Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 64769

standards, as set forth in the PR/HACCP

final rule, have been suggested.

Although there is not yet an applicable

Salmonella standard for turkeys,

commenters are free to suggest a

practicable standard for use in gathering

data on turkeys under the protocols here

suggested. Commenters are also free to

suggest the use of other microbiological

targets, such as a standard for reduction

in generic E. coli counts or reductions

in numbers of other microorganisms.

Finally, the protocol should describe

the testing methods to be employed both

for measuring water absorption and

retention and for sampling and testing

product for pathogen reductions. With

respect to the latter, FSIS recommends

the methods to be used for E. coli and

Salmonella testing under the PR/

HACCP final rule. The number of

samples, the type of samples, the

sampling time period and the type of

testing or measurement should be

included in the protocol. There also

should be a provision for reporting data

obtained, summarizing the results and

drawing conclusions.

FSIS requests that interested parties

submit their comments on the foregoing

protocol specifications at their earliest

opportunity, and preferably by the date

indicated in the DATES section of this

document. Should FSIS decide to issue

a notice of proposed rulemaking on

retained moisture, sound, readily

available data will be needed during the

comment period to avoid a protracted

rulemaking.

Done at Washington, DC: December 3,

1997.

Thomas J. Billy,

Administrator, Food Safety Inspection

Service.

[FR Doc. 97–32193 Filed 12–8–97; 8:45 am]

BILLING CODE 3410–DM–P

FEDERAL RESERVE SYSTEM

12 CFR 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

comment proposed revisions to the

official staff commentary to Regulation

Z (Truth in Lending). The commentary

applies and interprets the requirements

of Regulation Z. The proposed update

addresses increased rates for credit card

accounts triggered by events such as late

payments or exceeding credit limits. It

provides guidance on ‘‘same-as-cash’’

transactions in open-end plans. It also

addresses how creditors may determine

whether credit is an open-end plan or a

closed-end transaction. In addition, the

proposed update discusses issues such

as the treatment of annuity costs in

reverse mortgage transactions and

transaction fees imposed on checking

accounts with overdraft protection.

DATES: Comments must be received on

or before January 20, 1998.

ADDRESSES: Comments should refer to

Docket No. R–0992, and may be mailed

to William 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

MP–500 of the Martin 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

Michael E. Hentrel, 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, 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 providing for 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 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 commentary in

final form in March 1998; to the extent

the revisions impose new requirements

on creditors, compliance would 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) Definitions

2(a)(2) Advertisement

Comment 2(a)(2)–1 is revised to

address communications to consumers

about existing accounts. In response to

requests for guidance, the proposed

comment provides examples of

communications that are and are not

advertisements.

2(a)(18) Downpayment

Proposed comment 2(a)(18)–3 gives

guidance on how a creditor discloses

the downpayment in a credit sale if a

trade-in is involved and if the amount

of the existing lien on the trade-in

exceeds its value. The comment clarifies

that creditors should disclose zero and

not a negative amount.

2(a)(20) Open-end Credit

The Board has been asked by

Attorneys General of several states to

provide additional guidance concerning

how to determine whether 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 without

adequate information 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

determining the difference between an

open-end plan and a closed-end

transaction. Proposed comment

2(a)(20)–5 clarifies when a line of credit

is not self-replenishing.
64770 Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules

2(a)(24) Residential Mortgage

Transaction

Comment 2(a)(24)–5 is revised for

clarity. No substantive change is

intended.

Proposed comment 2(a)(24)–7 clarifies

that the definition of a residential

mortgage transaction includes a loan for

financing the construction of a primary

dwelling on land already owned by the

consumer.

Section 226.4—Finance Charge

4(a) Definition

4(a)(2) Special Rule: Closing Agent

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 lump-sum settlement or closing

fee that includes a charge for conducting

or attending a closing if the lump-sum

fee is primarily for services listed in

§ 226.4(c)(7), even if the lump-sum fee

includes incidental costs for services

that are otherwise considered finance

charges. The comment 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

lump-sum fee.

4(b) Examples of 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

with a credit feature is a finance charge

only if the charge on the account

exceeds the charge for a similar account

without 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 premium for the initial term

of coverage, among other conditions.

Comment 4(d)–11 contains examples of

what 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 consumer is

permitted to cancel the coverage at any

time does not signify that creditor may

treat the initial term of coverage for

purposes of this regulation as the period

covered by the consumer’s first

payment. Where the fee or premium for

the coverage is assessed periodically

and the consumer 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—Open-end Credit

Section 226.5a—Credit and Charge Card

Applications and Solicitations

5a(b) Required Disclosures

5a(b)(1) Annual Percentage Rate

Proposed comment 5a(b)(1)–7 clarifies

that if the APR will increase upon a

stated event (such as the consumer’s

making a late payment or exceeding the

credit limit), the card issuer must

disclose the increased rate, along with

the condition for increasing the rate.

Providing only a general description of

the condition, such as stating that the

rate will increase if the consumer ‘‘fails

to remain in good standing,’’ is not an

adequate description.

5a(b)(9) Late-Payment Fee

Proposed comment 5a(b)(9)–2

addresses cross references to the APR

disclosure required under § 226.5a(b)(1),

where the APR will increase due to a

late payment.

5a(b)(10) Over-the-Limit Fee

Proposed comment 5a(b)(10)–2

addresses cross references to the APR

disclosure required under § 226.5a(b)(1),

where the APR will increase if the credit

limit is exceeded.

Section 226.6—Initial Disclosure

Statement

6(a) Finance Charge

6(a)(2) Annual Percentage Rate

Proposed comment 6(a)(2)-11 clarifies

that if the APR will increase upon a

stated event (such as the consumer’s

making a late payment or exceeding the

credit limit), the card issuer must

include the increased rate in the

disclosures required under § 226.6(a)(2),

along with the condition that will

trigger the increase.

Section 226.7—Periodic Statement

Some creditors offer open-end plans

with a deferred payment 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 would permit a

consumer purchasing a $500 item in

January to avoid any finance charge on

the purchase if the $500 balance is paid

by March 31. Proposed comment 7–3

gives guidance on same-as-cash

transactions. To ease compliance, three

cross-references to the proposed

comment are added to provisions of

§ 226.7 addressing balances to which

periodic rates are applied, the amount of

the finance charge, and free-ride

periods. Comment is requested on

whether to add a similar cross-reference

under § 226.5(b)(2), which addresses the

timing of periodic statements for openend plans offering free-ride periods.

Section 226.14—Determination of

Annual Percentage Rate

14(c) Annual Percentage Rate for

Periodic Statements

Revisions to two comments are

proposed. Comment 14(c)–5 addresses

the calculation of the APRs for

multifeatured plans that charge

transaction fees in addition to periodic

rates. In response to requests for

guidance, the comment clarifies that

creditors may separately consider each

feature in calculating the denominator.

Multifeatured plans are defined to

include plans with features such as

purchases, cash advances, or overdraft

checking, or plans with groups of

transactions with different pricing

structures. (See comment 7–1). Creditors

may disclose APRs separately for each

feature or may state a composite APR for

the whole plan. Some creditors offer

cash advances with 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.’’ Appendix F

gives instructions for calculating the

APR when 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

amount of the balance subject to a

transaction charge. The appendix is

silent on calculating the denominator

when separate features are involved.

Comment 14(c)–5 clarifies that

separate features may be considered in

calculating the denominator. The

proposal does not attempt 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

while guarding against distinctions

among account services that artificially

lower the APR on a consumer’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
Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 64771

method 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 denominator

in the APR computation.

Comment 14(c)–10 addresses the

treatment of fees imposed on

transactions that occur late in a billing

cycle and are impracticable to post until

the following billing cycle. The

comment would be revised to provide

broader guidance for calculating the

APR when finance charges posted in the

billing cycle include charges relating to

activity in prior cycles, such as

adjustments relating to error resolution.

It is intended to provide uniformity and

simplify compliance for the variety of

circumstances under which adjustments

may occur. For instances in which

adjustments from prior cycles would

produce a negative APR in the current

cycle, the comment incorporates the

calculation rule from § 226.14(c)(3)—the

APR should never be less than the APR

corresponding to the periodic rate

imposed on the account.

Subpart C—Closed-end Credit

Section 226.18—Content of Disclosures

18(g) Payment Schedule

Proposed comment 18(g)–4 clarifies

the requirements for disclosing the

timing of payments. It explains that

creditors must include the calendar date

when the beginning payment is due and

clarifies that reference to the occurrence

of a particular event, for example,

disclosing that the first payment is due

‘‘30 days after the completion of

construction,’’ is not sufficient. If a

precise date is unknown, the creditor

must 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 of Credit

33(c)(1) Costs to Consumer

Under § 226.33, the disclosed cost of

a reverse mortgage transaction must

contain all costs and charges paid by the

consumer, including the cost of any

annuity, whether the annuity purchase

is mandatory or voluntary or whether it

is made through the creditor or a third

party. In implementing this rule, the

Board stated its belief that the Congress

intended a broad application of the

terms ‘‘costs and charges.’’ (60 FR

15468, March 24, 1995.) Proposed

comment 33(c)(1)–2 provides further

guidance for determining when 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, when possible,

should use a standard typeface with a

type size of 10 or 12 characters per inch.

This will enable the Board to convert

the text to machine-readable form

through electronic scanning, and will

facilitate automated retrieval of

comments for review. Also, if

accompanied by an original document

in paper form, comments may be

submitted on 31⁄2 inch or 51⁄4 inch

computer diskettes in any IBMcompatible DOS-based format.

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.

Text of Proposed Revisions

Certain conventions have been used

to highlight the proposed revisions to

the text of the staff commentary. New

language is shown inside bold-faced

arrows, while language that would be

deleted is set off with bold-faced

brackets. Comments are numbered to

comply with new Federal Register

publication rules.

For the reasons set forth in the

preamble, the Board proposes to amend

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

Section 226.2—Definitions and Rules of

Construction, the following

amendments would be made:

a. Under Paragraph 2(a)(2)

Advertisement., paragraph 1. would be

revised;

b. Under Paragraph 2(a)(18)

Downpayment., a new paragraph 3.

would be added;

c. Under Paragraph 2(a)(20) Open-end

credit., paragraphs 3. and 5. would be

revised; and

d. Under Paragraph (2)(a)(24)

Residential mortgage transaction.,

paragraph 5. would 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) Advertisement.

1. Coverage. Only commercial messages

that promote consumer credit transactions

requiring disclosures are advertisements.

Messages inviting, offering, or otherwise

announcing generally to prospective

customers that availability of credit

transactions, whether in visual, oral, or print

media, are covered by the regulation.

i. Examples include:

A. Messages in a newspaper, magazine,

leaflet, promotional flyer, or catalog.

B. Announcements on radio, television, or

public address system.

C. Direct mail 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

statements offering auto loans at a stated

annual percentage rate.

I. Communications promoting 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

consumers, or oral or written communication

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 mandates that specific information

be displayed and only the information so

mandated 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.

flF. Communications about an existing

account (for example, a promotion in

connection with an existing credit card

account).fi

* * * * *

2(a)(18) Downpayment.

* * * * *

fl3. Effect of existing liens. In a credit sale,

the ‘‘downpayment’’ may only be used to

reduce the cash price. For example, when the

existing lien on an automobile to be traded

in exceeds the value of the automobile,

creditors must disclose a zero rather than a

negative number. To illustrate, assume a

consumer owes $10,000 on an existing

automobile loan and that the trade-in value
64772 Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules

of the automobile is only $8,000, leaving a

$2,000 deficit. The creditor should disclose

a downpayment of $0, not -$2,000.fi

* * * * *

2(a)(20) Open-end credit.

* * * * *

3. Repeated transactions. Under this

criterion, the creditor must reasonably

contemplate repeated transactions. This

means that the credit plan must be usable

from time to time and the creditor must

legitimately expect that there will be repeat

business rather than a one-time credit

extension. The creditor must expect repeated

dealings with the consumer under the credit

plan as a whole and need not believe the

consumer will reuse a particular feature of

the plan.

fli. Factors. Each credit plan may differ,

and no one factor will determine whether a

creditor reasonably contemplates repeated

transactions. Some of the factors to be

considered in determining whether a creditor

could reasonably contemplate repeated

transactions are:

A. Whether the line of credit is limited to

the purchase of a certain product if it is a

product that consumers would not likely

purchase in multiples. The greater the variety

of products available for purchase under the

credit line, the more likely it is that the

creditor reasonably contemplates repeated

transactions. Some creditors may not offer a

variety of products for purchase, but given

the nature of the creditor’s products or

services, it is nonetheless likely that

consumers will make repeated purchases—as

in the case of gasoline companies that issue

credit cards.

B. Whether the creditor establishes a line

of credit for the purpose of enabling the

consumer to purchase a designated item. It is

more likely that a creditor reasonably

contemplates repeated transactions if a

consumer may use the credit to purchase any

one of a number of items. For example, if a

retailer of pianos establishes a line of credit

for the purpose of the consumer purchasing

a piano, it is unlikely that the creditor can

reasonably contemplate repeated

transactions.

C. If the creditor establishes a line of credit

to finance the consumer’s purchase of a

designated item, the amount of the

transaction relative to the credit made

available to the consumer. The larger the

amount of the transaction, the less likely it

is that the creditor reasonably contemplates

repeated transactions. For example, if a

retailer of satellite dishes makes credit of

$5,000 available to a consumer for the

purchase of a satellite dish, and the cost of

the satellite dish is $4,500, it is not likely the

creditor contemplates repeated transactions.

The fact that the retailer sells other products

that are nominal in amount (compared with

the cost of the major purchase) is not a

sufficient basis to contemplate repeated

transactions.

D. The extent to which a creditor

reasonably solicits customers with its line of

credit to make additional purchases under

the credit line. For example, if a home

improvement contractor issues a private label

credit card with a $10,000 limit to a

consumer paying for roof repairs in the

amount of $9,000, and sends monthly

solicitations for aluminum siding, the

creditor does not reasonably contemplate

repeated transactions.

E. Whether the creditor has information on

consumers with the credit line showing that

consumers have made repeat purchases. The

more information that shows that consumers

have made repeat purchases, the more likely

it is that the creditor reasonably contemplates

repeated transactions.

ii. Standard.fi A standard based on

reasonable belief by a creditor necessarily

includes some margin for judgmental error.

The fact that a particular consumer does not

return for further credit extensions does not

prevent a plan from having been properly

characterized as open-end. For example, if

much of the customer base of a clothing store

makes repeat purchases, the fact that some

consumers use the plan only once would 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 with the consumer. For example:

A. It would be more reasonable for a thrift

institution chartered for the benefit of its

members to contemplate repeated

transactions with a member than for a seller

of aluminum siding to make the same

assumption about its customers.

B. It would be more reasonable for a bank

to make advances from a line of credit for the

purchase of an automobile than for an

automobile dealer to sell a car under an

open-end plan.

* * * * *

5. Reusable line. i. The total amount of

credit that may be extended during the

existence of an open-end plan is unlimited

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

consumer may use the line, repay, and reuse

the credit. flHowever, a line of credit

generally is not self-replenishing where the

initial line of credit is less than, or not much

more than, the amount of an item purchased

to open the credit line or, based on the

minimum monthly payments, the principal

reduction is so nominal that the credit line

is not reusable for an extended period of

time.fi The creditor may verify credit

information such as the consumer’s

continued income and employment status or

information for security purposes. This

criterion of unlimited credit distinguishes

open-end credit from a series of advances

made pursuant to a closed-end credit loan

commitment.

ii. For example:

A. Under a closed-end commitment, the

creditor might agree to lend a total of $10,000

in a series of advances as needed by the

consumer. When a consumer has borrowed

the full $10,000, no more is advanced under

that particular agreement, even if there has

been repayment of a portion of the debt.

iii. This criterion does not mean that the

creditor must establish a specific credit limit

for the line of credit or that the line of credit

must always be replenished to its original

amount. The creditor may reduce a credit

limit or refuse to extend new credit in a

particular case due to changes in the

economy, the creditor’s financial condition,

or the consumer’s creditworthiness. (The

rules in § 226.5b(f), however, limit the ability

of a creditor to suspend credit advances for

home equity plans.) While consumers should

have a reasonable expectation of obtaining

credit as long as they remain current and

within any present credit limits, further

extensions of credit need not be an absolute

right in order for the plan to meet the selfreplenishing criterion.

* * * * *

2(a)(24) Residential mortgage transaction.

* * * * *

5. Acquisition. fli. A residential mortgage

transaction finances the acquisition of a

consumer’s principal dwelling. The term

does not include a transaction involving a

consumer’s principal dwelling if the

consumer had previously purchased and

acquired some title to the dwelling, even

though the consumer had not acquired full

legal title.

ii. Examples of transactions involving a

previously acquired dwelling include the

financing of a balloon payment due under a

land sale contract and an extension of credit

made to a joint owner of property to buy out

the other joint owner’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,

where a buyer enters into a written

agreement with the creditor holding the

seller’s mortgage allowing the buyer to

assume the mortgage where the buyer

previously purchased the property and

agreed with the seller to make the mortgage

payments, § 226.20(b) does not apply

(assumptions involving residential

mortgages). fi [A transaction is not ‘‘to

finance the acquisition’’ of the consumer’s

principal dwelling (and therefore is not a

residential mortgage transaction) if the

consumer had previously purchased the

dwelling and acquired some title to the

dwelling, even though the consumer has not

acquired full legal title. Thus, the following

types of transactions are not a residential

mortgage transactions:

• The financing of a balloon payment due

under a land sale contract.

• An extension of credit made to a joint

owner of property to buy out the other joint

owner’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 requirement (§ 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:
Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules 64773

• A written agreement between a creditor

holding a seller’s mortgage and the buyer of

the property which allows the buyer to

assume the mortgage, where the buyer

previously purchased the property and

agreed with the seller to make the mortgage

payments.

* * * * *

fl7. Construction on previously acquired

vacant land. A residential mortgage

transaction includes a loan to finance the

construction of a consumer’s principal

dwelling on a vacant lot previously acquired

by the consumer.fi

* * * * *

3. In Supplement I to Part 226, under

Section 226.4—Finance Charge, the

following amendments would be made:

a. Under Paragraph 4(a)(2).,

paragraph 2. would be revised;

b. Under Paragraph 4(b)(2).,

paragraph 1. would be revised; and

c. Under Paragraph 4(d) Insurance

and debt cancellation coverage.,

paragraph 11. would be revised;

paragraph 12. would be redesignated as

paragraph 13.; and a new paragraph 12.

would be added.

The revisions and additions would

read as follows:

* * * * *

226.4 Finance Charge.

4(a) Definition.

* * * * *

4(a)(2) Special rule: closing agent charges.

* * * * *

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 § 226.4. For

example, a fee that would be paid in a

comparable cash transaction may be

excluded under § 226.4(a)[;]fl. A charge for

conducting or attending a closing is a finance

charge and may be excluded only if the

charge is included in and incidental tofi a

lump-sum fee for real estate closing costs

[may be] excluded under § 226.4(c)(7).

* * * * *

4(b) Examples of finance charges.

* * * * *

Paragraph 4(b)(2).

1. Checking account charges.flA checking

or transaction account charge imposed in

connection with a credit feature is a finance

charge under § 226.4(b)(2) to the extent the

charge exceeds the charge for a similar

account without a credit feature. If a charge

for an account with a credit feature does not

exceed the charge for an account without a

credit feature, the charge is not a finance

charge under § 226.4(b)(2). To illustrate:

i. A $5 service charge is imposed on an

account with an overdraft line of credit,

while a $3 service charge is imposed on an

account without a credit feature; the $2

difference is a finance charge.

ii. A $5 service charge is imposed for each

item that results in an overdraft on an

account with an overdraft line of credit,

while a $25 service charge is imposed for

paying or returning the item on a similar

account without a credit feature; the $5

charge is not a finance charge. fi[The

checking or transaction account charges

discussed in § 226.4(b)(2) include, for

example, the following situations:

• An account with an overdraft line of

credit incurs a $4.50 service charge, while an

account without 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 may be

excludable as a participation fee. (See the

commentary 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 imposed

uniformly for any item that overdraws a

checking account, regardless of whether the

items are paid or returned and whether 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 flor debt cancellationfi coverage

determines the period for which a premium

amount flor feefi must be disclosed,

flunless the one-year option discussed

under comment 4(d)-12 is available. For

purposes of § 226.4(d), the initial term is the

period for which the insurer or creditor is

obligated to provide coverage, even though

the consumer 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 automobile that is written for

one year is one year even though monthly

premiums 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

consumer pays or finances a single premium

in advance.fi [In some cases the initial term

is clear, for example a property insurance

policy on an automobile written 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 premium. In other cases, however, it

may not be clear what the initial term of the

insurance is, for example, when the

consumer agrees to pay a premium that is

assessed periodically and the consumer is

under no obligation to continue making the

payments. In cases such as this, the cost

disclosure may be made on the basis of a

premium for one year of insurance coverage.

The premium must be clearly labeled as

being for one year.]

fl12. 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 premium or fee is

clearly labeled as being for one year) if:

A. The initial term is not clear, or

B. The consumer has agreed to pay a

premium or fee that is assessed periodically

but the consumer 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 premium

payments are made monthly and the

consumer 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.fi

* * * * *

4. In Supplement I to Part 226, under

Section 226.5a—Credit and Charge Card

Applications and Solicitations, the

following amendments would be made:

a. Under Paragraph 5a(b)(1) Annual

Percentage Rate., a new paragraph 7. is

added;

b. Under Paragraph 5a(b)(9) Late

Payment Fee., a new paragraph 2. is

added; and

c. Under Paragraph 5a(b)(10) Overthe-Limit 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) Annual Percentage Rate.

* * * * *

fl7. Increased penalty rates. If the initial

rate will increase upon the occurrence of a

specified event such as a late payment or an

extension of credit that exceeds the credit

limit, the card issuer must disclose along

with the initial rate the increased penalty rate

that would apply. The issuer must 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 which the increased

rate will remain in effect, such as ‘‘until you

make three timely payments.’’ A creditor

need not disclose an increased rate that is

imposed when credit privileges are

permanently terminated.fi

* * * * *

5a(b)(9) Late Payment Fee.

* * * * *

fl2. Increased penalty rates. If the annual

percentage rate will increase as a result of

late payments, the disclosures under

§ 226.5a(b)(9) must include a reference to the

disclosures required under § 226.5a(b)(1).fi

5a(b)(10) Over-the-Limit Fee.

* * * * *

fl2. Increased penalty 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) must
64774 Federal Register / Vol. 62, No. 236 / Tuesday, December 9, 1997 / Proposed Rules

include a reference to the disclosures

required under § 226.5a(b)(1).fi

* * * * *

5. In Supplement I to Part 226,

Section 226.6—Initial Disclosure

Statement, under Paragraph 6(a)(2)., a

new paragraph 11. would be added to

read as follows:

* * * * *

Section 226.6—Initial Disclosure Statement

* * * * *

6(a) Finance charge.

* * * * *

Paragraph 6(a)(2).

* * * * *

fl11. Increased penalty rates. If the annual

percentage rate will increase upon the

occurrence of a specified event such as a late

payment or an extension of credit that

exceeds the credit limit, the creditor must

disclose along with the initial rate the

increased penalty rate that would apply. The

issuer must also disclose the specific

condition for imposing the increased rate,

such as ‘‘22% APR, if 60 days late.’’ The

issuer may disclose the period for which the

increased rate will remain in effect. A

creditor need not disclose an increased rate

that is imposed when credit privileges are

permanently terminated.fi

* * * * *

6. In Supplement I to Part 226, under

Section 226.7—Periodic Statement, the

following amendments would be made:

a. Under introductory text, a new

paragraph 3. would be added;

b. Under Paragraph 7(e) Balance on

which finance charge computed., a new

paragraph 10. would be added;

c. Under Paragraph 7(f) Amount of

finance charge., a new paragraph 9.

would be added; and

d. Under Paragraph 7(j) Free-ride

period., a new paragraph 2. would be

added.

The additions would read as follows:

* * * * *

§ 226.7 Periodic Statement.

* * * * *

fl3. Same-as-cash transactions. Some

creditors offer a deferred payment feature for

purchases in which consumers avoid finance

charges if the purchase balance is paid in full

by a certain date. For example, no finance

charge is imposed on a $500 purchase made

in January if the $500 balance is paid by

March 31.

i. Balances subject to periodic rates. Under

§ 226.7(e), creditors must disclose the

balances subject to periodic rates during a

billing cycle. The deferred payment balance

($500 in this example) is not subject to a

periodic rate for billing cycles between the

date of purchase and the payment due date.

Periodic statements sent for those billing

cycles should not include the deferred

payment balance in the balance disclosed

under § 226.7(e). At the creditor’s option, this

amount may be disclosed on periodic

statements provided it is identified by a term

other than the term used to identify the

balance disclosed under § 226.7(e).

ii. Amount of finance charge. Under

§ 226.7(f), creditors must disclose finance

charges imposed 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 payment balance

($500 in this example) is not paid in full by

the due date, but will not impose finance

charges for billing cycles between the date of

purchase and the payment due date. Periodic

statements for billing cycles preceding the

payment due date should not include in the

finance charge disclosed under § 226.7(f) the

amounts a consumer may owe if the deferred

payment balance is not paid in full by the

payment due date. In this example, the

February periodic statement should not

identify as finance charges interest

attributable to the $500 January purchase. At

the creditor’s option, this amount may be

disclosed on periodic statements provided it

is identified by a term other than ‘‘finance

charge.’’

iii. Free-ride period. Assuming monthly

billing cycles ending at month-end and a

free-ride period ending on the 25th of the

following month, here are two examples

illustrating how a creditor may comply with

the requirement to disclose the free-ride

period applicable to a deferred payment

balance ($500 in this example), and with the

14-day rule for mailing or delivering periodic

statements before imposing finance charges

(see § 226.5):

A. The creditor could include the $500

purchase on the periodic statement reflecting

account activity for February and sent on

March 1 and identify March 31 as the

payment due date for the $500 purchase.

(The creditor could also identify March 31 as

the payment due date for any other amounts

due on March 25.)

B. The creditor could include the $500

purchase on the periodic statement reflecting

activity for March and sent on April 1 and

identify April 25 as the payment due date for

the $500 purchase, permitting the consumer

to avoid finance charges if the $500 is paid

in full by April 25.fi

* * * * *

7(e) Balance on which finance charge

computed.

* * * * *

fl10. Same-as-cash transactions. See

comment 7–3(i).fi

7(f) Amount of finance charge.

* * * * *

fl9. Same-as-cash transactions. See

comment 7–3(ii).fi

* * * * *

7(j) Free-ride period.

* * * * *

fl2. Same-as-cash transactions. See

comment 7–3(iii).fi

* * * * *

7. In Supplement I to Part 226,

Section 226.14—Determination of

Annual Percentage Rate, under

Paragraph 14(c) Annual percentage rate

for periodic statements., paragraph 5.

and paragraph 10. would revised to read

as follows:

* * * * *

§ 226.14 Determination of Annual

Percentage Rate.

* * * * *

14(c) Annual percentage rate for periodic

statements.

* * * * *

5. Transaction charges. i. Section

226.14(c)(3) transaction charges include, for

example:

A. A loan fee of $10 imposed on a

particular advance.

B. A charge of 3% of the amount of each

transaction.

ii. The reference to avoiding duplication in

the computation requires that the amounts of

transactions on which transaction charges

were imposed not be included both in the

amount of total balances and in the ‘‘other

amounts on which a finance charge was

imposed’’ figure. flIn a multifeatured plan,

creditors may separately consider each bona

fide feature in the calculation of the

denominator.fi For further explanation and

examples of how to determine the

components of this formula, see appendix F.

* * * * *

10. fiPrior-cycle adjustments. i. The

annual percentage rate reflects the finance

charges imposed during the billing cycle.

However, finance charges imposed during

the billing cycle may relate to activity in a

prior cycle. Examples of circumstances when

this may 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 adjustment to the finance charge is

made following the resolution of a billing

error dispute.

C. A consumer fails to pay the purchase

balance under a deferred payment feature by

the payment due date, and finance charges

are imposed from the date of purchase.

ii. Finance charges relating to activity in

prior cycles should be reflected in the annual

percentage rate for the billing cycle in which

the charges are posted. If the creditor uses the

quotient method to calculate the annual

percentage rate, the numerator would include

the amount of any transaction charges plus

any other finance charges posted during the

billing cycle. Balances relating to the finance

charge adjustment may be included in the

denominator if permitted by the legal

obligation, the transaction was impracticable

to post in the previous cycle due to its

timing, or the charge relates to an adjustment

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 determined by multiplying each periodic

rate imposed during the billing cycle by the

number of periods in a year.fi [Transactions

at end of billing cycle. The annual percentage

rate reflects transactions and charges

imposed 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
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 which the

transaction and charges are posted:

i. The denominator is calculated as if the

transaction occurred on the first day of the

billing cycle; and

ii. The numerator includes the amount of

the transaction charge plus all finance

charges derived from the application of the

periodic rate to the amount of the transaction

(including all charges from a prior cycle).]

* * * * *

8. In Supplement I to Part 226,

Section 226.18—Content of Disclosures,

under Paragraph 18(g) Payment

schedule., the 18(g) heading would 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) Payment schedule.

* * * * *

fl4. Timing of payments. Creditors must

disclose when payments are due, including

the calendar date that the beginning payment

is due. For example, a creditor may disclose

that payments are due ‘‘monthly beginning

on July 1, 1998.’’ A reference to the

occurrence of a particular event, for example,

disclosing that the first payment is due ‘‘30

days after the completion of construction,’’ is

not sufficient. If the beginning-payment date

is unknown, the creditor must use an

estimated date and label the disclosure as an

estimate pursuant to § 226.17(c).fi

* * * * *

9. In Supplement I to Part 226,

Section 226.33—Requirements 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 of credit.

Paragraph 33(c)(1) Costs to consumer.

* * * * *

2. Annuity costs. * * * flFor example,

this includes the costs of an annuity that a

creditor offers, arranges, assists the consumer

in purchasing, or that the creditor is aware

the consumer is purchasing as a part of the

transaction.fi

* * * * *

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 of the Board.

[FR Doc. 97–31896 Filed 12–8–97; 8:45 am]

BILLING CODE 6210–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 97–NM–248–AD]

RIN 2120–AA64

Airworthiness Directives; Fokker

Model F28 Mark 0070 and Mark 0100

Series Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

adoption of a new airworthiness

directive (AD) that is applicable to all

Fokker Model F28 Mark 0070 and Mark

0100 series airplanes. This proposal

would require inspection of the wing

leading edge sections for the correct

amount of bleed air exhaust holes, and

corrective actions, if necessary. This

proposal is prompted by issuance of

mandatory continuing airworthiness

information by a foreign civil

airworthiness authority. The actions

specified by the proposed AD are

intended to prevent malfunction of the

wing leading edge thermal anti-ice

system, which could result in reduced

controllability of the airplane and/or

reduced structural integrity of the wing

due to overheating.

DATES: Comments must be received by

January 8, 1998.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), Transport

Airplane Directorate, ANM–103,

Attention: Rules Docket No. 97–NM–

248–AD, 1601 Lind Avenue, SW.,

Renton, Washington 98055–4056.

Comments may be inspected at this

location between 9:00 a.m. and 3:00

p.m., Monday through Friday, except

Federal holidays.

The service information referenced in

the proposed rule may be obtained from

Fokker Services B.V., Technical Support

Department, P.O. Box 75047, 1117 ZN

Schiphol Airport, the Netherlands. This

information may be examined at the

FAA, Transport Airplane Directorate,

1601 Lind Avenue, SW., Renton,

Washington.

FOR FURTHER INFORMATION CONTACT:

International Branch, ANM–116, FAA,

Transport Airplane Directorate, 1601

Lind Avenue, SW., Renton, Washington

98055–4056; telephone (425) 227–2110;

fax (425) 227–1149.

SUPPLEMENTARY INFORMATION:

Comments Invited

Interested persons are invited to

participate in the making of the

proposed rule by submitting such

written data, views, or arguments as

they may desire. Communications shall

identify the Rules Docket number and

be submitted in triplicate to the address

specified above. All communications

received on or before the closing date

for comments, specified above, will be

considered before taking action on the

proposed rule. The proposals contained

in this notice may be changed in light

of the comments received.

Comments are specifically invited on

the overall regulatory, economic,

environmental, and energy aspects of

the proposed rule. All comments

submitted will be available, both before

and after the closing date for comments,

in the Rules Docket for examination by

interested persons. A report

summarizing each FAA-public contact

concerned with the substance of this

proposal will be filed in the Rules

Docket.

Commenters wishing the FAA to

acknowledge receipt of their comments

submitted in response to this notice

must submit a self-addressed, stamped

postcard on which the following

statement is made: ‘‘Comments to

Docket Number 97–NM–248–AD.’’ The

postcard will be date stamped and

returned to the commenter.

Availability of NPRMs

Any person may obtain a copy of this

NPRM by submitting a request to the

FAA, Transport Airplane Directorate,

ANM–103, Attention: Rules Docket No.

97–NM–248–AD, 1601 Lind Avenue,

SW., Renton, Washington 98055–4056.

Discussion

The Rijksluchtvaartdienst (RLD),

which is the airworthiness authority for

the Netherlands, notified the FAA that

an unsafe condition may exist on all

Fokker Model F28 Mark 0070 and Mark

0100 series airplanes. The RLD advises

that, during assembly of a Fokker Model

F28 Mark 0100 series airplane, it was

discovered that the number of bleed air

exhaust holes in one of the wing leading

edge sections was not in conformity

with type design. Subsequent

investigation revealed that some spare

wing leading edge sections did not have

any bleed air exhaust holes present.