph 17(c)(2)(ii)
    Comment 17(c)(2)(ii)-1 addresses the new rule applicable to the
disclosure of per-diem interest charges. Under the rule, the disclosure
of any numerical amount affected by the per-diem interest charge is
considered accurate if it is based on the information known to the
creditor at the time the disclosure is prepared, whether or not the
disclosure of per-diem interest is accurate when it is received by the
consumer. The comment clarifies that, in such cases, the resulting
finance charge is considered accurate without regard to the tolerance
for errors under Sec. 226.18(d)(1). In response to requests for
guidance, the comment clarifies that disclosures may be considered
accurate under this rule without regard to whether they were labeled as
estimates.
Section 226.18--Content of Disclosures
18(c) Itemization of Amount Financed
    Comment 18(c)-4 is adopted substantially as proposed. Some
commenters expressed concern that this comment imposed additional
disclosure requirements. This is not the case. The comment is meant to
streamline disclosure requirements for transactions that are also
covered by Real Estate Settlement Procedures Act (RESPA) by allowing--
not requiring--creditors to substitute the good faith estimate or the
HUD-1 settlement statement for the itemization of the amount financed.
Guidance is added regarding the format requirements for these
disclosures.
    A proposed revision to comment 18(c)(1)(iv)-2 responded to a
proposal by the Department of Housing and Urban Development (HUD) to
change the way that the amount collected at closing for escrow items is
reflected on the HUD-1 for RESPA purposes (61 FR 46511, September 3,
1996). The Board is withdrawing the proposed revision given that HUD
has not yet taken final action on its proposal.
Section 226.22--Determination of the Annual Percentage Rate
22(a) Accuracy of the Annual Percentage Rate
Paragraphs 22(a)(4) and 22(a)(5)
    Section 226.22(a)(4) and 22(a)(5) provide APR tolerances for
mortgage loans when the finance charge has been misstated but is
considered accurate. The comments provide specific examples of these
tolerances. Minor revisions have been made for clarity.
Section 226.23--Right of Rescission
23(h) Special rules for foreclosures
Paragraph 23(h)(1)(i)
    Section 226.23(h), which implements section 125(i) of the TILA,
contains special rescission rules that apply after a foreclosure action
has been initiated. Section 226.23(h)(1) allows a consumer to rescind a
loan in foreclosure if a mortgage broker fee that should have been
included in the finance charge under the laws in effect at consummation
was not included. Section 226.23(h)(2) contains a separate finance
charge tolerance of $35 for loans in foreclosure; such loans may be
rescinded if the finance charge was understated by more than $35.
Comment 23(h)(1)(i)-1 is intended to clarify the relationship between
these two provisions.
    As proposed, the comment interpreted Sec. 226.23(h)(1) to allow
rescission if a mortgage broker fee was omitted from the finance charge
entirely or if it was understated, without regard to the dollar amount
involved. Under that interpretation, any finance charge understatement
traceable to a misstatement of a mortgage broker fee would allow
rescission of a loan in foreclosure; the $35 finance charge tolerance
in Sec. 226.23(h)(2) would not apply. Several commenters objected to
this interpretation and expressed the view that the $35 finance charge
tolerance should also apply to the rescission rights granted under
Sec. 226.23(h)(1)(i). They believed that the $35 tolerance in
Sec. 226.23(h)(2) provides the applicable rule for determining whether
a mortgage broker fee has been included ``in accordance with the laws
and regulations in effect'' at the time the loan was consummated. They
noted that otherwise, creditors would be liable for inadvertent and
technical errors--for example, if a mortgage broker fee was rounded
down from fractional to whole dollar amounts. The commenters argued
that this would be inconsistent with the purpose of the 1995 Amendments
as a whole, which was to reduce lender liability for small technical
errors.
    Upon further analysis and after consideration of the comments
received, a narrower interpretation of Sec. 226.23(h)(1)(i) has been
adopted. The Board believes that this narrower interpretation is
consistent with the intent of section 125(i) of the TILA. The $35
tolerance in Sec. 226.23(h)(2) reduces creditors' potential liability
by replacing the $10 tolerance that applied before the 1995 Amendments
became effective. Accordingly, comment 23(h)(1)(i)-1 clarifies that for
loans in foreclosure, a right of rescission exists under
Sec. 226.23(h)(1)(i) only if the entire mortgage broker fee has been
omitted from the finance charge. If the amount of a mortgage broker fee
is misstated, the consumer's right to rescind is based on the rule in
Sec. 226.23(h)(2). A new comment 23(h)(2)-1 has been added to clarify
that the $35 tolerance is based on the total finance charge and not its
component charges.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.31--General Rules
31(d) Basis of Disclosures and Use of Estimates
31(d)(3) Per-diem Interest
    Several commenters noted that a comment to paragraph 31(d)(3) like
the comment to 17(c)(2)(ii) would be useful; a conforming comment has
been added.
[[Page 10196]]
Section 33--Requirements for Reverse Mortgages
33(a) Definition
Paragraph 33(a)(2)
    Comment 33(a)(2)-2, which addresses reverse mortgages, is adopted
substantively as proposed.
List of Subjects in 12 CFR Part 226
    Advertising, Banks, banking, Consumer protection, Credit, Federal
Reserve System, Mortgages, Reporting and recordkeeping requirements,
Truth in lending.
    For the reasons set forth in the preamble, the Board amends 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:
    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
    2. In Supplement I to Part 226, under Introduction, the last
sentence in paragraph 5. is revised to read as follows:
Supplement I--Official Staff Interpretations
Introduction
* * * * *
    5. Comment designations. * * * Comments to the appendices may be
cited, for example, as Comment app. A-1.
* * * * *
    3. Supplement I to Part 226, under Sec. 226.2--Definitions and
Rules of Construction, paragraph 2(a)(25) is amended by removing the
last two sentences of the second paragraph of paragraph 6.
    4. In Supplement I to Part 226, under Sec. 226.4--Finance Charge,
the following amendments are made:
    a. Under 4(a) Definition., paragraphs 3. and 4. are removed and
paragraphs 5. through 7. are redesignated as paragraphs 3. through 5.,
respectively, and new paragraphs 4(a)(1), 4 (a)(2), and 4(a)(3) are
added after the end of the text of 4(a);
    b. Under 4(b) Examples of finance charges., a new paragraph
4(b)(10) is added;
    c. Under 4(c) Charges excluded from the finance charge., under
paragraph 4(c)(5)., paragraph 2. is revised;
    d. Under 4(d), the heading is revised, and a new paragraph 4(d)(3)
is added; and
    e. Under 4(e) Certain security interest charges., paragraphs 1.i.
and 2. are revised.
    The additions and revisions read as follows:
* * * * *
Subpart A--General
* * * * *
Sec. 226.4--Finance Charge
    4(a) Definition.
* * * * *
    4(a)(1) Charges by third parties.
    1. Choosing the provider of a required service. An example of a
third-party charge included in the finance charge is the cost of
required mortgage insurance, even if the consumer is allowed to
choose the insurer.
    2. Annuities associated with reverse mortgages. Some creditors
offer annuities in connection with a reverse mortgage transaction.
The amount of the premium is a finance charge if the creditor
requires the purchase of the annuity incident to the credit.
Examples include the following:
    i. The credit documents reflect the purchase of an annuity from
a specific provider or providers.
    ii. The creditor assesses an additional charge on consumers who
do not purchase an annuity from a specific provider.
    iii. The annuity is intended to replace in whole or in part the
creditor's payments to the consumer either immediately or at some
future date.
    4(a)(2) Special rule; closing agent charges.
    1. General. This rule applies to charges by a third party
serving as the closing agent for the particular loan. An example of
a closing agent charge included in the finance charge is a courier
fee where the creditor requires the use of a courier.
    2. Required 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 imposition of the charge, or retains a portion of the
charge. Fees charged by a third-party closing agent may be otherwise
excluded from the finance charge under Sec. 226.4. For example, a
fee that would be paid in a comparable cash transaction may be
excluded under Sec. 226.4(a); a lump-sum fee for real-estate closing
costs may be excluded under Sec. 226.4(c)(7).
    4(a)(3) Special rule; mortgage broker fees.
    1. General. A fee charged by a mortgage broker is excluded from
the finance charge if it is the type of fee that is also excluded
when charged by the creditor. For example, to exclude an application
fee from the finance charge under Sec. 226.4(c)(1), a mortgage
broker must charge the fee to all applicants for credit, whether or
not credit is extended.
    2. Coverage. This rule applies to charges paid by consumers to a
mortgage broker in connection with a consumer credit transaction
secured by real property or a dwelling.
    3. Compensation by lender. The rule requires all mortgage broker
fees to be included in the finance charge. Creditors sometimes
compensate mortgage brokers under a separate arrangement with those
parties. Creditors may draw on amounts paid by the consumer, such as
points or closing costs, to fund their payment to the broker.
Compensation paid by a creditor to a mortgage broker under an
agreement is not included as a separate component of a consumer's
total finance charge (although this compensation may be reflected in
the finance charge if it comes from amounts paid by the consumer to
the creditor that are finance charges, such as points and interest).
    4(b) Examples of finance charges.
* * * * *
    4(b)(10) Debt cancellation fees.
    1. Definition. Debt cancellation coverage provides for payment
or satisfaction of all or part of a debt when a specified event
occurs. The term includes guaranteed automobile protection or
``GAP'' agreements, which pay or satisfy the remaining debt after
property insurance benefits are exhausted.
    4(c) Charges excluded from the finance charge.
* * * * *
    Paragraph 4(c)(5).
* * * * *
    2. Other seller-paid amounts. Mortgage insurance premiums and
other finance charges are sometimes paid at or before consummation
or settlement on the borrower's behalf by a noncreditor seller. The
creditor should treat the payment made by the seller as seller's
points and exclude it from the finance charge if, based on the
seller's payment, the consumer is not legally bound to the creditor
for the charge. A creditor who gives disclosures before the payment
has been made should base them on the best information reasonably
available.
* * * * *
    4(d) Insurance and debt cancellation coverage.
* * * * *
    4(d)(3) Voluntary debt cancellation fees.
    1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection
(``GAP'') agreements must be disclosed according to Sec. 226.4(d)(3)
rather than according to Sec. 226.4(d)(2) for property insurance.
    2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by
providing a disclosure that refers to debt cancellation coverage
whether or not the coverage is considered insurance. Creditors may
use the model credit insurance disclosures only if the debt
cancellation coverage constitutes insurance under state law.
    4(e) Certain security interest charges.
    1. Examples.
    i. Excludable charges. Sums must be actually paid to public
officials to be excluded from the finance charge under Sec. 226.4(e)
(1) and (3). Examples are charges or other fees required for filing
or recording security agreements, mortgages, continuation
statements, termination statements, and similar documents, as well
as intangible property or other taxes even when the charges or fees
are imposed by the state solely on the creditor and charged to the
consumer (if the tax must be paid to record a security interest).
(See comment 4(a)-5 regarding the treatment of taxes, generally.)
* * * * *
[[Page 10197]]
    2. Itemization. The various charges described in Sec. 226.4(e)
(1) and (3) may be totaled and disclosed as an aggregate sum, or
they may be itemized by the specific fees and taxes imposed. If an
aggregate sum is disclosed, a general term such as security interest
fees or filing fees may be used.
* * * * *
    5. In Supplement I to Part 226, under Sec. 226.5--General
Disclosure Requirements, under Paragraph 5(b)(2)(ii)., paragraph 3. is
revised to read as follows:
* * * * *
Subpart B--Open-End Credit
Sec. 226.5--General Disclosure Requirements
* * * * *
    5(b) Time of disclosures.
* * * * *
    5(b)(2) Periodic statements.
* * * * *
    Paragraph 5(b)(2)(ii).
* * * * *
    3. Calling for periodic statements. The creditor may permit
consumers to call for their periodic statements, but may not require
them to do so. If the consumer wishes to pick up the statement and
the plan has a free-ride period, the statement (including a
statement provided by electronic means) must be made available in
accordance with the 14-day rule.
* * * * *
    6. In Supplement I to Part 226, under Sec. 226.17--General
Disclosure Requirements, the following amendments are made:
    a. Under 17(c) Basis of disclosures and use of estimates., text is
added under paragraph 17(c)(2)(ii); and
    b. Under 17(f) Early disclosures., paragraphs 1. introductory text,
1.i., the last sentence of 1.ii. and 1.iii. are revised and a heading
is added to paragraph 1.ii; and a new paragraph 17(f)(2) is added
preceding 17(g).
    The additions and revisions read as follows:
* * * * *
Subpart C--Closed-End Credit
Sec. 226.17--General Disclosure Requirements
* * * * *
    17(c) Basis of disclosures and use of estimates.
* * * * *
    Paragraph 17(c)(2)(ii).
    1. Per-diem interest. This paragraph applies to any numerical
amount (such as the finance charge, annual percentage rate, or
payment amount) that is affected by the amount of the per-diem
interest charge that will be collected at consummation. If the
amount of per-diem interest used in preparing the disclosures for
consummation is based on the information known to the creditor at
the time the disclosure document is prepared, the disclosures are
considered accurate under this rule, and affected disclosures are
also considered accurate, even if the disclosures are not labeled as
estimates. For example, if the amount of per-diem interest used to
prepare disclosures is less than the amount of per-diem interest
charged at consummation, and as a result the finance charge is
understated by $200, the disclosed finance charge is considered
accurate even though the understatement is not within the $100
tolerance of Sec. 226.18(d)(1), and the finance charge was not
labeled as an estimate. In this example, if in addition to the
understatement related to the per-diem interest, a $90 fee is
incorrectly omitted from the finance charge, causing it to be
understated by a total of $290, the finance charge is considered
accurate because the $90 fee is within the tolerance in
Sec. 226.18(d)(1).
* * * * *
    17(f) Early disclosures.
    1. Change in rate or other terms. Redisclosure is required for
changes that occur between the time disclosures are made and
consummation if the annual percentage rate in the consummated
transaction exceeds the limits prescribed in this section, even if
the initial disclosures would be considered accurate under the
tolerances in Secs. 226.18(d) or 226.22(a). To illustrate:
    i. General. A. If disclosures are made in a regular transaction
on July 1, the transaction is consummated on July 15, and the actual
annual percentage rate varies by more than \1/8\ of 1 percentage
point from the disclosed annual percentage rate, the creditor must
either redisclose the changed terms or furnish a complete set of new
disclosures before consummation. Redisclosure is required even if
the disclosures made on July 1 are based on estimates and marked as
such.
    B. In a regular transaction, if early disclosures are marked as
estimates and the disclosed annual percentage rate is within \1/8\
of 1 percentage point of the rate at consummation, the creditor need
not redisclose the changed terms (including the annual percentage
rate).
    ii. Nonmortgage loan. * * * (See Sec. 226.18(d)(2) of this
part.)
    iii. Mortgage loan. At the time TILA disclosures are prepared in
July, the loan closing is scheduled for July 31 and the creditor
does not plan to collect per-diem interest at consummation.
Consummation actually occurs on August 5, and per-diem interest for
the remainder of August is collected as a prepaid finance charge.
Assuming there were no other changes requiring redisclosure, the
creditor may rely on the disclosures prepared in July that were
accurate when they were prepared. However, if the creditor prepares
new disclosures in August that will be provided at consummation, the
new disclosures must take into account the amount of the per-diem
interest known to the creditor at that time.
* * * * *
    Paragraph 17(f)(2).
    1. Irregular transactions. For purposes of this paragraph, a
transaction is deemed to be ``irregular'' according to the
definition in footnote 46 of Sec. 226.22(a)(3).
* * * * *
    7. In Supplement I to Part 226, under Sec. 226.18--Content of
Disclosures, the following amendments are made:
    a. Under 18(c) Itemization of amount financed., paragraph 4. is
revised;
    b. Under 18(d) Finance charge., a new paragraph 18(d)(2) is added;
and
    c. 18(n) is amended by revising the heading and adding a new
paragraph 2.
    The additions and revisions read as follows:
* * * * *
Sec. 226.18--Content of Disclosures
* * * * *
    18(c) Itemization of amount financed.
* * * * *
    4. RESPA transactions. The Real Estate Settlement Procedures Act
(RESPA) requires creditors to provide a good faith estimate of
closing costs and a settlement statement listing the amounts paid by
the consumer. Transactions subject to RESPA are exempt from the
requirements of Sec. 226.18(c) if the creditor complies with RESPA's
requirements for a good faith estimate and settlement statement. The
itemization of the amount financed need not be given, even though
the content and timing of the good faith estimate and settlement
statement under RESPA differ from the requirements of
Secs. 226.18(c) and 226.19(a)(2). If a creditor chooses to
substitute RESPA's settlement statement for the itemization when
redisclosure is required under Sec. 226.19(a)(2), the statement must
be delivered to the consumer at or prior to consummation. The
disclosures required by Secs. 226.18(c) and 226.19(a)(2) may appear
on the same page or on the same document as the good faith estimate
or the settlement statement, so long as the requirements of
Sec. 226.17(a) are met.
* * * * *
    18(d) Finance charge.
* * * * *
    18(d)(2) Other credit.
    1. Tolerance. When a finance charge error results in a
misstatement of the amount financed, or some other dollar amount for
which the regulation provides no specific tolerance, the misstated
disclosure does not violate the act or the regulation if the finance
charge error is within the permissible tolerance under this
paragraph.
* * * * *
    18(n) Insurance and debt cancellation.
* * * * *
    2. Debt cancellation. Creditors may use the model credit
insurance disclosures only if the debt cancellation coverage
constitutes insurance under state law. Otherwise, they may provide a
parallel disclosure that refers to debt cancellation coverage.
* * * * *
    8. In Supplement I to Part 226, under Sec. 226.19--Certain
Residential Mortgage and Variable-Rate Transactions, under 19(a)(2)
Redisclosure required., the first sentence of paragraph 1. is revised
to read as follows:
* * * * *
[[Page 10198]]
Sec. 226.19--Certain Residential Mortgage and Variable-Rate
Transactions
* * * * *
    Paragraph 19(a)(2) Redisclosure required.
    1. Conditions for redisclosure. Creditors must make new
disclosures if the annual percentage rate at consummation differs
from the estimate originally disclosed by more than \1/8\ of 1
percentage point in regular transactions or \1/4\ of 1 percentage
point in irregular transactions, as defined in footnote 46 of
Sec. 226.22(a)(3). * * *
* * * * *
    9. In Supplement I to Part 226, Sec. 226.22--Determination of the
Annual Percentage Rate, is amended by adding new paragraphs 22(a)(4)
and 22(a)(5) to read as follows:
* * * * *
Sec. 226.22--Determination of the Annual Percentage Rate
    22(a) Accuracy of the annual percentage rate.
* * * * *
    22(a)(4) Mortgage loans.
    1. Example. If a creditor improperly omits a $75 fee from the
finance charge on a regular transaction, the understated finance
charge is considered accurate under Sec. 226.18(d)(1), and the
annual percentage rate corresponding to that understated finance
charge also is considered accurate even if it falls outside the
tolerance of \1/8\ of 1 percentage point provided under
Sec. 226.22(a)(2). Because a $75 error was made, an annual
percentage rate corresponding to a $100 understatement of the
finance charge would not be considered accurate.
    22(a)(5) Additional tolerance for mortgage loans.
    1. Example. This paragraph contains an additional tolerance for
a disclosed annual percentage rate that is incorrect but is closer
to the actual annual percentage rate than the rate that would be
considered accurate under the tolerance in Sec. 226.22(a)(4). To
illustrate: in an irregular transaction subject to a \1/4\ of 1
percentage point tolerance, if the actual annual percentage rate is
9.00 percent and a $75 omission from the finance charge corresponds
to a rate of 8.50 percent that is considered accurate under
Sec. 226.22(a)(4), a disclosed APR of 8.65 percent is within the
tolerance in Sec. 226.22(a)(5). In this example of an understated
finance charge, a disclosed annual percentage rate below 8.50 or
above 9.25 percent will not be considered accurate.
* * * * *
    10. In Supplement I to Part 226, Sec. 226.23--Right of Rescission
is amended by adding new 23(g) and 23(h) preceding the References to
read as follows:
* * * * *
Sec. 226.23--Right of Rescission
* * * * *
    23(g) Tolerances for accuracy.
    23(g)(2) One percent tolerance.
    1. New advance. The phrase ``new advance'' has the same meaning
as in comment 23(f)-4.
    23(h) Special Rules for Foreclosures.
    1. Rescission. Section 226.23(h) applies only to transactions
that are subject to rescission under Sec. 226.23(a)(1).
    Paragraph 23(h)(1)(i).
    1. Mortgage broker fees. A consumer may rescind a loan in
foreclosure if a mortgage broker fee that should have been included
in the finance charge was omitted, without regard to the dollar
amount involved. If the amount of the mortgage broker fee is
included but misstated the rule in Sec. 226.23(h)(2) applies.
    23(h)(2) Tolerance for disclosures.
    1. General. This section is based on the accuracy of the total
finance charge rather than its component charges.
* * * * *
    11. In Supplement I to Part 226, under Sec. 226.31--General Rules,
the following amendments are made:
    a. Under Paragraph 31(c)(1) paragraph 1. is redesignated as
paragraph 1. under Paragraph 31(c)., and paragraph 2., under Paragraph
31 (c)(1) is redesignated as paragraph 1; and
    b. Under 31(d), a new paragraph 31(d)(3), is added.
    The revisions and additions read as follows:
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
Sec. 226.31--General Rules
* * * * *
    31(d) Basis of disclosures and use of estimates.
* * * * *
    31(d)(3) Per-diem interest.
    1. Per-diem interest. This paragraph applies to the disclosure
of any numerical amount (such as the finance charge, annual
percentage rate, or payment amount) that is affected by the amount
of the per-diem interest charge that will be collected at
consummation. If the amount of per-diem interest used in preparing
the disclosures for consummation is based on the information known
to the creditor at the time the disclosure document is prepared, the
disclosures are considered accurate under this rule, and affected
disclosures are also considered accurate, even if the disclosures
were not labeled as estimates. (See comment 17(c)(2)(ii)-1
generally.)
* * * * *
    12. In Supplement I to Part 226, under Sec. 226.32--Requirements
for Certain Closed-End Home Mortgages, the following amendments are
made:
    a. Under Paragraph 32(b)(1)(i)., paragraph 1. is revised; and
    b. Under Paragraph 32(c)(3)., a new paragraph 2. is added.
    The revisions and additions read as follows:
* * * * *
Sec. 226.32--Requirements for Certain Closed-End Home Mortgages
* * * * *
    32(b) Definitions.
    Paragraph 32(b)(1)(i).
    1. General. Section 226.32(b)(1)(i) includes in the total
``points and fees'' items defined as finance charges under
Secs. 226.4(a) and 226.(4)(b). Items excluded from the finance
charge under other provisions of Sec. 226.4 are not included in the
total ``points and fees'' under paragraph 32(b)(1)(i), but may be
included in ``points and fees'' under paragraphs 32(b)(1)(ii) and
32(b)(1)(iii). Interest, including per-diem interest, is excluded
from ``points and fees'' under Sec. 226.32(b)(1).
* * * * *
    32(c) Disclosures.
* * * * *
    Paragraph 32(c)(3) Regular payment.
* * * * *
    2. Balloon payments. If a loan with a term of five years or more
provides for a balloon payment, the balloon payment must be
disclosed. For a loan with a term of less than five years, a balloon
payment is prohibited.
* * * * *
    13. In Supplement I to Part 226, under Sec. 226.33--Requirements
for Reverse Mortgages, under Paragraph 33(a)(2), in paragraph 2., the
third and fourth sentences are revised and a new sentence is added at
the end of the paragraph to read as follows:
* * * * *
Sec. 226.33--Requirements for Reverse Mortgages
    33(a) Definition.
* * * * *
    Paragraph 33(a)(2).
* * * * *
    2. Definite term or maturity date. * * * An obligation may state
a definite maturity date or term of repayment and still meet the
definition of a reverse-mortgage transaction if the maturity date or
term of repayment used would not operate to cause maturity prior to
the occurrence of any of the maturity events recognized in the
regulation. For example, some reverse mortgage programs specify that
the final maturity date is the borrower's 150th birthday; other
programs include a shorter term but provide that the term is
automatically extended for consecutive periods if none of the other
maturity events has yet occurred. These programs would be
permissible.
* * * * *
    14. In Supplement I to Part 226, under Appendices G and H--Open-End
and Closed-End Model Forms and Clauses, a new paragraph 2. is added to
read as follows:
* * * * *
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
* * * * *
    2. Debt cancellation coverage. This regulation does not
authorize creditors to characterize debt cancellation fees as
insurance premiums for purposes of this regulation. Creditors may
provide a disclosure that refers to debt cancellation
[[Page 10199]]
coverage whether or not the coverage is considered insurance.
Creditors may use the model credit insurance disclosures only if the
debt cancellation coverage constitutes insurance under state law.
* * * * *
    15. In Supplement I to Part 226, under Appendix H--Closed-End Model
Forms and Clauses, a new sentence is added to the end of paragraph 11.
to read as follows:
* * * * *
Appendix H--Closed-End Model Forms and Clauses
* * * * *
    11. Models H-8 and H-9. * * * The prior version of model form H-
9 is substantially similar to the current version and creditors may
continue to use it, as appropriate. Creditors are encouraged,
however, to use the current version when reordering or reprinting
forms.
* * * * *
    By order of the Board of Governors of the Federal Reserve
System, acting through the Secretary of the Board under delegated
authority, February 28, 1997.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 97-5447 Filed 3-5-97; 8:45 am]
BILLING CODE 6210-01-P