[Federal Register Volume 61, Number 102 (Friday, May 24, 1996)]
[Proposed Rules]
[Pages 26126-26135]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12685]



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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed 
Rules

[[Page 26126]]



FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-0927]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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

SUMMARY: The Board is publishing for comment proposed revisions to 
Regulation Z (Truth in Lending). The revisions would implement the 
Truth in Lending Act Amendments of 1995 (1995 Amendments), which 
establish new creditor-liability rules for closed-end loans secured by 
real property or dwellings consummated on or after September 30, 1995. 
The 1995 Amendments create several tolerances for accuracy in 
disclosing the amount of the finance charge, and creditors have no 
civil or administrative liability if the finance charge or affected 
disclosures are within the applicable tolerances. The amendments also 
clarify how lenders must disclose certain fees connected with mortgage 
loans. In addition, the Board is proposing a new rule regarding the 
treatment of fees charged in connection with debt cancellation 
agreements, which would be similar to the existing rule regarding 
credit insurance premiums, and provide for more uniform treatment of 
these fees.

DATES: Comments must be received on or before June 24, 1996.

ADDRESSES: Comments should refer to Docket No. R-0927, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding the availability of information.

FOR FURTHER INFORMATION CONTACT: James A. Michaels, Senior Attorney, or 
Natalie E. Taylor or Michael L. Hentrel, Staff Attorneys, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, at (202) 452-3667 or 452-2412; for users of 
Telecommunications Device for the Deaf (TDD) only, please contact 
Dorothea Thompson at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The purpose of the Truth in Lending Act (TILA) (15 U.S.C. 1601 et 
seq.) is to promote the informed use of consumer credit by requiring 
disclosures about its terms and cost. The act requires creditors to 
disclose credit terms and the cost of credit as a dollar amount (the 
finance charge) and as an annual percentage rate (the APR). The TILA 
requires additional disclosures for loans secured by a consumer's home 
and permits consumers to rescind certain transactions that involve 
their principal dwelling. The act is implemented by the Board's 
Regulation Z (12 CFR Part 226).

II. Proposed Regulatory Provisions

    On September 30, 1995, the Congress enacted the Truth in Lending 
Act Amendments of 1995 (1995 Amendments), Public Law 104-29, 109 Stat. 
271. The 1995 Amendments address the concerns of mortgage lenders 
stemming from a 1994 court decision, Rodash v. AIB Mortgage Co., 16 
F.3d 1142 (11th Cir. 1994). In that case, the U.S. Court of Appeals 
affirmed a district court opinion that allowed a consumer to rescind a 
mortgage loan and recover all fees and finance charges that had been 
paid, based in part on errors in the creditor's TILA disclosures. 
Subsequently, a number of class action lawsuits were filed, involving 
thousands of mortgage loans, alleging similar violations and seeking 
the remedy of rescission.
    In May 1995, in response to mortgage lenders' concerns about their 
potential liability for finance charge violations that they viewed as 
minor, the Congress enacted a temporary moratorium on such litigation. 
The moratorium expired on October 1, 1995, and has been replaced by the 
1995 Amendments, which establish new liability rules for loans 
consummated both before and after September 30. The Board is proposing 
regulations only regarding loans made after September 30, 1995.
    Remarks by the Congressional sponsors, made after enactment of the 
amendments, reflect their intent to apply the new rules only to closed-
end loans secured by real property or dwellings (including manufactured 
or mobile homes). 141 Cong. Rec. E1918 (daily ed. Oct. 11, 1995) 
(Statement of Rep. McCollum and Rep. Gonzalez). The 1995 Amendments 
contain several provisions, however, stating that they apply to any 
consumer credit transaction.
    Sections 2 and 3 of the 1995 Amendments amend section 106 of the 
TILA, concerning the determination of the finance charge to clarify how 
creditors must disclose certain fees connected with mortgage loans. The 
proposed regulation would incorporate the statutory amendments without 
substantive change. For the most part, the treatment of these fees 
under the revised regulation is consistent with existing Board 
interpretations. The only significant departure from current law 
concerns mortgage broker fees. Under the revised regulation--as 
mandated by the statutory amendments--all fees charged by a mortgage 
broker would be included in the finance charge unless it is the type of 
fee that would be excluded when it is charged by the creditor. 
Presently, fees charged by a mortgage broker are only included if the 
creditor requires the use of the broker or retains any part of the fee.
    Section 3 of the 1995 Amendments provides that disclosures 
regarding per diem interest charges will be considered accurate so long 
as they are based on information known to the creditor when the 
disclosures are prepared, even if the actual charges differ by the time 
disclosures are provided to the consumer. This provision would be 
incorporated in the regulation without change.
    The 1995 Amendments also establish several tolerances for accuracy 
in disclosing the finance charge in connection with closed-end loans 
secured by real property or dwellings. Previously, the TILA contained 
no tolerance for finance charge errors, although Regulation Z contains 
a de

[[Page 26127]]

minimis $10 tolerance that will continue to apply to non-mortgage 
loans. For mortgage loans, the proposed regulation contains a general 
$100 tolerance for finance charge disclosures. Three separate finance 
charge tolerances would apply in determining whether a consumer may 
rescind a mortgage loan on the grounds that the creditor failed to 
provide accurate disclosures; the tolerance varies depending on the 
type of loan, amount of credit extended and whether foreclosure 
proceedings have been initiated.
    Sections 5 and 8 of the 1995 Amendments revise section 125 of the 
TILA, which allows consumers to rescind certain mortgage loans and 
requires that they receive notice of their rescission rights. Section 5 
clarifies that a creditor will not be liable for the form of notice 
given to the consumer if the creditor has used the appropriate form 
published by the Board or a comparable notice. Section 8 establishes 
special rules that apply when the consumer seeks to rescind the loan 
after foreclosure proceedings have been initiated. The proposed 
regulation would incorporate these provisions.
    While the 1995 Amendments do not explicitly amend the existing 
tolerance for the annual percentage rate (APR) disclosures, the 
proposed regulation would establish additional APR tolerances in 
mortgage transactions where the disclosed APR results from a finance 
charge that is understated or overstated but within the tolerance 
established under the amendments. Accordingly, the APR would be 
considered accurate if it results from a finance charge that would also 
be considered accurate, even if the disclosed APR falls outside of the 
existing TILA tolerance of one-fourth or one-eighth of one percent.
    The proposed regulation would also provide an additional tolerance 
for mortgage transactions, to avoid creditor liability for a disclosed 
APR that is incorrect but is closer to the actual APR than the APR that 
would be considered accurate under the new statutory tolerance. The 
purpose of this tolerance is to reduce or eliminate litigation over 
disclosure errors that are less serious than the errors allowed under 
the new finance charge tolerance.
    The Board is also proposing amendments to Regulation Z regarding 
the treatment of fees charged in connection with debt cancellation 
agreements, which provide similar benefits to credit insurance. Public 
comment was solicited last fall regarding the treatment of these fees 
under the existing rules, in connection with proposed changes to the 
Official Staff Commentary (60 FR 62764, December 7, 1995). The 
comments, mostly from creditors or their trade associations, expressed 
concern about the need under the current rule to determine, on a state-
by-state basis, whether debt cancellation fees should be treated as 
insurance premiums. In response to the commenters' concerns, the 
proposed interpretation was withdrawn based on the belief that the 
issues raised by the commenters would be better addressed in the 
context of a regulatory amendment (61 FR 14952, April 4, 1996). The 
proposed revisions to Regulation Z would provide uniform treatment for 
the disclosure of debt cancellation fees under the TILA, consistent 
with the existing rule for credit life, health, and accident insurance.
    Finally, the Board is proposing a technical amendment to the 
definition of ``business day.'' The revision clarifies that for 
purposes of the Board's rules implementing the Home Ownership and 
Equity Protection Act of 1994 in Subpart E of Regulation Z, the term 
``business day'' has the same meaning as in the rules regarding 
rescission.
    The Board expects to adopt a final rule in September 1996. Under 
the 1995 Amendments, the new rule regarding the treatment of mortgage 
broker fees will become effective on September 30, 1996, or 60 days 
after the Board issues a final regulation, whichever is earlier. The 
other provisions of the 1995 Amendments became effective upon their 
enactment on September 30, 1995, and the Board believes that its 
proposed changes to Regulation Z do not impose any additional 
disclosure requirements beyond those already required under the 
statute. Accordingly, the Board expects the proposed revisions to 
Regulation Z (other than the provision regarding the treatment of 
mortgage broker fees) to become effective 30 days after the final 
regulation is issued.

III. Section-by-Section Analysis

Subpart A--General

Section 226.2--Definitions and Rules of Construction
2(a) Definitions
2(a)(6)
    The definition of the term ``business day'' in paragraph 2(a)(6) 
would be revised to clarify that for purposes of the rules implementing 
the Home Ownership and Equity Protection Act of 1994 in Subpart E of 
Regulation Z, the term ``business day'' has the same meaning as in the 
rescission rules in sections 226.15 and 226.23. The proposed revision 
also updates the list of legal public holidays to include the Birthday 
of Martin Luther King, Jr.
Section 226.4--Finance Charge
4(a)(1) Charges by Third Parties
    Proposed paragraph 4(a)(1) reflects the general rule for third 
party charges currently contained in comment 4(a)-3 of the Official 
Staff Commentary.
4(a)(2) Special Rule; Closing Agent Charges
    Proposed paragraph 4(a)(2) incorporates the substance of section 
2(a) of the 1995 Amendments, which excludes from the finance charge, 
any fees charged by third-party closing agents provided that the 
creditor does not require the imposition of the charge or provision of 
the services, and does not retain any portion of the charge. The 
amendment is consistent with the existing interpretation in comment 
4(a)-4 of the Official Staff Commentary.
4(a)(3) Special Rule; Mortgage Broker Fees
    Proposed paragraph 4(a)(3) contains a new rule regarding the 
treatment of mortgage broker fees, to implement section 106(a)(6) of 
the TILA (15 U.S.C. Sec. 1605(a)(6)). The rule requires that all fees 
charged by a mortgage broker and paid by the consumer be included in 
the finance charge, without regard to whether the fee is paid to the 
broker or to the lender for delivery to the broker. A fee charged by a 
mortgage broker will be excluded from the finance charge only if it is 
the type of fee that would also be excluded when it is charged by the 
creditor. Fees paid by the funding party to a broker as a ``yield 
spread premium,'' that are already included in the finance charge, 
either as interest or as points, should not be double counted.
4(b) Example of Finance Charge
4(b)(10) Debt Cancellation Fees
    Proposed paragraph 4(b)(10) clarifies that fees charged by 
creditors in connection with debt cancellation agreements are 
considered finance charges. The conditions under which voluntary debt 
cancellation fees may be excluded from the finance charge are set forth 
in proposed paragraph 4(d)(3).
4(c) Charges Excluded From the Finance Charge
4(c)(7) Real-Estate Related Fees
4(c)(7)(ii)
    Paragraph 4(c)(7)(ii) would be revised to implement the amendment 
to section 106(e)(2) of the TILA (15 U.S.C. 1605(e)(2)). Formerly, the 
TILA excluded fees for preparation of a ``deed, settlement statement, 
or other

[[Page 26128]]

documents'' from the finance charge, and the existing regulation 
clarified that the exclusion applied only to the preparation of 
``similar documents.'' The regulation would be revised to reflect the 
new statutory language, which further clarifies that the documents must 
be ``loan-related.'' The Board believes that the amendment does not 
represent a substantive change from the current rule.
4(c)(7)(iii)
    Paragraph 4(c)(7)(iii) would be revised by deleting the reference 
to appraisal fees, which would be addressed separately in revised 
paragraph 4(c)(7)(iv).
4(c)(7)(iv)
    Paragraph 4(c)(7)(iv) would be redesignated as 4(c)(7)(v). 
Paragraph 4(c)(7)(iv) would be revised consistent with section 
106(e)(5) of the TILA (15 U.S.C. 1605(e)(5)), which clarifies that fees 
related to property inspections conducted prior to closing, in order to 
check for pest infestation or flood hazards, may be excluded from the 
finance charge. The proposed revision is consistent with comment 
4(c)(7)-3 of the Official Staff Commentary, which states that excluded 
fees are those charged solely in connection with the initial decision 
to extend credit. The exclusion does not apply to fees for services to 
be performed periodically during the term of the loan.
4(d) Insurance and Debt Cancellation Agreements
    The Board proposes to amend Regulation Z by adding a provision 
regarding the requirements for disclosing the cost of debt cancellation 
agreements, which provide consumers with benefits similar to credit 
insurance. Under these agreements, generally in return for a fee, the 
creditor agrees to cancel all or part of any remaining debt in the 
event of a certain occurrence, such as the death, disability or 
unemployment of the consumer or the destruction or theft of goods 
securing the loan. The creditor may or may not purchase insurance to 
cover this risk.
    During the past year, the Board received a significant number of 
inquiries concerning the proper treatment of fees paid for a form of 
debt cancellation agreement known as guaranteed automobile protection 
or ``GAP,'' which is sold in connection with motor vehicle loans. GAP 
agreements cancel the remaining debt when the vehicle securing the loan 
is stolen or destroyed and the settlement payment made by the 
consumer's primary automobile insurance is insufficient to pay the loan 
balance.
    Debt cancellation fees are not specifically addressed in the 
existing regulation; however, under the current rules they would not 
receive uniform treatment in Truth in Lending disclosures. For example, 
in some states, charges for debt cancellation agreements may be 
considered credit insurance premiums. Regulation Z currently allows 
such fees to be excluded from the finance charge only if the agreement 
insures against the death, disability or loss of income of the borrower 
and certain disclosures are provided. On the other hand, fees for GAP 
coverage offered by a creditor, which does not protect against the 
types of risk covered in sections 226.4(d) (1) and (2), are always 
included in the finance charge, as are other types of debt cancellation 
fees in states where the agreements are not considered to be insurance.
    Pursuant to its authority under section 105 of the TILA, the Board 
is proposing a rule that would specifically address debt cancellation 
fees and provide uniform treatment for their disclosure. The proposed 
rule would exclude debt cancellation fees from the finance charge if 
the consumer's purchase of the product is voluntary, the extension of 
credit is not conditioned on the purchase, and specified disclosures 
are provided to the consumer. This is consistent with the existing rule 
for credit life, health, and accident insurance.
4(d)(1) Voluntary Credit Insurance Premiums
    Paragraph 4(d)(1)(i) would be modified consistent with existing 
comment 4(d)-1 of the Official Staff Commentary, to clarify that a 
disclosure that insurance coverage is not required by the creditor must 
be in writing.
4(d)(3) Debt cancellation fees

    Proposed paragraph 4(d)(3) addresses the treatment of fees paid for 
GAP coverage and other debt cancellation agreements. The new provision 
closely follows the existing rule pertaining to credit insurance in 
section 226.4(d)(1), and would exclude fees for debt cancellation from 
the finance charge if the specified conditions are met. The provision 
would apply without regard to whether the debt cancellation agreement 
is considered to be insurance under state law.
    Fees for GAP coverage must be disclosed according to this rule 
rather than the provisions in paragraph 4(d)(2). Even though GAP 
coverage is triggered by the loss of or damage to property, GAP 
agreements do not insure against such loss or damage. Instead they 
insure against the credit risk that remains if there is a balance due 
on the obligation after traditional property insurance benefits are 
exhausted.
4(e) Certain Security-interest Charges
4(e)(3) Taxes on Security Instruments
    Proposed paragraph 4(e)(3) would be added consistent with section 
106(d)(3) of the TILA (15 U.S.C. Sec. 1605(d)(3)). The new provision 
would provide that taxes levied on security instruments or on documents 
evidencing indebtedness (``intangible property taxes''), that must be 
paid in order to record the security instrument, are excluded from the 
finance charge. The 1995 Amendments and proposed rule are consistent 
with existing comment 4(e)-1(i) of the Official Staff Commentary.

Subpart C--Closed-End Credit

Section 226.17--General Disclosure Requirements
17(a) Form of Disclosures
17(a)(1)
    Footnote 38 in paragraph 17(a)(1) would be revised to include the 
disclosures relating to debt cancellation agreements among those that 
may be made together with or separately from the other required 
disclosures.
17(c) Basis of Disclosures and Use of Estimates
17(c)(2)
    Paragraph 17(c)(2) would be redesignated as 17(c)(2)(i) and 
modified slightly to reflect the general rule that disclosures must be 
based on the best information reasonably available to the creditor at 
the time the disclosures are provided to the consumer. This is 
consistent with existing comment 17(c)(2)-1 of the Official Staff 
Commentary, which would be redesignated as comment 17(c)(2)(i)-1.
17(c)(2)(ii)
    Proposed paragraph 17(c)(2)(ii) reflects the 1995 amendment to 
section 121(c) of the TILA (15 U.S.C. 1631(c)), which deals with the 
disclosure of per diem interest charges collected upon loan 
consummation.
    Per diem interest, also known as ``odd-days interest,'' is the 
interest that will accrue between consummation and the first regularly-
scheduled payment. Previously, the general requirement that TILA 
disclosures must be accurate at the time the disclosures are provided 
to consumers applied to the disclosure of per diem interest. Under the 
1995 Amendments, a disclosure with respect

[[Page 26129]]

to the amount of per diem interest to be collected at consummation will 
be considered accurate if the disclosure is based on the information 
actually known to the creditor at the time the disclosure is prepared, 
even if the actual charges differ by the time disclosures are provided 
to the borrower. Creditors should exercise reasonable diligence in 
ascertaining the necessary information when preparing disclosures. This 
change is intended to eliminate the need to revise the TILA disclosures 
if a change in the closing date also changes the amount of the per diem 
interest that is paid at closing.
    The 1995 Amendments state that this provision applies to ``any 
consumer credit transaction,'' although remarks by the Congressional 
sponsors suggest that it may have been intended to apply only to 
closed-end mortgage loans. The Board proposes to limit the provision to 
closed-end loans; the provision does not appear relevant to open-end 
lines of credit. Accordingly, the amended regulation would apply the 
new rule to any closed-end loan involving per diem interest charges. 
Comment is solicited on whether the statutory provision would have any 
applicability in open-end credit transactions.
17(f) Early Disclosures
    Paragraph 17(f) would be revised for clarification and divided into 
paragraphs 17(f) (1) and (2). As revised, the rule more clearly 
reflects the interpretation presently contained in comment 17(f)-1 of 
the Official Staff Commentary. The revisions also clarify that the 
creditor's duty to provide new disclosures is determined by comparing 
the APR disclosed under section 226.18(e) with the APR disclosed in the 
consummated transaction, even though the actual APR determined in 
accordance with Regulation Z may differ.
    Also, a new footnote 41 has been added to cross reference and 
distinguish this rule from the rule on redisclosures contained in 
section 226.19(a)(2). Section 226.19(a)(2), which only applies to 
certain residential mortgage transactions, provides additional leeway 
by allowing a creditor to make the new disclosures prior to 
consummation or settlement, whichever occurs later.
Section 226.18--Content of Disclosures
18(d) Finance Charge
    Section 106(f) of the TILA (15 U.S.C. Sec. 1605(f)) establishes a 
new tolerance for accuracy in disclosing the finance charge for closed-
end loans secured by real property or dwellings. Section 226.18(d) has 
been revised and reorganized to incorporate this change.
18(d)(1) Mortgage Loans
    Proposed paragraph 18(d)(1) provides a new finance charge tolerance 
applicable to mortgage loans consummated on or after September 30, 
1995. For covered transactions, the disclosed finance charge will be 
considered accurate if it is understated by $100 or less or if the 
finance charge is overstated. The new tolerance applies to the 
disclosed finance charge as well as any disclosure affected by the 
finance charge, including the annual percentage rate (APR). The effect 
of the new finance charge tolerance on the disclosed APR is explained 
in more detail in connection with the proposed revisions to section 
226.22(a).
18(d)(2) Other Credit
    The existing tolerance for finance charge disclosures, currently in 
footnote 41, continues to apply to all other closed-end loans 
consummated on or after September 30, 1995, and has been moved into 
proposed paragraph 18(d)(2).
18(n) Insurance and Debt Cancellation Agreements
    Paragraph 18(n) would be revised to include disclosures made in 
connection with debt cancellation agreements.
Section 226.19--Certain Residential Mortgage and Variable Rate 
Transactions
19(a)(2) Redisclosure Required
    Paragraph 19(a)(2) would be revised to make it consistent with the 
revision made to section 226.17(f)(2). The change clarifies that a 
creditor's duty to provide new disclosures is determined by comparing 
the APR that was disclosed under section 226.18(e) with the APR 
disclosed in the consummated transaction.
Section 226.22--Determination of Annual Percentage Rate
22(a) Accuracy of Annual Percentage Rate
    Paragraph 22(a) would be revised to add new paragraphs (a)(4) and 
(a)(5). The TILA contains tolerances for the APR, which are either one-
quarter or one-eighth of one percent, depending on the type of 
transaction. These existing statutory APR tolerances are not altered by 
the 1995 Amendments, although the amendments create a tolerance for the 
finance charge disclosed for mortgage loans as well as ``any disclosure 
affected by the finance charge.'' Although this language could be 
viewed as applying only to numerical amounts for which there is no 
statutory tolerance (such as the amount financed) the Board is of the 
view that the 1995 Amendments should be interpreted broadly to include 
the APR as one of the ``affected disclosures.'' Otherwise, transactions 
in which the disclosed finance charge is misstated but considered 
accurate under the new tolerance might be subject to legal challenge 
based on the disclosed APR, which seems inconsistent with the 
legislative intent. For closed-end loans secured by real property or 
dwellings, the proposed revisions would establish two additional 
tolerances for accuracy in disclosing the APR when the disclosed 
finance charge is within the tolerances established by the 1995 
Amendments.
22(a)(4) Mortgage Loans
    Proposed paragraph 22(a)(4) provides an additional tolerance for 
APR disclosures in transactions where the finance charge is understated 
or overstated but is considered accurate under the 1995 Amendments. For 
example, in a secured home-improvement loan, if a creditor improperly 
omits a $100 fee from the finance charge, the understated finance 
charge would now be considered accurate under section 226.18(d)(1). 
Under paragraph 22(a)(4), the APR resulting from the understated 
finance charge would also be considered accurate, even if the disclosed 
APR falls outside of the existing tolerance of one-eighth of one 
percent provided under section 107(c) of the TILA. For purposes of 
determining a borrower's right to rescind a mortgage loan, an APR 
resulting from a finance charge that is considered accurate in 
accordance with the applicable rule in section 226.23(g) or (h)(2), 
would also be considered accurate.
22(a)(5) Additional Tolerance for Mortgage Loans
    In light of the new APR tolerance established under the 1995 
Amendments, the Board proposes to adopt an additional APR tolerance 
(not required by the statute), in section 226.22(a)(5). The purpose 
would be to avoid the anomalous result of imposing liability on a 
creditor for a disclosed APR that is incorrect but is closer to the 
actual APR than the APR that would be considered accurate under the 
statutory tolerance in paragraph 22(a)(4).
    For instance, if the omission of a $100 fee from the finance charge 
would result in understatement of the finance charge and a disclosed 
APR that is understated by one-half of one percent, that APR would be 
considered accurate under

[[Page 26130]]

paragraph 22(a)(4), even though it is outside of the existing APR 
tolerance of one-eighth of one percent. Under proposed paragraph 
22(a)(5), the disclosed APR would also be considered accurate if it is 
understated by less than one-half of one percent. Thus, if the actual 
APR in this example was 9.00 percent and the $100 omission would result 
in an APR of 8.50 that would be considered accurate under paragraph 
22(a)(4), a disclosed APR of 8.75 percent would be within the tolerance 
in paragraph 22(a)(5). Similarly, if an overstated finance charge 
results in an overstated APR, the creditor would not be liable for an 
overstatement that is closer to the actual APR.
    Under section 105 of the TILA, the Board is authorized to adopt 
exceptions to the TILA that will facilitate compliance. Proposed 
paragraph 22(a)(5) would treat as accurate, a disclosed APR that is 
more accurate than the one resulting from a misstated finance charge 
that is considered accurate under the 1995 Amendments. The Board 
believes that this rule will facilitate compliance with the TILA, and 
prevent disputes over errors that have no greater effect on consumers 
beyond the effects already contemplated by the statutory tolerances. 
The Board recognizes that this rule might allow a creditor to disclose 
an inaccurate APR that is not derived from either the actual or the 
disclosed finance charge. Presumably, this situation would not be 
common. On balance, however, the Board believes the proposed rule is 
consistent with the intent of the 1995 Amendments.
Section 226.23--Right of Rescission
23(b) Notice of Right To Rescind
    Proposed paragraph 23(b)(2) implements amendments to TILA section 
125 (15 U.S.C. 1635). Under the 1995 amendments, creditors will not be 
liable for the form of rescission notice they give to the consumer if 
the creditor uses the appropriate form published by the Board or a 
comparable notice. Proposed paragraph 23(b)(2) requires proper use of 
the model form approved by the Board or a comparable form. Creditors 
properly completing the appropriate form in Appendix H would be deemed 
in compliance with the regulation for those disclosures. The model form 
in Appendix H-9 has been revised slightly to ease compliance and 
clarify that it may be used in loan refinancings with the original 
creditor, without regard to whether the creditor is the holder of the 
note at the time of refinancing.
23(g) Tolerances for Accuracy
    Proposed paragraph 23(g) would implement section 106(f)(2) of the 
TILA (15 U.S.C. Sec. 1605(f)(2)), which creates separate finance charge 
tolerances that apply in determining whether a consumer may rescind a 
loan based on inaccurate TILA disclosures. These tolerances are 
intended to limit rescission as a remedy available to consumers for 
TILA disclosure violations. Under the rescission tolerances, the 
finance charge and other disclosures affected by the finance charge are 
deemed accurate if they do not vary from the actual finance charge by 
more than a certain amount; either one-half of one percent of the total 
amount of credit extended, or one percent of the total amount of credit 
extended, depending on the type of transaction.
    The Board proposes to apply the rescission in section 106(f)(2) in 
addition to, rather than in lieu of, the general tolerances in section 
106(f)(1). The Board believes that it is unlikely that the Congress 
intended to allow the rescission remedy to be invoked when the 
disclosures would otherwise be considered accurate under the general 
tolerance rules. As a result, when the rescission tolerance based on a 
percentage of the amount of credit extended is less than $100, the 
general $100 tolerance in section 106(f)(1) would apply. For example, 
in the case of a small home improvement loan, the one-half of one 
percent rescission tolerance would be less than $100 for loans under 
$20,000. In such cases, the $100 tolerance would apply in determining 
the borrower's right to rescind the transaction. The Board also 
proposes to apply the general rule in section 106(f)(1)(B), that 
overstated finance charges of any amount shall be treated as accurate, 
as the applicable rule in determining whether a consumer may rescind a 
loan.
    The Board also proposes in paragraph (g), to interpret the 
statutory phrase ``total amount of credit extended'' to be the ``face 
amount of the note'' for purposes of calculating the rescission 
tolerances. For purposes of paragraph (g)(2), the Board interprets the 
statutory language ``no new consolidation'' to mean that this tolerance 
applies where the transaction does not involve the consolidation of an 
existing loan. The Board believes that this promotes ease of compliance 
and consistency.
23(h) Special Rules for Foreclosures
    Proposed paragraph 23(h) implements section 125(i)(2) of the TILA 
(15 U.S.C. Sec. 1635(i)(2)), which provides special rescission rules 
after a foreclosure action has been initiated. The Board interprets 
this provision in its context to apply only to closed-end credit; there 
does not appear to be any basis for applying it to open-end lines of 
credit. For example, the 1995 Amendments allow a consumer to rescind a 
loan in foreclosure if a mortgage broker fee was not properly 
disclosed; broker fees, however, are not generally associated with 
open-end lines of credit.
    The special tolerances applicable to foreclosures are intended to 
provide additional consumer protection in light of the new finance 
charge tolerance that generally limits the consumer's right to rescind 
a closed-end mortgage loan. Once foreclosure is initiated, the consumer 
may rescind the loan if the finance charge is understated by more than 
$35, even though a larger tolerance would apply before foreclosure. 
Because open-end home equity loans currently have no tolerance for 
finance charge errors, applying the $35 foreclosure tolerance to open-
end loans would result in less protection for consumers. The Board 
believes this result would be inconsistent with the intent of the 
special foreclosure rules.

Subpart E--Special Rules for Certain Mortgage Transactions

Section 226.31--General Rules
31(d) Basis of Disclosures and Use of Estimates
    Paragraph 31(d) would be revised and reorganized, consistent with 
the revisions made to section 226.17(c).
31(d)(3)
    Proposed paragraph 31(d)(3) would incorporate the new rule 
regarding the disclosure of per diem interest charges, consistent with 
the proposed amendment in section 226.17(c)(2)(ii). Under the 1995 
Amendments, a disclosure with respect to per diem interest charges 
collected upon loan consummation will be considered accurate if the 
disclosure is based on the information actually known to the creditor 
at the time the disclosure is prepared. In preparing disclosures, 
creditors are expected to exercise reasonable diligence in ascertaining 
the necessary information. Proposed paragraph 31(d)(3) would clarify 
that the same rule applies to a disclosure made pursuant to Subpart E 
(such as the APR) that would be affected by the per diem interest 
charge.
31(g) Accuracy of Annual Percentage Rate
    Paragraph 31(g) would be revised to clarify that a creditor may 
rely on the

[[Page 26131]]

APR tolerances provided in section 226.22 for purposes of determining 
whether a transaction is covered under section 226.32(a) and making the 
disclosures required by section 226.32(c).
Appendix H to Part 226--Closed-end Model Forms and Clauses
H-9 Rescission Model Form
    The 1995 Amendments clarify that creditors will not be liable for 
the form of rescission notice they give to the consumer if the creditor 
uses the appropriate form published by the Board or a comparable 
notice. In order to ease compliance, model form H-9 has been revised 
slightly to clarify that it may be used in loan refinancings with the 
original creditor, without regard to whether the original creditor is 
the holder of the note at the time of refinancing. Creditors may, 
however, continue to use the original forms H-8 and H-9 as appropriate.
Supplement I--Official Staff Interpretations
    The proposed revisions would conform the Official Staff Commentary 
consistent with the proposed amendments to Regulation Z.

IV. Form of Comment Letters

    Comment letters should refer to Docket No. R-0927 and, when 
possible, should use a standard Courier typeface with a type size of 10 
or 12 characters per inch. This will enable the Board to convert the 
text to machine-readable form through electronic scanning, and will 
facilitate automated retrieval of comments for review. Also, if 
accompanied by an original document in paper form, comments may be 
submitted on 3\1/2\ inch or 5\1/4\ inch computer diskettes in any IBM-
compatible DOS-based format.
    The comment period ends on June 24, 1996. Normally, the Board 
provides a 60-day comment period, in keeping with the Board's policy 
statement on rulemaking (44 FR 3957, January 19, 1979). The proposed 
regulatory revisions implement changes in the law made by the 1995 
Amendments and with the exception of one provision related to mortgage 
broker fees, the statutory amendments are already in effect. The 
amendments regarding the disclosure of mortgage broker fees will become 
effective on or before September 30, 1996. The Board believes that an 
abbreviated comment period is desirable to ensure that a final rule is 
in place as soon as possible to provide guidance to creditors affected 
by the new rules.

V. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. Sec. 603), the Board's Office of the Secretary has reviewed 
the proposed amendments to Regulation Z. Overall, the amendments are 
not expected to have any significant impact on small entities. The 
proposed regulatory revisions required to implement the 1995 Amendments 
clarify the existing disclosure requirements and ease compliance by 
providing new tolerances. Under the existing rules, fees charged in 
connection with debt cancellation agreements are generally treated as 
finance charges; the proposed rule allows creditors to exclude these 
fees from the finance charge if additional disclosures are provided to 
the consumer. A final regulatory flexibility analysis will be conducted 
after consideration of comments received during the public comment 
period.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
Sec. 3501 et seq.), the Board has reviewed the proposed amendments 
under the authority delegated to the Board by the Office of Management 
and Budget. 5 CFR 1320 Appendix A.1. Comments on the collection or 
disclosure of information associated with this regulation should be 
sent to the Office of Management and Budget, Paperwork Reduction 
Project (7100-0199), Washington, DC 20503, with copies of such comments 
to be sent to Mary M. McLaughlin, Federal Reserve Board Clearance 
Officer, Division of Research and Statistics, Mail Stop 97, Board of 
Governors of the Federal Reserve System, Washington, DC 20551.
    The respondents are individuals or businesses that regularly offer 
or extend consumer credit. The purpose of the TILA and Regulation Z is 
to promote the informed use of consumer credit by requiring creditors 
to disclose its terms and cost. Records must be retained by creditors 
for 24 months. The revisions to the requirements in this proposed 
regulation are found in 12 CFR 226.2, 226.4, 226.17, 226.18, 226.19, 
226.22, 226.23, and 226.31.
    The Board's Regulation Z applies to all types of creditors, not 
just state member banks. Under the Paperwork Reduction Act, however, 
the Federal Reserve accounts for the paperwork burden associated with 
Regulation Z only for state member banks. Any estimates of paperwork 
burden for institutions other than state member banks that would be 
affected by the proposed amendments would be provided by the federal 
agency or agencies that supervise those lenders.
    The proposed changes are not expected to increase the ongoing 
annual burden of Regulation Z. There are 1,042 state member banks with 
an average frequency of 136,294 responses per bank each year. The 
current estimated burden for Regulation Z ranges from 5 seconds per 
response (for disclosures prior to opening a credit card account) to 30 
minutes per response (for inclusion of information in an 
advertisement). The combined annual burden for all state member banks 
under Regulation Z is estimated to be 1,975,600 hours; based on an 
hourly cost of $20, the combined annual cost is estimated to be $39.5 
million (an average of $37,920 per state member bank). Using the same 
hourly cost, the Federal Reserve estimates that there would be 
associated start up cost in the amount of $160 per respondent for 
changing disclosures (or disclosure-producing software) to include 
disclosures relating to voluntary debt cancellation agreements.
    The disclosures made by creditors to consumers under Regulation Z 
are mandatory. Since the Federal Reserve does not collect any 
information, no issue of confidentiality arises. Disclosures relating 
to specific transactions or accounts are not publicly available.
    Comments are invited on: (a) whether the proposed revision to 
Regulation Z is necessary for the proper performance of the Federal 
Reserve's functions; including whether the disclosed information has 
practical utility; (b) the accuracy of the Federal Reserve's estimate 
of the burden of the proposed disclosures, including the cost of 
compliance; (c) ways to enhance the quality, utility, and clarity of 
the information disclosures; and (d) ways to minimize the burden of 
information disclosures on respondents, including through the use of 
automated techniques or other forms of information technology.
    An agency may not collect or sponsor the collection or disclosure 
of information, and an organization is not required to collect or 
disclose information unless a currently valid OMB control number is 
displayed. The OMB control number for Regulation Z is 7100-0199

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.

[[Page 26132]]

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions to the regulation. New language is shown inside bold-faced 
arrows, while language that would be deleted is set off with bold-faced 
brackets.
    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR Part 226 as follows:

PART 226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 226 continues to read as 
follows:

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).

    2. Section 226.2 would be amended by revising paragraph (a)(6) to 
read as follows:


Sec. 226.2  Definitions and rules of construction.

    (a) Definitions. * * *
* * * * *
    (6) Business day means a day on which the creditor's offices are 
open to the public for carrying on substantially all of its business 
functions. However, for purposes of rescission under Secs. 226.15 and 
226.23, <rt-triang>and for purposes of Sec. 226.31,<lf-triang> the term 
means all calendar days except Sundays and the legal public holidays 
specified in 5 USC 6103(a), such as New Year's Day, <rt-triang>the 
Birthday of Martin Luther King, Jr.,<lf-triang> Washington's Birthday, 
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, 
Thanksgiving Day, and Christmas Day.
* * * * *
    3. Section 226.4 would be amended as follows:
    a. Paragraph (a) would be revised;
    b. New paragraph (b)(10) would be added;
    c. A heading would be added to paragraph (c)(7), paragraph (c)(7) 
introductory text would be republished, paragraphs (c)(7)(ii) and 
(c)(7)(iii) would be revised, paragraph (c)(7)(iv) would be 
redesignated as paragraph (c)(7)(v) and republished, and a new 
paragraph (c)(7)(iv) would be added;
    d. Paragraph (d) heading would be revised, paragraph (d)(1) heading 
and introductory text and paragraph (d)(1)(i) would be revised, and a 
new paragraph (d)(3) would be added.
    e. A new paragraph (e)(3) would be added.
    The revisions and additions would read as follows:


Sec. 226.4  Finance charge.

    (a) Definition. The finance charge is the cost of consumer credit 
as a dollar amount. It includes any charge payable directly or 
indirectly by the consumer and imposed directly or indirectly by the 
creditor as an incident to or a condition of the extension of credit. 
It does not include any charge of a type payable in a comparable cash 
transaction.
    <rt-triang>(1) Charges by third parties. The finance charge 
includes fees and amounts charged by someone other than the creditor 
(unless otherwise excluded under this section) if the creditor requires 
the use of the third party as a condition of or incident to the 
extension of credit (even if the consumer can choose the third party) 
or retains the charge.
    (2) Special rule; closing agent charges. Fees charged by a third-
party closing agent are finance charges only if the creditor requires 
the particular services for which the consumer is charged or requires 
the imposition of the charge, or retains any portion of the charge.
    (3) Special rule; mortgage broker fees. Fees charged by a mortgage 
broker (including fees paid directly to the broker or paid to the 
creditor for delivery to the broker) are finance charges even if the 
creditor does not require the consumer to use a mortgage broker and the 
creditor does not retain any portion of the charge.<lf-triang>
    (b) Example of finance charge * * *
* * * * *
    <rt-triang>(10) Debt cancellation fees. Premiums or other charges 
paid in connection with a debt cancellation agreement, without regard 
to whether the agreement is insurance under applicable law.<lf-triang>
    (c) Charges excluded from the finance charge. * * *
* * * * *
    (7) <rt-triang>Real-estate related fees.<lf-triang> The following 
fees in a transaction secured by real property or in a residential 
mortgage transaction, if the fees are bona fide and reasonable in 
amount:
* * * * *
    (ii) Fees for preparing <rt-triang>loan-related documents, such 
as<lf-triang> deeds, mortgages, and reconveyance[,] 
<rt-triang>or<lf-triang> settlement [, and similar] documents.
    (iii) Notary [, appraisal,] and credit report fees.
    (iv) <rt-triang>Property appraisal fees, including fees related to 
any pest infestation or flood hazard inspections conducted prior to 
closing.<lf-triang>
    <rt-triang>(v)<lf-triang> Amounts required to be paid into escrow 
or trustee accounts if the amounts would not otherwise be included in 
the finance charge.
* * * * *
    (d) Insurance <rt-triang>and debt cancellation 
agreements<lf-triang>. (1) <rt-triang>Voluntary credit insurance 
premiums.<lf-triang> Premiums for credit life, accident, health or loss 
of income insurance may be excluded from the finance charge if the 
following conditions are met:
    (i) The insurance coverage is not required by the creditor, and 
this fact is disclosed <rt-triang>in writing<lf-triang>.
* * * * *
    <rt-triang>(3) Debt cancellation fees. Charges or premiums paid in 
connection with an agreement that provides for cancellation of all or 
part of the debtor's liability for amounts exceeding the value of the 
collateral securing the debtor's obligation, or in connection with any 
other debt cancellation agreement, may be excluded from the finance 
charge, without regard to whether the agreement is insurance, if the 
following conditions are met:
    (i) The agreement or coverage is not required by the creditor, and 
this fact is disclosed in writing.
    (ii) The fee or premium for the initial term of coverage is 
disclosed. If the term of coverage is less than the term of the credit 
transaction, the term of coverage also shall be disclosed. The fee or 
premium may be disclosed on a unit-cost basis only in open-end credit 
transactions, closed-end credit transactions by mail or telephone under 
226.17(g), and certain closed-end credit transactions involving an 
insurance plan that limits the total amount of indebtedness subject to 
coverage.
    (iii) The consumer signs or initials an affirmative written request 
for the coverage after receiving the disclosures specified in this 
paragraph. Any consumer in the transaction may sign or initial the 
request.<lf-triang>
    (e) Certain security interest charges. * * *
* * * * *
    <rt-triang>(3) Taxes on security instruments. Any tax levied on 
security instruments or on documents evidencing indebtedness if the 
payment of such taxes is a precondition for recording the instrument 
securing the evidence of indebtedness.<lf-triang>
* * * * *
    4. Section 226.17 would be amended as follows:
    a. In paragraph (a)(1), footnote 38 would be revised;
    b. Paragraph (c)(2) would be redesignated as paragraph (c)(2)(i) 
and revised, and paragraph (c)(2)(ii) would be added;
    c. Paragraph (f) would be revised.
    The revisions and additions would read as follows:

[[Page 26133]]

Sec. 226.17  General disclosure requirements.

    (a) Form of disclosures. (1) * * * \38\ * * *
---------------------------------------------------------------------------

    \38\ The following disclosures may be made together 
<rt-triang>with<lf-triang> or separately from other required 
disclosures: the creditor's identity under Sec. 226.18(a), the 
variable rate example under Sec. 226.18(f)(4), insurance 
<rt-triang>or debt cancellation agreements<lf-triang> under 
Sec. 226.18(n), and certain security interest charges under 
Sec. 226.18(o).
---------------------------------------------------------------------------

* * * * *
    (c) Basis of disclosures and use of estimates. * * *
    (2)<rt-triang>(i)<lf-triang> If any information necessary for an 
accurate disclosure is unknown to the creditor, it shall make the 
disclosure based on the best information reasonably available 
<rt-triang>at the time the disclosure is provided to the 
consumer,<lf-triang> and shall state that the disclosure is an 
estimate.
    <rt-triang>(ii) For a transaction in which a portion of the 
interest is determined on a per diem basis and collected upon 
consummation, any disclosure with respect to the per diem interest 
shall be deemed to be accurate if the disclosure is based on 
information actually known to the creditor at the time that the 
disclosure documents are prepared for consummation of the 
transaction.<lf-triang>
* * * * *
    (f) Early disclosures. If disclosures are given before the date of 
consummation of a transaction and a subsequent event makes them 
inaccurate, <rt-triang>before consummation \39\<lf-triang> the creditor 
shall disclose [the changed terms before consummation]
---------------------------------------------------------------------------

    <rt-triang>\39\ For certain residential mortgage transactions, 
Sec. 226.19(a)(2) permits redisclosure no later than consummation or 
settlement, whichever is later.<lf-triang>
---------------------------------------------------------------------------

    <rt-triang>(1) any changed term that was not based on an estimate 
in accordance with Sec. 226.17(c)(2) and labelled as such;
    (2) all changed terms,<lf-triang> if the annual percentage rate 
<rt-triang>disclosed<lf-triang> in the consummated transaction varies 
from the annual percentage rate disclosed under Sec. 226.18(e) by more 
than \1/8\ of 1 percentage point in a regular transaction, or more than 
\1/4\ of 1 percentage point in an irregular transaction, as defined in 
Sec. 226.22(a).
* * * * *
    5. Section 226.18 would be amended as follows:
    a. Footnote 41 in paragraph (d) would be removed and paragraph (d) 
introductory text would be republished;
    b. New paragraphs (d)(1) and (d)(2) would be added;
    c. Footnotes 39 and 40 in paragraph (c) would be redesignated as 
footnotes 40 and 41 respectively; and
    d. Paragraph (n) would be revised.
    The revisions and additions would read as follows:


Sec. 226.18  Content of disclosures.

* * * * *
    (d) Finance charge. The finance charge, using that term, and a 
brief description such as ``the dollar amount the credit will cost 
you.'' [\41\]
---------------------------------------------------------------------------

    [\41\ The finance charge shall be considered accurate if it is 
not more than $5 above or below the exact finance charge in a 
transaction involving an amount financed of $1,000 or less, or not 
more than $10 above or below the exact finance charge in a 
transaction involving an amount financed of more than $1,000.]
---------------------------------------------------------------------------

    <rt-triang>(1) Mortgage loans. In a transaction secured by real 
property or a dwelling, the disclosed finance charge and other 
disclosures affected by the disclosed finance charge (such as the 
amount financed and the annual percentage rate) shall be treated as 
accurate if the amount disclosed as the finance charge:
    (i) is greater than the amount required to be disclosed; or
    (ii) is understated by no more than $100.
    (2) Other credit. In any other transaction, the amount disclosed as 
the finance charge shall be treated as accurate if it is not more than 
$5 above or below the amount required to be disclosed in a transaction 
involving an amount financed of $1,000 or less, or not more than $10 
above or below the amount required to be disclosed in a transaction 
involving an amount financed of more than $1,000.<lf-triang>
* * * * *
    (n) Insurance <rt-triang>and debt cancellation 
agreements<lf-triang>. The items required by Sec. 226.4(d) in order to 
exclude certain insurance premiums <rt-triang>and debt cancellation 
fees<lf-triang> from the finance charge.
* * * * *
    6. Section 226.19 would be amended by revising paragraph (a)(2) to 
read as follows:


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

    (a) * * *
    (2) Redisclosure required. If the annual percentage rate 
<rt-triang>disclosed<lf-triang> in the consummated transaction varies 
from the annual percentage rate disclosed under Sec. 226.18(e) by more 
than \1/8\ of 1 percentage point in a regular transaction or more than 
\1/4\ of 1 percentage point in an irregular transaction, as defined in 
Sec. 226.22, the creditor shall disclose the changed terms no later 
than consummation or settlement.
* * * * *
    7. Section 226.22 would be amended by adding new paragraphs (a)(4) 
and (a)(5) to read as follows:


Sec. 226.22  Determination of annual percentage rate.

    (a) Accuracy of annual percentage rate. * * *
* * * * *
    <rt-triang>(4) Mortgage loans. If the annual percentage rate 
disclosed in a transaction secured by real property or a dwelling 
varies from the actual rate determined in accordance with paragraph 
(a)(1) of this section, the disclosed annual percentage rate shall be 
considered accurate if:
    (i) It is the rate resulting from the disclosed finance charge; and
    (ii) The disclosed finance charge would be considered accurate 
under Sec. 226.18(d)(1) or Sec. 226.23 (g) or (h).
    (5) Additional tolerance for mortgage loans. In a transaction 
secured by real property or a dwelling, if the disclosed finance charge 
is calculated incorrectly but considered accurate under 
Sec. 226.18(d)(1) or Sec. 226.23 (g) or (h), the disclosed annual 
percentage rate shall be considered accurate:
    (i) If the disclosed finance charge is understated, and the 
disclosed annual percentage rate is also understated but is closer to 
the actual annual percentage rate than the rate that would be 
considered accurate under paragraph (a)(4) of this section;
    (ii) If the disclosed finance charge is overstated, and the 
disclosed annual percentage rate is also overstated but is closer to 
the actual annual percentage rate than the rate that would be 
considered accurate under paragraph (a)(4) of this section.<lf-triang>
* * * * *
    8. Section 226.23 would be amended as follows:
    a. Paragraphs (b)(1) through (b)(5) would be redesignated as 
paragraphs (b)(1)(i) through (b)(1)(v);
    b. Paragraph (b) would be redesignated as paragraph (b)(1) and 
republished;
    c. A new paragraph (b)(2) would be added; and
    d. New paragraphs (g) and (h) would be added.
    The revisions and additions would read as follows:


Sec. 226.23  Right of rescission.

* * * * *
    (b) <rt-triang>(1)<lf-triang> Notice of right to rescind. In a 
transaction subject to rescission, a creditor shall deliver two copies 
of the notice of the right to rescind to each consumer entitled to 
rescind. The notice shall be on a separate document that identifies the 
transaction and shall clearly and conspicuously disclose the following:

[[Page 26134]]

    [(1)]<rt-triang>(i)<lf-triang> The retention or acquisition of a 
security interest in the consumer's principal dwelling.
    [(2)]<rt-triang>(ii)<lf-triang> The consumer's right to rescind the 
transaction.
    [(3)]<rt-triang>(iii)<lf-triang> How to exercise the right to 
rescind, with a form for that purpose, designating the address of the 
creditor's place of business.
    [(4)]<rt-triang>(iv)<lf-triang> The effects of rescission, as 
described in paragraph (d) of this section.
    [(5)]<rt-triang>(v)<lf-triang> The date the rescission period 
expires.
    <rt-triang>(2) Proper form of notice. To satisfy the disclosure 
requirements of paragraph (b)(1) of this section, the creditor shall 
provide a notice that conforms with the model forms in Appendix H of 
this part, as appropriate, or a notice that is substantially 
similar.<lf-triang>
* * * * *
    <rt-triang>(g) Tolerances for accuracy. (1) Except as provided in 
paragraphs (g)(2) and (h)(2) of this section, the finance charge and 
other disclosures affected by the finance charge (such as the amount 
financed and the annual percentage rate) shall be considered accurate 
for purposes of this section if the disclosed finance charge is:
    (i) Greater than the amount required to be disclosed; or
    (ii) Understated by no more than \1/2\ of one percent of the face 
amount of the note or $100, whichever is greater.
    (2) In a refinancing of a residential mortgage transaction (other 
than a transaction covered by Sec. 226.32) with a creditor where no new 
money is advanced and there is no consolidation of an existing loan, 
the finance charge and other disclosures affected by the finance charge 
(such as the amount financed and the annual percentage rate) shall be 
considered accurate for purposes of this section if the disclosed 
finance charge is:
    (i) Greater than the amount required to be disclosed; or
    (ii) Understated by no more than one percent of the face amount of 
the note or $100, whichever is greater.
    (h) Special rules for foreclosures--(1) Right to rescind. After the 
initiation of a foreclosure on the consumer's principal dwelling which 
secures the credit obligation, the consumer shall have the right to 
rescind the transaction if:
    (i) A mortgage broker fee was not included in the finance charge, 
if required by the laws and regulations in effect at the time of 
consummation; or
    (ii) The creditor did not provide the appropriate form of notice, 
in accordance with Appendix H of this part, or a substantially similar 
notice.
    (2) Tolerance for disclosures. After the initiation of foreclosure, 
the finance charge and other disclosures affected by the finance charge 
(such as the amount financed and the annual percentage rate) shall be 
considered accurate for purposes of this section if the disclosed 
finance charge is:
    (i) Greater than the amount required to be disclosed; or
    (ii) Understated by no more than $35.<lf-triang>
    9. Section 226.31 would be amended by revising paragraphs (d) and 
(g) as follows:


Sec. 226.31   General rules.

* * * * *
    (d) Basis of disclosures and use of estimates. 
<rt-triang>(1)<lf-triang> Disclosures shall reflect the terms of the 
legal obligation between the parties.
    <rt-triang>(2)<lf-triang> 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 at 
<rt-triang> the time the disclosures are provided <lf-triang>and shall 
state clearly that the disclosure is an estimate.
    <rt-triang>(3) For a transaction in which a portion of the interest 
is determined on a per diem basis and collected upon consummation, any 
disclosure with respect to the per diem interest shall be deemed to be 
accurate if the disclosure is based on the information actually known 
to the creditor at the time that the disclosure documents are prepared 
for consummation of the transaction.<lf-triang>
* * * * *
    (g) Accuracy of annual percentage rate. For purposes of 
Sec. 226.32, the annual percentage rate shall be considered 
accurate<rt-triang>, and may be used in determining whether a 
transaction is covered by Sec. 226.32,<lf-triang> if it is accurate 
according to the requirements and within the tolerances set forth in 
Sec. 226.22.
    10. In Part 226, Appendix H is amended by revising the entry for H-
9 Rescission Model Form in the contents listing at the beginning of the 
appendix and the H-9 Rescission Model Form to read as follows:

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

* * * * *
H-9--Rescission Model Form (Refinancing[)] <rt-triang> with Original 
Creditor)<lf-triang> (Sec. 226.23)
* * * * *
H-9--Rescission Model Form (Refinancing[)] <rt-triang> with Original 
Creditor)<lf-triang>

Notice of Right To Cancel

Your Right To Cancel

    You are entering into a new transaction to increase the amount 
of credit provided to you. [We acquired a [mortgage/lien/security 
interest] [on/in] your home under the original transaction and will 
retain that [mortgage/lien/security interest] in the new 
transaction.] <rt-triang>Your home is the security for this new 
transaction.<lf-triang> You have a legal right under federal law to 
cancel the new transaction, without cost, within three business days 
from whichever of the following events occurs last:
    (1) The date of the new transaction, which is 
____________________; or
    (2) The date you received your new Truth in Lending disclosures; 
or
    (3) The date you received this notice of your right to cancel.
    If you cancel the new transaction, your cancellation will apply 
only to the increase in the amount of credit. It will not affect the 
amount that you presently owe or the [mortgage/lien/security 
interest] we already have [on/in] your home. If you cancel, the 
[mortgage/lien/security interest] as it applies to the increased 
amount is also cancelled. Within 20 calendar days after we receive 
your notice of cancellation of the new transaction, we must take the 
steps necessary to reflect the fact that our [mortgage/lien/security 
interest] [on/in] your home no longer applies to the increase of 
credit. We must also return any money you have given to us or anyone 
else in connection with the new transaction.
    You may keep any money we have given you in the new transaction 
until we have done the things mentioned above, but you must then 
offer to return the money at the address below. If we do not take 
possession of the money within 20 calendar days of your offer, you 
may keep it without further obligation.

How To Cancel

    If you decide to cancel the new transaction, you may do so by 
notifying us in writing, at (creditor's name and business address).
    You may use any written statement that is signed and dated by 
you and states your intention to cancel, or you may use this notice 
by dating and signing below. Keep one copy of this notice because it 
contains important information about your rights.
    If you cancel by mail or telegram, you must send the notice no 
later than midnight of ____________________ (date) (or midnight of 
the third business day following the latest of the three events 
listed above).
    If you send or deliver your written notice to cancel some other 
way, it must be

[[Page 26135]]

delivered to the above address no later than that time.
    I Wish to Cancel

----------------------------------------------------------------------
Consumer's Signature

----------------------------------------------------------------------
 Date

Supplement I--[Amended]

    11. In Supplement I to Part 226, under Section 226.4--Finance 
Charge, under 4(a) Definition, paragraph 3. ii. would be removed.
    12. In Supplement I to Part 226, under Section 226.17--General 
Disclosure Requirements, under 17(c) Basis of disclosures and use of 
estimates, Paragraph 17(c)(2) would be redesignated as Paragraph 
17(c)(2)(i):

Supplement I--Official Staff Interpretations

* * * * *

Section 226.17--General Disclosure Requirements

* * * * *

17(c) Basis of Disclosures and Use of Estimates

* * * * *

Paragraph 17(c)(2)<rt-triang>(i).<lf-triang>

* * * * *
    13. In Supplement I to Part 226, under Section 226.18--Content of 
Disclosures, under 18(d) Finance charge, paragraph 2 would be removed.
    14. In Supplement I to Part 226, under Section 226.23--Right of 
Rescission, under 23(b) Notice of right to rescind, the first sentence 
of paragraph 3 would be revised to read as follows:
* * * * *

Section 226.23--right of rescission

* * * * *
    23(b) Notice of right to rescind.
* * * * *
    3. Content. The notice must include all of the information outlined 
in Section 226.23(b)(1)<rt-triang>(i) through (v)<lf-triang> [through 
5]. * * *
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, May 15, 1996.
William W. Wiles,
Secretary of the Board
[FR Doc. 96-12685 Filed 5-23-96; 8:45 am]
BILLING CODE 6210-01-P