This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

62764

Vol. 60, No. 235

Thursday, December 7, 1995

FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R–0903]

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

provides guidance mainly on issues

relating to reverse mortgages and

mortgages bearing rates above a certain

percentage or fees above a certain

amount. It also addresses issues of

general interest, such as the treatment of

debt cancellation contracts and a card

issuer’s responsibilities when a

cardholder asserts a claim or defense

relating to a merchant dispute.

DATES: Comments must be received on

or before February 2, 1996.

ADDRESSES: Comments should refer to

Docket No. R–0903, 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 the

availability of information.

FOR FURTHER INFORMATION CONTACT: For

Subparts A and B (open-end credit),

Jane Jensen Gell or Obrea O. Poindexter,

Staff Attorneys; for Subparts A, C and E

(closed-end credit, reverse mortgages,

and mortgages bearing rates or fees

above a certain percentage or amount),

Jane Ahrens, Senior Attorney, or Kyung

Cho-Miller, Kurt Schumacher, or

Manley Williams, Staff Attorneys,

Division of Consumer and Community

Affairs, Board of Governors of the

Federal Reserve System, at (202) 452–

3667 or 452–2412. For users of

Telecommunications Device for the Deaf

(TDD) only, please contact Dorthea

Thompson, at (202) 452–3544.

SUPPLEMENTARY INFORMATION:

I. Background

The purpose of the Truth in Lending

Act (TILA; 15 U.S.C. 1601 et seq.) is to

promote the informed use of consumer

credit by requiring disclosures about its

terms and cost. The act requires

creditors to disclose credit terms and

the cost of credit as an annual

percentage rate (APR). The act requires

additional disclosures for loans secured

by a consumer’s home, and permits

consumers to cancel certain transactions

that involve their principal dwelling. It

also imposes limitations on some credit

transactions secured by a consumer’s

principal dwelling. The act is

implemented by the Board’s Regulation

Z (12 CFR part 226). The Board also has

an official staff commentary (12 CFR

part 226 (Supp. I)) that interprets the

regulation, and provides guidance to

creditors in applying the regulation to

specific transactions. It is updated

periodically to address significant

questions that arise, and is a substitute

for individual staff interpretations. The

Board expects to adopt amendments in

final form in March 1996 with

compliance optional until October 1,

1996, the effective date for mandatory

compliance.

On March 24, 1995, the Board

published amendments to Regulation Z

implementing the Home Ownership and

Equity Protection Act of 1994, contained

in the Riegle Community Development

and Regulatory Improvement Act of

1994, Public Law 103–325, 108 Stat.

2160 (60 FR 15463). These amendments,

which became effective on October 1,

impose new disclosure requirements

and substantive limitations on certain

closed-end mortgage loans bearing rates

or fees above a certain percentage or

amount. The amendments also impose

new disclosure requirements for reverse

mortgage transactions, which provide

advances primarily to elderly

homeowners and rely principally on the

home’s value for repayment. In large

measure, the proposed commentary

incorporates the supplementary

information accompanying that

rulemaking, and addresses other issues

that have arisen since the publication of

the final rule.

The Congress recently amended TILA

provisions concerning finance charge

disclosures for home mortgage loans.

The Truth in Lending Act Amendments

of 1995 (‘‘1995 Act,’’ Public Law 104–

29, 109 Stat. 271) clarify the treatment

of several fees typically associated with

real estate-related lending, and revise

tolerances for finance charge

calculations for loans secured by real

estate or dwellings. The statutory

amendments, which were enacted in

response to a number of lawsuits, also

address consumer remedies for

creditors’ past and future disclosure

violations. The 1995 Act became

effective immediately for provisions

relating to tolerances, past and future

liability, and the exclusion of certain

closing costs from the finance charge

calculation. The statutory amendments

that exclude certain real estate related

closing costs from the finance charge

generally codify interpretations

previously issued by the Board, and no

further revisions to the commentary are

contemplated at this time.

Another statutory provision

categorizes all brokers fees paid by the

consumer to the broker (or to the

creditor for delivery to the broker) as

finance charges; this provision will

become effective 60 days after the Board

issues a final rule or no later than 12

months after enactment of the

amendments to the act. It is anticipated

that the Board will issue a proposed

amendment to Regulation Z addressing

brokers fees during the first quarter of

1996, and will make any changes to the

commentary relating to the treatment of

brokers fees as part of that rulemaking.

II. Proposed Commentary

Subpart A—General

Section 226.4—Finance Charge

4(a) Definition

Proposed comment 4(a)–8 addresses

the treatment of fees charged in

connection with debt cancellation

agreements. In the case of motor vehicle

loans, debt cancellation agreements

(sometimes referred to as ‘‘gap’’
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules 62765

agreements) offer protection to

consumers in the event the vehicle is

stolen or destroyed and the motor

vehicle insurance proceeds are

insufficient to extinguish the debt.

Under these agreements, in return for a

fee paid, the consumer is not held liable

for the remaining balance due on the

loan. Other types of agreements may

provide for debt cancellation if the

borrower dies or becomes disabled. In

some states, debt cancellation

agreements may be regulated as or

otherwise considered insurance

contracts.

The Board has received questions

from creditors about the proper

treatment of fees for debt cancellation

agreements. Section 226.4(d) allows a

creditor to exclude optional credit life

and certain property insurance

premiums from the finance charge if the

creditor meets certain conditions,

including disclosure of the premium.

Some creditors believe that debt

cancellation fees should uniformly be

treated as § 226.4(d) insurance

premiums under the regulation. These

creditors generally believe that the fees

for optional debt cancellation contracts

should be excluded from the finance

charge. An alternative view is that the

fees may be treated as insurance

premiums only if the contract is

considered insurance under state law.

Proposed comment 4(a)–8 follows the

state law analysis. The proposed

comment provides that if a debt

cancellation agreement is regulated as or

considered insurance under state law,

the fee may be excludable from the

finance charge in accordance with the

rules in § 226.4(d). That is, under the

proposed comment the fee may be

excludable if the insurance is properly

characterized as credit life, accident,

health or loss-of-income insurance as

specified in § 226.4(d)(1), or as

insurance against loss of or damage to

property, or against liability arising out

of the ownership or use of property as

specified in § 226.4(d)(2). Insurance

protecting the creditor against credit

loss is a finance charge. (See

§ 226.4(b)(5) and accompanying

commentary.)

If state law does not regulate or

consider the agreement to be insurance,

then the general rules in § 226.4(a)

apply. Under § 226.4(a), debt

cancellation fees paid to a creditor are

treated as finance charges because they

are charged by the creditor as an

incident to the extension of credit and,

although optional, the fees are not of a

type payable in a comparable cash

transaction.

4(d) Insurance

Comment 4(d)–5 would be revised to

clarify that insurance is deemed to be

required—and the premiums treated

and disclosed as finance charges—when

a consumer has several alternatives to

fulfill a condition to a credit extension,

one of which is to purchase insurance

from the creditor and the consumer

elects that option. For example, where,

as a condition to obtaining a credit card,

a consumer must purchase a life

insurance policy from the creditor,

assign an existing policy, or pledge

another form of security, such as a

certificate of deposit, if the consumer

purchases the insurance from the

creditor, the premiums are finance

charges.

Subpart B—Open-end Credit

Section 226.6—Initial Disclosure

Statement

6(b) Other Charges

Comment 6(b)–1 would be revised to

state that a membership fee to join an

organization is an ‘‘other charge’’ if the

primary benefit of membership is the

opportunity to apply for a credit card

and other benefits are incidental. For

example, if an organization offers, in

addition to the opportunity for a credit

card account, only minor benefits such

as a newsletter and a member

information hotline, a fee to join the

organization should be disclosed as an

‘‘other charge.’’

Section 226.12—Special Credit Card

Rules

12(c) Right of Cardholder to Assert

Claims or Defenses Against Card Issuer

12(c)(2) Adverse Credit Reports

Prohibited

Proposed comment 12(c)(2)–2

provides guidance on when a card

issuer may consider a dispute settled for

purposes of reporting an amount in

dispute as delinquent. Until the card

issuer conducts a reasonable

investigation, the disputed amount may

not be collected or reported as

delinquent.

Section 226.14—Determination of

Annual Percentage Rate

14(c) Annual Percentage Rate for

Periodic Statements

Comment 14(c)–10 would provide

guidance on calculating the APR on

periodic statements when a transaction

occurs at the end of one cycle, but is

posted to the account in a subsequent

cycle, such as when a cardholder

obtains a cash advance (for which there

is a transaction fee) on the last day of

a billing cycle and the transaction is

posted to the cardholder’s account on

the second day of the following cycle.

The transaction (and fee, if applicable)

are included on the statement reflecting

the cycle in which the transaction

posted, and the proposed comment

clarifies how creditors calculate the

APR to reflect the delay in posting.

Subpart C—Closed-end Credit

Section 17—General Disclosure

Requirements

17(c) Basis of Disclosure and Use of

Estimates

Paragraph 17(c)(1)

Comment 17(c)(1)–10 would be

revised to clarify that if a contract for a

variable rate transaction provides for a

delay in the implementation of changes

to an index value, the creditor may use

any index value in effect during the

delay period. For example, if a contract

specifies that rate changes are based on

the index value in effect 45 days before

the change date, the creditor may use

any index value in effect within that 45-

day delay period.

Proposed comment 17(c)(1)–18

addresses pawn transactions. There has

been some confusion about the coverage

and compliance of pawn transactions

under the TILA. The comment clarifies

how some of the items required to be

disclosed under § 226.18 such as the

amount financed, the finance charge,

and the percentage should be disclosed.

Disclosure of these transactions under

the open-end credit provisions is not

addressed based on the belief that

typically pawn transactions are not

open-end credit transactions.

Section 18—Content of Disclosures

18(c) Itemization of Amount Financed

Paragraph 18(c)(1)(iii)

Proposed comment 18(c)(1)(iii)–2

concerns the treatment of certain

charges known as ‘‘upcharges’’ that

creditors may sometimes add to a fee

charged by a third party for services

such as maintenance and service

contracts on automobiles. The comment,

which only applies in cases where a

creditor charges the same amount of an

upcharge in both cash and credit

transactions, offers flexibility in how

creditors can choose to itemize and

disclose the amount charged for the

service (including the amount of the

upcharge). The treatment of these fees

for purposes of disclosures under the

TILA does not govern the imposition or

amount of such upcharges.
62766 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules

Section 226.20—Subsequent Disclosure

Requirements

20(a) Refinancings

The Board has been asked whether

certain actions constitute adding a

variable-rate feature for purposes of this

section. Comment 20(a)–3 would be

revised to clarify that changing the

index on a variable-rate transaction is

not adding a variable-rate feature, nor is

substituting an index for one that no

longer exists.

Subpart E—Special Rules for Certain

Home Mortgage Transactions

Section 226.31—General Rules

31(c) Timing of Disclosures

31(c)(1) Disclosures for Certain Closedend Home Mortgages

Numerous creditors have suggested

that the rule for furnishing disclosures

should be deemed to be satisfied as long

as the creditor places the disclosures in

the mail three days prior to

consummation. The word ‘‘furnish’’ for

purposes of § 226.32 disclosures has the

same meaning as ‘‘deliver’’ for the other

disclosure requirements of Regulation Z.

Accordingly, proposed comment

31(c)(1)–1 clarifies that disclosures are

furnished, or delivered, when received

by the consumer, not when mailed by

the creditor.

Proposed comment 31(c)(1)–2 clarifies

that creditors may rely on the definition

of ‘‘business days’’ in comment 2(a)(6)–

2 for purposes of complying with the

timing requirements for furnishing

disclosures under this section.

31(c)(1)(i) Change in Terms

Proposed comment 31(c)(1)(i)–1

clarifies that a creditor must provide

new § 226.32(c) disclosures if a change

in terms (whether in the formal written

agreement or otherwise, such as an oral

agreement affecting the amount of a fee

required to be paid at closing) makes the

previously provided disclosures

inaccurate.

31(c)(1)(iii) Consumer’s Waiver of

Waiting Period Before Consummation

Proposed comment 31(c)(1)(iii)–1

provides guidance on circumstances in

which the consumer may modify or

waive the right to the three-day waiting

period to meet bona fide personal

financial emergencies. Generally,

whether a bona fide personal financial

emergency exists is a matter to be

decided between the parties. The

provisions in comments 23(e)–1 and

34(e)–2 apply to this section. For

example, a consumer’s waiver does not

automatically insulate the creditor from

liability for failing to provide the threeday waiting period.

31(c)(2) Disclosures for Reverse

Mortgages

Proposed comment 31(c)(2)–1 clarifies

the definition of ‘‘business day’’ for

purposes of providing reverse mortgage

disclosures to consumers.

31(d) Basis of Disclosures and Use of

Estimates

Section 226.31(d) mirrors the

provisions in § 226.5(c) and § 226.17(c),

and allows the use of estimates when

information necessary for an accurate

disclosure is unknown to the creditor,

provided that the disclosure is clearly

identified as an estimate. Proposed

comment 31(d)–1 clarifies that when a

disclosure required by § 226.32 is

marked as an estimate and becomes

inaccurate due to a change in terms that

occurs before consummation, new

disclosures must be provided.

Section 226.32—Requirements for

Certain Closed-end Home Mortgages

32(a) Coverage

Paragraph 32(a)(1)(i)

Proposed comment 32(a)(1)(i)–1

clarifies when an application is

received, for purposes of determining

which Treasury securities yield should

be used to compare the APR. Proposed

comment 32(a)(1)(i)–2 provides

guidance on comparing loan maturities

to yields on Treasury securities, for

purposes of determining whether a

mortgage loan is covered by § 226.32.

Proposed comment 32(a)(1)(i)–3 clarifies

rules for calculating the APR for

variable-rate, discount, premium, or

stepped-rate loans.

Proposed comment 32(a)(1)(i)–4

clarifies which Treasury security to use

for the APR test, and where the yields

on these securities can be found.

Creditors may request the Board

statistical release H–15 by calling (202)

452–3245. Treasury security yields are

also available from the Federal Reserve

Bank of New York by calling (212) 720–

6619.

Paragraph 32(a)(1)(ii)

Creditors must follow the rules in

§ 226.32 if, in part, the total points and

fees payable by the consumer at or

before loan closing exceed the greater of

$400 or 8 percent of the total loan

amount. The Board is required to adjust

the $400 amount, based on the annual

percentage change in the Consumer

Price Index as reported on June 1,

effective January 1 of the following year.

The Board anticipates that adjustments

to the $400 dollar figure will be

published each yearend and

incorporated into the commentary the

following spring.

Paragraph 32(b)(1)

Paragraph 32(b)(1)(i)

Comment 32(b)(1)(i)–1 clarifies the

scope of items defined as finance

charges under § 226.4 that are

considered ‘‘points and fees.’’

Paragraph 32(b)(1)(ii)

Proposed comment 32(b)(1)(ii)–1

addresses the treatment of mortgage

brokers fees. Section 226.32(b)(1)

defines ‘‘points and fees’’ to include all

finance charges (except interest or the

time-price differential), as well as all

compensation paid to mortgage brokers.

Accordingly, compensation paid to a

mortgage broker must be included as

‘‘points and fees’’ even if the amount is

not disclosed as a finance charge.

Section 32(b)(1)(ii) at the time it was

issued was interpreted to include all

mortgage broker fees that are required to

be disclosed under the Real Estate

Settlement Procedures Act. Under that

interpretation, amounts paid by

creditors to mortgage brokers would be

included, as are amounts paid by

consumers. Upon further analysis, a

narrower interpretation is being

proposed. Proposed comment

32(b)(1)(ii)–1 states that for purposes of

the ‘‘points and fees’’ test, only

mortgage broker fees paid by the

consumer are included in the

calculation. The comment further

clarifies that mortgage broker fees

should not be double counted; that is,

where such fees are included in the

finance charge, they are already

included as ‘‘points and fees’’ under

§ 226.32(b)(1)(i) and should not be

counted again under § 226.32(b)(1)(ii).

32(c)(3) Regular payment

Proposed comment 32(c)(3)–1 clarifies

that the regulation contemplates the

disclosure of monthly or other regularly

scheduled periodic payments, such as

bimonthy or quarterly. The comment

also clarifies that there must be at least

two payments, and they must be in an

amount and occur at such intervals that

the payments fully amortize the loan.

For the amount of the payment,

proposed comment 32(c)(3)–2 clarifies

that creditors may rely on § 226.18(g) for

guidance.

32(c)(4) Variable-rate

Proposed comment 32(c)(4)–1

provides additional guidance on

calculating ‘‘worst-case’’ payment

examples when the transaction has

more than one payment stream.
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules 62767

32(d) Limitations

32(d)(1)(i) Balloon Payment

The statute and regulation prohibit

the use of balloon payments for

mortgages covered by § 226.32 that have

a term of less than five years. For such

loans, the repayment schedule must

fully amortize the outstanding principal

balance through ‘‘regular periodic

payments.’’ The proposed comment

provides guidance on the definition of

‘‘regular periodic payments.’’

32(d)(2) Negative Amortization

Proposed comment 32(d)(2)–1

clarifies that the prohibition against

including negative amortization in a

mortgage covered by § 226.32 does not

extend to increases in the principal

balance unrelated to the payment

schedule, such as an increase related to

the purchase of force-placed insurance.

32(d)(4) Increased Interest Rate

Proposed comment 32(d)(4)–1

clarifies that a rate increase in a

variable-rate transaction is not

prohibited by the act or regulation, even

if the rate increases after the consumer

has defaulted on the obligation.

32(d)(5) Rebates

Section 226.32(d)(5) restricts how

creditors may calculate refunds of

interest when a mortgage loan subject to

this section is accelerated due to a

consumer’s default. The proposed

comment clarifies that this restriction

applies to refunds of interest only, and

not to refunds of other items such as

origination fees or points. In addition,

the proposed comment clarifies that the

refund calculation includes odd-days

interest, regardless of when it is paid.

32(d)(7) Prepayment Penalty

Exception

Proposed comment 32(d)(7)–1

provides guidance on calculating a

consumer’s debt-to-income ratio.

Proposed comment 32(d)(7)–2 clarifies

that verification of employment satisfies

the regulation’s requirement that the

creditor obtain ‘‘payment records for

employment income.’’

32(e) Prohibited Acts and Practices

32(e)(1) Repayment Ability

For mortgage loans subject to

§ 226.32, the regulation prohibits

creditors from engaging in a pattern or

practice of extending such credit based

on the consumer’s collateral without

regard to the consumer’s repayment

ability, including the consumer’s

current and expected income, current

obligations, and employment. Proposed

comment 32(e)(1)–1 provides guidance

on determining the consumer’s

repayment ability. The comment

clarifies that creditors may rely on the

same information provided by the

consumer in connection with

§ 226.32(d)(7), or other information,

including information about unverified

income.

Section 226.33—Requirements for

Reverse Mortgages

The U.S. Department of Housing and

Urban Development (HUD) has

modified its software regarding reverse

mortgages originated under the Home

Equity Conversion Mortgage (HECM)

program to conform with the

requirements and the terminology used

for reverse mortgages under Regulation

Z and the appendices to the regulation.

(The HECM program has been

temporarily suspended, pending the

reauthorization of funding by the

Congress.) For example, HUD’s software

now allows creditors to use the initial

interest rate, rather than the ‘‘expected

interest rate,’’ in calculating the total

annual loan cost rate for a variable-rate

transaction. Although creditors may

find HUD’s software helpful in meeting

the disclosure requirements under

Regulation Z, they should first take

steps to verify the accuracy of the

software, including any instructions,

before using it. Neither HUD nor the

Board provides a ‘‘safe harbor’’ to

creditors regarding use of this software.

33(a) Definition

Proposed comment 33(a)–1 addresses

an implication relative to the definition

of a reverse mortgage transaction under

the regulation. If a transaction

structured as a reverse mortgage loan is

a recourse transaction (that is, one that

imposes personal liability on the

consumer for the difference between the

loan balance at maturity and the value

of the property), it is not a reverse

mortgage under § 226.33. Thus, if the

transaction is also closed-end, and the

annual percentage rate or the points and

fees assessed in the transaction exceed

those specified in § 226.32(a)(1), the

transaction is covered by § 226.32. Such

transactions may not generally contain a

balloon payment or negative

amortization (both of which are found

in reverse mortgages by definition).

Open-end credit plans are exempt from

the provisions of § 226.32(a).

33(c)(2) Payments to Consumer

Proposed comment 33(c)(2)–1

provides guidance where the legal

obligation of a reverse mortgage

transaction includes a benefit, such as a

‘‘death benefit,’’ in which a payment to

the consumer’s estate (or a credit to the

outstanding loan balance) will be made

upon the occurrence of an event (for

example, the consumer’s death within a

certain period of time).

III. Form of Comment Letters

Comment letters should refer to

Docket No. R–0903, and, when possible,

should use a standard courier 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, along with

an original document in paper form,

commenters are encouraged to submit

their comments 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.

Certain conventions have been used

to highlight the proposed revisions to

the regulation. 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 226.4—Finance Charge, the

following amendments would be made:

1. Under 4(a) Definition., a new

paragraph 8. would be added; and

2. Under 4(d) Insurance., paragraph 5.

would be revised.

The additions and revisions read as

follows:

Supplement I—Official Staff

Interpretations

* * * * *

Subpart A—General

* * * * *

Section 226.4—Finance Charge

4(a) Definition.

* * * * *

fl8. Treatment of Debt Cancellation

Agreements. Some creditors may require debt

cancellation agreements while others may

offer them as an option. In the case of motor
62768 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules

vehicle loans, these agreements, sometimes

referred to as ‘‘gap’’ agreements, offer

protection to consumers if the vehicle is

stolen or destroyed and the motor vehicle

insurance proceeds are insufficient to

extinguish the debt. In return for a fee, the

consumer will not be held liable for the

remaining balance due on the loan. Other

types of agreements provide for debt

cancellation if the borrower dies or becomes

disabled. In some states these agreements are

regulated as or otherwise considered

insurance under state law.

i. Insurance. If the agreement is regulated

as or considered insurance under state law,

the fee paid by the consumer may be

excludable from the finance charge if it meets

the requirements in § 226.4(d). Insurance

protecting the creditor against credit loss,

however, is a finance charge under

§ 226.4(b)(5).

ii. Other. If the agreement is not considered

insurance under state law, debt cancellation

fees paid to the creditor, whether required or

optional, are incident to the extension of

credit and must be disclosed as a finance

charge. An optional debt cancellation fee

paid to a third-party is a finance charge only

to the extent that the third-party shares the

fee with the creditor. If a creditor cannot

determine whether state law considers the

agreement insurance, the fees must be treated

as if the agreement is not insurance.fi

* * * * *

Paragraph 4(d).

* * * * *

5. Required credit life insurance. Credit

life, accident, health, or loss-of-income

insurance must be voluntary in order for the

premium or charges to be excluded from the

finance charge. Whether the insurance is in

fact required or optional is a factual question.

If the insurance is required, the premiums

must be included in the finance charge,

whether the insurance is purchased from the

creditor or from a third party. If the

flconsumer is required to elect one of

several options—such asfi [only option the

creditor gives the consumer is] to purchase

credit life insurance from the creditorfl,fi

[or to] assign an existing life insurance

policy, fl or pledge security such as a

certificate of deposit,fi and the consumer

purchases the credit life insurance, the

premium must be included in the finance

charge. (If the consumer assigns a preexisting

policy instead, no premium is included in

the finance charge. flThe security interest

would be disclosed under § 226.6(c) or

§ 226.18(m).fi See the commentary to

§ 226.(4)(b) (7) and (8).)

* * * * *

3. In supplement I to part 226, under

section 226.6—Initial Disclosure

Statement, under 6(b) Other charges.,

paragraph 1.v. would be revised to read

as follows:

* * * * *

Subpart B—Open-End Credit

* * * * *

Section 226.6—Initial Disclosure Statement

* * * * *

6(b) Other charges.

1. * * *

v. A membership or participation fee for a

package of services that includes an openend credit feature, unless the fee is required

whether or not the open-end credit feature is

included. For example, a membership fee to

join a credit union is not an ‘‘other charge,’’

even if membership is required to apply for

credit. flFor the fee to be excluded from

disclosure as an ‘‘other charge,’’ however, the

package of services must have some

substantive purpose other than access to the

credit feature. For example, if the primary

benefit of membership in an organization is

the opportunity to apply for a credit card,

and the other benefits offered are incidental

to the credit feature, the membership fee is

an ‘‘other charge.’’fi

* * * * *

4. In supplement I to part 226, under

Section 226.12—Special Credit Card

Provisions, under 12(c)(2) Adverse

credit reports prohibited., new

paragraph 2. would be added to read as

follows:

* * * * *

Section 226.12—Special Credit Card

Provisions

* * * * *

12(c)(2) Adverse credit reports prohibited.

* * * * *

fl2. Settlement of dispute. A card issuer

may not consider a dispute settled and report

an amount disputed as delinquent or begin

collection of the disputed amount until it has

completed a reasonable investigation of the

cardholder’s claim. In conducting an

investigation, the card issuer may reasonably

request the cardholder’s cooperation. The

card issuer may not automatically consider a

dispute settled due to the cardholder’s failure

or refusal to comply with a particular

request.fi

* * * * *

5. In supplement I to Part 226, under

Section 226.14—Determination of

Annual Percentage Rate, under 14(c)

Annual percentage rate for periodic

statements., a new paragraph 10. would

be added to read as follows:

* * * * *

Section 226.14—Determination of Annual

Percentage Rate

* * * * *

14(c) Annual percentage rate for periodic

statements.

* * * * *

fl10. Transactions at end of billing cycle.

The annual percentage rate reflects

transactions and charges imposed during the

billing cycle. However, a transaction that

occurs at the end of a billing cycle may be

impracticable to post until the following

cycle, such as a cash advance that occurs on

the last day of a billing cycle. The transaction

is posted to the account in the following

cycle. In this case, the annual percentage rate

shall be calculate as follows for the billing

cycle in which the transaction and charges

are posted:

i. The denominator shall be calculated as

if the transaction occurred on the first day of

the billing cycle, and

ii. The numerator shall include 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).fi

* * * * *

6. In Supplement I to Part 226, under

Section 226.17—General Disclosure

Requirements, under Paragraph

17(c)(1)., paragraph 10. would be

revised and a new paragraph 18. would

be added to read as follows:

* * * * *

Subpart C—Closed-End Credit

Section 226.17—General Disclosure

Requirements

* * * * *

17(c) Basis of disclosures and use of

estimates.

Paragraph 17(c)(1).

* * * * *

10. Discounted and premium variable-rate

transactions. 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. In a discounted

transaction, for example, a creditor may

calculate interest rates according to a formula

using the six-month Treasury bill rate plus a

2 percent margin. If the Treasury bill rate at

consummation is 10 percent, the creditor

may forgo the 2 percent spread and charge

only 10 percent for a limited time, instead of

setting an initial rate of 12 percent.

fli.fi When creditors use an initial

interest rate that is not calculated using the

index or formula for later rate adjustments,

the disclosures should reflect a composite

annual percentage rate based on the initial

rate for as long as it is charged and, for the

remainder of the term, the rate that would

have been applied using the index or formula

at the time of consummation. The rate at

consummation need not be used if a contract

provides for a delay in the implementation of

changes in an index value. For example, if

the contract specifies that rate changes are

based on the index value in effect 45 days

before the change date, creditors may use

flanyfi [the] index value in effect flduring

the 45 day periodfi [not more than 45 days]

before consummation in calculating a

composite annual percentage rate.

flii.fi The effect of the multiple rates

must also be reflected in the calculation and

disclosure of the finance charge, total of

payments, and payment schedule.

fliii.fi If a loan contains a rate or payment

cap that would prevent the initial rate or

payment, at the time of the first adjustment,

from changing to the rate determined by the

index or formula at consummation, the effect

of that rate or payment cap should be

reflected in the disclosures.

fliv.fi Because these transactions involve

irregular payment amounts, an annual
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules 62769

percentage rate tolerance of 1⁄4 of 1 percent

applies, in accordance with § 226.22(a)(3) of

the regulation.

flv.fi Examples of discounted variablerate transactions include:

flA.fi A 30-year loan for $100,000 with

no prepaid finance charges and rates

determined by the Treasury bill rate plus 2

percent. Rate and payment adjustments are

made annually. Although the Treasury bill

rate at the time of consummation is 10

percent, the creditor sets the interest rate for

one year at 9 percent, instead of 12 percent

according to the formula. The disclosures

should reflect a composite annual percentage

rate of 11.63 percent based on 9 percent for

one year and 12 percent for 29 years.

Reflecting those two rate levels, the payment

schedule should show 12 payments of

$804.62 and 348 payments of $1,025.31. The

finance charge should be $266,463.32 and the

total of payments $366,463.32.

flB.fi Same loan as above, except with a

2 percent rate cap on periodic adjustments.

The disclosures should reflect a composite

annual percentage rate of 11.53 percent based

on 9 percent for the first year, 11 percent for

the second year, and 12 percent for the

remaining 28 years. Reflecting those three

rate levels, the payment schedule should

show 12 payments of $804.62, 12 payments

of $950.09, and 336 payments of $1,024.34.

The finance charge should be $265,234.76

and the total of payments $365,234.76.

flC.fi Same loan as above, except with a

71⁄2 percent cap on payment adjustments.

The disclosures should reflect a composite

annual percentage rate of 11.64 percent,

based on 9 percent for one year and 12

percent for 29 years. Because of the payment

cap, five levels of payments should be

reflected. The payment schedule should

show 12 payments of $804.62, 12 payments

of $864.97, 12 payments of $929.84, 12

payments of $999.58, and 312 payments of

$1,070.04. The finance charge should be

$277,040.60, and the total of payments

$377,040.60.

flD.fi This paragraph does not apply to

variable-rate loans in which the initial

interest rate is set according to the index or

formula used for later adjustments but is not

set at the value of the index or formula at

consummation. For example, if a creditor

commits to an initial rate based on the

formula on a date prior to consummation, but

the index has moved during the period

between that time and consummation, a

creditor should base its disclosures on the

initial rate.

* * * * *

fl18. Pawn Transactions. For a transaction

in which a consumer pledges or sells an item

to a creditor in return for a sum of money,

and retains the right to redeem the item for

a greater sum (the redemption price) within

a specified period of time:

i. The amount financed is the initial sum

paid to the consumer.

ii. The finance charge is the difference

between the initial sum paid to the consumer

and the redemption price.

iii. The term of the transaction, for

calculating the annual percentage rate, is the

specified period of time agreed to by the

creditor and the consumer.fi

* * * * *

7. In Supplement I to Part 226, under

Section 226.18—Content of Disclosures,

under Paragraph 18(c)(1)(iii)., a new

paragraph 2. would be added to read as

follows:

* * * * *

Section 226.18—Content of Disclosures

* * * * *

Paragraph 18(c)(1)(iii).

* * * * *

fl2. Creditor-imposed charges added to

amounts paid to others. A creditor that offers

an item for sale in both cash and credit

transactions sometimes adds an amount

(often referred to as an ‘‘upcharge’’) to a fee

charged to a consumer by a third party for

a service (such as for a maintenance or

service contract) that is payable in an equal

amount in both types of transactions, and

retains that amount. At its option, the

creditor may list the total charge (including

the portion retained by it) as an amount paid

to others, or it may choose to reflect the

amounts in the manner in which they were

actually paid to or retained by the

appropriate parties.fi

* * * * *

8. In Supplement I to Part 226, under

Section 226.20 Subsequent Disclosure

Requirements, under Paragraph 20(a)

Refinancings., paragraph 3. would be

revised to read as follows:

* * * * *

Section 226.20—Subsequent Disclosure

Requirements

Paragraph 20(a) Refinancings.

* * * * *

3. Variable-rate.

fli.fi If a variable-rate feature was

properly disclosed under the regulation, a

rate change in accord with those disclosures

is not a refinancing. flFor example, no new

disclosures are required when the variablerate feature is invoked on a renewable

balloon-payment mortgage that was

previously disclosed as a variable-rate

transaction.fi [For example, a renewable

balloon-payment mortgage that was disclosed

as a variable-rate transaction is not subject to

new disclosure requirements when the

variable-rate feature is invoked. However,

even]

flii. Evenfi if it is not accomplished by

the cancellation of the old obligation and

substitution of a new one, a new transaction

subject to new disclosures results if the

creditor either:

flA.fi Increases the rate based on a

variable-rate feature that was not previously

disclosed, or

flB.fi Adds a variable-rate feature to the

obligation. flA creditor does not add a

variable-rate feature by changing the index of

a variable-rate transaction or substituting a

new index for one that no longer exists.

iii.fi If either of flthe abovefi [these] two

events occur in a transaction secured by a

principal dwelling with a term longer than

one year, the disclosures required under

§ 226.19(b) also must be given at that time.

* * * * *

9. In Supplement I to Part 226, a new

Subpart E—Special Rules for Certain

Home Mortgage Transactions would be

added as follows:

* * * * *

flSubpart E—Special Rules for Certain

Home Mortgage Transactions

Section 226.31—General Rules

31(c) Timing of disclosure.

Paragraph 31(c)(1) Disclosures for certain

closed-end home mortgages.

1. Furnishing disclosures. Disclosures are

considered furnished when received by the

consumer.

2. Pre-consummation waiting period. A

creditor must furnish the special disclosures

at least three business days prior to

consummation. For purposes of § 226.32,

‘‘business day’’ means every calendar day

except Sundays and federal legal holidays.

For example, if disclosures are provided on

Friday, consummation could occur any time

on Tuesday, the third business day following

receipt of disclosures.

Paragraph 31(c)(1)(i) Change in terms.

1. Redisclosure required. Creditors must

provide new disclosures if the regular

payment or any other disclosure required by

§ 226.32(c) becomes inaccurate.

Paragraph 31(c)(1)(ii) Telephone

disclosures.

1. Telephone disclosures. Disclosures by

telephone must be furnished at least three

calendar days prior to consummation.

Paragraph 31(c)(1)(iii) Consumer’s waiver

of waiting period before consummation.

1. Modification or waiver. A consumer may

modify or waive the right to the three-day

waiting period only after receiving the

disclosures required by § 226.32 and only if

the circumstances meet the criteria for

establishing a bona fide personal financial

emergency in § 226.23(e). Whether these

criteria are met are determined by the facts

surrounding individual situations. The

impending sale of the consumer’s home at

foreclosure is one example of a bona fide

personal financial emergency. Each

consumer entitled to the three-day waiting

period must sign a written statement for the

waiver to be effective.

Paragraph 31(c)(2) Disclosures for reverse

mortgages.

1. Business days. For purposes of

providing reverse mortgage disclosures,

‘‘business day’’ means a day on which the

creditor’s offices are open to the public for

carrying on substantially all of its business

functions.

2. Open-end plans. Disclosures for openend reverse mortgages must be provided

three business days before the first

transaction under the plan (see § 226.5(b)(1)).

31(d) Basis of disclosures and use of

estimates.

1. Redisclosure. When a disclosure

required by § 226.32 is based on and labeled

as an estimate and becomes inaccurate due

to a change in terms that occurs before

consummation, new disclosures must be

provided.
62770 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules

Section 226.32—Requirements for Certain

Closed-End Home Mortgages

32(a) Coverage.

Paragraph 32(a)(1)(i).

1. Application date. An application is

deemed received when it reaches the creditor

in any of the ways applications are normally

transmitted. (See § 226.19(a).) For example, if

a borrower applies for a 10-year loan on

September 30 and the creditor counteroffers

with a 7-year loan on October 10, the creditor

must measure the annual percentage rate

against the appropriate Treasury security

yield as of August 15. An application

transmitted through an intermediary agent or

broker is received when it reaches the

creditor, rather than when it reaches the

agent or broker.

2. When fifteenth not a business day. If the

15th day of the month immediately

preceding the application date is not a

business day, the creditor must use the yield

as of the business day immediately preceding

the 15th.

3. Calculating annual percentage rates for

variable-rate loans and discount loans.

Creditors must use the rules set out in the

commentary to § 226.17(c)(1) in calculating

the annual percentage rate for variable-rate

loans (assume the rate in effect at the time

of disclosure remains unchanged) and for

discount, premium, and stepped-rate

transactions (which must reflect composite

annual percentage rates).

4. Treasury securities. To determine the

yield on a Treasury security for the annual

percentage rate test, creditors may use the

Board’s Selected Interest Rates (statistical

release H–15) or the actual auction results.

Treasury auctions are held at regular

intervals for the different types of securities.

These figures are published by major

financial and metropolitan newspapers, and

are also available from Federal Reserve

Banks. Creditors must use the yield on the

security that has the nearest maturity at

issuance to the loan’s maturity. For example,

if a creditor must compare the annual

percentage rate to Treasury securities with

either seven-year or ten-year maturities, the

annual percentage rate for an eight-year loan

is compared with securities that have a

seven-year maturity; the annual percentage

rate for a nine-year loan is compared with

securities that have a ten-year maturity. If the

loan maturity is exactly halfway between, the

annual percentage rate is compared with the

Treasury security that has the lower yield.

For example, if the loan has a maturity of 20

years and comparable securities have

maturities of 10 years with a yield of 6.501

percent and 30 years with a yield of 6.906

percent, the annual percentage rate is

compared with 10 percentage points over the

yield of 6.501 percent, the lower of the two

yields.

Paragraph 32(a)(1)(ii).

1. Total loan amount. For purposes of the

‘‘points and fees’’ test, the total loan amount

is calculated by taking the amount financed,

as determined according to § 226.18(b), and

deducting any cost listed in § 226.32(b)(1)(iii)

that is both included as points and fees under

§ 226.32(b)(1) and financed by the creditor.

For example, if a consumer borrows $10,000,

finances a $300 fee for a creditor-conducted

appraisal, and pays $400 in points at closing,

the amount financed according to § 226.18(b)

is $9,900 ($10,000 plus the $300 appraisal fee

that is financed by the creditor, less $400 in

prepaid finance charges). The $300 appraisal

fee paid to the creditor is added to other

points and fees under § 226.32(b)(1)(iii). It is

deducted from the amount financed under

§ 226.18(b) ($9,900) to derive a total loan

amount of $9,600. If the $300 appraisal fee

is paid in cash at closing, the $300 is

included in the points and fees calculation.

However, because it is not financed by the

creditor, the $300 fee is not part of the

amount financed under § 226.18(b) ($10,000,

in this case). The total loan amount is $9,600

($10,000, less $400 in prepaid finance

charges).

32(b) Definitions.

Paragraph 32(b)(1)(i).

1. General. Items defined as finance

charges under § 226.4(a) and 226.(4)(b) are

included under this paragraph as a

component of the total ‘‘points and fees.’’

Items excluded from the finance charge

under other provisions of § 226.4 are not

included in the calculation under this

paragraph 32(b)(1)(i), although the fee may be

included in ‘‘points and fees’’ under

paragraphs 32(b)(1)(ii) and 32(b)(1)(iii).

Paragraph 32(b)(1)(ii).

1. Mortgage broker fees. In determining

‘‘points and fees’’ for purposes of this

section, compensation paid by a consumer to

a mortgage broker (directly or through the

creditor for delivery to the broker) is

included in the calculation whether or not

the amount is disclosed as a finance charge.

Mortgage broker fees that are not paid by the

consumer are not included. Broker fees

already included in the calculation as finance

charges under § 226.32(b)(1)(i) need not be

counted again under § 226.32(b)(1)(ii).

2. Example. Section 226.32(b)(1)(iii)

defines ‘‘points and fees’’ to include all items

listed in § 226.4(c)(7), other than amounts

held for future payment of taxes. An item

listed in § 226.4(c)(7) may be excluded from

the ‘‘points and fees’’ calculation, however,

if the charge is reasonable, the creditor

receives no direct or indirect compensation

from the charge, and the charge is not paid

to an affiliate of the creditor. For example, a

reasonable fee paid by the consumer to an

independent, third-party appraiser may be

excluded from the points and fees calculation

(assuming no compensation is paid to the

creditor). A fee paid by the consumer for an

appraisal performed by the creditor must be

included in the calculation, even though the

fee may be excluded from the finance charge

if it is bona fide and reasonable in amount.

32(c) Disclosures.

1. Format. The disclosures must be clear

and conspicuous but need not be in any

particular type size or typeface, nor

presented in any particular manner. For

example, the disclosures need not be a part

of the mortgage.

Paragraph 32(c)(3) Regular payment.

1. General. The regular payment is the

amount due from the borrower at regular

intervals, such as monthly, bimonthly,

quarterly, or annually. There must be at least

two payments, and the payments must be in

an amount and at such intervals that they

fully amortize the amount owed. If the loan

has two payment streams, the regular

payment for each must be disclosed.

2. Discount and premium rates. In

disclosing the regular payment, creditors may

rely on the rules set forth in § 226.18(g). In

discounted or premium variable rate

transactions where the creditor sets the

initial interest rate and later rate adjustments

are determined by an index or formula, the

creditor must disclose both the payment

based on the discount or premium and the

payment that will be in effect thereafter.

Additional explanatory material which does

not detract from the required disclosures may

accompany the disclosed amounts. For

example, if a monthly payment is $250 for

the first six months and then increases based

on an index and margin, the creditor could

use language such as the following: ‘‘Your

regular monthly payment will be $250 for six

months. After six months your regular

monthly payment will be based on an index

and margin, which currently would make

your payment $350. Your actual payment at

that time may be higher or lower.’’

Paragraph 32(c)(4) Variable-rate.

1. Calculating ‘‘worst-case’’ payment

example. Creditors may rely on instructions

in § 226.19(b)(2)(x) for calculating the

maximum possible increases in rates in the

shortest possible timeframe, based on the

face amount of the note (not the hypothetical

loan amount of $10,000 required by

§ 226.19(b)(2)(x)). The creditor must provide

a maximum payment for each payment

stream, where a payment schedule provides

for more than one payment stream and more

than one maximum payment amount is

possible.

32(d) Limitations.

Paragraph 32(d)(1)(i) Balloon payment.

1. Regular periodic payments. The

repayment schedule for a § 226.32 mortgage

loan with a term of less than five years must

fully amortize the outstanding principal

balance through ‘‘regular periodic

payments.’’ A payment is a ‘‘regular periodic

payment’’ if it is not more than twice the

amount of other payments.

Paragraph 32(d)(2) Negative amortization.

1. Negative amortization. The prohibition

against negative amortization in a mortgage

covered by § 226.32 does not preclude

increases in the principal balance that result

from events unrelated to the payment

schedule, such as when a consumer fails to

obtain property insurance and the creditor

purchases and adds the premium to the

consumer’s principal balance.

Paragraph 32(d)(4) Increased interest rate.

1. Variable-rate transactions. The

limitation on interest rate increases does not

apply to rate increases resulting from index

changes in a variable-rate transaction, even if

the increase occurs after default by the

consumer.

Paragraph 32(d)(5) Rebates.

1. Calculation of refunds. The limitation

applies only to refunds of interest and not to

any other charges that are considered finance

charges under § 226.4 (for example, points

and fees paid at closing). The calculation of

the refund of interest includes odd-days

interest, whether paid at or after

consummation.
Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules 62771

Paragraph 32(d)(6) Prepayment penalties.

1. State law. If using the actuarial method

defined by applicable state law results in a

refund that is greater than the refund

calculated by using the method described in

section 933(d) of the Housing and

Community Development Act of 1992,

creditors must use the state law definition in

determining if a refund is a prepayment

penalty under § 226.32(d)(6).

32(d)(7) Prepayment penalty exception.

Paragraph 32(d)(7)(iii).

1. Calculating debt-to-income ratio. ‘‘Debt’’

does not include amounts paid by the

borrower in cash at closing or amounts from

the loan proceeds that directly repay an

existing debt. Creditors may consider

combined debt-to-income ratios for

transactions involving joint applicants.

2. Verification. Verification of employment

satisfies the requirement for payment records

for employment income.

32(e) Prohibited acts and practices.

Paragraph 32(e)(1) Repayment ability.

1. Determining repayment ability. The

information provided to the creditor in

connection with § 226.32(d)(7) may be used

to show that the creditor considered the

consumer’s income and obligations before

extending the credit. Any expected income

can be considered by the creditor, except

equity income that the consumer would

obtain through the foreclosure of a mortgage

covered by § 226.32. For example, a creditor

may use information about income other than

regular salary or wages such as gifts,

expected retirement payments, or income

from housecleaning or childcare. The

creditor also may use unverified income, so

long as the creditor has a reasonable basis for

believing that the income exists.

Paragraph 32(e)(2) Home-Improvement

Contracts.

Paragraph 32(e)(2)(i).

1. Joint payees. If a creditor pays a

contractor with an instrument jointly payable

to the contractor and the consumer, the

instrument must name as payee each

consumer who is primarily obligated on the

note.

Paragraph 32(e)(3) Notice to Assignee.

1. Subsequent sellers or assignors. Any

person, whether or not the original creditor,

that sells or assigns a mortgage subject to this

section must furnish the notice of potential

liability to the purchaser or assignee.

2. Format. While the notice of

potential liability need not be in any

particular format, the notice must be

prominent. Placing it on the face of the

note, such as with a stamp, is one means

of satisfying the prominence

requirement.

Section 226.33—Requirements for Reverse

Mortgages

33(a) Definition.

1. Nonrecourse transaction. A nonrecourse

reverse mortgage transaction limits the

homeowner’s liability to the proceeds of the

sale of the home (or any lesser amount

specified in the credit obligation). If a

transaction structured as a closed-end reverse

mortgage transaction allows recourse against

the consumer, and the annual percentage rate

or the points and fees exceed those specified

under § 226.32(a)(1), the transaction is

subject to all the requirements of § 226.32,

including the limitations concerning balloon

payments and negative amortization.

Paragraph 33(a)(2).

1. Default. Default is not defined by the

regulation, but rather by the legal obligation

between the parties and state or other law.

2. Definite term or maturity date. To meet

the definition of a reverse mortgage

transaction, a creditor cannot require any

principal, interest, or shared appreciation or

equity to be due and payable (other than in

the case of default) until after the consumer’s

death, transfer of the dwelling, or the

consumer ceases to occupy the dwelling as

a principal dwelling. Some state laws require

legal obligations secured by a mortgage to

specify a definite maturity date or term of

repayment in the instrument. Such a

provision in an obligation does not violate

the definition of a reverse mortgage

transaction if the maturity date or term or

repayment required by state law would in no

case operate to cause maturity prior to the

occurrence of any of the events recognized in

the regulation. For example, a provision that

allows a reverse mortgage loan to become due

and payable only after the consumer’s death,

transfer, or cessation of occupancy, or after

a specified term, but which automatically

extends the term for consecutive periods as

long as none of the other events has occurred

would meet the definition of a reverse

mortgage transaction.

33(c) Projected total cost of credit.

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

1. Costs and charges to consumer—relation

to finance charge. All costs and charges to

the consumer that are incurred in a reverse

mortgage transaction are included in the

projected total cost of credit, and thus in the

total annual loan cost rates, whether or not

the cost or charge is a finance charge under

§ 226.4 of the regulation.

2. Annuity costs. As part of the credit

transaction, some creditors require or permit

a consumer to purchase an annuity that

immediately—or at some future time—

supplements or replaces the creditor’s

payments. The amount paid by the consumer

for the annuity is a cost to the consumer

under this section, regardless of whether the

annuity is purchased through the creditor or

a third party, or whether the purchase is

mandatory or voluntary.

3. Disposition costs excluded. Disposition

costs incurred in connection with the sale or

transfer of the property subject to the reverse

mortgage are not included in the costs to the

consumer under this paragraph. (However,

see the definition of Valn in appendix K to

the regulation to determine the effect certain

disposition costs may have on the total

annual loan cost rates.)

Paragraph 33(c)(2) Payments to consumer.

1. Payments upon a specified event. The

projected total cost of credit should not

reflect contingent payments in which a credit

to the outstanding loan balance or a payment

to the consumer’s estate is made upon the

occurrence of an event (for example, a ‘‘death

benefit’’ payable if the consumer’s death

occurs within a certain period of time). Thus,

the table of total annual loan cost rates

required under § 226.33(b)(2) would not

reflect such payments. At its option,

however, a creditor may put an asterisk,

footnote, or similar type of notation in the

table next to the applicable total annual loan

cost rate, and state in the body of the note,

apart from the table, the assumption upon

which the total annual loan cost is made and

any different rate that would apply if the

contingent benefit were paid.

Paragraph 33(c)(3) Additional creditor

compensation.

1. Shared appreciation or equity. Any

shared appreciation or equity that the

creditor is entitled to receive pursuant to the

legal obligation must be included in the total

cost of a reverse mortgage loan. For example,

if a creditor agrees to a reduced interest rate

on the transaction in exchange for a portion

of the appreciation or equity that may be

realized when the dwelling is sold, that

portion is included in the projected total cost

of credit.

Paragraph 33(c)(4) Limitations on

consumer liability.

1. In general. Creditors must include any

limitation on the consumer’s liability (such

as a nonrecourse limit or an equity

conservation agreement) in the projected

total cost of credit. These limits and

agreements protect a portion of the equity in

the dwelling for the consumer or the

consumer’s estate. For example, the

following contractual provisions are

limitations on the consumer’s liability that

must be included in the projected total cost

of credit:

i. A limit on the consumer’s liability to a

certain percentage of the projected value of

the home.

ii. A limit on the consumer’s liability to the

net proceeds from the sale of the property

subject to the reverse mortgage.

2. Uniform assumption for ‘‘net proceeds’’

recourse limitations. If the legal obligation

between the parties does not specify a

percentage for the ‘‘net proceeds’’ liability of

the consumer, for purposes of the disclosures

required by § 226.33, a creditor must assume

that the costs associated with selling the

property will equal 7 percent of the projected

sale price (see the definition of the Valn

symbol under appendix K(b)(6)).fi

* * * * *

10. In Supplement I to Part 226, a new

Appendix K—Total Annual Loan Cost

Rate Computations for Reverse Mortgage

Transactions and a new Appendix L—

Assumed Loan Periods for

Computations of Total Annual Loan

Cost Rates would be added to read as

follows:

* * * * *

flAppendix K—Total Annual Loan Cost

Rate Computations for Reverse Mortgage

Transactions

1. General. The calculation of total annual

loan cost rates under appendix K is based on

the principles set and the estimation or

‘‘iteration’’ procedure used to compute

annual percentage rates under appendix J.

Rather than restate this iteration process in

full, the regulation cross-references the

procedures found in appendix J. In other

aspects the appendix reflects the special
62772 Federal Register / Vol. 60, No. 235 / Thursday, December 7, 1995 / Proposed Rules

nature of reverse mortgage transactions.

Special definitions and instructions are

included where appropriate.

(b) Instructions and equations for the total

annual loan cost rate.

(b)(5) Number of unit-periods between two

given dates.

1. Assumption as to when transaction

begins. The computation of the total annual

loan cost rate is based on the assumption that

the reverse mortgage transaction begins on

the first day of the month in which

consummation is estimated to occur.

Therefore, fractional unit-periods (as used

under appendix J for calculating annual

percentage rates) are not used.

(b)(9) Assumption for discretionary cash

advances.

1. Amount of credit. Creditors should

compute the total annual loan cost rates for

transactions involving discretionary cash

advances by assuming that 50 percent of the

initial amount of the credit available under

the transaction is advanced at closing or, in

an open-end transaction, when the consumer

becomes obligated under the plan. (For the

purposes of this assumption, the initial

amount of the credit is the principle loan

amount less any costs to the consumer under

section 226.33(c)(1).)

(b)(10) Assumption for variable-rate

reverse mortgage transactions.

1. Initial discount or premium rate. Where

a variable-rate reverse mortgage transaction

includes an initial discount or premium rate,

the creditor should apply the same rules for

calculating the total annual loan cost rate as

are applied when calculating the annual

percentage rate for a loan with an initial

discount or premium rate (see the

commentary to § 226.17(c)).

(d) Reverse mortgage model form and

sample form.

(d)(2) Sample form.

1. General. The ‘‘clear and conspicuous’’

standard for reverse mortgage disclosures

does not require disclosures to be printed in

any particular type size. Disclosures may be

made on more than one page, and use both

the front and the reverse sides, so long as the

pages constitute an integrated document.

Appendix L—Assumed Loan Periods for

Computations of Total Annual Loan Cost

Rates

1. General. The life expectancy figures

used in this appendix are those found in the

U.S. Decennial Life Tables for women, as

rounded to the nearest whole year and as

published by the U. S. Department of Health

and Human Services. The figures contained

in this appendix must be used by creditors

for all consumers (men and women). This

appendix will be revised periodically by the

Board to incorporate revisions to the figures

made in the Decennial Tables.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, 1995.

Jennifer J. Johnson,

Deputy Secretary of the Board.

[FR Doc. 95–29711 Filed 12–6–95; 8:45 am]

BILLING CODE 6210–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 95–ANE–03]

Airworthiness Directives; Sensenich

Propeller Manufacturing Company Inc.

Models M76EMM, M7EMMS, 76EM8,

and 76EM8S() Metal Propellers

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes to

revise an existing airworthiness

directive (AD), applicable to Sensenich

Propeller Manufacturing Company Inc.

Models M76EMM, M7EMMS, 76EM8,

and 76EM8S() metal propellers, that

currently restricts operators from

continuously operating the propeller at

engine speeds from 2,150 to 2,350

revolutions per minute (RPM). This

action would remove propellers

installed on certain additional Textron

Lycoming O–360 series reciprocating

engines with solid crankshafts from this

requirement, and update the referenced

Sensenich Propeller Company Inc.

service bulletin to the latest revision.

Reworking of all affected propeller

models remains a requirement of the

proposed AD, regardless of engine

installation. This proposal is prompted

by inquiries concerning tachometer red

arc restrictions on certain Textron

Lycoming O–360 series reciprocating

engines with solid crankshafts. The

actions specified by the proposed AD

are intended to prevent propeller blade

tip fatigue failure, which can result in

loss of control of the aircraft.

DATES: Comments must be received by

February 5, 1996.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), New England

Region, Office of the Assistant Chief

Counsel, Attention: Rules Docket No.

95–ANE–03, 12 New England Executive

Park, Burlington, MA 01803–5299.

Comments may be inspected at this

location between 8:00 a.m. and 4:30

p.m., Monday through Friday, except

Federal holidays.

The service information referenced in

the proposed rule may be obtained from

Sensenich Propeller Manufacturing

Company Inc., 519 Airport Road, Lititz,

PA 17543; telephone (717) 569–0435,

fax (717) 560–3725. This information

may be examined at the FAA, New

England Region, Office of the Assistant

Chief Counsel, 12 New England

Executive Park, Burlington, MA.

FOR FURTHER INFORMATION CONTACT:

Raymond J. O’Neill, Aerospace

Engineer, New York Aircraft

Certification Office, FAA, Engine and

Propeller Directorate, 10 Fifth St.,

Valley Stream, NY 11581; telephone

(516) 256–7505, fax (516) 568–2716.

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

should 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 95–ANE–03.’’ 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, New England Region, Office of the

Assistant Chief Counsel, Attention:

Rules Docket No. 95–ANE–03, 12 New

England Executive Park, Burlington, MA

01803–5299.

Discussion

On May 6, 1969, the Federal Aviation

Administration (FAA) issued

Airworthiness Directive (AD) 69–09–03,

Amendment 39–761 (34 FR 7371, May

7, 1969), applicable to Sensenich

Propeller Manufacturing Company Inc.

Models M76EMM, M7EMMS, 76EM8,

and 76EM8S() metal propellers.

Revision 1, Amendment 39–808 (34 FR

12563, August 1, 1969); and Revision 2,

Amendment 39–1102 (35 FR 17030,

November 5, 1970), were subsequently