Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15463

for Fiscal Year 1991 and up to 20 per

cent of funds allocated in subsequent

fiscal years to a State agency may,

subject to the provisions of § 235.5 of

this part, remain available for obligation

and expenditure by such State agency

during the following fiscal year.

* * * * *

(c) The SAE funds allocated under

§ 235.4(b)(2), (b)(4), and (d) shall be

used exclusively for Food Distribution

Program administrative expenses for the

programs under Parts 210, 220, and 226

of this chapter by any distributing

agency which receives such funds. SAE

funds allocated under § 235.4(a)(1),

(a)(2), (b)(1), (b)(3) and (f), and those

funds for the Child and Adult Care Food

Program under (b)(4) which are not

otherwise redirected for the Food

Distribution Program under § 235.4(d)

may be used to assist in the

administration of the Food Distribution

Program for such purposes. However, no

funds designated for the exclusive use

of the Food Distribution Program may

be transferred by any State agency for

other purposes. Furthermore, for each

fiscal year beginning with Fiscal Year

1993, expenditures of funds from State

sources for administrative costs

incurred in the distribution of USDA

donated foods to schools and

institutions which participate in

programs governed by parts 210, 220,

and/or 226 of this chapter shall not be

less than the amount of such funds

expended in Fiscal Year 1991.

* * * * *

(g) FCS shall allocate, for the purpose

of providing grants on an annual basis

to public entities and private nonprofit

organizations participating in projects

under section 18(c) of the National

School Lunch Act, not more than

$4,000,000 in each of Fiscal Years 1993

and 1994. Subject to the maximum

allocation for such projects for each

fiscal year, at the beginning of each of

Fiscal Years 1993 and 1994, FCS shall

allocate, from funds available under

§ 235.5(d) that have not otherwise been

allocated to States, an amount equal to

the estimates by FCS of the funds to be

returned under paragraph (a) of this

section, but not less than $1,000,000 in

each fiscal year. To the extent that

amounts returned to FCS are less than

estimated or are insufficient to meet the

needs of the projects, FCS may allocate

amounts to meet the needs of the

projects from funds available under this

section that have not been otherwise

allocated to States. FCS shall reallocate

any of the excess funds above the

minimum level in accordance with

§ 235.5(d).

§ 235.7 [Amended]

7. In § 235.7,

a. The second sentence of paragraph

(b) is amended by removing the

reference to ‘‘§ 235.4(c) of this part’’ and

adding in its place the reference to

‘‘§ 235.6(a)’’.

b. The first sentence of paragraph (c)

is amended by removing the words

‘‘directed by Congress and requested’’

and adding in their place the word

‘‘authorized’’. Paragraph (c) is further

amended by removing the words ‘‘FY

’80’’ from the last sentence.

§ 235.11 [Amended]

8. In § 235.11:

a. Paragraph (b)(2) is amended by

removing the reference to ‘‘§ 235.4(a)’’

and adding in its place the reference to

‘‘§ 235.4 (a)(1)’’.

b. Paragraph (b)(3) is amended by

removing the reference to ‘‘§ 235.4(b)’’

and addding in its place the reference to

‘‘§ 235.4(a)(2)’’.

c. Paragraph (b)(4) is amended by

removing the reference to ‘‘§ 235.4(a)’’

and adding in its place the reference to

‘‘ § 235.4(a)(1)’’.

d. Paragraph (b)(7) is amended by

removing the reference to ‘‘§ 235.4(e)’’

and adding in its place the reference to

‘‘§ 235.5(d)’’.

Dated: March 16, 1995.

William E. Ludwig,

Administrator.

[FR Doc. 95–7310 Filed 3–23–95; 8:45 am]

BILLING CODE 3410–30–U

FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R–0858]

Truth in Lending

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board is publishing

amendments to Regulation Z (Truth in

Lending). The amendments implement

changes made to the Truth in Lending

Act by the Riegle Community

Development and Regulatory

Improvement Act of 1994. The law

imposes new disclosure requirements

and substantive limitations on closedend home equity mortgage loans bearing

rates or fees above a certain percentage

or amount. The amendments provide

protection to consumers entering into

these mortgages. The law also imposes

new disclosure requirements to assist

consumers in comparing the cost of

reverse mortgage transactions, which

provide periodic advances primarily to

elderly homeowners and rely

principally on the home’s value for

repayment.

DATES: This rule is effective March 22,

1995. Compliance is optional until

October 1, 1995.

FOR FURTHER INFORMATION CONTACT: Jane

Ahrens, Senior Attorney, or Kyung ChoMiller, Sheilah Goodman, or Kurt

Schumacher, Staff Attorneys, Division

of Consumer and Community Affairs,

Board of Governors of the Federal

Reserve System, at (202) 452–3667 or

452–2412; for the hearing impaired

only, Dorothea Thompson,

Telecommunications Device for the

Deaf, at (202) 452–3544.

SUPPLEMENTARY INFORMATION:

I. Background

The purpose of the Truth in Lending

Act (15 U.S.C. 1601–1666j) is to

promote the informed use of consumer

credit. 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.

The act is implemented by the Board’s

Regulation Z (12 CFR part 226).

The Home Ownership and Equity

Protection Act of 1994 (HOEPA),

contained in the Riegle Community

Development and Regulatory

Improvement Act of 1994 (Community

Development Act), Pub. L. 103–325, 108

Stat. 2160, amends the Truth in Lending

Act (TILA). Section 152 of the HOEPA

adds a new section 129 dealing with

certain mortgages bearing rates or fees

above a certain percentage or amount.

Section 154 adds a new section 138

dealing with reverse mortgage

transactions.

The HOEPA was enacted in

September 1994, and directs the Board

to issue final regulations within 180

days. Section 155 provides that the

statutory provisions and the Board’s

rules shall apply on the October 1

following six months after the final

regulation is issued. It also states that

the final rule governs all mortgage

transactions having rates or fees above

a certain percentage or amount

(‘‘Section 32 mortgages,’’ as found in

§ 226.32 of the regulation) consummated

after the mandatory effective date. The

Board has determined that the same

compliance rule applies to reverse

mortgage transactions consummated

after October 1, 1995.
15464 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations

II. Regulatory Provisions

In December 1994, the Board

published a proposed rule amending

Regulation Z, to implement the new law

(59 FR 61832, December 2, 1994). The

Board received about 100 comments on

the proposal. About 85 percent were

from creditors or other businesses

potentially affected by the proposal (and

their trade associations); the remainder

were mainly from consumer groups and

individuals. Commenters generally

supported the Board’s proposal,

although some believe the act’s

provisions are detrimental to consumers

seeking credit. In large measure, the

regulatory amendments that the Board

has adopted in the final rule follow the

proposal; technical suggestions or

concerns raised by commenters are

addressed in the final rule. The sectionby-section descriptions given below

provide interpretive guidance to

creditors until autumn 1995, when an

update to the Official Staff Commentary

to the regulation will be proposed.

III. Section-by-Section Analysis

Section 226.2—Definitions and Rules of

Construction

2(a) Definitions

2(a)(17) Creditor

Section 226.2(a)(17) n.3 implements

section 152(c) of the HOEPA and

defines coverage in terms of the number

of Section 32 mortgage transactions that

will subject a lender to the TILA. The

regulation parallels the statute. A

creditor includes a person originating—

during any 12-month period—two or

more Section 32 mortgage loans, or one

or more such mortgage loans through a

mortgage broker. Thus, for example, a

person that originates one Section 32

mortgage during a 12-month period is

not covered. A person that originates

three home-secured loans, two of which

are secured by Section 32 mortgages,

will be required to comply with the

TILA for the latter two transactions.

Persons making fewer than five homesecured loans during a calendar year—

that do not meet the definition of a

Section 32 mortgage—are not subject to

the act.

Subpart B—Open-End Credit

Section 226.5b—Requirements for Home

Equity Plans

5b(f) Limitations on Home Equity Plans

The TILA generally restricts creditors’

ability to terminate open-end plans and

demand repayment to narrowly drawn

circumstances, such as when the

consumer fails to make payments or

takes actions that adversely affect the

creditor’s security. Section 154(c) of the

HOEPA excludes reverse mortgage

transactions from these restrictions. The

legislative history states that the

statutory amendment codifies the

Board’s existing interpretation regarding

a creditor’s ability to accelerate an openend reverse mortgage loan in accordance

with the credit contract, specifically,

upon the consumer’s death. The

regulatory amendment reflects that

legislative intent.

Subpart C—Closed-End Credit

Section 226.23—Right of Rescission

23(a) Consumer’s Right to Rescind

Section 152(b) of the HOEPA provides

that Section 32 mortgage disclosures

and certain practices involving these

loans are ‘‘material’’ for purposes of the

TILA. The amendments to footnote 48 of

the regulation implement the change.

Consumers are provided with the right

to rescind a Section 32 mortgage if a

creditor fails to furnish the disclosures

under § 226.32(c) or if the loan

documents include a credit term under

§ 226.32(d).

Subpart D—Miscellaneous

Section 226.28—Effect on State Laws

28(b) Equivalent Disclosure

Requirements

Section 152(e) of the HOEPA provides

that the procedure for substituting

substantially similar state law

disclosures for federal TILA

requirements does not apply to state

disclosure requirements for Section 32

mortgages. The amendments reflect this

limitation.

Subpart E—Special Rules for Certain

Home Mortgage Transactions

The amendments to the TILA (section

129 dealing with mortgages having rates

or fees above a certain percentage or

amount and section 138 dealing with

reverse mortgage transactions) layer

disclosure and timing requirements onto

the requirements already imposed for

these consumer credit transactions. The

Board has implemented these

provisions by adding a new subpart E to

the regulation: § 226.31 addresses

general requirements such as timing and

format rules; § 226.32 contains rules

relating to mortgages having rates or fees

above a certain percentage or amount;

and § 226.33 addresses reverse

mortgages.

Section 226.31—General Rules

31(a) Relation to Other Subparts

Section 31(a) explicitly states that the

requirements and limitations of Subpart

E are in addition to—not in lieu of—

requirements and limitations contained

in other subparts of the regulation. For

example, Subpart C requires creditors to

provide disclosures at the time of

application and prior to consummation

for closed-end variable-rate loans that

are secured by the consumer’s principal

dwelling and have a term greater than

one year. If these transactions are also

mortgage loans subject to § 226.32,

Subpart E requires creditors to provide

the special disclosures at least three

business days prior to the

consummation.

31(c) Timing of Disclosures

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

Implementing section 129(b) of the

TILA, the regulation requires a threeday ‘‘cooling off’’ period between the

time a consumer is furnished with

special disclosures about a mortgage

subject to § 226.32 (Section 32 mortgage)

and the time the consumer becomes

obligated under the loan. Some

commenters suggested that the final rule

should provide flexibility in the timing

requirements to facilitate delivery by

mail or the contemporaneous delivery of

other required disclosures. The Board

believes, however, that the act requires

that consumers considering a Section 32

mortgage loan be given the special

disclosures at least three business days

before completing the transaction,

regardless of the creditor’s method of

delivering these disclosures or the

timing of other disclosures.

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

Implementing section 129(b)(2) of the

act, the regulation requires creditors to

provide new Section 32 mortgage

disclosures if, after giving the

disclosures to the consumer and before

consummation, the creditor changes any

terms that make the disclosures

inaccurate. New disclosures are

triggered by a changed term only if it

affects the APR, for example, or other

disclosures set forth in § 226.32(c).

Commenters requested guidance on the

scope of ‘‘terms’’ for which such a

change could trigger new disclosures.

The Board believes the scope extends

both to a change in the terms of the loan

agreement, as well as to a change in any

charge associated with closing the loan.

31(c)(1)(iii) Consumer’s Waiver of

Waiting Period Before Consummation

Section 129(b)(3) of the TILA

authorizes the Board to permit the

consumer to modify or waive the right

to the three-day waiting period to meet

bona fide personal financial

emergencies. Sections 226.15(e) and

226.23(e) of the regulation discuss
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15465

waivers of the right to rescind to meet

bona fide personal financial

emergencies. Comment was solicited on

whether the Board should provide a

similar provision for waivers of the

three-day waiting period on Section 32

mortgages.

In response to comments received and

upon further analysis, the Board is

adding a new paragraph providing that

the consumer may modify or waive the

three-day waiting period between

delivery of Section 32 mortgage

disclosures and consummation, if the

consumer determines that the extension

of credit is needed to meet a bona fide

personal financial emergency.

Some commenters requested that the

Board identify specific circumstances

that are bona fide personal financial

emergencies. Generally, the facts

surrounding individual situations will

determine whether the standard is met

and the consumer may waive the threeday waiting period before

consummation. The Board believes,

however, that consummating a Section

32 mortgage loan to prevent the sale of

the consumer’s home at foreclosure is a

bona fide personal financial emergency.

For example, if the consumer’s home

is scheduled to be sold at foreclosure

within the three-day waiting period, the

consumer could waive the waiting

period to consummate the Section 32

mortgage loan and forestall the

foreclosure. The consumer may exercise

the waiver, however, only after

receiving the disclosures required by

paragraph (c)(1).

31(c)(2) Disclosures for Reverse

Mortgages

Section 138 of the TILA requires

creditors to furnish additional

disclosures to consumers for a reverse

mortgage transaction at least three

business days prior to consummation.

Under the statute, timing requirements

for closed-end credit are often tied to

the consummation of the transaction,

and the regulation parallels the statute

for closed-end reverse mortgage loans.

However, reverse mortgage loans may

also be structured as open-end credit

plans. In that case, the regulation

provides that the disclosures must be

given at least three business days prior

to the first transaction under the openend credit plan or before the consumer

becomes obligated on the plan. (See

official staff interpretations of

§ 226.5(b)(1) in Supplement I of this

part.)

Conforming Paragraphs

Paragraphs (d), (e), and (f) mirror

provisions in subparts B and C (§ 226.5

and § 226.17).

31(g) Accuracy of Annual Percentage

Rate

Creditors offering mortgages subject to

§ 226.32 must include the APR as part

of the new Section 32 mortgage

disclosures. In response to comments

received, the regulation clarifies that the

APR shall be calculated in accordance

with § 226.22, which provides guidance

for calculating an APR (and provides a

tolerance for minor calculation errors)

for transactions covered by Subpart C

(closed-end). Commenters also

suggested that the regulation should

provide a tolerance for errors made in

calculating payment amounts for the

Section 32 mortgage loan disclosure. No

tolerance exists for any such calculation

errors under Subpart C, and the Board

has not adopted a tolerance for payment

amounts in Section 32 mortgage

disclosures.

Section 226.32—Requirements for

Certain Closed-End Home Mortgages

32(a) Coverage

Section 103(aa) of the TILA defines

the mortgages covered by new section

129 based on the rates charged and fees

paid. The proposal referred to those

mortgages as high-rate, high-fee

mortgages. Many commenters opposed

the label, stating that early versions of

the legislation had been revised to

delete any identification of the covered

mortgages with their relative cost. The

final rule follows the statutory

approach.

32(a)(1)(i)

The statute covers mortgages that

charge rates above a specified standard.

The rate-based test is tied to Treasury

securities having terms comparable to

the loan’s maturity, and several

commenters asked for more guidance on

how creditors may determine if a

particular transaction meets that test.

The proposal cited the Board’s Selected

Interest Rates (statistical release H–15)

as an example of a readily available

source that identifies Treasury securities

(bills, notes, and bonds) with maturities

of 1, 2, 3, 5, 7, 10, 20, and 30 years. The

same figures are published in other

widely available sources, such as major

financial and metropolitan newspapers.

Commenters also sought guidance for

selecting the proper maturity for loan

maturities that do not match those of

Treasury securities. The Board believes

that creditors could use rounding. For

example, if a creditor must compare the

APR to Treasury securities with either

seven-year or ten-year maturities, the

APR for an eight-year loan would be

compared to securities with a sevenyear maturity; a nine-year loan would be

compared to securities with a ten-year

maturity. If the loan maturity is exactly

halfway between the maturities for two

published Treasury securities, the

creditor would compare the APR to the

yield for the lower Treasury security.

The act and regulation require

creditors to compare the APR to yields

as of the fifteenth day of the month

immediately preceding the month in

which the application for credit is

received. Commenters asked the Board

to clarify when an application is

deemed to be received. The Board

believes an application is received when

it reaches the creditor in any of the ways

applications are normally transmitted,

even if the consumer did not provide all

the information required for the creditor

to make the credit decision. (See official

staff interpretations of § 226.19(a)(1) in

Supplement I of this part.)

32(a)(1)(ii)

The statute covers mortgages if 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

contemplates that any adjustment to the

$400 dollar amount will be published

with the proposed updates to Regulation

Z’s official staff commentary (in the

autumn of each year). The adjustment

will be based on the annual percentage

change in the Consumer Price Index (as

reported on June 1) and will be effective

on January 1 of the following year.

Many commenters asked for further

guidance to determine the ‘‘total loan

amount.’’ Some suggested using the face

amount of the note; others suggested

using the ‘‘amount financed’’ as

calculated according to § 226.18(b). The

Board believes the statute requires

creditors to omit from the ‘‘total loan

amount’’ any additional costs that may

be incurred at closing—and included in

the face amount of the note if financed

by the creditor—when determining

whether the ratio of fees to the total loan

amount exceeds 8 percentage points.

Thus, the ‘‘total loan amount’’ is the

amount financed, as defined in

§ 226.18(b), less any items that are

required to be disclosed under

§ 226.4(c)(7) and that are not excluded

as fees under paragraph (b)(1)(iii) of this

section.

32(a)(2)

Section 103(aa) of the TILA provides

that the Section 32 mortgage rules do

not apply to a residential mortgage

transaction, a reverse mortgage

transaction, or an open-end credit plan.

The regulation tracks those exceptions.
15466 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations

32(b) Definitions

32(b)(1) Points and Fees

Section 103(aa) of the TILA defines

points and fees as all finance charges

(except interest or the time-price

differential), all compensation paid to

mortgage brokers, and all items

identified in section 106(e) (other than

amounts held for future payment of

taxes). A charge is excluded from the

definition 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.

The Board believes the Congress

intended a broad application of the term

‘‘compensation,’’ including, for

example, amounts paid to brokers by

creditors in addition to amounts paid by

consumers. Many commenters

considered this interpretation too

expansive, and suggested that broker

fees should only be considered ‘‘fees’’ if

the broker is required by the creditor as

a condition of obtaining the credit. (See

official staff interpretations of § 226.4(a)

in Supplement I of this part.)

RESPA requires creditors to provide

consumers with estimates of closing

costs—including fees paid by creditors

to brokers—for certain real-estate

secured loans (Regulation X, 24 CFR

3500, Appendix A, fact pattern 12). The

Board believes that including in the

total fee calculation all broker fees

required to be disclosed under RESPA is

consistent with the intent of the

Congress and addresses the

commenters’ concerns about broker fees

that are unknown to the creditor.

Section 103(aa) authorizes the Board

to identify other charges that are

appropriate to include in the total fee

calculation. The conference report cites

credit insurance premiums as an

example of fees that could be included,

if evidence showed that the premiums

were being used to circumvent the

statute. Several commenters, mostly

insurance industry representatives,

opposed the regulation’s including

premiums for credit life insurance that

is purchased at the consumer’s option.

Section 158 of the HOEPA requires

the Board (in consultation with its

Consumer Advisory Council) to conduct

public hearings that examine home

equity loans in the marketplace and the

adequacy of federal laws (including the

new rules affecting Section 32

mortgages and reverse mortgage

transactions) in protecting consumers—

particularly low-income consumers. The

statute provides that the initial hearing

must be held prior to September 1997,

and the Board contemplates that the

first hearing will occur sometime in

1996. The Board believes the hearings

may provide an appropriate forum to

explore whether any particular charges

should be included in the total fee

calculation. The regulation does not

identify any additional fees at this time.

32(b)(2) Affiliate

Section 129(k) of the TILA defines

‘‘affiliate’’ for purposes of the Section 32

mortgage rules by a statutory reference

to the Bank Holding Company Act of

1956 (12 U.S.C. 1841(k)). That act

defines affiliate as any company that

controls, is controlled by, or is under

common control with another company.

It also defines ‘‘company’’ and defines

when one company is considered to

‘‘control’’ another (12 U.S.C. 1841(a)

and (b)). The proposal defined the term

by a statutory reference; to ease

compliance, the final rule adds a brief

narrative.

32(c) Disclosures

The regulation tracks the disclosure

requirements of section 129(a). In

response to comments, a new H–16—

Mortgage Sample has been added to

Appendix H. Creditors using it properly

will be deemed to be in compliance

with the regulation for those

disclosures.

32(c)(3) Regular Payment

The act requires creditors to disclose

the amount of the regular ‘‘monthly’’

payment. In response to comments

received and upon further analysis, the

final regulation clarifies that the

disclosure contemplates monthly or

other regularly scheduled periodic

payments, such as monthly, bimonthly,

or quarterly.

32(c)(4) Variable-rate

The law requires creditors offering

variable-rate transactions to disclose a

monthly payment based on an interest

rate cap required for consumer contracts

by a provision in the Competitive

Equality Banking Act of 1987 (CEBA),

which is implemented in § 226.30. The

legislative history provides that in

calculating the maximum payment

based on the interest rate cap, creditors

should assume the maximum possible

increases in rates in the shortest

possible timeframe. Paragraph

§ 226.19(b)(2)(x)—which requires a

similar maximum payment disclosure

for adjustable-rate mortgage

transactions—provides guidance for

calculating the maximum possible

increases in rates in the shortest

possible timeframe.

32(d) Limitations

Section 129 of the TILA prohibits

mortgage creditors covered by § 226.32

from including several terms in their

contracts. In large measure, the final

regulation follows the proposal. In the

proposal, the headings for and

substantive limitations in paragraphs

(d)(1) and (d)(2) were inadvertently

reversed; the error has been corrected.

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

Under the act and regulation, the

repayment schedule for a Section 32

mortgage loan with a term of less than

five years must fully amortize the

outstanding principal balance through

regular periodic payments. Many

commenters requested further guidance

on the phrase ‘‘regular periodic’’

payments. Some were concerned that

small interest-only payments with

occasional payments of principal would

be prohibited, and the lack of flexibility

in designing a payment schedule would

ultimately be detrimental to consumers.

Others suggested defining a ‘‘regular

periodic payment’’ as one that is not

more than twice the amount of other

payments. The Board has adopted this

approach and believes it reflects the

intent of the Congress and provides

certainty in compliance.

32(d)(1)(ii) Exception

Section 129(l)(1) of the TILA

authorizes the Board to create

exemptions to the limitations set forth

in paragraph (d) and paragraph (e) of

this section, upon a finding that the

exemption is in the interest of the

borrowing public and will apply only to

mortgage products or categories of

products that maintain and strengthen

home ownership and protect equity.

The legislative history expresses the

Congress’s concern that the legislation

might inappropriately apply to some

government loans or short-term

‘‘bridge’’ construction loans. It also

states that in granting the exemption

authority to the Board, the Congress

intended that the Board consider

exemptions on a product-by-product

basis.

Based on the legislative history, the

comments received and upon further

analysis, the Board is creating a

narrowly drawn exemption from the

balloon payment limitation for mortgage

loans subject to § 226.32 with maturities

of less than one year, if the purpose of

the loan is a ‘‘bridge’’ loan connected

with the acquisition or construction of

a dwelling intended to become the

consumer’s principal dwelling. These

‘‘bridge’’ loans remain subject to all

other provisions of the section.
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15467

32(d)(2) Negative Amortization

The act and regulation prohibit

payment schedules with regular

periodic payments that may result in

increases to the principal balance.

Technical changes to the regulation are

made for clarity. The Board believes that

the prohibition does not extend to

increases in the principal balance

unrelated to the payment schedule, such

as when a consumer fails to obtain

property insurance and the creditor

purchases insurance and adds the

premium to the consumer’s principal

balance.

32(d)(4) Increased Interest Rate

The act and regulation prohibit

creditors from increasing the interest

rate after default. This prohibition does

not prevent a creditor offering a

variable-rate loan from changing the

rate, if, for example, the rate is tied to

an index and the index increases after

the consumer has defaulted on the

obligation.

32(d)(5) Rebates

Section 129(d) of the TILA restricts

how creditors may calculate refunds of

interest when a Section 32 mortgage

loan is accelerated due to a consumer’s

default. The regulation clarifies that the

paragraph covers limitation on refunds

of interest (not other charges—points,

for example—that are considered

finance charges under § 226.4). The

calculation would include odd-days

interest, whether paid at or after

consummation.

32(d)(6) Prepayment Penalties

Section 129(c) of the TILA generally

bars creditors from including a

prepayment penalty in a Section 32

mortgage contract. The statute includes,

as a prepayment penalty, refunds of

unearned interest calculated less

favorably than the actuarial method

defined in section 933(d) of the Housing

and Community Development Act of

1992 (HCDA).

The legislative history provides that

where the actuarial method, as defined

by state law, provides a refund that is

greater than the refund received under

the HCDA definition, creditors should

apply state law to determine if a refund

is a prepayment penalty for a Section 32

mortgage. The legislative history states

that the reference to the HCDA is not

intended to be exclusive, and that

penalties based on a percentage of the

outstanding balance or on the number of

months of interest are also prohibited.

32(d)(7) Prepayment Penalty Exception

Section 129(c)(2) of the TILA allows

creditors to include a prepayment

penalty clause in a Section 32 mortgage

loan under narrowly drawn

circumstances. To include a prepayment

penalty clause in the loan documents, a

creditor must verify that the consumer’s

monthly debt-to-income ratio is 50

percent or less. The Board believes that

in calculating the consumer’s monthly

debts and income to determine the debtto-income ratio, creditors may rely on

widely accepted underwriting

standards, such as those published by

the Federal National Mortgage

Association, the Federal Home Loan

Mortgage Corporation, the Federal

Housing Administration, or the

Veteran’s Administration. A creditor

using one of these standards and

determining that the consumer’s

monthly debt-to-income ration is 50

percent or less will be deemed to meet

the requirements of this provision. The

Board believes this safe harbor provides

consistency and eases compliance.

32(e) Prohibited Acts and Practices

Section 129(l)(2) of the TILA

authorizes the Board to prohibit acts or

practices in connection with mortgage

loans that the Board finds to be unfair,

deceptive, or designed to evade the

Section 32 mortgage rules. The Board

also may prohibit acts or practices

related to refinancing mortgage loans

that the Board finds are associated with

abusive lending practices or that are not

in the borrower’s interest. Neither the

proposal nor the final regulation

identifies any prohibited practices

pursuant to this authority.

Section 157 of the HOEPA requires

the Board to conduct a study and make

recommendations to the Congress

regarding, in part, the adequacy of

federal laws protecting consumers with

open-end credit plans secured by the

consumer’s principal dwelling. The

study must be completed within

eighteen months after the amendments

are adopted. The Board believes the

study and the hearing required by the

HOEPA will assist the Board in

determining whether certain acts or

practices should be prohibited.

32(e)(1) Repayment Ability

Section 129(h) of the TILA prohibits

creditors extending mortgage loans

subject to § 226.32 from engaging in a

pattern or practice of extending such

credit to consumers 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. Commenters

requested that ‘‘pattern or practice’’ be

defined; however, the Board believes a

determination whether a creditor

engages in a pattern or practice will

depend on individual fact situations.

Thus, the final regulation—like the

proposal—does not define the phrase.

Paragraph (d)(7) permits creditors to

assess a prepayment penalty if, in part,

the creditor verifies that the consumer’s

monthly debt to income ratio is 50

percent or less. In the supplementary

materials accompanying the proposal,

the Board stated that creditors could

rely on information provided by the

consumer in connection with paragraph

(d)(7) when considering a consumer’s

ability to repay the debt. Many

commenters were concerned that the

Board intended to incorporate the

income verification and debt-to-income

ratio requirements into paragraph (e)(1).

These concerns are unfounded. There is

no debt-to-income ratio requirement for

paragraph (e)(1). The information

provided to creditors in connection with

paragraph (d)(7) may be used to

demonstrate that the creditor considered

the consumer’s income and obligations

before extending the credit. Other

information—for example, information

about gift income, expected retirement

payments, or other unverifiable

income—may also be considered. The

Board believes any expected income can

be considered by the creditor, other than

equity income obtainable by the

consumer through the foreclosure of a

Section 32 mortgage with the creditor.

32(e)(2) Home Improvement Contracts

Section 129(i) of the TILA restricts

how creditors may disburse proceeds to

contractors under a home improvement

contract secured by a mortgage subject

to § 226.32. The regulation reflects the

statutory requirement that the creditor

must disburse the proceeds by an

instrument payable to the consumer or

jointly to the consumer and the

contractor. The Board believes that if

the contractor and the consumer are

joint payees, the instrument must name

as payees all consumers who are

primarily obligated on the note.

Alternatively, the regulation provides

that at the election of the consumer, the

creditor can disburse the proceeds

through an escrow agent in accordance

with terms established in a written

agreement signed by the consumer, the

creditor, and the contractor prior to the

disbursement. The Board solicited

comment on whether further guidance

was needed regarding the use of a third

party escrow agent, including an agent

that is an affiliate of the creditor. The

Board believes that RESPA adequately

protects consumers dealing with an

escrow agent that is an affiliate of the

creditor. RESPA prohibits creditors from

requiring the use of an affiliate, and
15468 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations

requires disclosures to be furnished if

the consumer opts to use the services of

an escrow agent that is in a ‘‘controlled

business arrangement’’ with the creditor

(Regulation X, 24 CFR 3500.15).

32(e)(3) Notice to Assignee

The act and regulation require

persons who sell or assign mortgages

covered by § 226.32 to furnish a notice

of the potential liability under the TILA.

In response to comments received, the

notice more directly discloses an

assignee’s potential liability.

Section 226.33—Requirements for

Reverse Mortgages

33(a) Definition

Section 154 of the HOEPA defines a

‘‘reverse mortgage’’ as a nonrecourse

transaction that is secured by the

consumer’s principal dwelling and that

ties repayment (other than upon default)

to the homeowner’s death or permanent

move from or transfer of the home. The

definition in the regulation tracks the

statute.

A nonrecourse transaction limits the

homeowner’s liability to no more than

the proceeds of the sale of the home

(unless a lesser amount is provided for

in the credit obligation, such as by an

equity reservation or an equity

conservation agreement between the

consumer and creditor). Neither the

statute nor the regulation defines

‘‘nonrecourse transactions.’’ Similarly,

specific acts of default for purposes of

the reverse mortgage rules are not

defined. Neither the act nor the

legislative history identifies such acts,

and the Board believes that the

determination of ‘‘default’’ is most

appropriately left to the legal obligation

between the parties and state or other

law.

33(b) Content of Disclosures

Section 138 of the TILA establishes a

new standard to measure the cost of

reverse mortgage credit. The statute

requires reverse mortgage creditors to

disclose a good faith projection of the

total cost of the credit to the consumer,

by means of a table of annual interest

rates. The legislative history states that

the Congress contemplated a disclosure

scheme modeled after the matrix

disclosure currently required by section

255 of the National Housing Act and

implemented by the Department of

Housing and Urban Development’s

(HUD’s) Home Equity Conversion

Mortgage (HECM) program. The Board’s

regulation reflects that approach, except

as noted below.

The regulation requires creditors to

use the term ‘‘total annual loan cost

rate’’ rather than ‘‘annual interest rate’’

in complying with this section. The

statute uses but does not mandate the

term ‘‘annual interest rate,’’ and the

Board believes that a different term will

avoid possible confusion with the

disclosure of the ‘‘annual percentage

rate’’ (APR) required by other parts of

the regulation. The term ‘‘total annual

loan cost rate’’ is unlikely to be

confused with the APR and is a more

accurate description of the percentage

cost of reverse mortgages than ‘‘annual

interest rate.’’ For example, the rate may

reflect costs other than interest, such as

annuity premiums, appraisal fees, and a

percentage of any appreciation in the

consumer’s home.

Section 138(a)(1) of the TILA requires

creditors to disclose total annual loan

cost rates for not less than three

projected appreciation rates and not less

than three credit transaction periods, as

determined by the Board. HUD’s HECM

matrix similarly discloses nine ‘‘average

annual percentage rates’’ based on three

assumed annual home appreciation

rates and three assumed loan terms. As

discussed below, the Board has adopted

the HECM model which requires the

tabular disclosure of nine total annual

loan cost rates, as described below. The

regulation permits an additional

assumed loan term, as described below.

The HECM matrix is accompanied by

a listing of the basic factors used in

calculating the projected total cost of

credit, such as the age of the borrower,

the value of the consumer’s home, etc.,

and a brief discussion of some

assumptions used in calculating the

rates in the matrix. The regulation

requires that the matrix be accompanied

by a listing of key factors used in

calculating the total annual loan cost

rates, along with a brief narrative that

helps consumers to interpret the rates

disclosed in the matrix. (See the

supplementary material accompanying

proposed Appendix K for further

discussion of the model disclosure.)

33(c) Projected Total Cost of Credit

Section 138 (a) and (b) of the TILA

identify factors creditors must consider

when calculating the projected total cost

of credit and the corresponding total

annual loan cost rates. The regulation

lists those requirements in paragraph (c)

of this section. (The mathematical

formula for determining the total annual

loan cost rate is contained in Appendix

K.)

33(c)(1) Costs to Consumer

Section 138(b)(2) of the TILA includes

in the projected total cost of credit all

costs and charges to the consumer,

including the costs of any annuity that

the consumer purchases (if any) as part

of the reverse mortgage transaction. The

regulation parallels the statute, except

that the term ‘‘associated’’ has been

deleted.

The Board believes the Congress

intended a broad application of the

terms ‘‘costs and charges.’’ For example,

the Board believes all costs and charges

connected with the reverse mortgage

transaction must be included in the

projected total cost of credit, whether or

not the charge is deemed to be a finance

charge under Subpart A of the

regulation.

Some creditors require or permit

consumers to purchase an annuity as

part of the transaction that immediately,

or at some future time, supplements or

replaces the creditor’s payments. The

law and regulation require the amount

paid by the consumer for the annuity to

be included as a cost to the consumer.

This is the case whether the purchase is

made through the creditor or a third

party, or whether the purchase is

mandatory or voluntary.

The HECM program does not include

disposition costs as a part of the total

annual loan cost rate, and the regulation

follows that approach. Few commenters

addressed the issue; they were about

evenly split on whether to include

disposition costs as part of the total

annual loan cost rate. Based on these

comments and upon further analysis,

the Board has retained the rule as

proposed.

33(c)(2) Advances to Consumer

Section 138(b)(3) of the TILA requires

creditors to consider in the projected

total cost of credit all advances to and

for the benefit of the consumer,

including annuity payments received by

the consumer from an annuity

purchased as part of the reverse

mortgage transaction. The regulation

generally tracks the statute, with slight

modifications for clarity.

33(c)(3) Additional Creditor

Compensation

Section 138(b)(1) of the TILA and the

regulation include, in the total cost of a

reverse mortgage loan, any shared

appreciation or equity that the creditor

is entitled to receive pursuant to the

credit contract. For example, creditors

sometimes offer a reduced interest rate

in exchange for a portion of the

appreciation or equity that may be

realized when the dwelling is sold.

33(c)(4) Limitations on Consumer

Liability

Section 138(b)(4) of the TILA requires

creditors to consider in the projected

total cost of credit any limitation on the
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15469

consumer’s liability under the reverse

mortgage loan. This includes, for

example, equity conservation

agreements. These agreements protect a

portion of the equity in the dwelling for

the consumer or the consumer’s estate.

This paragraph also applies to the

nonrecourse provision that is a part of

any credit contract meeting the

definition of a reverse mortgage

transaction. (See paragraph (a) of this

section.) Some reverse mortgage

transactions provide that a consumer’s

liability will not exceed a specific

percentage of the projected home value,

say 75 percent. Other reverse mortgages

set the consumer’s maximum liability at

the ‘‘net proceeds’’ available from the

sale of the home. That is, if a consumer

sells the home for $100,000 and

brokerage commissions and other

incidental selling costs were $7,000, the

creditor would receive no more than

$93,000—the net proceeds of the sale.

The Board believes that the purposes

of the reverse mortgage disclosures are

enhanced if the calculations of projected

total costs for ‘‘net proceeds’’ recourse

limitations are based on uniform

assumptions about the costs associated

with the sale of the home. Thus, if a

contract does not otherwise specify a

percentage for net proceeds, creditors

must assume closing costs of 7 percent,

which approximates the amounts paid

for typical brokerage fees and other

incidental costs. The Board solicited

comment on this approach. Most

commenters agreed both with the

approach and the use of the 7 percent

figure.

33(c)(5) Assumed Annual Appreciation

Rates

Section 138(a)(1) of the TILA requires

each total annual loan cost rate to be

based on one of (at least) three projected

appreciation rates for the consumer’s

dwelling. The regulation tracks the

appreciation rates used in HUD’s HECM

program. That is, the total annual loan

cost rates are based on assumed annual

home appreciation rates of 0 percent, 4

percent, and 8 percent. HUD’s program

based the 4 percent annual appreciation

rate on its assessment of long-term

averages of historical housing

appreciation rates. The 0 percent and 8

percent rates help consumers

understand the potential costs and

benefits of the loan if their dwelling

does not appreciate in value at all, or if

its value appreciated at a rate double the

4 percent rate.

Commenters were about equally

divided on the use of these assumed

appreciation rates. Those that opposed

the proposed figures believed that 0

percent, 3 percent, and 6 percent would

be more appropriate. Based on the

comments received and upon further

analysis, the Board believes that the

percentages used by HUD are

appropriate estimates for reverse

mortgage disclosures, and are required

by the final rule.

33(c)(6) Assumed Loan Period

Section 138(a)(1) of the TILA also

requires each total annual loan cost rate

to be based on one of (at least) three

credit transaction periods, as

determined by the Board, including a

short-term reverse mortgage, a term

equaling the actuarial life expectancy of

the consumer, and ‘‘such longer term as

the Board deems appropriate.’’ The

proposed regulation tracked the

assumed loan periods required under

the HECM program: a period of two

years, a period equal to the consumer’s

life expectancy, and a period equal to

approximately 1.4 times the consumer’s

life expectancy (the creditor would use

the life expectancy of the youngest

consumer in transactions involving

multiple borrowers).

The statute authorizes the Board to

require total annual loan cost rates for

more than three assumed loan periods.

In the proposed rule, the Board noted

that, depending on the age of the

borrower, a significant time interval

could exist between the shortest loan

period (two years) and the consumer’s

life expectancy. Accordingly, the Board

solicited comment on whether other

assumed loan periods, such as an

assumed loan period of one-half of the

life expectancy figure, should be added

to the regulation; and if so, whether

calculations based on the additional

assumed loan periods should be

required or optional.

About 10 commenters addressed this

point, and views were mixed. Some

believed an additional assumed loan

period equal to one-half of the life

expectancy figure would assist

consumers in better understanding the

costs of the reverse mortgage transaction

in the event that, for example, they

move permanently from the dwelling

either sooner or later than anticipated;

commenters were split on whether the

additional period should be mandatory

or optional. Those commenters

opposing an additional assumed loan

period expressed concern about

increased compliance burden and

possible consumer confusion.

Based on the comments received and

upon further analysis, the Board is

permitting creditors to add a fourth

assumed loan period equal to one-half

of the life expectancy figure. Use of the

additional period is permissive, to

promote flexibility. The Board believes

consumers will benefit by receiving

information about the transaction’s costs

for a ‘‘midpoint’’ assumed loan period,

given the potential of an event such as

a permanent move from the home

during the borrower’s lifetime. The

benefits to the consumer outweigh any

additional compliance burden: For

lenders offering reverse mortgage

transactions not covered by the HECM

program, the compliance burden of

choosing to implement a new disclosure

scheme based on four (rather than three)

assumed loan periods is not significant;

HECM lenders will revise their

disclosures to comply with other

requirements, such as the narrative

required in the model form, in any

event, and are not required to add the

fourth loan period to their forms.

Appendix K—Total Annual Loan Cost

Rate Computations for Reverse

Mortgage Transactions

The final regulation bases the

calculation of total annual loan cost

rates on a commonly used computation

tool, an internal rate of return formula.

The formula uses the estimation or

‘‘iteration’’ procedure required to

compute APRs under Appendix J of this

part. However, Appendix J is written in

the context of forward (not reverse)

mortgages. The formulas are similar to

those in Appendix J; however, to ease

compliance and avoid confusion about

terminology, definitions and

instructions appropriate for reverse

mortgages are placed in Appendix K.

The final rule tracks the proposal,

except as noted below.

(b) Instructions and Equations for the

Total Annual Loan Cost Rate

(b)(5) Number of Unit-Periods Between

Two Given Dates

The total annual loan cost rates are

based on an assumption that the reverse

mortgage transaction begins on the first

day of the month in which

consummation is estimated to occur.

The total annual loan cost rates are

good-faith projections based on a

number of assumptions. The Board

believes that using the fractional unitperiods required under Appendix J for

calculating APRs is unnecessary for

these disclosures, and has omitted many

of the definitions relating to time

intervals.

(b)(8) Solution of General Equation by

Iteration Process

Rather than restate the iteration

process required to be used in

determining total annual loan cost rates

under the appendix, the regulation

refers lenders to Appendix J of this
15470 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations

regulation for the procedures to be

followed.

(b)(9) Assumption for Discretionary

Cash Advances

Some reverse mortgage transactions

permit the consumer to control when

advances are received. The regulation

requires creditors to use a special

assumption for calculating the total

annual loan cost rate in this case.

Creditors must assume that 50 percent

of the amount of the credit line is

advanced when the consumer becomes

obligated under the transaction (at the

interest rate then in effect) and that no

further advances are made during the

remaining term. The Board believes this

assumption is appropriate for reverse

mortgage credit lines, given that the

amount and timing of advances (and,

thus, the estimated interest owed) are

within the consumer’s control. The

assumption used in the final rule also is

consistent with HUD’S HECM program

(and with Appendix D’s requirements

for an estimated interest figure when the

amount and timing of construction loan

advances are unknown).

Creditors should follow this approach

for estimating interest on open-end

reverse mortgage credit lines. Once the

interest figure is determined, creditors

should use the general equation in

section (b)(8) of this appendix to

calculate the total annual loan cost rate.

(b)(10) Assumption for Variable-Rate

Reverse Mortgage Transactions

Regulation Z provides that to

calculate the APR, creditors offering

variable-rate transactions must base

disclosures on the initial interest rate

and not assume the rate will increase.

The Board proposed adopting the same

convention for calculating total annual

loan cost rates, and solicited comment

on whether the assumption used in

HUD’s HECM program—the ‘‘expected

interest rate’’—was more appropriate.

The majority of commenters favored the

use of the initial interest rate and the

Board has adopted this approach in the

final rule. Commenters also requested

information on how to calculate the

total annual loan cost rate when there is

an initial discount rate. Creditors should

apply the same rules for calculating the

annual loan cost rate as are applied

when calculating an APR for a loan with

an initial discount rate (§ 226.17(c)).

(b)(11) Assumption for Closing Costs

The regulation requires creditors to

assume all closing and other consumer

costs are financed by the creditor. These

costs are generally financed as a part of

the transaction, and the Board believes

this assumption provides uniformity.

(c) Examples of Total Annual Loan Cost

Rate Computations

Three examples are provided to assist

creditors in calculating the total annual

loan cost rate. Some figures have been

corrected, and interest rates have been

added to the examples.

Reverse Mortgage Model Form and

Sample Form

The regulation requires that the

matrix be accompanied by a disclosure

substantially similar to the model form

in this paragraph. Reverse mortgages are

complicated transactions, and the Board

believes a uniform disclosure will

enhance consumer understanding of the

proposed transaction and promote

informed comparison shopping.

The model form and sample form are

placed in this appendix, because they

apply to both open-end and closed-end

reverse mortgage transactions. This

avoids publishing the forms twice, in

Appendix G (Open-end model forms

and clauses) and Appendix H (Closedend model forms and clauses). The

sample form has technical corrections to

some figures.

Appendix L—Assumed Loan Periods

for Calculation of Total Annual Loan

Cost Rates

The law requires the total annual loan

cost rate disclosures for reverse

mortgage transactions to be based on at

least three assumed loan periods, as

determined by the Board. The regulation

tracks the assumed loan period

requirements of HUD’s HECM program

(two years, a period equal to the

youngest consumer’s life expectancy,

and a period 1.4 times that consumer’s

life expectancy), and adds an optional

additional loan period equal to one-half

of the youngest consumer’s life

expectancy.

The Board proposed using the U.S.

Decennial Life Tables for the life

expectancy figures. These tables are

published by the Department of Health

and Human Services and are widely

available to the public. The Board

solicited comment on other sources of

such data. Most commenters agreed

with the use of the U.S. Decennial Life

Tables, and the requirement to use those

tables has been adopted in the final rule.

The figures in the appendix are based

on data currently available, that is, on

tables for 1979–1981, as rounded to the

nearest whole year. The Board

contemplates updating the figures as

data are published periodically.

The regulation tracks the HECM

program’s use of female life expectancy

figures for calculating total annual loan

cost rates for all borrowers, as women

are estimated to comprise the majority

of borrowers under existing reverse

mortgage programs.

IV. Regulatory Flexibility Analysis

The Board’s Office of the Secretary

has prepared an economic impact

statement on the amendments to

Regulation Z. A copy of the analysis

may be obtained from Publications

Services, Board of Governors of the

Federal Reserve System, Washington,

D.C. 20551, at (202) 452–3245.

V. Paperwork Reduction Act

In accordance with section 3507 of

the Paperwork Reduction Act of 1980

(44 U.S.C. 35; 5 CFR 1320.13), the

amendments were reviewed by the

Board under the authority delegated to

the Board by the Office of Management

and Budget after consideration of

comments received during the public

comment period.

Regulation Z requires creditors

offering mortgages subject to § 226.32

and creditors offering reverse mortgage

transactions to furnish to consumers at

least three days prior to consummation

a one-time notice disclosing costs of the

loan and reminding consumers that

signing an application or receiving

disclosures does not require the

consumer to complete the transaction.

Model forms are adopted to ease

compliance for creditors furnishing

Section 32 and reverse mortgage

disclosures.

The Board believes that the types of

mortgage products that trigger these

additional disclosures are not typically

offered by state member banks; thus, the

requirements have only a negligible

impact on the paperwork burden for

state member banks. Any estimates of

paperwork burden for institutions other

than state member banks that are

affected by the amendments would be

provided by the federal agency or

agencies that supervise these lenders.

List of Subjects in 12 CFR Part 226

Advertising, Credit, Federal Reserve

System, Mortgages, Reporting and

recordkeeping requirements, Truth in

lending.

For the reasons set forth in the

preamble, the Board amends 12 CFR

part 226 as set forth below:

PART 226—TRUTH IN LENDING

(REGULATION Z)

1. The authority citation for part 226

continues to read as follows:

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604

and 1637(c)(5).

2. Section 226.1 is amended as

follows:
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15471

3A person regularly extends consumer credit only

if it extended credit (other than credit subject to the

requirements of § 226.32) more than 25 times (or

more than 5 times for transactions secured by a

dwelling) in the preceding calendar year. If a person

did not meet these numerical standards in the

preceding calendar year, the numerical standards

shall be applied to the current calendar year. A

person regularly extends consumer credit if, in any

12-month period, the person originates more than

one credit extension that is subject to the

requirements of § 226.32 or one or more such credit

extensions through a mortgage broker.

48The term ‘‘material disclosures’’ means the

required disclosures of the annual percentage rate,

the finance charge, the amount financed, the total

payments, the payment schedule, and the

disclosures and limitations referred to in § 226.32

(c) and (d).

a. Paragraph (b) is revised;

b. Paragraph (d)(5) is redesignated as

paragraph (d)(6);

c. A new paragraph (d)(5) is added;

and

d. Redesignated paragraph (d)(6) is

revised.

The revisions and addition read as

follows:

§ 226.1 Authority, purpose, coverage,

organization, enforcement and liability.

* * * * *

(b) The purpose of this regulation is

to promote the informed use of

consumer credit by requiring

disclosures about its terms and cost. The

regulation gives consumers the right to

cancel certain credit transactions that

involve a lien on a consumer’s principal

dwelling, regulates certain credit card

practices, and provides a means for fair

and timely resolution of credit billing

disputes. The regulation does not

govern charges for consumer credit. The

regulation requires a maximum interest

rate to be stated in variable-rate

contracts secured by the consumer’s

dwelling. It also imposes limitations on

home equity plans that are subject to the

requirements of § 226.5b and mortgages

that are subject to the requirements of

§ 226.32.

* * * * *

(d) * * *

(5) Subpart E relates to mortgage

transactions covered by § 226.32 and

reverse mortgage transactions. It

contains rules on disclosures, fees, and

total annual loan cost rates.

(6) Several appendices contain

information such as the procedures for

determinations about state laws, state

exemptions and issuance of staff

interpretations, special rules for certain

kinds of credit plans, a list of

enforcement agencies, and the rules for

computing annual percentage rates in

closed-end credit transactions and total

annual loan cost rates for reverse

mortgage transactions.

* * * * *

3. In § 226.2, footnote 3 in paragraph

(a)(17)(i) is revised to read as follows:

§ 226.2 Definitions and rules of

construction.

(a) * * *

(17) * * *

(i) * * * 3 * * *

* * * * *

4. In § 226.5b, paragraph (f)(2)

introductory text is revised and a new

paragraph (f)(4) is added to read as

follows:

§ 226.5b Requirements for home equity

plans.

* * * * *

(f) * * *

(2) Terminate a plan and demand

repayment of the entire outstanding

balance in advance of the original term

(except for reverse mortgage

transactions that are subject to

paragraph (f)(4) of this section) unless:

* * * * *

(4) For reverse mortgage transactions

that are subject to § 226.33, terminate a

plan and demand repayment of the

entire outstanding balance in advance of

the original term except:

(i) In the case of default;

(ii) If the consumer transfers title to

the property securing the note;

(iii) If the consumer ceases using the

property securing the note as the

primary dwelling; or

(iv) Upon the consumer’s death.

* * * * *

5. In § 226.23, footnote 48 in

paragraph (a)(3) is revised to read as

follows:

§ 226.23 Right of rescission.

(a) * * *

(3) * * * 48 * * *

* * * * *

6. In § 226.28, the first sentence of

paragraph (b) is revised to read as

follows:

§ 226.28 Effect on State laws.

* * * * *

(b) Equivalent disclosure

requirements. If the Board determines

that a disclosure required by state law

(other than a requirement relating to the

finance charge, annual percentage rate,

or the disclosures required under

§ 226.32) is substantially the same in

meaning as a disclosure required under

the act or this regulation, creditors in

that state may make the state disclosure

in lieu of the federal disclosure. * * *

* * * * *

7. Part 226 is amended by adding a

new Subpart E to read as follows:

Subpart E—Special Rules for Certain Home

Mortgage Transactions

Sec.

226.31 General rules.

226.32 Requirements for certain closed-end

home mortgages.

226.33 Requirements for reverse mortgages.

Subpart E—Special Rules for Certain

Home Mortgage Transactions

§ 226.31 General rules.

(a) Relation to other subparts in this

part. The requirements and limitations

of this subpart are in addition to and not

in lieu of those contained in other

subparts of this part.

(b) Form of disclosures. The creditor

shall make the disclosures required by

this subpart clearly and conspicuously

in writing, in a form that the consumer

may keep.

(c) Timing of disclosure—(1)

Disclosures for certain closed-end home

mortgages. The creditor shall furnish

the disclosures required by § 226.32 at

least three business days prior to

consummation of a mortgage transaction

covered by § 226.32.

(i) Change in terms. After complying

with paragraph (c)(1) of this section and

prior to consummation, if the creditor

changes any term that makes the

disclosures inaccurate, new disclosures

shall be provided in accordance with

the requirements of this subpart.

(ii) Telephone disclosures. A creditor

may provide new disclosures by

telephone if the consumer initiates the

change and if, at consummation:

(A) The creditor provides new written

disclosures; and

(B) The consumer and creditor sign a

statement that the new disclosures were

provided by telephone at least three

days prior to consummation.

(iii) Consumer’s waiver of waiting

period before consummation. The

consumer may, after receiving the

disclosures required by paragraph (c)(1)

of this section, modify or waive the

three-day waiting period between

delivery of those disclosures and

consummation if the consumer

determines that the extension of credit

is needed to meet a bona fide personal

financial emergency. To modify or

waive the right, the consumer shall give

the creditor a dated written statement

that describes the emergency,

specifically modifies or waives the

waiting period, and bears the signature

of all the consumers entitled to the

waiting period. Printed forms for this

purpose are prohibited, except when

creditors are permitted to use printed

forms pursuant to § 226.23(e)(2).

(2) Disclosures for reverse mortgages.

The creditor shall furnish the
15472 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations

disclosures required by § 226.33 at least

three business days prior to:

(i) Consummation of a closed-end

credit transaction; or

(ii) The first transaction under an

open-end credit plan.

(d) Basis of disclosures and use of

estimates. Disclosures shall reflect the

terms of the legal obligation between the

parties. If any information necessary for

accurate disclosure is unknown to the

creditor, the creditor shall make the

disclosure based on the best information

reasonably available and shall state

clearly that the disclosure is an

estimate.

(e) Multiple creditors; multiple

consumers. If a transaction involves

more than one creditor, only one set of

disclosures shall be given and the

creditors shall agree among themselves

which creditor must comply with the

requirements that this part imposes on

any or all of them. If there is more than

one consumer, the disclosures may be

made to any consumer who is primarily

liable on the obligation. If the

transaction is rescindable under

§ 226.15 or § 226.23, however, the

disclosures shall be made to each

consumer who has the right to rescind.

(f) Effect of subsequent events. If a

disclosure becomes inaccurate because

of an event that occurs after the creditor

delivers the required disclosures, the

inaccuracy is not a violation of

Regulation Z (12 CFR part 226),

although new disclosures may be

required for mortgages covered by

§ 226.32 under paragraph (c) of this

section, § 226.9(c), § 226.19, or § 226.20.

(g) Accuracy of annual percentage

rate. For purposes of § 226.32, the

annual percentage yield shall be

considered accurate if it is accurate

according to the requirements and

within the tolerances set forth in

§ 226.22.

§ 226.32 Requirements for certain closedend home mortgages.

(a) Coverage. (1) Except as provided in

paragraph (a)(2) of this section, the

requirements of this section apply to a

consumer credit transaction that is

secured by the consumer’s principal

dwelling, and in which either:

(i) The annual percentage rate at

consummation will exceed by more

than 10 percentage points the yield on

Treasury securities having comparable

periods of maturity to the loan maturity

as of the fifteenth day of the month

immediately preceding the month in

which the application for the extension

of credit is received by the creditor; or

(ii) The total points and fees payable

by the consumer at or before loan

closing will exceed the greater of 8

percent of the total loan amount, or

$400; the $400 figure shall be adjusted

annually on January 1 by the annual

percentage change in the Consumer

Price Index that was reported on the

preceding June 1.

(2) This section does not apply to the

following:

(i) A residential mortgage transaction.

(ii) A reverse mortgage transaction

subject to § 226.33.

(iii) An open-end credit plan subject

to subpart B of this part.

(b) Definitions. For purposes of this

subpart, the following definitions apply:

(1) For purposes of paragraph (a)(1)(ii)

of this section, points and fees mean:

(i) All items required to be disclosed

under § 226.4(a) and 226.4(b), except

interest or the time-price differential;

(ii) All compensation paid to

mortgage brokers; and

(iii) All items required to be disclosed

under § 226.4(c)(7) (other than amounts

held for future payment of taxes) unless

the charge is reasonable, the creditor

receives no direct or indirect

compensation in connection with the

charge, and the charge is not paid to an

affiliate of the creditor.

(2) Affiliate means any company that

controls, is controlled by, or is under

common control with another company,

as set forth in the Bank Holding

Company Act of 1956 (12 U.S.C. 1841 et

seq.).

(c) Disclosures. In addition to other

disclosures required by this part, in a

mortgage subject to this section the

creditor shall disclose the following:

(1) Notices. The following statement:

‘‘You are not required to complete this

agreement merely because you have

received these disclosures or have

signed a loan application. If you obtain

this loan, the lender will have a

mortgage on your home. You could lose

your home, and any money you have

put into it, if you do not meet your

obligations under the loan.’’

(2) Annual percentage rate. The

annual percentage rate.

(3) Regular payment. The amount of

the regular monthly (or other periodic)

payment.

(4) Variable-rate. For variable-rate

transactions, a statement that the

interest rate and monthly payment may

increase, and the amount of the single

maximum monthly payment, based on

the maximum interest rate required to

be disclosed under § 226.30.

(d) Limitations. A mortgage

transaction subject to this section may

not provide for the following terms:

(1)(i) Balloon payment. For a loan

with a term of less than five years, a

payment schedule with regular periodic

payments that when aggregated do not

fully amortize the outstanding principal

balance.

(ii) Exception. The limitations in

paragraph (d)(1)(i) of this section do not

apply to loans with maturities of less

than one year, if the purpose of the loan

is a ‘‘bridge’’ loan connected with the

acquisition or construction of a dwelling

intended to become the consumer’s

principal dwelling.

(2) Negative amortization. A payment

schedule with regular periodic

payments that cause the principal

balance to increase.

(3) Advance payments. A payment

schedule that consolidates more than

two periodic payments and pays them

in advance from the proceeds.

(4) Increased interest rate. An

increase in the interest rate after default.

(5) Rebates. A refund calculated by a

method less favorable than the actuarial

method (as defined by section 933(d) of

the Housing and Community

Development Act of 1992, 15 U.S.C.

1615(d)), for rebates of interest arising

from a loan acceleration due to default.

(6) Prepayment penalties. Except as

allowed under paragraph (d)(7) of this

section, a penalty for paying all or part

of the principal before the date on

which the principal is due. A

prepayment penalty includes computing

a refund of unearned interest by a

method that is less favorable to the

consumer than the actuarial method, as

defined by section 933(d) of the Housing

and Community Development Act of

1992.

(7) Prepayment penalty exception. A

mortgage transaction subject to this

section may provide for a prepayment

penalty otherwise permitted by law

(including a refund calculated according

to the rule of 78s) if:

(i) The penalty can be exercised only

for the first five years following

consummation;

(ii) The source of the prepayment

funds is not a refinancing by the

creditor or an affiliate of the creditor;

and

(iii) At consummation, the consumer’s

total monthly debts (including amounts

owed under the mortgage) do not exceed

50 percent of the consumer’s monthly

gross income, as verified by the

consumer’s signed financial statement, a

credit report, and payment records for

employment income.

(e) Prohibited acts and practices. A

creditor extending mortgage credit

subject to this section may not:

(1) Repayment ability. Engage in a

pattern or practice of extending such

credit to a consumer based on the

consumer’s collateral if, considering the

consumer’s current and expected

income, current obligations, and
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15473

employment status, the consumer will

be unable to make the scheduled

payments to repay the obligation.

(2) Home improvement contracts. Pay

a contractor under a home improvement

contract from the proceeds of a mortgage

covered by this section, other than:

(i) By an instrument payable to the

consumer or jointly to the consumer and

the contractor; or

(ii) At the election of the consumer,

through a third-party escrow agent in

accordance with terms established in a

written agreement signed by the

consumer, the creditor, and the

contractor prior to the disbursement.

(3) Notice to assignee. Sell or

otherwise assign a mortgage subject to

this section without furnishing the

following statement to the purchaser or

assignee: ‘‘Notice: This is a mortgage

subject to special rules under the federal

Truth in Lending Act. Purchasers or

assignees of this mortgage could be

liable for all claims and defenses with

respect to the mortgage that the

borrower could assert against the

creditor.’’

§ 226.33 Requirements for reverse

mortgages.

(a) Definition. For purposes of this

subpart, reverse mortgage transaction

means a nonrecourse consumer credit

obligation in which:

(1) A mortgage, deed of trust, or

equivalent consensual security interest

securing one or more advances is

created in the consumer’s principal

dwelling; and

(2) Any principal, interest, or shared

appreciation or equity is due and

payable (other than in the case of

default) only after:

(i) The consumer dies;

(ii) The dwelling is transferred; or

(iii) The consumer ceases to occupy

the dwelling as a principal dwelling.

(b) Content of disclosures. In addition

to other disclosures required by this

part, in a reverse mortgage transaction

the creditor shall provide the following

disclosures in a form substantially

similar to the model form found in

paragraph (d) of Appendix K of this

part:

(1) Notice. A statement that the

consumer is not obligated to complete

the reverse mortgage transaction merely

because the consumer has received the

disclosures required by this section or

has signed an application for a reverse

mortgage loan.

(2) Total annual loan cost rates. A

good-faith projection of the total cost of

the credit, determined in accordance

with paragraph (c) of this section and

expressed as a table of ‘‘total annual

loan cost rates,’’ using that term, in

accordance with Appendix K of this

part.

(3) Itemization of pertinent

information. An itemization of loan

terms, charges, the age of the youngest

borrower and the appraised property

value.

(4) Explanation of table. An

explanation of the table of total annual

loan cost rates as provided in the model

form found in paragraph (d) of

Appendix K of this part.

(c) Projected total cost of credit. The

projected total cost of credit shall reflect

the following factors, as applicable:

(1) Costs to consumer. All costs and

charges to the consumer, including the

costs of any annuity the consumer

purchases as part of the reverse

mortgage transaction.

(2) Payments to consumer. All

advances to and for the benefit of the

consumer, including annuity payments

that the consumer will receive from an

annuity that the consumer purchases as

part of the reverse mortgage transaction.

(3) Additional creditor compensation.

Any shared appreciation or equity in the

dwelling that the creditor is entitled by

contract to receive.

(4) Limitations on consumer liability.

Any limitation on the consumer’s

liability (such as nonrecourse limits and

equity conservation agreements).

(5) Assumed annual appreciation

rates. Each of the following assumed

annual appreciation rates for the

dwelling:

(i) 0 percent.

(ii) 4 percent.

(iii) 8 percent.

(6) Assumed loan period. (i) Each of

the following assumed loan periods, as

provided in Appendix L of this part:

(A) Two years.

(B) The actuarial life expectancy of

the consumer to become obligated on

the reverse mortgage transaction (as of

that consumer’s most recent birthday).

In the case of multiple consumers, the

period shall be the actuarial life

expectancy of the youngest consumer

(as of that consumer’s most recent

birthday).

(C) The actuarial life expectancy

specified by paragraph (c)(6)(i)(B) of this

section, multiplied by a factor of 1.4 and

rounded to the nearest full year.

(ii) At the creditor’s option, the

actuarial life expectancy specified by

paragraph (c)(6)(i)(B) of this section,

multiplied by a factor of .5 and rounded

to the nearest full year.

9. In Part 226, Appendix H is

amended by:

a. Revising the appendix heading;

b. Revising the table of contents at the

beginning of the appendix; and

c. Adding a new H–16 Mortgage

Sample in numerical order.

The revisions and additions read as

follows:

Appendix H to Part 226—Closed-End Model

Forms and Clauses

H–1—Credit Sale Model Form (§ 226.18)

H–2—Loan Model Form (§ 226.18)

H–3—Amount Financed Itemization Model

Form (§ 226.18(c))

H–4(A)—Variable-Rate Model Clauses

(§ 226.18(f)(1))

H–4(B)—Variable-Rate Model Clauses

(§ 226.18(f)(2))

H–4(C)—Variable-Rate Model Clauses

(§ 226.19(b))

H–4(D)—Variable-Rate Model Clauses

(§ 226.20(c))

H–5—Demand Feature Model Clauses

(§ 226.18(i))

H–6—Assumption Policy Model Clause

(§ 226.18(q))

H–7—Required Deposit Model Clause

(§ 226.18(r))

H–8—Rescission Model Form (General)

(§ 226.23)

H–9—Rescission Model Form (Refinancing)

(§ 226.23)

H–10—Credit Sale Sample

H–11—Installment Loan Sample

H–12—Refinancing Sample

H–13—Mortgage with Demand Feature

Sample

H–14—Variable-Rate Mortgage Sample

(§ 226.19(b))

H–15—Graduated Payment Mortgage Sample

H–16—Mortgage Sample (§ 226.32)

* * * * *

BILLING CODE 6210–01–P
15474 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations

BIlLING CODE 6210–01–C

* * * * *

10. In Part 226, a new Appendix K is

added to read as follows:

Appendix K to Part 226—Total Annual Loan

Cost Rate Computations for Reverse

Mortgage Transactions

(a) Introduction. Creditors are required to

disclose a series of total annual loan cost

rates for each reverse mortgage transaction.

This appendix contains the equations

creditors must use in computing the total

annual loan cost rate for various transactions,

as well as instructions, explanations, and

examples for various transactions. This

appendix is modeled after Appendix J of this

part (Annual Percentage Rates Computations

for Closed-end Credit Transactions); creditors

should consult Appendix J of this part for

additional guidance in using the formulas for

reverse mortgages.

(b) Instructions and equations for the total

annual loan cost rate.

(1) General rule. The total annual loan cost

rate shall be the nominal total annual loan

cost rate determined by multiplying the unitperiod rate by the number of unit-periods in

a year.

(2) Term of the transaction. For purposes

of total annual loan cost disclosures, the term

of a reverse mortgage transaction is assumed

to begin on the first of the month in which

consummation is expected to occur. If a loan

cost or any portion of a loan cost is initially

incurred beginning on a date later than

consummation, the term of the transaction is

assumed to begin on the first of the month

in which that loan cost is incurred. For

purposes of total annual loan cost

disclosures, the term ends on each of the

assumed loan periods specified in

§ 226.33(c)(6).

(3) Definitions of time intervals.

(i) A period is the interval of time between

advances.

(ii) A common period is any period that

occurs more than once in a transaction.

(iii) A standard interval of time is a day,

week, semimonth, month, or a multiple of a

week or a month up to, but not exceeding,

1 year.

(iv) All months shall be considered to have

an equal number of days.

(4) Unit-period.

(i) In all transactions other than singleadvance, single-payment transactions, the

unit-period shall be that common period, not

to exceed one year, that occurs most

frequently in the transaction, except that:

(A) If two or more common periods occur

with equal frequency, the smaller of such

common periods shall be the unit-period; or

(B) If there is no common period in the

transaction, the unit-period shall be that

period which is the average of all periods

rounded to the nearest whole standard

interval of time. If the average is equally near

two standard intervals of time, the lower

shall be the unit-period.

(ii) In a single-advance, single-payment

transaction, the unit-period shall be the term

of the transaction, but shall not exceed one

year.

(5) Number of unit-periods between two

given dates.

(i) The number of days between two dates

shall be the number of 24-hour intervals

between any point in time on the first date

to the same point in time on the second date.

(ii) If the unit-period is a month, the

number of full unit-periods between two

dates shall be the number of months. If the

unit-period is a month, the number of unitperiods per year shall be 12.

(iii) If the unit-period is a semimonth or a

multiple of a month not exceeding 11

months, the number of days between two

dates shall be 30 times the number of full

months. The number of full unit-periods

shall be determined by dividing the number

of days by 15 in the case of a semimonthly

unit-period or by the appropriate multiple of

30 in the case of a multimonthly unit-period.

If the unit-period is a semimonth, the number

of unit-periods per year shall be 24. If the

number of unit-periods is a multiple of a

month, the number of unit-periods per year

shall be 12 divided by the number of months

per unit-period.

(iv) If the unit-period is a day, a week, or

a multiple of a week, the number of full unitperiods shall be determined by dividing the

number of days between the two given dates

by the number of days per unit-period. If the

unit-period is a day, the number of unitperiods per year shall be 365. If the unitperiod is a week or a multiple of a week, the

number of unit-periods per year shall be 52

divided by the number of weeks per unitperiod.

(v) If the unit-period is a year, the number

of full unit-periods between two dates shall

be the number of full years (each equal to 12

months).

(6) Symbols. The symbols used to express

the terms of a transaction in the equation set

forth in paragraph (b)(8) of this appendix are

defined as follows:

Aj=The amount of each periodic or lumpsum advance to the consumer under the

reverse mortgage transaction.

i=Percentage rate of the total annual loan cost

per unit-period, expressed as a decimal

equivalent.

j=The number of unit-periods until the jth

advance.

n=The number of unit-periods between

consummation and repayment of the

debt.

Pn=Min (Baln, Valn). This is the maximum

amount that the creditor can be repaid at

the specified loan term.

Baln=Loan balance at time of repayment,

including all costs and fees incurred by

the consumer (including any shared

appreciation or shared equity amount)

compounded to time n at the creditor’s

contract rate of interest.

Valn=Val0 (1 + σ)y, where Val0 is the property

value at consummation, σ is the assumed

annual rate of appreciation for the

dwelling, and y is the number of years

in the assumed term. Valn must be

reduced by the amount of any equity

reserved for the consumer by agreement

between the parties, or by 7 percent (or

the amount or percentage specified in

the credit agreement), if the amount

required to be repaid is limited to the net

proceeds of sale.

Σ=The summation operator.

Symbols used in the examples shown in

this appendix are defined as follows:

= +

= + + + +⋅⋅⋅ +

= + −× +

=

− −

−

∑

j

x x j

x x

n

i

i i i or

i

i

i

0

1

1 1

1

1 1 1

1 1

1

( )

( ) ( ) ( ) ;

( ) ( )

w=The number of unit-periods per year.
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15475

I=wi × 100=the nominal total annual loan cost

rate.

(7) General equation. The total annual loan

cost rate for a reverse mortgage transaction

must be determined by first solving the

following formula, which sets forth the

relationship between the advances to the

consumer and the amount owed to the

creditor under the terms of the reverse

mortgage agreement for the loan cost rate per

unit-period (the loan cost rate per unit-period

is then multiplied by the number of unitperiods per year to obtain the total annual

loan cost rate I; that is, I = wi):

j

n

j

n j A i Pn

=

− −

∑ + =

0

1

( ) 1

(8) Solution of general equation by

iteration process. (i) The general equation in

paragraph (b)(7) of this appendix, when

applied to a simple transaction for a reverse

mortgage loan of equal monthly advances of

$350 each, and with a total amount owed of

$14,313.08 at an assumed repayment period

of two years, takes the special form:

P FV i or

P

i

i

i

n

n

n

=

= ×

+ −

× +

















¬ 350

350

1 1

1

24 ,

( ) ( )

Using the iteration procedures found in steps

1 through 4 of (b)(9)(i) of Appendix J of this

part, the total annual loan cost rate, correct

to two decimals, is 48.53%.

(ii) In using these iteration procedures, it

is expected that calculators or computers will

be programmed to carry all available

decimals throughout the calculation and that

enough iterations will be performed to make

virtually certain that the total annual loan

cost rate obtained, when rounded to two

decimals, is correct. Total annual loan cost

rates in the examples below were obtained by

using a 10-digit programmable calculator and

the iteration procedure described in

Appendix J of this part.

(9) Assumption for discretionary cash

advances. If the consumer controls the timing

of advances made after consummation (such

as in a credit line arrangement), the creditor

must use the general formula in paragraph

(b)(7) of this appendix. The total annual loan

cost rate shall be based on the assumption

that 50 percent of the principal loan amount

is advanced at closing, or in the case of an

open-end transaction, at the time the

consumer becomes obligated under the plan.

Creditors shall assume the advances are

made at the interest rate then in effect and

that no further advances are made to, or

repayments made by, the consumer during

the term of the transaction or plan.

(10) Assumption for variable-rate reverse

mortgage transactions. If the interest rate for

a reverse mortgage transaction may increase

during the loan term and the amount or

timing is not known at consummation,

creditors shall base the disclosures on the

initial interest rate in effect at the time the

disclosures are provided.

(11) Assumption for closing costs. In

calculating the total annual loan cost rate,

creditors shall assume all closing and other

consumer costs are financed by the creditor.

(c) Examples of total annual loan cost rate

computations.

(1) Lump-sum advance at consummation.

Lump-sum advance to consumer at

consummation: $30,000

Total of consumer’s loan costs financed at

consummation: $4,500

Contract interest rate: 11.60%

Estimated time of repayment (based on life

expectancy of a consumer at age 78): 10

years

Appraised value of dwelling at

consummation: $100,000

Assumed annual dwelling appreciation rate:

4%

P Min

i i

i

j

j

120

120 0

0

119

120

109 441 32 137 662 72

30 000 1 0 1 109 441 32

010843293

=

+ + + =

=

−

=

−

∑

( , . , , . )

, ( ) ( ) , .

.

Total annual loan cost rate (100(.010843293

x 12)) = 13.01%

(2) Monthly advance beginning at

consummation.

Monthly advance to consumer, beginning at

consummation: $492.51

Total of consumer’s loan costs financed at

consummation: $4,500

Contract interest rate: 9.00%

Estimated time of repayment (based on life

expectancy of a consumer at age 78): 10

years

Appraised value of dwelling at

consummation: $100,000

Assumed annual dwelling appreciation rate:

8%

P Min

i

i

i

i

120

120

107 053 63 200 780 02

492 51

1 1

1 107 053 63

009061140

=

×

+ −

× +

















=

=

( , . , , . )

. ( ) ( ) , .

.

Total annual loan cost rate (100(.009061140

x 12))=10.87%

(3) Lump sum advance at consummation

and monthly advances thereafter.

Lump sum advance to consumer at

consummation: $10,000

Monthly advance to consumer, beginning at

consummation: $725

Total of consumer’s loan costs financed at

consummation: $4,500

Contract rate of interest: 8.5%

Estimated time of repayment (based on life

expectancy of a consumer at age 75): 12

years

Appraised value of dwelling at

consummation: $100,000

Assumed annual dwelling appreciation rate:

8%
15476 Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations

P Min

i i

i

j

j

144

144 0

0

143

144

221 818 30 234 189 82

10 000 1 725 1 221 818 30

007708844

=

+ + + =

=

−

=

−

∑

( , . , , . )

, ( ) ( ) , .

.

Total annual loan cost rate (100(.007708844

x 12)) = 9.25%

(d) Reverse mortgage model form and

sample form.

(1) Model form.

Total Annual Loan Cost Rate

Loan Terms

Age of youngest borrower:

Appraised property value:

Interest rate:

Monthly advance:

Initial draw:

Line of credit:

Initial Loan Charges

Closing costs:

Mortgage insurance premium:

Annuity cost:

Monthly Loan Charges

Servicing fee:

Other Charges:

Mortgage insurance:

Shared Appreciation:

Repayment Limits

Assumed annual appreciation

Total annual loan cost rate

2-year loan

term

[ ]-year

loan term]

[ ]-year

loan term

[ ]-year

loan term

0% .................................................................................................................................... [ ]

4% .................................................................................................................................... [ ]

8% .................................................................................................................................... [ ]

The cost of any reverse mortgage loan

depends on how long you keep the loan and

how much your house appreciates in value.

Generally, the longer you keep a reverse

mortgage, the lower the total annual loan cost

rate will be.

This table shows the estimated cost of your

reverse mortgage loan, expressed as an

annual rate. It illustrates the cost for three

[four] loan terms: 2 years, [half of life

expectancy for someone your age,] that life

expectancy, and 1.4 times that life

expectancy. The table also shows the cost of

the loan, assuming the value of your home

appreciates at three different rates: 0%, 4%

and 8%.

The total annual loan cost rates in this

table are based on the total charges associated

with this loan. These charges typically

include principal, interest, closing costs,

mortgage insurance premiums, annuity costs,

and servicing costs (but not costs when you

sell the home).

The rates in this table are estimates. Your

actual cost may differ if, for example, the

amount of your loan advances varies or the

interest rate on your mortgage changes.

Signing an Application or Receiving These

Disclosures Does Not Require You To

Complete This Loan

(2) Sample Form.

Total Annual Loan Cost Rate

Loan Terms

Age of youngest borrower: 75

Appraised property value: $100,000

Interest rate: 9%

Monthly advance: $301.80

Initial draw: $1,000

Line of credit: $4,000

Initial Loan Charges

Closing costs: $5,000

Mortgage insurance premium: None

Annuity cost: None

Monthly Loan Charges

Servicing fee: None

Other Charges

Mortgage insurance: None

Shared Appreciation: None

Repayment Limits

Net proceeds estimated at 93% of projected

home sale

Assumed annual appreciation

Total annual loan cost rate

2-year loan

term

[6-year loan

term]

12-year

loan term

17-year

loan term

0% .................................................................................................................................... 39.00% [14.94%] 9.86% 3.87%

4% .................................................................................................................................... 39.00% [14.94%] 11.03% 10.14%

8% .................................................................................................................................... 39.00% [14.94%] 11.03% 10.20%

The cost of any reverse mortgage loan

depends on how long you keep the loan and

how much your house appreciates in value.

Generally, the longer you keep a reverse

mortgage, the lower the total annual loan cost

rate will be.

This table shows the estimated cost of your

reverse mortgage loan, expressed as an

annual rate. It illustrates the cost for three

[four] loan terms: 2 years, [half of life

expectancy for someone your age,] that life

expectancy, and 1.4 times that life

expectancy. The table also shows the cost of

the loan, assuming the value of your home

appreciates at three different rates: 0%,4%

and 8%.

The total annual loan cost rates in this

table are based on the total charges associated

with this loan. These charges typically

include principal, interest, closing costs,

mortgage insurance premiums, annuity costs,

and servicing costs (but not disposition

costs—costs when you sell the home).

The rates in this table are estimates. Your

actual cost may differ if, for example, the

amount of your loan advances varies or the

interest rate on your mortgage changes.

Signing an Application or Receiving These

Disclosures Does Not Require You To

Complete This Loan

11. In Part 226, a new Appendix L is

added to read as follows:

Appendix L to Part 226—Assumed Loan

Periods for Computations of Total Annual

Loan Cost Rates

(a) Required tables. In calculating the total

annual loan cost rates in accordance with

Appendix K of this part, creditors shall

assume three loan periods, as determined by

the following table.

(b) Loan periods.

(1) Loan Period 1 is a two-year loan period.

(2) Loan Period 2 is the life expectancy in

years of the youngest borrower to become

obligated on the reverse mortgage loan, as

shown in the U.S. Decennial Life Tables for

1979–1981 for females, rounded to the

nearest whole year.
Federal Register / Vol. 60, No. 57 / Friday, March 24, 1995 / Rules and Regulations 15477

(3) Loan Period 3 is the life expectancy

figure in Loan Period 3, multiplied by 1.4

and rounded to the nearest full year (life

expectancy figures at .5 have been rounded

up to 1).

(4) At the creditor’s option, an additional

period may be included, which is the life

expectancy figure in Loan Period 2,

multiplied by .5 and rounded to the nearest

full year (life expectancy figures at .5 have

been rounded up to 1).

Age of youngest borrower Loan period

1 (in years)

[Optional

loan period

(in years)]

Loan period

2 (life expectancy)

(in years)

Loan period

3 (in years)

62 ..................................................................................................................................... 2 [11] 21 29

63 ..................................................................................................................................... 2 [10] 20 28

64 ..................................................................................................................................... 2 [10] 19 27

65 ..................................................................................................................................... 2 [9] 18 25

66 ..................................................................................................................................... 2 [9] 18 25

67 ..................................................................................................................................... 2 [9] 17 24

68 ..................................................................................................................................... 2 [8] 16 22

69 ..................................................................................................................................... 2 [8] 16 22

70 ..................................................................................................................................... 2 [8] 15 21

71 ..................................................................................................................................... 2 [7] 14 20

72 ..................................................................................................................................... 2 [7] 13 18

73 ..................................................................................................................................... 2 [7] 13 18

74 ..................................................................................................................................... 2 [6] 12 17

75 ..................................................................................................................................... 2 [6] 12 17

76 ..................................................................................................................................... 2 [6] 11 15

77 ..................................................................................................................................... 2 [5] 10 14

78 ..................................................................................................................................... 2 [5] 10 14

79 ..................................................................................................................................... 2 [5] 9 13

80 ..................................................................................................................................... 2 [5] 9 13

81 ..................................................................................................................................... 2 [4] 8 11

82 ..................................................................................................................................... 2 [4] 8 11

83 ..................................................................................................................................... 2 [4] 7 10

84 ..................................................................................................................................... 2 [4] 7 10

85 ..................................................................................................................................... 2 [3] 6 8

86 ..................................................................................................................................... 2 [3] 6 8

87 ..................................................................................................................................... 2 [3] 6 8

88 ..................................................................................................................................... 2 [3] 5 7

89 ..................................................................................................................................... 2 [3] 5 7

90 ..................................................................................................................................... 2 [3] 5 7

91 ..................................................................................................................................... 2 [2] 4 6

92 ..................................................................................................................................... 2 [2] 4 6

93 ..................................................................................................................................... 2 [2] 4 6

94 ..................................................................................................................................... 2 [2] 4 6

95 and over ...................................................................................................................... 2 [2] 3 4

By order of the Board of Governors of the

Federal Reserve System, March 20, 1995.

William W. Wiles,

Secretary of the Board.

[FR Doc. 95–7231 Filed 3–23–95; 8:45 am]

BILLING CODE 6210–01–P

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

Small Business Size Regulations;

Handicapped Workshop Participation

in Small Business Set-Aside Contracts

AGENCY: Small Business Administration.

ACTION: Final rule.

SUMMARY: The Small Business

Administration (SBA) hereby amends its

size regulations to include public or

private organizations for the

handicapped as eligible concerns to

participate in small business set-aside

contracts during fiscal year 1995, in an

aggregate amount not to exceed

$40,000,000. Section 305 of the Small

Business Administration

Reauthorization and Amendments Act

of 1994 expanded the eligibility of

entities which may participate in small

business set-aside contracts to include

public or private organizations for the

handicapped during fiscal year 1995.

Handicapped organizations had been

eligible for set-aside contracts during

fiscal years 1989 through 1993.

EFFECTIVE DATE: This rule is effective on

March 24, 1995.

FOR FURTHER INFORMATION CONTACT: Gary

M. Jackson, Assistant Administrator for

Size Standards, (202) 205–6840.

121.601. The Small Business

Administration Reauthorization and

Amendments Act of 1994 amended

Section 15(c) of the Act, 15 U.S.C.

644(c), by expanding the eligibility of

entities which may participate in small

business set-aside contracts to include

public or private organizations for the

handicapped during fiscal year 1995.

See Public Law 103–403, Section 305.

However, this statutory revision limits

the extent of participation by public or

private handicapped organizations in

small business set-aside awards to an

aggregate amount not to exceed

$40,000,000. The Act further provides

that Federal agencies making awards to

such organizations pursuant to

provisions of this Act may use multiyear contracts, if appropriate.

This statutory provision reinstates the

eligibility of public or private

handicapped organizations previously

authorized by Public Law 100–590 for

fiscal years 1989 through 1993. Sections

121.2001 through 121.2005 of the Small

Business Size Regulations prescribe

regulations governing the participation

of public or private handicapped

organization on small business set-aside

contracts. The regulations include the

definition of terms, procedures for

protesting the status of an offeror

asserting eligibility as a handicapped

organization, and procedures for filing

appeals of an award to a handicapped

organization on the basis of severe