Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations 16771

law and requesting a modification of the

order or to be exempted therefrom. Such

handler is afforded the opportunity for

a hearing on the petition. After the

hearing the Secretary would rule on the

petition. The Act provides that the

district court of the United States in any

district in which the handler is an

inhabitant, or has his or her principal

place of business, has jurisdiction in

equity to review the Secretary’s ruling

on the petition, provided a bill in equity

is filed not later than 20 days after date

of the entry of the ruling.

Pursuant to the requirements set forth

in the Regulatory Flexibility Act (RFA),

the Administrator of the Agricultural

Marketing Service (AMS) has

considered the economic impact of this

rule on small entities.

The purpose of the RFA is to fit

regulatory actions to the scale of

business subject to such actions in order

that small businesses will not be unduly

or disproportionately burdened.

Marketing orders issued pursuant to the

Act, and rules issued thereunder, are

unique in that they are brought about

through group action of essentially

small entities acting on their own

behalf. Thus, both statutes have small

entity orientation and compatibility.

There are 8 handlers of spearmint oil

regulated under the marketing order

each season and approximately 260

spearmint oil producers in the Far West.

Small agricultural producers have been

defined by the Small Business

Administration (13 CFR 121.601) as

those having annual receipts of less than

$500,000, and small agricultural service

firms are defined as those whose annual

receipts are less than $5,000,000. A

minority of these producers and

handlers may be classified as small

entities.

The marketing order, administered by

the Department, requires that the

assessment rate for a particular fiscal

year apply to all assessable spearmint

oil handled from the beginning of such

year. Annual budgets of expenses are

prepared by the Committee, the agency

responsible for local administration of

this marketing order, and submitted to

the Department for approval. The

members of the Committee are handlers

and producers of spearmint oil. They

are familiar with the Committee’s needs

and with the costs for goods, services,

and personnel in their local area, and

are thus in a position to formulate

appropriate budgets. The Committee’s

budget is formulated and discussed in a

public meeting. Thus, all directly

affected persons have an opportunity to

participate and provide input.

The assessment rate recommended by

the Committee is derived by dividing

the anticipated expenses by expected

shipments of spearmint oil. Because that

rate is applied to actual shipments, it

must be established at a rate which will

provide sufficient income to pay the

Committee’s expected expenses.

The Committee met on February 22,

1995, and unanimously recommended a

total expense amount of $233,272 for its

1995–96 budget. This is $4,567 less in

expenses than the 1994–95 budget.

The Committee also unanimously

recommended an assessment rate of

$.10 per pound for the 1995–96 fiscal

year, which is $.01 more than the

assessment rate from the 1994–95 fiscal

year. The assessment rate, when applied

to anticipated shipments of 2,000,000

pounds from the 1995–96 spearmint oil

production, would yield $200,000.00 in

assessment income. This, along with

approximately $24,272 from the

Committee’s authorized reserves, and

$9,000 interest will be adequate to cover

estimated expenses.

Major expense categories for the

1995–96 fiscal year include $101,300 for

salaries, $20,000 for market

development, and $23,000 for travel.

Funds in the reserve at the beginning of

the 1995–96 fiscal year are estimated at

$160,000, which is within the maximum

permitted by the order of one fiscal

year’s expenses.

While this action will impose some

additional costs on handlers, the costs

are in the form of uniform assessments

on all handlers. Some of the additional

costs may be passed on to producers.

However, these costs should be

significantly offset by the benefits

derived from the operation of the

marketing order. Therefore, the

Administrator of the AMS has

determined that this action will not

have a significant economic impact on

a substantial number of small entities.

After consideration of all relevant

matter presented, including the

information and recommendations

submitted by the Committee and other

available information, it is hereby found

that this rule as hereinafter set forth will

tend to effectuate the declared policy of

the Act.

Pursuant to 5 U.S.C. 553, it is also

found and determined upon good cause

that it is impracticable, unnecessary,

and contrary to the public interest to

give preliminary notice prior to putting

this rule into effect because: (1) The

Committee needs to have sufficient

funds to pay its expenses which are

incurred on a continuous basis; (2) the

1995–96 fiscal year starts on June 1,

1995, and the marketing order requires

that the rate of assessment for the fiscal

year apply to all assessable spearmint

oil handled during the fiscal year; (3)

handlers are aware of this rule which

was recommended by the Committee at

a public meeting; and (4) this interim

final rule provides a 30-day comment

period, and all comments timely

received will be considered prior to

finalization of this rule.

List of Subjects in 7 CFR Part 985

Marketing agreements, Oils and fats,

Reporting and recordkeeping

requirements, Spearmint oil.

For the reasons set forth in the

preamble, 7 CFR part 985 is amended as

follows:

PART 985—MARKETING ORDER

REGULATING THE HANDLING OF

SPEARMINT OIL PRODUCED IN THE

FAR WEST

1. The authority citation for 7 CFR

Part 985 continues to read as follows:

Authority: 7 U.S.C. 601–674.

Note: This section will not appear in the

annual Code of Federal Regulations.

2. A new § 985.315 is added to read

as follows:

§ 985.315 Expenses and assessment rate.

Expenses of $233,272.00 by the

Spearmint Oil Administrative

Committee are authorized and an

assessment rate of $.10 per pound of

assessable spearmint oil is established

for the fiscal year ending May 31, 1996.

Unexpended funds may be carried over

as a reserve.

Dated: March 28, 1995.

Sharon Bomer Lauritsen,

Deputy Director, Fruit and Vegetable Division.

[FR Doc. 95–8099 Filed 3–31–95; 8:45 am]

BILLING CODE 3410–02–W

FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R–0863]

Truth in Lending

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule; official staff

interpretation.

SUMMARY: The Board is publishing

revisions to the official staff

commentary to Regulation Z (Truth in

Lending). The commentary applies and

interprets the requirements of

Regulation Z. The revisions clarify

regulatory provisions and provide

further guidance on issues of general

interest, such as the treatment of various

fees and taxes associated with real

estate-secured loans and a creditor’s
16772 Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations

responsibilities when investigating a

claim of the unauthorized use of a credit

card.

DATES: This rule is effective April 1,

1995. Compliance is optional until

October 1, 1995.

FOR FURTHER INFORMATION CONTACT: For

Subparts A and B (open-end credit),

Jane Jensen Gell or Obrea Otey

Poindexter, Staff Attorneys; for Subparts

A and C (closed-end credit), Kyung ChoMiller, Sheilah A. Goodman, W. Kurt

Schumacher, Natalie E. Taylor, or

Manley Williams, Staff Attorneys,

Division of Consumer and Community

Affairs, Board of Governors of the

Federal Reserve System, at (202) 452–

3667 or 452–2412; for 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 (TILA; 15 U.S.C. 1601 et seq.) 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. It

also imposes limitations on some credit

transactions secured by a consumer’s

principal dwelling. The act is

implemented by the Board’s Regulation

Z (12 CFR part 226). The regulation

authorizes the issuance of official staff

interpretations of the regulation. (See

Appendix C to Regulation Z.) The Board

has published a staff commentary to

Regulation Z which clarifies existing

law and provides guidance to creditors

in applying the regulation to specific

transactions (Supplement I of this part).

The Board updates the commentary

periodically as a substitute for

individual staff interpretations.

In December, the Board published

proposed amendments to the

commentary to Regulation Z (59 FR

64351, December 14, 1994). The Board

received about 150 comments. Nearly

90% were from creditors or their

representatives; the remainder were

from consumer advocates, government

officials, and individuals. Overall,

commenters generally supported the

proposed amendments. Views were

mixed on a number of comments, and

some commenters expressed concerns

about issues not addressed in the

proposal. Except as discussed below,

the commentary has been revised as

proposed; some technical suggestions or

concerns raised by commenters are

addressed. Compliance with the

amendments is mandatory on October 1,

1995.

II. Commentary Revisions

Subpart A—General

Section 226.2—Definitions and Rules of

Construction

2(a) Definitions

2(a)(17) Creditor

Paragraph 2(a)(17)(i)

Comment 2(a)(17)(i)–8 clarifies the

identity of the creditor for participant

loans from an employee savings plan,

such as 401(k) plans. The proposal

would have clarified that the plan (and

not the plan trust or trustee) is the

creditor for purposes of the TILA.

Some commenters asked for further

guidance when the plan’s trust or

trustee provide disclosures for the

plan’s participant loan program. The

comment is revised from the proposal

for clarity. Creditors should look to the

plan (not the trust or trustee) to

determine whether the numerical tests

for coverage have been met. The person

to whom the participant’s loan is

initially made payable (whether the

plan, the trust, or the trustee) is

responsible for Regulation Z compliance

for participant loans.

Section 226.4—Finance Charge

4(a) Definition

Comment 4(a)–1 is revised as

proposed to indicate that section 12 of

the Real Estate Settlement Procedures

Act (RESPA; 12 U.S.C. 2610) prohibits

creditors from charging fees for

preparing TILA disclosure statements in

RESPA-covered transactions. The

comments generally supported the

revisions.

The Board received a substantial

number of comments relating to the

proposed revision to comment 4(a)–3 on

fees charged by third parties. While

most commenters believed that the

comment helped clarify the treatment of

third-party fees generally, the examples

of settlement agent charges, mortgage

broker fees, and taxes raised a number

of questions.

Creditors had expressed concern

about some charges imposed by loanclosing agents being imputed to the

creditor. Some had indicated that

despite the fact that they require the use

of a closing agent (and in limited ways

the agent acts on behalf of the creditor),

in the modern mortgage lending

environment, creditors do not have

control over certain fees that may be

charged to consumers by these entities,

particularly where there is no affiliation

between the creditor and the third party,

as is often the case. To address this

concern, the proposed revision to

comment 4(a)–3 provided by example

that if a particular fee imposed by a

settlement agent is not required or

retained by the creditor, the fee is not

a finance charge, even though the

creditor requires use of a third party.

Comment 4(a)–3, which applies to all

types of credit extensions (not just

home-purchase or other home-secured

loans), is revised in the final version to

clarify the general third-party rule.

Upon further analysis, guidance about

fees charged by settlement agents in real

estate-secured transactions is provided

in a separate comment 4(a)–4. This new

comment gives the general rule for

evaluating settlement agent fees, and is

followed by an example. Comments

previously numbered 4(a)–4 through –6

are now renumbered.

Many commenters also requested

further clarification on the example of

mortgage broker fees as a finance charge.

The proposed clarification responded to

questions about the existing mortgage

broker fee example, which had been

added to address programs offering

lower rates and clearly more favorable

terms to borrowers who use the

creditor’s affiliated mortgage broker

than to borrowers who apply to the

creditor directly. The particular

example has been deleted; while the

mortgage broker fee charged in this

instance is still considered a finance

charge, it is a much less common

practice today, and therefore has caused

confusion. The example of mortgage

broker fees is amended to simply reflect

the general rule that a fee is a finance

charge if the creditor retains the fee.

With regard to taxes, some

commenters noted that the commentary

addresses in several areas the issue of

whether taxes are finance charges.

These commenters requested that all

comments referring to taxes be

consolidated into one comment. To ease

compliance, the reference to taxes

currently contained in comment 4(a)–3

is removed. The general rules on the

treatment of taxes under the TILA are

contained in renumbered and revised

comment 4(a)–7, formerly comment

4(a)–6. The current reference to taxes

under 4(e)–1 has been revised and the

current reference to taxes under 4(a)–1

remains unaffected.

4(c) Charges Excluded From the

Finance Charge

Paragraph 4(c)(7)

Comment 4(c)(7)–1 clarifies certain

real-estate and residential mortgage
Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations 16773

transaction costs that are excluded from

the finance charge. In response to

commenters’ suggestions and upon

further analysis, the comment is revised

to state that fees excludable under this

section include not only the cost of the

charges excludable under this section,

but also the cost of verifying or

confirming information relating to

excludable item itself. The previous

language specifically stated that a credit

report fee included the cost of verifying

information in the report. This language

was intended to be read only as an

example. It is now more clearly shown

as such. Verification or confirmation

fees, like other excludable charges

under this section, must be bona fide

and reasonable in amount.

The language addressing lump sum

charges has been moved to a new

comment, 4(c)(7)–2. This provision has

been adopted as proposed, with some

revisions for clarity. The comment states

that a lump sum charge for conducting

or attending a closing (charged, for

example, by a lawyer or a title company)

is excluded from the finance charge if

the charge is primarily for services

related to items listed in § 226.4(c)(7)

(such as reviewing or completing

documents), even if other incidental

services, such as explaining various

documents or disbursing funds for the

parties, are performed. This is an

exception to the general rule on the

treatment of lump sum fees. Most

commenters supported the proposal as a

clarification of the Board’s existing

position. Several, however, opposed

allowing creditors to exclude fees for

incidental services where the charge is

primarily for services related to items

listed in § 226.4(c)(7), believing that this

would result in less accurate

disclosures.

Comment 4(c)(7)–3 (proposed as

4(c)(7)–2) has been adopted as

proposed, with minor changes for

clarity. The comment states that charges

excludable under § 226.4(c)(7) are those

imposed in connection with the initial

decision to grant credit—for example, a

fee to search for tax liens on the

property or to determine if flood

insurance is required. The comment

also clarifies that fees for services to be

performed during the loan term, for

example, to monitor a consumer’s

continued compliance with contract

provisions, such as paying property

taxes or purchasing flood insurance, are

not excludable under § 226.4(c)(7),

regardless of when they are paid. These

recurring administrative fees, paid by

the consumer to protect the creditor’s

security interest, are finance charges.

Commenters generally agreed with the

proposed language. Many, however, had

concerns regarding the treatment of fees

paid at closing for services attributable

both to the initial credit decision and to

services to be performed periodically

over the term of the loan. For example,

certain flood certification providers

charge a consolidated fee, and it may

not be clear to creditors what portion of

the fee relates to the services connected

with the initial credit decision. The

final commentary addresses these

concerns by specifying that a creditor

may treat the entire charge as a finance

charge if the creditor is uncertain of the

portion properly attributable to the

finance charge. Such sum need not be

labelled as an estimate.

4(e) Certain Security Interest Charges

Comment 4(e)–1 provides examples of

security interest charges that are and are

not excludable as finance charges. The

proposal stated that only recording fees

relating to the obligation between the

creditor and the consumer were

excludable. Most commenters supported

the proposal, although some were

opposed. The comment is adopted as

proposed, but indicates that fees to

record documents such as an

assignment between a creditor and a

third party are finance charges.

In response to comments and for

clarity, the portion of comment 4(e)–1

dealing with taxes has been revised. As

discussed above, comment 4(a)–7

(formerly 4(a)–6) contains the general

rules on the treatment of taxes.

Subpart B—Open-End Credit

Section 226.5—General Disclosure

Requirements

5(b) Time of Disclosures

5(b)(1) Initial Disclosures

Comment 5(b)(1)–1 provides that

initial disclosures must be provided

before the consumer makes the first

purchase under an open-end plan. The

comment provides an example to

illustrate that when a consumer makes

a purchase and opens an account with

a retailer contemporaneously, initial

disclosures must be given to the

consumer at that time.

Comment 5(b)(1)–5 addresses the

general rule as it relates to the timing of

initial disclosures when a creditor offers

consumers an option to transfer

outstanding balances with other

creditors as part of a preapproval or

general solicitation of an open-end

credit plan. The proposal required

creditors to comply with initial

disclosure requirements under § 226.6

before the consumer authorized the

balance transfer. The purpose of the

proposal was to ensure that consumers

receive initial disclosures before the

first transaction is made under the plan.

Commenters were divided on the

proposal. Several commenters believed

that the disclosures required under

§ 226.5a at the time of solicitation

adequately protect and sufficiently

inform the consumer about the terms of

the credit plan. The initial disclosures

required under § 226.6, however,

contain important terms that are not

included in the solicitation disclosures.

For example, the initial disclosures give

the cash advance APR, information that

could be an important factor in a

consumer’s decision to authorize a

balance transfer. To ease compliance,

card issuers that are subject to the

requirements of § 226.5a may establish

procedures that comply with both

sections in a single disclosure

statement. Comment 5a–2 provides

guidance on the appropriate format for

combined disclosures. For example, a

creditor could provide the § 226.5a

disclosures in a tabular format, along

with the additional disclosures required

by § 226.6 outside the table.

Other commenters requested an ‘‘optout’’ provision that would allow card

issuers to comply by establishing a

procedure under which a consumer

could cancel or reverse the balance

transfer after receiving initial

disclosures. This option raises concerns

about the effect such an approach would

have on a consumer whose balance with

a third party would be paid by the card

issuer. It could be difficult to cancel or

reverse the balance transfer transaction.

Commenters suggested that a creditor

could comply with the initial disclosure

requirements under § 226.6 by delaying

the requested transfer for a period of

time after the initial disclosures are

sent. The delay would ensure that the

initial disclosures are received by the

consumer before the transferred balance

is applied to the new plan. Under the

revised commentary, a creditor

complies with this section if initial

disclosures required under § 226.6 are

furnished before a balance transfer

transaction occurs.

Section 226.6—Initial Disclosure

Statement

6(b) Other Charges

Comment 6(b)–1 provides guidance

for disclosing a termination fee imposed

in an open-end credit plan, as proposed.

Commenters generally supported the

disclosure of a termination fee as an

‘‘other charge.’’ Some commenters

believed disclosing the fee as a finance

charge might better assist consumers in

shopping for a credit plan. But this

approach would not facilitate consumer
16774 Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations

shopping based on the APR, since the

APR in the initial disclosures reflects on

finance charges based on periodic rates,

and thus would not be affected by a

termination fee. Furthermore, the

consumer would gain little from

receiving an APR (disproportionately

high in some cases) on what might be

the last periodic statement for a fee

imposed when the consumer closes the

plan.

Section 226.12—Special Credit Card

Rules

12(b) Liability of Cardholder for

Unauthorized Use

Comments 12(b)–2 and –3 address a

card issuer’s rights and responsibilities

in responding to a claim of

unauthorized use under § 226.12.

Comment 12(b)–2 clarifies that a card

issuer is not required to impose any

liability. Comment 12(b)–3 clarifies that

a card issuer wishing to impose liability

must investigate claims in a reasonable

manner.

Comment 12(b)–3 lists some of the

procedures that may be involved in the

investigation of a claim. The procedures

involved in conducting a reasonable

investigation depend on the facts of the

situation; neither a minimum nor a

maximum number of steps is required to

deem a particular investigation

‘‘reasonable.’’ Some commenters

expressed concern about card issuers

advising consumers that they may be

required to appear in a court action.

These commenters believed such

statements would possibly be

misleading and intimidating, and that in

any case a court action was independent

of a card issuer’s investigation. The

reference to court appearances has been

deleted.

Commenters suggested a variety of

other actions that a card issuer may

take, in addition to those proposed, in

a reasonable investigation of a claim of

unauthorized use. The list has been

expanded to clarify that a card issuer

may request documentation to verify the

claim and may request information

regarding the cardholder’s knowledge of

the person who allegedly used the card

or of that person’s authority to do so.

Many commenters expressed concern

that the proposed comment prohibited a

card issuer from denying a claim

because a cardholder refused to comply

with any request for cooperation, such

as the failure to submit a signed

statement. A card issuer may not

automatically deny a claim based solely

on the cardholder’s failure or refusal to

comply with a particular request. For

example, a cardholder may return an

unsigned questionnaire about the claim

but may refuse to submit a sworn

statement. The card issuer may not

automatically deny the claim because it

is unaccompanied by an affidavit.

However, the comment also makes clear

that the cardholder’s failure to cooperate

may affect the card issuer’s ability to

investigate the claim of unauthorized

use. For example, if the cardholder fails

to respond to requests for information

the card issuer can reasonably obtain

only from the cardholder, the comment

provides that the card issuer, without

further information, may reasonably

terminate its investigation.

Section 226.15—Right of Rescission

15(a) Consumer’s Right To Rescind

Paragraph 15(a)(1)

Comments 15(a)(1)–5 and –6 are

revised to provide further guidance on

the right to rescind a transaction

secured by a consumer’s principal

dwelling. (See also comments 23(a)(1)–

3 and –4.)

15(d) Effects of Rescission

Comment 15(d)(2)–1 is revised to

clarify that if a consumer rescinds a

credit transaction, the creditor must

refund any broker fee that is part of the

credit transaction, even though the

consumer paid the fee to the broker

rather than to the creditor. (See

comment 23(d)(2)–1.)

Section 226.16—Advertising

16(d) Additional Requirements for

Home Equity Plans

Comment 16(d)–7 clarifies disclosure

requirements for balloon payments in

home equity plan advertisements. The

commentary to § 226.5b(d)(5)(ii)

provides that for plans in which a

balloon payment will occur if the

consumer makes only the minimum

payments, the disclosure must state that

fact. A comparable requirement applies

to advertisements, since the regulatory

provisions on treatment of balloon

payments in home equity advertising

and in disclosures are generally parallel.

A number of commenters thought the

proposed comment would require a

disclosure about balloon payments in

any advertisement for a program in

which a balloon payment occurs,

regardless of whether the advertisement

included a ‘‘trigger term.’’ The proposed

comment was not intended to impose

such a requirement. The comment has

been revised to clarify that disclosure is

required only if the advertisement

contains a statement about a minimum

periodic payment. The comment also

addresses questions about the required

content of the disclosure, including

concerns about the effect of the crossreference to comment 5b(d)(5)(ii)–3.

Subpart C—Closed-End Credit

Section 226.17—General Disclosures

17(a) Form of Disclosures

Paragraph 17(a)(1)

Comment 17(a)(1)–5 is revised to

clarify that a late payment fee on a

single payment loan is information

directly related to the segregated

disclosures. The introductory language

has been revised to clarify that the list

of directly related information is

exhaustive.

17(c) Basis of Disclosures and Use of

Estimates

Paragraph 17(c)(4)

Section 226.17(c)(4) allows creditors

to disregard in the payment schedule

and other calculations any small

variations in the first payment due to a

long or short first period. Comment

17(c)(4)–4 clarifies that prepaid finance

charges, such as ‘‘odd-days’’ or ‘‘perdiem’’ interest paid at or prior to

closing, may not be considered as the

first payment on a loan. Thus, ‘‘odddays’’ interest paid at or prior to closing

cannot be considered a part of the

payment schedule and disregarded as a

irregularity in disclosing the finance

charges in the payment schedule. The

language has been adopted as proposed,

with a minor change made to state that

the comment applies to ‘‘pre-paid’’ and

‘‘odd-days’’ interest, using those terms

by name.

Commenters favored treating odddays or per-diem interest collected at

closing as being the first payment for the

purposes of these ‘‘minor irregularities’’

provisions when the consummation

date is subject to change outside of the

lender’s control (for example, in some

escrow-closing states). If interest

collected at, or prior to, consummation

meets the definition of a prepaid finance

charge, it must be treated as such.

The regulation does not require

creditors to collect odd-days or perdiem interest at, or prior to,

consummation. If that interest is

collected as part of the first periodic

payment, instead, the minor

irregularities provisions of § 226.17(c)(4)

would apply to the extent the amount is

within those parameters.

17(f) Early Disclosures

Comment 226.17(f)–1 is revised to

clarify that the regulation requires

redisclosure not only if the APR, at

consummation, differs from the earlier

disclosed APR by more than the

allowable 1/8 or 1/4 of 1 percent
Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations 16775

tolerance, but also if the early

disclosures were not marked as

estimates, and the terms at

consummation, other than the APR,

differ from the earlier disclosed terms.

Language has been added to the second

example to illustrate the case when

terms at consummation differ from

those previously disclosed, where they

were not marked as estimates. To

facilitate comparison of the two

examples, the dates in the second

example have been changed to those

stated in the first example. A third

example has been added to illustrate

circumstances when the regulation does

not require redisclosure even though the

consummated terms, including the APR,

differ from the disclosed terms.

Section 226.18—Content of Disclosures

18(c) Itemization of Amount Financed

Paragraph 18(c)(1)(iv)

Comment 18(c)(1)(iv)–2 clarifies

disclosure requirements under the TILA

that are affected by new aggregate

accounting rules under the Real Estate

Settlement Procedures Act (RESPA; 12

U.S.C. 2601). The comment provides

that creditors may use the amount on

line 1002 of the HUD–1 or HUD–1A,

without adjustment, to calculate the

prepaid finance charge under the TILA.

In October 1994, the Department of

Housing and Urban Development

(HUD), which implements Real Estate

Settlement Procedures Act (RESPA; 12

U.S.C. 2601) through Regulation X (24

CFR Part 3500), amended its regulation

to implement new procedures for

calculating the amount consumers must

pay into escrow accounts associated

with RESPA-covered home mortgage

loans (59 FR 53890, October 26, 1994,

and 60 FR 8812, February 15, 1995).

These procedures are being phased in

over time for existing escrow accounts;

all new escrow accounts established on

or after April 24, 1995, must comply

with the new procedures. Eventually, all

lenders will be required to use an

aggregate accounting method instead of

a single-item method for RESPA

transactions. The use of the aggregate

method will affect disclosure

requirements under Regulation Z.

Currently, in calculating the amounts

required to be paid into escrow accounts

at closing, most lenders use what is

referred to as the single-item analysis.

(Property taxes, insurance, and mortgage

insurance premiums are common

examples of escrow items.) Under

single-item analysis, lenders account

separately for each item to be collected

at closing and held in escrow.

Under the aggregate accounting

method, rather than accounting for each

item separately, the amount for escrow

is determined as a whole. This will

make it difficult for a creditor to

determine how much of the aggregate

amount is actually allocated to each

escrow item.

Regardless of how they collect the

funds under RESPA, lenders will

continue to disclose escrow items on the

HUD settlement statement using the

single-item analysis. If the amount

actually collected at settlement is

affected by the aggregate accounting

method, the settlement statement will

reflect the adjustment on a separate line

in the 1000 series (§ 3500.8(c)(1), 60 FR

8816, February 15, 1995). Mortgage

insurance premiums, one of the items

typically paid at settlement and

included in the escrow account, are

listed on line 1002 of the HUD

statement. This amount is also a prepaid

finance charge under Regulation Z.

If a creditor is collecting the

settlement charges using aggregate

analysis the amount actually collected

may be less than the amount listed on

line 1002. Guidance had been requested

on what amount lenders should use as

the prepaid finance charge, since the

amount disclosed is not precisely the

amount collected. Various alternatives

were considered to ensure as accurate

and uniform a disclosure as possible.

Comment 18(c)(1)(iv)–2 provides that

creditors may use the amount on line

1002, without adjustment, to calculate

the prepaid finance charge under the

TILA. This approach will ease

compliance and provide consumers

with an easily identifiable amount for

the mortgage insurance. While this

method does slightly overstate the

amount of the prepaid finance charge

for mortgage insurance, nonetheless this

method seems to provide the more

accurate and equitable treatment

possible given the problems associated

with identifying the amount of any

single item in an aggregate accounting

analysis.

Commenters generally supported this

approach. Several commenters

requested further clarification on

whether the approach is mandatory,

whether the figure used is considered an

estimate, and how the tolerance is

applied in this situation. A sentence has

been added to the comment to clarify

that the Board is deeming the figure

used on the HUD–1 or HUD–1A as

accurate, for purposes of Regulation Z,

as long as that amount is computed in

accordance with RESPA. Accordingly,

the figure is not considered an estimate,

and the tolerance would apply as it does

for all other figures disclosed under

Regulation Z. As long as the figure

disclosed is accurate for purposes of

RESPA, the figure is accurate to

determine the finance charge tolerance.

The approach is mandatory for all loans

closed using the aggregate accounting

method required by RESPA.

18(d) Finance Charge

Comment 18(d)–2 has been adopted

as proposed, with some minor revisions

for clarity. The comment states that

although there is no specific tolerance

for the amount financed, an error in that

figure—resulting from an error in the

finance charge—does not violate the act

or the regulation provided the finance

charge disclosed under § 226.18(d) is

within the permissible tolerance

provided in footnote 41 of the

regulation. This same interpretation

applies to other disclosures for which

the regulation provides no specific

tolerance, such as the total of payments.

Most commenters were in favor of the

proposal. Views were split among those

commenters opposing the proposal.

Some suggested that a maximum

tolerance of $10 was insufficient to

adequately protect lenders. Several

others opposed any tolerance for errors

in the amount financed or the other

disclosures that was not currently

addressed in the regulation.

Several commenters pointed out that

the language suggested the error must

result from an error in the finance

charge ‘‘that constitutes a part of the

amount financed.’’ This phrase has been

deleted as unnecessary.

Section 226.19—Certain Residential

Mortgage and Variable-Rate

Transactions

19(b) Certain Variable-Rate

Transactions

Paragraph 19(b)(2)(vii)

Comment 19(b)(2)(vii)–2, with the

exception of a few technical changes, is

adopted as proposed. It states that loans

with more than one way to trigger

negative amortization are separate

variable-rate loan programs requiring

separate disclosures to the extent they

vary from each other. For example, a

loan which provides for monthly

interest rate changes but only annual

payment changes and an option for the

borrower to cap the amount of monthly

payments whenever the new payment

would exceed the old payment by more

than a certain margin, contains two

separate variable-rate programs. Each

program may trigger negative

amortization requiring separate

disclosures. (See comments

226.19(b)(2)–2 and –3 for a discussion

on the definition of a variable-rate

program and consolidation of

disclosures for more than one program.)
16776 Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations

For the program that gives the borrower

an option to cap monthly payments, the

creditor must fully disclose the rules

relating to the payment cap option,

including the effects of exercising it

(such as negative amortization occurs

and that the principal balance will

increase), except that the disclosure in

§ 226.19(b)(2)(viii) need not be given for

the option.

Section 226.22—Determination of the

Annual Percentage Rate

22(a) Accuracy of the Annual

Percentage Rate

Paragraph 22(a)(1)

Comment 22(a)(1)–5 corrects an

erroneous footnote reference.

Section 226.23—Right of Rescission

23(a) Consumer’s Right To Rescind

Paragraph 23(a)(1)

Comment 23(a)(1)–4, which contains

an exception to the ‘‘one principal

dwelling’’ rule in comment 23(a)(1)–3,

is revised. Under the exception, a

consumer may have, in effect, two

principal dwellings for a time. Even if

a consumer is acquiring or constructing

a new principal dwelling, any loan

subject to Regulation Z may be

rescinded when the consumer’s current

principal dwelling secures the loan. A

typical example is a bridge loan.

The proposed comment provided, by

example, that a loan secured by the new

home and the current home is a

residential mortgage transaction. While

many commenters agreed with the

proposal, some viewed it as a change in

the existing interpretation. Upon further

analysis, the proposed example would

negate the exception to the general rule.

The existing language of comment

23(a)(1)–4 has been retained with

language and examples added for

clarification. Accordingly, even if a loan

is a purchase-money loan secured by the

new home (that is, a residential

mortgage transaction) where that loan

also is secured by the consumer’s

current home, the loan is rescindable.

23(d) Effects of Rescission

Paragraph 23(d)(2)

Comment 23(d)(2)–1 has been revised

to clarify that if a consumer rescinds a

credit transaction, the creditor must

refund to the consumer any broker fee

that is part of the credit transaction,

even though the consumer paid the fee

to the broker rather than to the creditor.

Several commenters expressed concern

that the literal language of the comment

could be construed to encompass a fee

paid to a broker who did not participate

in the credit transaction. Some

commenters wanted broker fees covered

only to the extent that the lender

required the use of a broker. Creditors

must refund to the consumer any

broker’s fee paid as part of the credit

transaction, whether or not the creditor

required the use of a broker.

(23)(f) Exempt Transactions

Paragraph (23)(f)(4)

Comment 23(f)–4 clarifies that

§ 226.23(f)(2) exempts from the right of

rescission refinancings by original

creditors—to whom a written agreement

was originally payable. Therefore, if a

consumer refinances with any other

creditor, the general rescission model

form (model form H–8) is the

appropriate form to provide to the

consumer.

Several commenters opposed the

proposal, which they believe would

result in an anomaly. That is, if the

original creditor assigns the mortgage to

a third party and the consumer returns

to the original creditor to refinance

(with no new advances), the original

creditor would be excused from

providing the consumer with the right

of rescission.

In certain circumstances the

application of this rule may produce an

anomalous result. Nevertheless, this

interpretation is required by section

103(f) of the act and § 226.2(a)(17) of the

regulation, which define ‘‘creditor’’ as

‘‘* * * the person to whom the debt

arising from the consumer credit

transaction is initially payable.* * *’’.

The comment also clarifies that in a

merger, consolidation or acquisition, the

acquiring creditor would be considered

the original creditor for purposes of the

exemption in § 226.23(f)(2). For

example, if two lending institutions

merge, the resulting institution is

considered the original creditor for

refinancing mortgages previously

originated by either of the two

institutions. Accordingly, the new

institution may use model form H–9 if

new money is advanced. (See comment

2(a)(25)–6.)

Appendix J—Annual Percentage Rate

Computations for Closed-End Credit

Transactions

As proposed, the Board has revised

the 1981 changes paragraph in the

reference section to make a technical

correction to the second sentence.

List of Subjects in 12 CFR Part 226

Advertising, Banks, banking,

Consumer protection, Credit, Federal

Reserve System, Mortgages, Reporting

and recordkeeping requirements, Truth

in lending.

For the reasons set forth in the

preamble, the Board amends 12 CFR

part 226 as follows:

PART 226—TRUTH IN LENDING

(REGULATION Z)

1. The authority citation for part 226

continues to read as follows:

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

and 1637(c)(5).

2. In Supplement I to Part 226, under

Section 226.2—Definitions and Rules of

Construction, under Paragraph

2(a)(17)(i)., paragraph 8. is revised to

read as follows:

Supplement I—Official Staff

Interpretations

* * * * *

Subpart A—General

* * * * *

Section 226.2—Definitions and Rules of

Construction

* * * * *

Paragraph 2(a)(17)(i).

* * * * *

8. Loans from employee savings plan.

Some employee savings plans permit

participants to borrow money up to a certain

percentage of their account balances, and use

a trust to administer the receipt and

disbursement of funds. Unless each

participant’s account is an individual plan

and trust, the creditor should apply the

numerical tests to the plan as a whole rather

than to the individual account, even if the

loan amount is determined by reference to

the balance in the individual account and the

repayments are credited to the individual

account. The person to whom the obligation

is originally made payable (whether the plan,

the trust, or the trustee) is the creditor for

purposes of the act and regulation.

* * * * *

3. In Supplement I to Part 226, under

Section 226.4—Finance Charge, the

following amendments are made:

a. Under 4(a) Definition., paragraphs

1., and 3. are revised, paragraphs 4., 5.,

and 6 are redesignated as paragraphs 5.,

6., and 7., a new paragraph 4. is added,

and newly designated paragraph 7. is

revised;

b. Under Paragraph 4(c)(7).,

paragraph 1. is revised and new

paragraphs 2. and 3. are added; and

c. Under (4)(e) Certain security

interest charges., paragraph 1. is

revised.

The revisions and additions read as

follows:

* * * * *

Section 226.4—Finance Charge

4(a) Definition.

1. Charges in comparable cash

transactions. Charges imposed uniformly in

cash and credit transactions are not finance

charges. In determining whether an item is a
Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations 16777

finance charge, the creditor should compare

the credit transaction in question with a

similar cash transaction. A creditor financing

the sale of property or services may compare

charges with those payable in a similar cash

transaction by the seller of the property or

service.

i. For example, the following items are not

finance charges:

A. Taxes, license fees, or registration fees

paid by both cash and credit customers.

B. Discounts that are available to cash and

credit customers, such as quantity discounts.

C. Discounts available to a particular group

of consumers because they meet certain

criteria, such as being members of an

organization or having accounts at a

particular financial institution. This is the

case even if an individual must pay cash to

obtain the discount, provided that credit

customers who are members of the group and

do not qualify for the discount pay no more

than the nonmember cash customers.

D. Charges for a service policy, auto club

membership, or policy of insurance against

latent defects offered to or required of both

cash and credit customers for the same price.

ii. In contrast, the following items are

finance charges:

A. Inspection and handling fees for the

staged disbursement of construction loan

proceeds.

B. Fees for preparing a Truth in Lending

disclosure statement, if permitted by law (for

example, the Real Estate Settlement

Procedures Act prohibits such charges in

certain transactions secured by real

property).

C. Charges for a required maintenance or

service contract imposed only in a credit

transaction.

iii. If the charge in a credit transaction

exceeds the charge imposed in a comparable

cash transaction, only the difference is a

finance charge. For example:

A. If an escrow agent is used in both cash

and credit sales of real estate and the agent’s

charge is $100 in a cash transaction and $150

in a credit transaction, only $50 is a finance

charge.

2. Costs of doing business. * * *

3. Charges by third parties. Charges

imposed on the consumer by someone other

than the creditor are finance charges (unless

otherwise excluded) if the creditor requires

the use of a third party as a condition of or

incident to the extension of credit, even if the

consumer can choose the third party, or the

creditor retains the charge. For example:

i. The cost of required mortgage insurance,

even if the consumer is allowed to choose the

insurer.

ii. A mortgage broker fee, to the extent that

the broker shares the fee with the creditor.

4. Charges by settlement agents. Charges

imposed on the consumer by a settlement

agent (such as an attorney, escrow agent, or

title company) are finance charges only if the

creditor requires the particular services for

which the settlement agent is charging the

borrower and the charge for those services is

not otherwise excluded from the finance

charge. For example, a fee for courier service

charged by a settlement agent to send a

document to the title company or some other

party is not a finance charge, provided that

the creditor has not required the use of a

courier or retained the charge.

5. Forfeitures of interest. * * *

6. Treatment of fees for use of automated

teller machines. * * *

7. Taxes. i. Generally, a tax imposed by a

state or other governmental body solely on a

creditor is a finance charge if the creditor

separately imposes the charge on the

consumer.

ii. In contrast, a tax is not a finance charge

(even if the tax is collected by the creditor)

if applicable law imposes the tax:

A. Solely on the consumer;

B. On the creditor and the consumer

jointly;

C. On the credit transaction, without

indicating which party is liable for the tax;

or

D. On the creditor, if applicable law directs

or authorizes the creditor to pass the tax on

to the consumer. (For purposes of this

section, if applicable law is silent as to

passing on the tax, the law is deemed not to

authorize passing it on.)

iii. For example, a stamp tax, property tax,

intangible tax, or any other state or local tax

imposed on the consumer, or on the credit

transaction, is not a finance charge even if

the tax is collected by the creditor.

iv. In addition, a tax is not a finance charge

if it is excluded from the finance charge by

an other provision of the regulation or

commentary (for example, if the tax is

imposed uniformly in cash and credit

transactions).

* * * * *

Paragraph 4(c)(7).

1. Real estate or residential mortgage

transaction charges. The list of charges in

§ 226.4(c)(7) applies both to residential

mortgage transactions (which may include,

for example, the purchase of a mobile home)

and to other transactions secured by real

estate. The fees are excluded from the finance

charge even if the services for which the fees

are imposed are performed by the creditor’s

employees rather than by a third party. In

addition, the cost of verifying or confirming

information connected to the item is also

excluded. For example, credit report fees

cover not only the cost of the report, but also

the cost of verifying information in the

report. In all cases, charges excluded under

§ 226.4(c)(7) must be bona fide and

reasonable.

2. Lump sum charges. If a lump sum

charged for several services includes a charge

that is not excludable, a portion of the total

should be allocated to that service and

included in the finance charge. However, a

lump sum charged for conducting or

attending a closing (for example, by a lawyer

or a title company) is excluded from the

finance charge if the charge is primarily for

services related to items listed in § 226.4(c)(7)

(for example, reviewing or completing

documents), even if other incidental services

such as explaining various documents or

disbursing funds for the parties are

performed. The entire charge is excluded

even if a fee for the incidental services would

be a finance charge if it were imposed

separately.

3. Charges assessed during the loan term.

Real estate or residential mortgage

transaction charges excluded under

§ 226.4(c)(7) are those charges imposed solely

in connection with the initial decision to

grant credit. This would include, for

example, a fee to search for tax liens on the

property or to determine if flood insurance is

required. The exclusion does not apply to

fees for services to be performed periodically

during the loan term, regardless of when the

fee is collected. For example, a fee for one

or more determinations during the loan term

of the current tax lien status or flood

insurance requirements is a finance charge,

regardless of whether the fee is imposed at

closing, or when the service is performed. If

a creditor is uncertain about what portion of

a fee to be paid at consummation or loan

closing is related to the initial decision to

grant credit, the entire fee may be treated as

a finance charge.

* * * * *

(4)(e) Certain security interest charges.

1. Examples.

i. Excludable charges. Sums must be

actually paid to public officials to be

excluded from the finance charge under

§ 226.4(e)(1). Examples are charges or other

fees required for filing or recording security

agreements, mortgages, continuation

statements, termination statements, and

similar documents, and intangible property

or other taxes imposed by the state solely on

the creditor and payable by the consumer (if

the tax must be paid to record a security

agreement).

ii. Charges not excludable. If the obligation

is between the creditor and a third party (an

assignee, for example), charges or other fees

for filing or recording security agreements,

mortgages, continuation statements,

termination statements, and similar

documents relating to that obligation are not

excludable from the finance charge under

this section.

* * * * *

4. In Supplement I to Part 226, under

Section 226.5—General Disclosure

Requirements, under 5(b)(1) Initial

disclosures., in paragraph 1., the first

and second sentences are revised, and a

new paragraph 5. is added to read as

follows:

* * * * *

Subpart B—Open-End Credit

Section 226.5—General Disclosure

Requirements

* * * * *

5(b)(1) Initial disclosures.

1. Disclosure before the first transaction.

The rule that the initial disclosure statement

must be furnished ‘‘before the first

transaction’’ requires delivery of the initial

disclosure statement before the consumer

becomes obligated on the plan. For example,

the initial disclosures must be given before

the consumer makes the first purchase (such

as when a consumer opens a credit plan and

makes purchases contemporaneously at a

retail store), receives the first advance, or

pays any fees or charges under the plan other

than an application fee or refundable

membership fee (see below).* * *

* * * * *
16778 Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations

5. Balance transfers. A creditor that solicits

the transfer by a consumer of outstanding

balances from an existing account to a new

open-end plan must comply with § 226.6

before the balance transfer occurs. Card

issuers that are subject to the requirements of

§ 226.5a may establish procedures that

comply with both sections in a single

disclosure statement.

* * * * *

5. In Supplement I to Part 226, under

Section 226.6—Initial Disclosure

Statement, under 6(b) Other charges.,

paragraph 1. is revised to read as

follows:

* * * * *

Section 226.6—Initial Disclosure Statement

* * * * *

6(b) Other charges.

1. General; examples of other charges.

Under § 226.6(b), significant charges related

to the plan (that are not finance charges)

must also be disclosed. For example:

i. Late payment and over-the-credit-limit

charges.

ii. Fees for providing documentary

evidence of transactions requested under

§ 226.13 (billing error resolution).

iii. Charges imposed in connection with

real estate transactions such as title,

appraisal, and credit report fees (see

§ 226.4(c)(7)).

iv. A tax imposed on the credit transaction

by a state or other governmental body, such

as a documentary stamp tax on cash

advances (see the commentary to § 226.4(a)).

v. A membership or participation fee for a

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

whether or not the open-end credit feature is

included. For example, a membership fee to

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

even if membership is required to apply for

credit.

vi. Automated teller machine (ATM)

charges described in comment 4(a)–5 that are

not finance charges.

vii. Charges imposed for the termination of

an open-end credit plan.

* * * * *

6. In Supplement I to Part 226, under

Section 226.12—Special Credit Card

Provisions, under 12(b) Liability of

cardholder for unauthorized use., new

paragraphs 2. and 3. are added to read

as follows:

* * * * *

Section 226.12—Special Credit Card

Provisions

* * * * *

12(b) Liability of cardholder for

unauthorized use.

* * * * *

2. Imposing liability. A card issuer is not

required to impose liability on a cardholder

for the unauthorized use of a credit card; if

the card issuer does not seek to impose

liability, the issuer need not conduct any

investigation of the cardholder’s claim.

3. Reasonable investigation. If a card issuer

seeks to impose liability when a claim of

unauthorized use is made by a cardholder,

the card issuer must conduct a reasonable

investigation of the claim. In conducting its

investigation, the card issuer may reasonably

request the cardholder’s cooperation. The

card issuer may not automatically deny a

claim based solely on the cardholder’s failure

or refusal to comply with a particular

request; however, if the card issuer otherwise

has no knowledge of facts confirming the

unauthorized use, the lack of information

resulting from the cardholder’s failure or

refusal to comply with a particular request

may lead the card issuer reasonably to

terminate the investigation. The procedures

involved in investigating claims may differ,

but actions such as the following represent

steps that a card issuer may take, as

appropriate, in conducting a reasonable

investigation:

i. Reviewing the types or amounts of

purchases made in relation to the

cardholder’s previous purchasing pattern.

ii. Reviewing where the purchases were

delivered in relation to the cardholder’s

residence or place of business.

iii. Reviewing where the purchases were

made in relation to where the cardholder

resides or has normally shopped.

iv. Comparing any signature on credit slips

for the purchases to the signature of the

cardholder or an authorized user in the card

issuer’s records, including other credit slips.

v. Requesting documentation to assist in

the verification of the claim.

vi. Requesting a written, signed statement

from the cardholder or authorized user.

vii. Requesting a copy of a police report,

if one was filed.

viii. Requesting information regarding the

cardholder’s knowledge of the person who

allegedly used the card or of that person’s

authority to do so.

* * * * *

7. In Supplement I to Part 226, under

Section 226.15 —Right of Rescission,

the following amendments are made:

a. Under Paragraph 15(a)(1).,

paragraph 5. is revised;

b. Under Paragraph 15(a)(1).,

paragraph 6. is revised; and

c. Under Paragraph 15(d)(2)., in

paragraph 1., the third sentence is

revised.

The additions and revisions read as

follows:

* * * * *

Section 226.15—Right of Rescission

* * * * *

Paragraph 15(a)(1).

* * * * *

5. Principal dwelling. A consumer can only

have one principal dwelling at a time. (But

see comment 15(a)(1)–6.) A vacation or other

second home would not be a principal

dwelling. A transaction secured by a second

home (such as a vacation home) that is not

currently being used as the consumer’s

principal dwelling is not rescindable, even if

the consumer intends to reside there in the

future. When a consumer buys or builds a

new dwelling that will become the

consumer’s principal dwelling within one

year or upon completion of construction, the

new dwelling is considered the principal

dwelling if it secures the open-end credit

line. In that case, the transaction secured by

the new dwelling is a residential mortgage

transaction and is not rescindable. For

example, if a consumer whose principal

dwelling is currently A builds B, to be

occupied by the consumer upon completion

of construction, an advance on an open-end

line to finance B and secured by B is a

residential mortgage transaction. Dwelling, as

defined in § 226.2, includes structures that

are classified as personalty under state law.

For example, a transaction secured by a

mobile home, trailer, or houseboat used as

the consumer’s principal dwelling may be

rescindable.

6. Special rule for principal dwelling.

Notwithstanding the general rule that

consumers may have only one principal

dwelling, when the consumer is acquiring or

constructing a new principal dwelling, a

credit plan or extension that is subject to

Regulation Z and is secured by the equity in

the consumer’s current principal dwelling is

subject to the right of rescission regardless of

the purpose of that loan (for example, an

advance to be used as a bridge loan). For

example, if a consumer whose principal

dwelling is currently A builds B, to be

occupied by the consumer upon completion

of construction, a loan to finance B and

secured by A is subject to the right of

rescission. Moreover, a loan secured by both

A and B is, likewise, rescindable.

* * * * *

Paragraph 15(d)(2).

1. Refunds to consumer. * * * ‘‘Any

amount’’ includes finance charges already

accrued, as well as other charges such as

broker fees, application and commitment

fees, or fees for a title search or appraisal,

whether paid to the creditor, paid by the

consumer directly to a third party, or passed

on from the creditor to the third party. * * *

* * * * *

8. In Supplement I to Part 226, under

Section 226.16—Advertising, under

16(d) Additional Requirements for

Home Equity Plans, a new paragraph 7.

is added to read as follows:

* * * * *

Section 226.16—Advertising

* * * * *

16(d) Additional Requirements for Home

Equity Plans.

* * * * *

7. Balloon payment. In some programs, a

balloon payment will occur if only the

minimum payments under the plan are

made. If an advertisement for such a program

contains any statement about a minimum

periodic payment, the advertisement must

also state that a balloon payment will result

(not merely that a balloon payment ‘‘may’’

result). (See comment 5b(d)(5)(ii)–3 for

guidance on items not required to be stated

in the advertisement, and on situations in

which the balloon payment requirement does

not apply.)

* * * * *

9. In Supplement I to Part 226, under

Section 226.17—General Disclosure
Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations 16779

Requirements, the following

amendments are made:

a. Under Paragraph 17(a)(1).,

paragraph 5. is revised;

b. Under Paragraph 17(c)(4)., a new

paragraph 4. is added; and

c. Under 17(f) Early disclosures.,

paragraph 1. is revised.

The revisions and additions read as

follows:

* * * * *

Subpart C—Closed-End Credit

Section 226.17—General Disclosure

Requirements

* * * * *

Paragraph 17(a)(1).

* * * * *

5. Directly related. The segregated

disclosures may, at the creditor’s option,

include any information that is directly

related to those disclosures. The following is

directly related information:

i. A description of a grace period after

which a late payment charge will be

imposed. For example, the disclosure given

under § 226.18(l) may state that a late charge

will apply to ‘‘any payment received more

than 15 days after the due date.’’

ii. A statement that the transaction is not

secured. For example, the creditor may add

a category labelled ‘‘unsecured’’ or ‘‘not

secured’’ to the security interest disclosures

given under § 226.18(m).

iii. The basis for any estimates used in

making disclosures. For example, if the

maturity date of a loan depends solely on the

occurrence of a future event, the creditor may

indicate that the disclosures assume that

event will occur at a certain time.

iv. The conditions under which a demand

feature may be exercised. For example, in a

loan subject to demand after five years, the

disclosures may state that the loan will

become payable on demand in five years.

v. An explanation of the use of pronouns

or other references to the parties to the

transaction. For example, the disclosures

may state, ‘‘‘You’ refers to the customer and

‘we’ refers to the creditor.’’

vi. Instructions to the creditor or its

employees on the use of a multiple-purpose

form. For example, the disclosures may state,

‘‘Check box if applicable.’’

vii. A statement that the borrower may pay

a minimum finance charge upon prepayment

in a simple-interest transaction. For example,

when state law prohibits penalties, but

would allow a minimum finance charge in

the event of prepayment, the creditor may

make the § 226.18(k)(1) disclosure by stating,

‘‘You may be charged a minimum finance

charge.’’

viii. A brief reference to negative

amortization in variable-rate transactions. For

example, in the variable-rate disclosure, the

creditor may include a short statement such

as ‘‘Unpaid interest will be added to

principal.’’ (See the commentary to

§ 226.18(f)(1)(iii).)

ix. A brief caption identifying the

disclosures. For example, the disclosures

may bear a general title such as ‘‘Federal

Truth in Lending Disclosures’’ or a

descriptive title such as ‘‘Real Estate Loan

Disclosures.’’

x. A statement that a due-on-sale clause or

other conditions on assumption are

contained in the loan document. For

example, the disclosure given under

§ 226.18(q) may state, ‘‘Someone buying your

home may, subject to conditions in the dueon-sale clause contained in the loan

document, assume the remainder of the

mortgage on the original terms.’’

xi. If a state or Federal law prohibits

prepayment penalties and excludes the

charging of interest after prepayment from

coverage as a penalty, a statement that the

borrower may have to pay interest for some

period after prepayment in full. The

disclosure given under § 226.18(k) may state,

for example, ‘‘If you prepay your loan on

other than the regular installment date, you

may be assessed interest charges until the

end of the month.’’

xii. More than one hypothetical example

under § 226.18(f)(1)(iv) in transactions with

more than one variable-rate feature. For

example, in a variable-rate transaction with

an option permitting consumers to convert to

a fixed-rate transaction, the disclosures may

include an example illustrating the effects on

the payment terms of an increase resulting

from conversion in addition to the example

illustrating an increase resulting from

changes in the index.

xiii. The disclosures set forth under

§ 226.18(f)(1) for variable-rate transactions

subject to § 226.18(f)(2).

xiv. A statement whether or not a

subsequent purchaser of the property

securing an obligation may be permitted to

assume the remaining obligation on its

original terms.

xv. A late-payment fee disclosure under

§ 226.18(l) on a single payment loan.

* * * * *

Paragraph 17(c)(4).

* * * * *

4. Relation to prepaid finance charges.

Prepaid finance charges, including ‘‘odddays’’ or ‘‘per-diem’’ interest, paid prior to or

at closing may not be treated as the first

payment on a loan. Thus, creditors may not

disregard an irregularity in disclosing such

finance charges.

* * * * *

17(f) Early disclosures.

1. Change in rate or other terms.

Redisclosure is required for changes that

occur between the time disclosures are made

and consummation if the annual percentage

rate in the consummated transaction exceeds

the limits prescribed in § 226.22(a) (1⁄8 of 1

percentage point in regular transactions and

1⁄4 of 1 percentage point in irregular

transactions). Redisclosure is also required,

even if the annual percentage rate is within

the permitted tolerance, if the disclosures

were not based on estimates in accordance

with § 226.17(c)(2) and labelled as such. To

illustrate:

i. If disclosures are made in a regular

transaction on July 1, the transaction is

consummated on July 15, and the actual

annual percentage rate varies by more than

1⁄8 of 1 percentage point from the disclosed

annual percentage rate, the creditor must

either redisclose the changed terms or

furnish a complete set of new disclosures

before consummation. Redisclosure is

required even if the disclosures made on July

1 are based on estimates and marked as such;

ii. If disclosures are made on July 1, the

transaction is consummated on July 15, and

the finance charge increased by $35 but the

disclosed annual percentage rate is within

the permitted tolerance, the creditor must at

least redisclose the changed terms that were

not marked as estimates. (See § 226.18(d) and

footnote 41 of this part); and

iii. If early disclosures are marked as

estimates and the disclosed annual

percentage rate is within tolerance at

consummation, the creditor need not

redisclose the changed terms (including the

annual percentage rate).

* * * * *

10. In Supplement I to Part 226, under

Section 226.18—Content of Disclosures,

the following amendments are made:

a. Under Paragraph 18(c)(1)(iv)., a

new paragraph 2. is added; and

b. Under 18(d) Finance charge.,

paragraph 2. is revised.

The additions and revisions read as

follows:

* * * * *

Section 226.18—Content of Disclosures

* * * * *

Paragraph 18(c)(1)(iv).

* * * * *

2. Prepaid mortgage insurance premiums.

RESPA requires creditors to give consumers

a settlement statement disclosing the costs

associated with mortgage loan transactions.

Included on the settlement statement are

mortgage insurance premiums collected at

settlement, which are prepaid finance

charges. In calculating the total amount of

prepaid finance charges, creditors should use

the amount for mortgage insurance listed on

the line for mortgage insurance on the

settlement statement (line 1002 on HUD–1 or

HUD 1–A), without adjustment, even if the

actual amount collected at settlement may

vary because of RESPA’s escrow accounting

rules. Figures for mortgage insurance

disclosed in conformance with RESPA shall

be deemed to be accurate for purposes of

Regulation Z.

18(d) Finance charge.

* * * * *

2. Tolerance. A tolerance for the finance

charge is provided in footnote 41 of this part.

When a miscalculation of the amount

financed, or of some other numerical

disclosure for which the regulation provides

no specific tolerance, results from an error in

a finance charge, the miscalculated amount

financed or other numerical disclosure does

not violate the act or the regulation if the

finance charge disclosed under § 226.18(d) is

within the permissible tolerance under

footnote 41 of this part.

* * * * *

11. In Supplement I to Part 226, under

Section 226.19—Certain Residential

Mortgage and Variable-Rate

Transactions, under paragraph
16780 Federal Register / Vol. 60, No. 63 / Monday, April 3, 1995 / Rules and Regulations

19(b)(2)(vii)., paragraph 2. is revised to

read as follows:

Section 226.19—Certain Residential

Mortgage and Variable-Rate Transactions

* * * * *

Paragraph 19(b)(2)(vii).

* * * * *

2. Negative amortization and interest rate

carryover. A creditor must disclose, where

applicable, the possibility of negative

amortization. For example, the disclosure

might state, ‘‘If any of your payments is not

sufficient to cover the interest due, the

difference will be added to your loan

amount.’’ Loans that provide for more than

one way to trigger negative amortization are

separate variable-rate programs requiring

separate disclosures. (See the commentary to

§ 226.19(b)(2) for a discussion on the

definition of a variable-rate loan program and

the format for disclosure.) If a consumer is

given the option to cap monthly payments

that may result in negative amortization, the

creditor must fully disclose the rules relating

to the option, including the effects of

exercising the option (such as negative

amortization will occur and the principal

loan balance will increase); however, the

disclosure in § 226.19(b)(2)(viii) need not be

provided.

* * * * *

12. In Supplement I to Part 226, under

Section 226.22—Determination of the

Annual Percentage Rate, under

Paragraph 22(a)(1)., in paragraph 5., the

reference ‘‘Footnote 45a’’ is revised to

read ‘‘Footnote 45d’’.

13. In Supplement I to Part 226, under

Section 226.23—Right of Rescission, the

following amendments are made:

a. Under Paragraph 23(a)(1).,

paragraph 3.is revised;

b. Under Paragraph 23(a)(1).,

paragraph 4. is revised;

c. Under Paragraph 23(d)(2)., in

paragraph 1., the third sentence is

revised; and

d. Under 23(f) Exempt transactions.,

in paragraph 4., two new sentences are

added following the first sentence, and

a new sentence is added at the end of

the paragraph.

The additions and revisions read as

follows:

* * * * *

Section 226.23—Right of Rescission

* * * * *

Paragraph 23(a)(1).

* * * * *

3. Principal dwelling. A consumer can only

have one principal dwelling at a time. (But

see comment 23(a)(1)–4.) A vacation or other

second home would not be a principal

dwelling. A transaction secured by a second

home (such as a vacation home) that is not

currently being used as the consumer’s

principal dwelling is not rescindable, even if

the consumer intends to reside there in the

future. When a consumer buys or builds a

new dwelling that will become the

consumer’s principal dwelling within one

year or upon completion of construction, the

new dwelling is considered the principal

dwelling if it secures the acquisition or

construction loan. In that case, the

transaction secured by the new dwelling is a

residential mortgage transaction and is not

rescindable. For example, if a consumer

whose principal dwelling is currently A

builds B, to be occupied by the consumer

upon completion of construction, a

construction loan to finance B and secured

by B is a residential mortgage transaction.

Dwelling, as defined in § 226.2, includes

structures that are classified as personalty

under state law. For example, a transaction

secured by a mobile home, trailer, or

houseboat used as the consumer’s principal

dwelling may be rescindable.

4. Special rule for principal dwelling.

Notwithstanding the general rule that

consumers may have only one principal

dwelling, when the consumer is acquiring or

constructing a new principal dwelling, any

loan subject to Regulation Z and secured by

the equity in the consumer’s current

principal dwelling (for example, a bridge

loan) is subject to the right of rescission

regardless of the purpose of that loan. For

example, if a consumer whose principal

dwelling is currently A builds B, to be

occupied by the consumer upon completion

of construction, a construction loan to

finance B and secured by A is subject to the

right of rescission. A loan secured by both A

and B is, likewise, rescindable.

* * * * *

Paragraph 23(d)(2).

1. Refunds to consumer. * * * ‘‘Any

amount’’ includes finance charges already

accrued, as well as other charges, such as

broker fees, application and commitment

fees, or fees for a title search or appraisal,

whether paid to the creditor, paid directly to

a third party, or passed on from the creditor

to the third party. * * *

* * * * *

23(f) Exempt transactions.

* * * * *

4. New advances. * * * The original

creditor is the creditor to whom the written

agreement was initially made payable. In a

merger, consolidation or acquisition, the

successor institution is considered the

original creditor for purposes of the

exemption in § 226.23(f)(2). * * * The

general rescission notice (model form H–8) is

the appropriate form for use by creditors not

considered original creditors in refinancing

transactions.

* * * * *

14. In Supplement I to Part 226, under

Appendix J, under the heading

References, under 1981 changes:, the

last sentence is revised to read as

follows:

* * * * *

Appendix J—Annual Percentage Rate

Computations for Closed-End Credit

Transactions

* * * * *

References

* * * * *

1981 changes: * * * Paragraph (b)(5)(vi)

has been revised to permit creditors in singleadvance, single-payment transactions in

which the term is less than a year and is

equal to a whole number of months, to use

either the 12-month method or the 365-day

method to compute the number of unitperiods per year.

By order of the Board of Governors of the

Federal Reserve System, acting through the

Secretary of the Board under delegated

authority, March 28, 1995.

William W. Wiles,

Secretary of the Board.

[FR Doc. 95–8071 Filed 3–31–95; 8:45 am]

BILLING CODE 6210–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 94–ANE–17; Amendment 39–

9182; AD 95–07–03]

Airworthiness Directives; AlliedSignal

Aerospace GTCP85 Series Auxiliary

Power Units

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule.

SUMMARY: This amendment adopts a

new airworthiness directive (AD),

applicable to AlliedSignal Aerospace

(formerly Garrett Auxiliary Power

Division and Garrett Turbine Engine

Co.) GTCP85 series auxiliary power

units (APU), that requires modifying the

APU to install an exhaust centerbody.

This amendment is prompted by reports

of two uncontained APU failures where

turbine wheel fragments exited the APU

exhaust axially and damaged the

aircraft. The actions specified by this

AD are intended to prevent an axially

uncontained APU failure and damage to

the aircraft.

DATES: Effective May 3, 1995.

The incorporation by reference of

certain publications listed in the

regulations is approved by the Director

of the Federal Register as of May 3,

1995.

ADDRESSES: The service information

referenced in this AD may be obtained

from AlliedSignal Aerospace Services,

P.O. Box 52170, Phoenix, AZ 85072–

2170, Attn: Dept. 65–71, Mailstop 1802–

AA. This information may be examined

at the Federal Aviation Administration

(FAA), New England Region, Office of

the Assistant Chief Counsel, 12 New

England Executive Park, Burlington,

MA; or at the Office of the Federal

Register, 800 North Capitol Street NW.,

suite 700, Washington, DC.