[Federal Register Volume 62, Number 230 (Monday, December 1, 1997)]
[Rules and Regulations]
[Pages 63441-63447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31087]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0960]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board is publishing revisions to Regulation Z. The 
revisions implement an amendment to the Truth in Lending Act contained 
in the Economic Growth and Regulatory Paperwork Reduction Act of 1996 
affecting the disclosure of a fifteen-year historical example of rates 
and payments. The amendment applies to variable-rate loans with a term 
exceeding one year and secured by the consumer's principal dwelling. 
The amendment allows creditors to provide a statement that the periodic 
payment may substantially increase or decrease together with a maximum 
interest rate and payment based on a $10,000 loan amount, in lieu of 
having to provide a fifteen-year historical example of index values.

DATES: Effective date: This rule is effective November 21, 1997. 
Compliance date: Compliance is optional until October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Kyung H. Cho-Miller, Staff Attorney, 
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 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 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 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 credit transactions covered by TILA and Regulation Z fall into 
two categories--open- or closed-end credit transactions. Open-end 
credit is defined as a plan under which the creditor reasonably 
contemplates repeated transactions, which prescribes the terms of such 
transactions, and which provides for a finance charge that may be 
computed from time to time on the outstanding unpaid balance, for 
example, credit extended by means of a credit card (Sec. 226.2(a)(20)). 
Closed-end credit is defined as any credit arrangement that does not 
fall within the definition of open-end credit (Sec. 226.2(a)(10)). A 
mortgage loan with a fixed maturity date is an example of closed-end 
credit.

II. Regulatory Provisions

    Under Regulation Z, the timing and number of disclosures required 
for variable-rate loans vary depending on the term and security for the 
loan. For all variable-rate loans, disclosures are generally provided 
once--prior to consummation. However, if the loan exceeds a term of one 
year and is secured by the consumer's principal dwelling, creditors are 
required to provide disclosures at different times--a loan program 
disclosure when an application is received (or when a nonrefundable fee 
is paid, whichever occurs earlier), transaction-specific Truth in 
Lending disclosures prior to consummation, and disclosures subsequent 
to consummation when certain rate or payment changes occur. (See 
Regulation Z, 12 CFR 226.17(b), 18(f), 19, and 20(c).)
    Disclosures provided at application for a variable-rate mortgage 
include the Board-prescribed Consumer Handbook on Adjustable Rate 
Mortgages (or a comparable substitute) and a loan program disclosure 
for each variable-rate program in which the consumer has expressed 
interest. The loan program disclosure consists of twelve separate 
items, including information such as the identification of the index or 
formula to be used for adjustments and a fifteen-year historical 
example of how changes in the index values or formula used to compute 
interest rates would have affected the interest rates and payments on a 
$10,000 loan.
    On September 30, 1996, the Economic Growth and Regulatory Paperwork

[[Page 63442]]

Reduction Act of 1996 (Pub. L. 104-208, 110 Stat. 3009) (1996 
amendment) amended the TILA by providing creditors the option to give a 
statement that the periodic payments may increase or decrease 
substantially together with the maximum interest rate and payment 
amount for a $10,000 loan amount in lieu of having to give the fifteen-
year historical example.
    The Board issued a proposal in January 1997 (62 FR 5183, Feb. 4, 
1997). Sixty-nine comments were received. Based on comments and further 
analysis, the Board has adopted a final rule that implements the 
statutory changes. The final rule is discussed in detail in the 
section-by-section analysis below.

III. Section-by-Section Analysis

Subpart A--General

Section 226.19--Certain Residential Mortgage Transactions
    19(b) Certain variable-rate transactions. Section 226.19(b) 
requires the historical example disclosure for loans exceeding a term 
of one year that are secured by a consumer's principal dwelling and in 
which the APR may increase after consummation (such as when the rate is 
tied to an index). The 1996 amendment refers to ``residential mortgage 
transactions'' to identify when the alternative disclosure option is 
available, but does not explicitly limit application of the alternative 
disclosure to loans that exceed a term of one year. ``Residential 
mortgage transaction'' is defined in Regulation Z (Sec. 226.2(a)(24)) 
as credit secured by the consumer's principal dwelling to finance the 
acquisition or initial construction of that dwelling. Under this 
definition, the alternative disclosure option would not extend to 
refinance and second-mortgage transactions. The Board believes that the 
amendment was intended to apply to loans where the fifteen-year 
historical example is currently required, namely loans that exceed one 
year and are secured by the consumer's principal dwelling. Accordingly, 
the Board proposed to apply the alternative disclosure option to 
variable-rate loans with a term greater than one year and secured by 
the consumer's principal dwelling.
    The majority of commenters strongly supported the Board's proposal 
to apply the amendment to loans where the fifteen-year historical 
example is currently required. Those commenters stated that an 
interpretation to apply the amendment only to ``residential mortgage 
transactions''--primarily purchase-money mortgages--would result in 
increased regulatory burden on creditors by requiring two sets of 
disclosures.
    The Board believes that the Congress did not intend to limit the 
flexibility in the 1996 amendment to purchase-money transactions nor to 
apply the provision to loans that do not currently require the 
historical example. The Board believes that the Congress intended to 
provide this option to all credit transactions secured by the 
consumer's principal dwelling, given that the committee report to the 
1996 amendment broadly states the alternative disclosure option would 
be available to lenders in consumer credit transactions under closed-
end plans. Pursuant to its authority under section 105(a) of the TILA, 
the Board has adopted a final rule that makes the alternative 
disclosure option available for any close-end credit transactions where 
the term exceeds one year and is secured by the consumer's dwelling. 
Section 105(a) provides that the Board's regulations ``may contain such 
classifications, differentiations, or other provisions, and may provide 
for such adjustments and exceptions for any class of transactions, as 
in the judgment of the Board are necessary or proper to effectuate the 
purposes of [the TILA], to prevent circumvention or evasion thereof, or 
to facilitate compliance therewith.''
    Paragraph 19(b)(2)(viii) currently sets forth the required 
historical example based on a $10,000 loan amount and paragraph 
19(b)(2)(x) the required disclosure of the maximum interest rate and 
payment for a $10,000 loan amount. The proposal revised paragraph 
19(b)(2)(viii) to set forth the historical example requirements in 
paragraph 19(b)(2)(viii)(A); and incorporated the substance of 
paragraph 19(b)(2)(x) on the maximum interest rate and payment 
disclosure in paragraph 19(b)(2)(viii)(B). If the creditor chose to 
disclose the maximum interest rate and payment in lieu of a historical 
example, a statement that the periodic payment may increase or decrease 
substantially must accompany the rate and payment amount. The proposal 
provided that the statement requirement may be satisfied by providing 
the disclosure required by paragraph 19(b)(2)(vi) that states, for 
example, ``your monthly payment can increase or decrease substantially 
based on annual changes in the interest rate.''
    A question was raised about whether the proposed wording would 
allow creditors to provide both the historical example and the maximum 
interest rate and payment. The Board believes that the 1996 amendment 
allows creditors to substitute the maximum interest rate and payment 
for the historical example or to provide both disclosures. The 
commentary to paragraph 19(b)(2)(viii) has been revised accordingly. 
The commentary to paragraph 19(b)(2)(viii)(B) provides that the 
statement that must accompany the maximum rate and payment disclosure 
is not separately required if a similar disclosure is made pursuant to 
the requirement in paragraph 19(b)(2)(vi).
    Regulation Z currently requires creditors to disclose a maximum 
interest rate using the most recent interest rate shown in the 
historical example. Because creditors are not required to provide the 
historical example under the 1996 amendments, creditors instead must 
use a ``recent'' interest rate as determined by the Board. The Board 
proposed to require creditors to calculate the maximum rate and payment 
based on an initial rate that was in effect within one year of the 
disclosure. A more frequent basis for updating the index or formula 
would place greater burden on creditors than currently exists under the 
regulation, whereas the Congress intended to reduce burden with the 
alternative. The Board solicited comment on whether there are 
circumstances in which the consumer benefit from updating the initial 
interest rate more frequently than annually would outweigh the 
compliance burden of producing the disclosures more frequently.
    The majority of the commenters supported the proposal to base the 
maximum rate and payment on an interest rate in effect within one year 
of the disclosure. They believed that this was consistent with the 
current requirement regarding revisions to the historical example. 
Several commenters observed, however, that the proposed language would 
require creditors to update the maximum rate and payment twice a year 
and suggested adopting one of the timing rules already applicable to 
variable-rate transactions under Sec. 226.19(b)(2). For example, the 
timing rules for revising the loan program disclosure in comment 
19(b)(2)-5 permit creditors to update once a year, as soon as 
reasonably possible after the new index value becomes available. 
Similarly, comments 19(b)(2)(viii)-3 and -4 allow disclosures to use a 
margin or discount or premium used during the six months preceding 
preparation of the disclosures. Based on these comments and further 
analysis, the staff has revised the draft rule for determining the 
initial interest rate that will be used for the maximum rate and 
payment disclosure; it defines the initial interest rate as one in 
effect as of an identified month and year for the particular loan 
program. The final rule eliminates any

[[Page 63443]]

requirement for creditors to update the maximum rate and payment 
disclosure more frequently than the loan program disclosure.
    Commenters asked for clarification on whether the amount of a 
recent discount or premium is reflected in the alternative disclosure. 
Several commenters requested general clarification on how the initial 
rate was derived. Several commenters also suggested that all references 
to ``the most recent rate'' be deleted since it implies that creditors 
must continually update the information. Several commenters questioned 
whether an explanation of how the consumer may calculate the payments 
for the loan amount to be borrowed would be required absent the 
historical example.
    Based on comments and further analysis, the Board believes that the 
initial and maximum interest rates and payments should reflect any 
offered discount or premium in order to reduce consumer confusion. 
References to ``the most recent rate'' have been deleted and replaced 
by ``initial interest rate.'' A definition of the ``initial interest 
rate'' is provided and clarifies that it is based on the index plus 
margin, adjusted by the amount of any discount or premium.
    Since the maximum rate and payment is based on a $10,000 loan 
amount, the Board believes that an explanation on how to calculate the 
payments for another loan amount would allow consumers to better 
understand the relationship of the maximum rate and payment disclosure 
to their particular transaction without placing undue burden on the 
creditors. Section 226.19(b)(2)(ix) has been revised to require the 
explanation under either alternative.

Appendix H to Part 226--Closed-end Model Forms and Clauses

    The sample clauses and model forms to appendix H-4 and H-14 have 
been revised in response to comments.

Supplement I--Official Staff Interpretation

    Revisions have been made to the Official Staff Commentary to 
conform with the amendments to Regulation Z.

IV. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 603), the Board's Office of the Secretary has reviewed the 
amendments to Regulation Z. Overall, the amendments are not expected to 
have any significant impact on small entities. The regulatory revisions 
required to implement the 1996 amendment reduce the number of 
disclosures required for variable-rate mortgages and ease compliance by 
providing creditors with the option of disclosing either a fifteen-year 
historical example or a maximum payment example.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.), the Board has reviewed the final rule under the 
authority delegated to the Board by the Office of Management and 
Budget. 5 CFR part 1320, Appendix A.1.
    The respondents are individuals or businesses that regularly offer 
or extend consumer credit. The purpose of the TILA and Regulation Z is 
to promote the informed use of consumer credit by requiring creditors 
to disclose its terms and cost. Records must be retained by creditors 
for 24 months. The disclosure requirements revised by this final rule 
are found in 12 CFR 226.19 and part 226, appendix H.
    The Board's Regulation Z applies to all types of creditors, not 
just state member banks. For purposes of the Paperwork Reduction Act, 
however, the Federal Reserve accounts for the paperwork burden 
associated with Regulation Z disclosures only for state member banks. 
The estimates of paperwork burden for institutions other than state 
member banks are provided by the federal agency or agencies that 
supervise those lenders.
    The final rule is expected to decrease the ongoing annual burden of 
Regulation Z. There are 1,014 state member banks, making an estimated 
5,750 closed-end credit disclosures each year on average, at 6.5 
minutes per disclosure. The proportion of such loans that are mortgages 
with an adjustable rate is estimated to be small. It is estimated that 
the combined annual burden for state member banks under Regulation Z 
will decrease by approximately 10,000 burden hours to an average 6.4 
minutes per disclosure. The Federal Reserve estimates an associated 
start-up cost of $160 per respondent to replace the fifteen-year 
historical example with the maximum rate and payment example. No 
comments specifically addressing the burden estimate were received.
    The disclosures made by creditors to consumers under Regulation Z 
are mandatory. Since the Federal Reserve does not collect any 
information, no issue of confidentiality arises. Disclosures relating 
to specific transactions or accounts are not publicly available.
    The Federal Reserve may not conduct or sponsor, and an organization 
is not required to respond to, an information collection unless it 
displays a currently valid OMB control number. The OMB control number 
for Regulation Z is 7100-0199.
    The Federal Reserve has a continuing interest in the public's 
opinion regarding collections of information. Members of the public may 
submit comments, at any time, regarding the burden estimate or any 
other aspect of this collection of information, including suggestions 
for reducing the burden. Comments may be sent to: Secretary, Board of 
Governors of the Federal Reserve System, 20th and C Streets, N.W., 
Washington, DC 20551; and to the Office of Management and Budget, 
Paperwork Reduction Project (7100-0199), Washington, DC 20503.

List of Subjects in 12 CFR Part 226

    Advertising, 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. Section 226.19 is amended by:
    a. Republishing the introductory text of paragraph (b)(2);
    b. Revising paragraph (b)(2)(viii);
    c. Revising paragraph (b)(2)(ix);
    d. Removing paragraph (b)(2)(x); and
    e. Paragraphs (b)(2)(xi), (b)(2)(xii), and (b)(2)(xiii) are 
redesignated as paragraphs (b)(2)(x), (b)(2)(xi) and (b)(2)(xii) 
respectively.
    The revisions read as follows:


Sec. 226.19  Certain residential mortgage and variable-rate 
transactions.

* * * * *
    (b) Certain variable-rate transactions. * * *
* * * * *
    (2) A loan program disclosure for each variable-rate program in 
which the consumer expresses an interest. The following disclosures, as 
applicable, shall be provided:
* * * * *
    (viii) At the option of the creditor, either of the following:
    (A) A historical example, based on a $10,000 loan amount, 
illustrating how payments and the loan balance would have been affected 
by interest rate changes implemented according to the terms of the loan 
program disclosure. The example shall reflect the most recent 15 years 
of index values. The example shall reflect all significant loan

[[Page 63444]]

program terms, such as negative amortization, interest rate carryover, 
interest rate discounts, and interest rate and payment limitations, 
that would have been affected by the index movement during the period.
    (B) The maximum interest rate and payment for a $10,000 loan 
originated at the initial interest rate (index value plus margin, 
adjusted by the amount of any discount or premium) in effect as of an 
identified month and year for the loan program disclosure assuming the 
maximum periodic increases in rates and payments under the program; and 
the initial interest rate and payment for that loan and a statement 
that the periodic payment may increase or decrease substantially 
depending on changes in the rate.
    (ix) An explanation of how the consumer may calculate the payments 
for the loan amount to be borrowed based on either:
    (A) The most recent payment shown in the historical example in 
paragraph (b)(2)(viii)(A) of this section; or
    (B) The initial interest rate used to calculate the maximum 
interest rate and payment in paragraph (b)(2)(viii)(B) of this section.
* * * * *
    3. In part 226, Appendix H is amended by revising the appendix 
heading, H-4(C) Variable-Rate Model Clauses, and H-14 Variable-Rate 
Mortgage Sample to read as follows:

Appendix H to Part 226--Closed-end Model Forms and Clauses

* * * * *

H-4(C)--Variable-Rate Model Clauses

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.

How Your Interest Rate and Payment Are Determined

    <bullet> Your interest rate will be based on [an index plus a 
margin] [a formula].
    <bullet> Your payment will be based on the interest rate, loan 
balance, and loan term.
--[The interest rate will be based on (identification of index) plus 
our margin. Ask for our current interest rate and margin.]
--[The interest rate will be based on (identification of formula). 
Ask us for our current interest rate.]
--Information about the index [formula for rate adjustments] is 
published [can be found] ________________.
--[The initial interest rate is not based on the (index) (formula) 
used to make later adjustments. Ask us for the amount of current 
interest rate discounts.]

How Your Interest Rate Can Change

    <bullet> Your interest rate can change (frequency).
    <bullet> [Your interest rate cannot increase or decrease more 
than ______ percentage points at each adjustment.]
    <bullet> Your interest rate cannot increase [or decrease] more 
than ______ percentage points over the term of the loan.

How Your Payment Can Change

    <bullet> Your payment can change (frequency) based on changes in 
the interest rate.
    <bullet> [Your payment cannot increase more than (amount or 
percentage) at each adjustment.]
    <bullet> You will be notified in writing ________ days before 
the due date of a payment at a new level. This notice will contain 
information about your interest rates, payment amount, and loan 
balance.
    <bullet> [You will be notified once each year during which 
interest rate adjustments, but no payment adjustments, have been 
made to your loan. This notice will contain information about your 
interest rates, payment amount, and loan balance.]
    <bullet> [For example, on a $10,000 [term] loan with an initial 
interest rate of ________ [(the rate shown in the interest rate 
column below for the year 19 ________)] [(in effect (month) (year)], 
the maximum amount that the interest rate can rise under this 
program is ________ percentage points, to ________%, and the monthly 
payment can rise from a first-year payment of $________ to a maximum 
of $________ in the __________ year. To see what your payments would 
be, divide your mortgage amount by $10,000; then multiply the 
monthly payment by that amount. (For example, the monthly payment 
for a mortgage amount of $60,000 would be: $60,000 <divide> $10,000 
= 6; 6  x  ________ = $________ per month.)]

Example

    The example below shows how your payments would have changed 
under this ARM program based on actual changes in the index from 
1982 to 1996. This does not necessarily indicate how your index will 
change in the future.
    The example is based on the following assumptions:

                                                                        
                                                                        
                                                                        
Amount...................................  $10,000                      
Term.....................................  __________                   
Change date..............................  __________                   
Payment adjustment.......................  (frequency)                  
Interest adjustment......................  (frequency)                  
[Margin] *...............................  __________                   
Caps ________ [periodic interest rate cap]                              
     ________ [lifetime interest rate cap                               
     ________ [payment cap]                                             
[Interest rate carryover]                                               
[Negative amortization]                                                 
[Interest rate discount] **                                             
Index.......(identification of index or formula)                        
                                                                        
                                                                        
* This is a margin we have used recently, your margin may be different. 
** This is the amount of a discount we have provided recently; your loan
  may be discounted by a different amount.]                             


----------------------------------------------------------------------------------------------------------------
                                                             Margin                                             
                   Year                       Index (%)    (Percentage    Interest       Monthly      Remaining 
                                                             points)      Rate (%)     Payment ($)   Balance ($)
----------------------------------------------------------------------------------------------------------------
1982......................................  ............  ............  ............  ............  ............
1983......................................  ............  ............  ............  ............  ............
1984......................................  ............  ............  ............  ............  ............
1985......................................  ............  ............  ............  ............  ............
1986......................................  ............  ............  ............  ............  ............
1987......................................  ............  ............  ............  ............  ............
1988......................................  ............  ............  ............  ............  ............
1989......................................  ............  ............  ............  ............  ............
1990......................................  ............  ............  ............  ............  ............
1991......................................  ............  ............  ............  ............  ............
1992......................................  ............  ............  ............  ............  ............
1993......................................  ............  ............  ............  ............  ............
1994......................................  ............  ............  ............  ............  ............
1995......................................  ............  ............  ............  ............  ............
1996......................................  ............  ............  ............  ............  ............
----------------------------------------------------------------------------------------------------------------
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
  multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount  
  of $60,000 taken out in 1982 would be: $60,000<divide>$10,000=6; 6 x ________=$________ per month.)           


[[Page 63445]]

* * * * *

H-14--Variable-Rate Mortgage Sample

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.

How Your Interest Rate and Payment Are Determined

    <bullet> Your interest rate will be based on an index rate plus 
a margin.
    <bullet> Your payment will be based on the interest rate, loan 
balance, and loan term.

--The interest rate will be based on the weekly average yield on 
United States Treasury securities adjusted to a constant maturity of 
1 year (your index), plus our margin. Ask us for our current 
interest rate and margin.
--Information about the index rate is published weekly in the Wall 
Street Journal.
    <bullet> Your interest rate will equal the index rate plus our 
margin unless your interest rate ``caps'' limit the amount of change 
in the interest rate.

How Your Interest Rate Can Change

    <bullet> Your interest rate can change yearly.
    <bullet> Your interest rate cannot increase or decrease more 
than 2 percentage points per year.
    <bullet> Your interest rate cannot increase or decrease more 
than 5 percentage points over the term of the loan.

How Your Monthly Payment Can Change

    <bullet> Your monthly payment can increase or decrease 
substantially based on annual changes in the interest rate.
    <bullet> [For example, on a $10,000, 30-year loan with an 
initial interest rate of 12.41 percent in effect in July 1996, the 
maximum amount that the interest rate can rise under this program is 
5 percentage points, to 17.41 percent, and the monthly payment can 
rise from a first-year payment of $106.03 to a maximum of $145.34 in 
the fourth year. To see what your payment is, divide your mortgage 
amount by $10,000; then multiply the monthly payment by that amount. 
(For example, the monthly payment for a mortgage amount of $60,000 
would be: $60,000<divide>$10,000=6; 6 x 106.03=$636.18 per month.)
    <bullet> You will be notified in writing 25 days before the 
annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan 
balance.]

[Example

    The example below shows how your payments would have changed 
under this ARM program based on actual changes in the index from 
1982 to 1996. This does not necessarily indicate how your index will 
change in the future. The example is based on the following 
assumptions:

Amount...................................  $10,000                      
Term.....................................  30 years                     
Payment adjustment.......................  1 year                       
Interest adjustment......................  1 year                       
Margin...................................  3 percentage points          
Caps________ 2 percentage points annual interest rate                   
    ________ 5 percentage points lifetime interest rate                 
Index________ Weekly average yield on U.S. Treasury securities adjusted 
 to a constant maturity of one year.                                    
                                                                        


----------------------------------------------------------------------------------------------------------------
                                                             Margin*                                            
   Year (as of 1st week ending in July)       Index (%)    (percentage    Interest       Monthly      Remaining 
                                                             points)      Rate (%)     Payment ($)   Balance ($)
----------------------------------------------------------------------------------------------------------------
1982......................................         14.41             3         17.41        145.90      9,989.37
1983......................................          9.78             3       **15.41        129.81      9,969.66
1984......................................         12.17             3         15.17        127.91      9,945.51
1985......................................          7.66             3       **13.17        112.43      9,903.70
1986......................................          6.36             3      ***12.41        106.73      9,848.94
1987......................................          6.71             3      ***12.41        106.73      9,786.98
1988......................................          7.52             3      ***12.41        106.73      9,716.88
1989......................................          7.97             3       **12.41        106.73      9,637.56
1990......................................          8.06             3      ***12.41        106.73      9,547.83
1991......................................          6.40             3      ***12.41        106.73      9,446.29
1992......................................          3.96             3      ***12.41        106.73      9,331.56
1993......................................          3.42             3      ***12.41        106.73      9,201.61
1994......................................          5.47             3      ***12.41        106.73      9,054.72
1995......................................          5.53             3      ***12.41        106.73      8,888.52
1996......................................          5.82             3      ***12.41        106.73     8,700.37 
----------------------------------------------------------------------------------------------------------------
*This is a margin we have used recently; your margin may be different.                                          
**This interest rate reflects a 2 percentage point annual interest rate cap.                                    
***This interest rate reflects a 5 percentage point lifetime interest rate cap.                                 
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
  multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount  
  of $60,000 taken out in 1982 would be: $60,000<divide>$10,000=6; 6 x $106.73=$640.38.)                        

    <bullet> You will be notified in writing 25 days before the annual 
payment adjustment may be made. This notice will contain information 
about your interest rates, payment amount and loan balance.]
* * * * *
    4. In Supplement I to Part 226, under Section 226.19--Certain 
Residential Mortgage and Variable-Rate Transactions, under paragraph 
19(b) Certain variable-rate transactions, the following amendments are 
made:
    a. Paragraph 2, under the heading ``Paragraph 19(b)(2)'', is 
revised.
    b. Paragraph 1, under the heading ``Paragraph 19(b)(2)(v)'', is 
revised.
    c. The heading ``Paragraph 19(b)(2)(viii)'' is revised to read 
``Paragraph 19(b)(2)(viii)(A)''.
    d. A new heading ``Paragraph 19(b)(2)(viii)'' and a new paragraph 1 
is added below the new heading, and both are transferred immediately 
preceding ``Paragraph 19(b)(2)(viii)(A).''
    e. The heading ``Paragraph 19(b)(2)(x)'' is revised to read 
``Paragraph 19(b)(2)(viii)(B)'' and the paragraph heading and text are 
transferred immediately preceding the heading ``Paragraph 
19(b)(2)(ix).''
    f. Paragraphs 1 and 2, under the heading ``Paragraph 
19(b)(2)(viii)(B)'' are revised and a new paragraph 5 is added.
    g. Paragraph 1, under the heading ``Paragraph 19(b)(2)(ix)'' is 
revised.
    h. The heading ``Paragraph 19(b)(2)(xi)'' is revised to read 
``Paragraph 19(b)(2)(x).''
    i. The heading ``Paragraph 19(b)(2)(xii)'' is revised to read 
``Paragraph 19(b)(2)(xi).''
    j. The heading ``Paragraph 19(b)(2)(xiii)'' is revised to read 
``Paragraph 19(b)(2)(xii).''
    The revisions and additions read as follows:

[[Page 63446]]

Supplement 1 to Part 226--Official Staff Interpretations

* * * * *

Section 226.19--Certain Residential Mortgage Transactions.

* * * * *

19(b) Certain variable-rate transactions.

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Paragraph 19(b)(2).

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    2. Variable-rate loan program defined. i. Generally, if the 
identification, the presence or absence, or the exact value of a 
loan feature must be disclosed under this section, variable-rate 
loans that differ as to such features constitute separate loan 
programs. For example, separate loan programs would exist based on 
differences in any of the following loan features:
    A. The index or other formula used to calculate interest rate 
adjustments.
    B. The rules relating to changes in the index value, interest 
rate, payments, and loan balance.
    C. The presence or absence of, and the amount of, rate or 
payment caps.
    D. The presence of a demand feature.
    E. The possibility of negative amortization.
    F. The possibility of interest rate carryover.
    G. The frequency of interest rate and payment adjustments.
    H. The presence of a discount feature.
    I. In addition, if a loan feature must be taken into account in 
preparing the disclosures required by Sec. 226.19(b)(2)(viii), 
variable-rate loans that differ as to that feature constitute 
separate programs under Sec. 226.19(b)(2).
    ii. If, however, a representative value may be given for a loan 
feature or the feature need not be disclosed under 
Sec. 226.19(b)(2), variable-rate loans that differ as to such 
features do not constitute separate loan programs. For example, 
separate programs would not exist based on differences in the 
following loan features:
    A. The amount of a discount.
    B. The amount of a margin.
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Paragraph 19(b)(2)(v).

    1. Discounted and premium interest rate. In some variable-rate 
transactions, creditors may set an initial interest rate that is not 
determined by the index or formula used to make later interest rate 
adjustments. Typically, this initial rate charged to consumers is 
lower than the rate would be if it were calculated using the index 
or formula. However, in some cases the initial rate may be higher. 
If the initial interest rate will be a discount or a premium rate, 
creditors must alert the consumer to this fact. For example, if a 
creditor discounted a consumer's initial rate, the disclosure might 
state, ``Your initial interest rate is not based on the index used 
to make later adjustments.'' (See the commentary to 
Sec. 226.17(c)(1) for a further discussion of discounted and premium 
variable-rate transactions.) In addition, the disclosure must 
suggest that consumers inquire about the amount that the program is 
currently discounted. For example, the disclosure might state, ``Ask 
us for the amount our adjustable rate mortgages are currently 
discounted.'' In a transaction with a consumer buydown or with a 
third-party buydown that will be incorporated in the legal 
obligation, the creditor should disclose the program as a discounted 
variable-rate transaction, but need not disclose additional 
information regarding the buydown in its program disclosures. (See 
the commentary to Sec. 226.19(b)(2)(viii) for a discussion of how to 
reflect the discount or premium in the historical example or the 
maximum rate and payment disclosure).
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Paragraph 19(b)(2)(viii).

    1. Historical example and initial and maximum interest rates and 
payments. A creditor may disclose both the historical example and 
the initial and maximum interest rates and payments.

Paragraph 19(b)(2)(viii)(A).

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Paragraph 19(b)(2)(viii)(B).

    1. Initial and maximum interest rates and payments. The 
disclosure form must state the initial and maximum interest rates 
and payments for a $10,000 loan originated at an initial interest 
rate (index value plus margin adjusted by the amount of any discount 
or premium) in effect as of an identified month and year for the 
loan program disclosure. (See comment 19(b)(2)-5 on revisions to the 
loan program disclosure.) In calculating the maximum payment under 
this paragraph, a creditor should assume that the interest rate 
increases as rapidly as possible under the loan program, and the 
maximum payment disclosed should reflect the amortization of the 
loan during this period. Thus, in a loan with 2 percentage point 
annual (and 5 percentage point overall) interest rate limitations or 
``caps,'' the maximum interest rate would be 5 percentage points 
higher than the initial interest rate disclosed. Moreover, the loan 
would not reach the maximum interest rate until the fourth year 
because of the 2 percentage point annual rate limitations, and the 
maximum payment disclosed would reflect the amortization of the loan 
during this period. If the loan program includes a discounted or 
premium initial interest rate, the initial interest rate should be 
adjusted by the amount of the discount or premium.
    2. Term of the loan. In calculating the initial and maximum 
payments, the creditor need not base the disclosures on each term to 
maturity or payment amortization offered under the program. Instead, 
the creditor may follow the rules set out in comment 
19(b)(2)(viii)(A)-5.
    If a historical example is provided under 
Sec. 226.19(b)(2)(viii)(A), the terms to maturity or payment 
amortization used in the historical example must be used in calculating 
the initial and maximum payment. In addition, creditors must state the 
term or payment amortization used in making the disclosures under this 
section.
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    5. Periodic payment statement. The statement that the periodic 
payment may increase or decrease substantially may be satisfied by the 
disclosure in paragraph 19(b)(2)(vi) if it states for example, ``your 
monthly payment can increase or decrease substantially based on annual 
changes in the interest rate.''

Paragraph 19(b)(2)(ix).

    1. Calculation of payments. A creditor is required to include a 
statement on the disclosure form that explains how a consumer may 
calculate his or her actual monthly payments for a loan amount other 
than $10,000. The example should be based upon the most recent payment 
shown in the historical example or upon the initial interest rate 
reflected in the maximum rate and payment disclosure. In transactions 
in which the latest payment shown in the historical example is not for 
the latest year of index values shown (such as in a five-year loan), a 
creditor may provide additional examples based on the initial and 
maximum payments disclosed under Sec. 226.19(b)(2)(viii)(B). The 
creditor, however, is not required to calculate the consumer's 
payments. (See the model clauses in appendix H-4(C).)

Paragraph 19(b)(2)(x).

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Paragraph 19(b)(2)(xi).

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Paragraph 19(b)(2)(xii).

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    5. In Supplement I to Part 226, under paragraph heading Paragraph 
19(b)(2)(viii)(A), all references in paragraphs 3 and 4 to 
``Sec. 226.19(b)(2)(viii)'' are revised to read 
``Sec. 226.19(b)(2)(viii)(A)''.
    6. In Supplement I to Part 226, under paragraph heading Paragraph 
19(b)(2)(viii)(A), in paragraphs 6 and 7 the words ``comment 
19(b)(2)(x)'' are revised to read ``comment 19(b)(2)(viii)(B)'' each 
place they appear.
    7. In Supplement I to Part 226, under paragraph heading Paragraph 
19(b)(2)(viii)(B), in paragraphs 2, 3, and 4 the words ``comment 
19(b)(2)(viii)'' are revised to read ``comment 19(b)(2)(viii)(A)'' each 
place they appear.
    8. In Supplement I to Part 226, Appendix H--Closed-End Model Forms 
and Clauses, Paragraphs 6 and 18, are revised to read as follows:
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Appendix H--Closed-End Model Forms and Clauses

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[[Page 63447]]

    6. Model H-4(C). This model clause illustrates the early 
disclosures required generally under Sec. 226.19(b). It includes 
information on how the consumer's interest rate is determined and 
how it can change over the term of the loan, and explains changes 
that may occur in the borrower's monthly payment. It contains an 
example of how to disclose historical changes in the index or 
formula values used to compute interest rates for the preceding 15 
years. The model clause also illustrates the disclosure of the 
initial and maximum interest rates and payments based on an initial 
interest rate (index value plus margin, adjusted by the amount of 
any discount or premium) in effect as of an identified month and 
year for the loan program disclosure and illustrates how to provide 
consumers with a method for calculating the monthly payment for the 
loan amount to be borrowed.
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    18. Sample H-14. This sample disclosure form illustrates the 
disclosures under Sec. 226.19(b) for a variable-rate transaction 
secured by the consumer's principal dwelling with a term greater 
than one year. The sample form shows a creditor how to adapt the 
model clauses in Appendix H-4(C) to the creditor's own particular 
variable-rate program. The sample disclosure form describes the 
features of a specific variable-rate mortgage program and alerts the 
consumer to the fact that information on the creditor's other 
closed-end variable-rate programs is available upon request. It 
includes information on how the interest rate is determined and how 
it can change over time. Section 226.19(b)(2)(viii) permits 
creditors the option to provide either a historical example or an 
initial and maximum interest rates and payments disclosure; both are 
illustrated in the sample disclosure. The historical example 
explains how the monthly payment can change based on a $10,000 loan 
amount, payable in 360 monthly installments, based on historical 
changes in the values for the weekly average yield on U.S. Treasury 
Securities adjusted to a constant maturity of one year. Index values 
are measured for 15 years, as of the first week ending in July. This 
reflects the requirement that the index history be based on values 
for the same date or period each year in the example. The sample 
disclosure also illustrates the alternative disclosure under 
Sec. 226.19(b)(2)(viii)(B) that the initial and the maximum interest 
rates and payments be shown for a $10,000 loan originated at an 
initial interest rate of 12.41 percent (which was in effect July 
1996) and to have 2 percentage point annual (and 5 percentage point 
overall) interest rate limitations or caps. Thus, the maximum amount 
that the interest rate could rise under this program is 5 percentage 
points higher than the 12.41 percent initial rate to 17.41 percent, 
and the monthly payment could rise from $106.03 to a maximum of 
$145.34. The loan would not reach the maximum interest rate until 
its fourth year because of the 2 percentage point annual rate 
limitations, and the maximum payment disclosed reflects the 
amortization of the loan during that period. The sample form also 
illustrates how to provide consumers with a method for calculating 
their actual monthly payment for a loan amount other than $10,000.
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    By order of the Board of Governors of the Federal Reserve 
System, November 21, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-31087 Filed 11-28-97; 8:45 am]
BILLING CODE 6210-01-P