This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

26126

Vol. 61, No. 102

Friday, May 24, 1996

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

§ 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
26128 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules

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

§ 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 homeimprovement 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 oneeighth 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
26130 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules

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. § 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.

§ 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
Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules 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 31⁄2 inch or 51⁄4 inch

computer diskettes in any IBMcompatible 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.

§ 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. § 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 disclosureproducing 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.
26132 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules

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:

§ 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

§§ 226.15 and 226.23, fland for

purposes of § 226.31,fi 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,

flthe Birthday of Martin Luther King,

Jr.,fi 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:

§ 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.

fl(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.fi

(b) Example of finance charge * * *

* * * * *

fl(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.fi

(c) Charges excluded from the finance

charge. * * *

* * * * *

(7) flReal-estate related fees.fi 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 flloan-related

documents, such asfi deeds, mortgages,

and reconveyanceø,¿ florfi settlement

ø, and similar¿ documents.

(iii) Notary ø, appraisal,¿ and credit

report fees.

(iv) flProperty appraisal fees,

including fees related to any pest

infestation or flood hazard inspections

conducted prior to closing.fi

fl(v)fi Amounts required to be paid

into escrow or trustee accounts if the

amounts would not otherwise be

included in the finance charge.

* * * * *

(d) Insurance fland debt cancellation

agreementsfi. (1) flVoluntary credit

insurance premiums.fi 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 flin writingfi.

* * * * *

fl(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 unitcost 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.fi

(e) Certain security interest charges.

* * *

* * * * *

fl(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.fi

* * * * *

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:
Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules 26133

38The following disclosures may be made

together flwithfi or separately from other required

disclosures: the creditor’s identity under

§ 226.18(a), the variable rate example under

§ 226.18(f)(4), insurance flor debt cancellation

agreementsfi under § 226.18(n), and certain

security interest charges under § 226.18(o).

fl39For certain residential mortgage transactions,

§ 226.19(a)(2) permits redisclosure no later than

consummation or settlement, whichever is later.fi

ø41The 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.¿

§ 226.17 General disclosure requirements.

(a) Form of disclosures. (1)

* * * 38 * * *

* * * * *

(c) Basis of disclosures and use of

estimates. * * *

(2)fl(i)fi 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 flat

the time the disclosure is provided to

the consumer,fi and shall state that the

disclosure is an estimate.

fl(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.fi

* * * * *

(f) Early disclosures. If disclosures are

given before the date of consummation

of a transaction and a subsequent event

makes them inaccurate, flbefore

consummation 39fi the creditor shall

disclose øthe changed terms before

consummation¿

fl(1) any changed term that was not

based on an estimate in accordance with

§ 226.17(c)(2) and labelled as such;

(2) all changed terms,fi if the annual

percentage rate fldisclosedfi in the

consummated transaction varies from

the annual percentage rate disclosed

under § 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 § 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:

§ 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.’’ ø41¿

fl(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.fi

* * * * *

(n) Insurance fland debt cancellation

agreementsfi. The items required by

§ 226.4(d) in order to exclude certain

insurance premiums fland debt

cancellation feesfi from the finance

charge.

* * * * *

6. Section 226.19 would be amended

by revising paragraph (a)(2) to read as

follows:

§ 226.19 Certain residential mortgage and

variable-rate transactions.

(a) * * *

(2) Redisclosure required. If the

annual percentage rate fldisclosedfi in

the consummated transaction varies

from the annual percentage rate

disclosed under § 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 § 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:

§ 226.22 Determination of annual

percentage rate.

(a) Accuracy of annual percentage

rate. * * *

* * * * *

fl(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

§ 226.18(d)(1) or § 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

§ 226.18(d)(1) or § 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.fi

* * * * *

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:

§ 226.23 Right of rescission.

* * * * *

(b) fl(1)fi 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:
26134 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules

ø(1)¿fl(i)fi The retention or

acquisition of a security interest in the

consumer’s principal dwelling.

ø(2)¿fl(ii)fi The consumer’s right to

rescind the transaction.

ø(3)¿fl(iii)fi How to exercise the

right to rescind, with a form for that

purpose, designating the address of the

creditor’s place of business.

ø(4)¿fl(iv)fi The effects of

rescission, as described in paragraph (d)

of this section.

ø(5)¿fl(v)fi The date the rescission

period expires.

fl(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.fi

* * * * *

fl(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 § 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.fi

9. Section 226.31 would be amended

by revising paragraphs (d) and (g) as

follows:

§ 226.31 General rules.

* * * * *

(d) Basis of disclosures and use of

estimates. fl(1)fi Disclosures shall

reflect the terms of the legal obligation

between the parties.

fl(2)fi 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 fl the time the

disclosures are provided fiand shall

state clearly that the disclosure is an

estimate.

fl(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.fi

* * * * *

(g) Accuracy of annual percentage

rate. For purposes of § 226.32, the

annual percentage rate shall be

considered accuratefl, and may be used

in determining whether a transaction is

covered by § 226.32,fi if it is accurate

according to the requirements and

within the tolerances set forth in

§ 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

(Refinancingø)¿ fl with Original

Creditor)fi (§ 226.23)

* * * * *

H–9—Rescission Model Form

(Refinancingø)¿ fl with Original

Creditor)fi

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. øWe acquired a ømortgage/lien/security

interest¿ øon/in¿ your home under the

original transaction and will retain that

ømortgage/lien/security interest¿ in the new

transaction.¿ flYour home is the security for

this new transaction.fi 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 llllllllll; 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

ømortgage/lien/security interest¿ we already

have øon/in¿ your home. If you cancel, the

ømortgage/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 ømortgage/lien/

security interest¿ øon/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

llllllllll (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
Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Proposed Rules 26135

delivered to the above address no later than

that time.

I Wish to Cancel

lllllllllllllllllllll

Consumer’s Signature

lllllllllllllllllllll

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)fl(i).fi

* * * * *

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)fl(i) through (v)fi

øthrough 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

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 344

RIN 3064–AB74

Recordkeeping and Confirmation

Requirements for Securities

Transactions

AGENCY: Federal Deposit Insurance

Corporation.

ACTION: Advance notice of proposed

rulemaking.

SUMMARY: The Federal Deposit

Insurance Corporation (FDIC) is

considering whether and how to amend

its regulations governing recordkeeping

and confirmation requirements for

securities transactions by state

nonmember banks. The agency’s present

regulation was adopted in 1979 and has

remained essentially unchanged since

that time. The FDIC is undertaking a

review of this regulation with the goal

of modernizing its requirements to,

among other things, reflect the

supervisory role played by other Federal

agencies charged with supervision of

securities transactions. The agency is

soliciting comment on a number of

issues that have been identified. The

responses will be used to aid the FDIC

in developing a proposed amendment

for public comment.

DATES: Comments must be received by

June 24, 1996.

ADDRESSES: Comments should be

directed to Jerry L. Langley, Executive

Secretary, Attention: Room F–402,

Federal Deposit Insurance Corporation,

550 17th Street, NW, Washington, DC

20429. Comments may be delivered to

room F–402, 1776 F Street, NW,

Washington, DC 20429, on business

days between 8:30 am and 5:00 pm or

sent by facsimile transmission to FAX

number 202/898–3838. Internet:

Comments@FDIC.gov. Comments will

be available for inspection and

photocopying in the FDIC Public

Information Center, room 100, 801 17th

Street, NW, Washington, DC 20429,

between 9:00 am and 5:00 pm on

business days.

FOR FURTHER INFORMATION CONTACT:

Curtis Vaughn, Examination Specialist,

Division of Supervision, (202) 898–

6759; John Harvey, Review Examiner

(Trust), Division of Supervision (202)

898–6762; Patrick J. McCarty, Counsel,

Legal Division (202) 898–8708; or

Gerald Gervino, Senior Attorney, Legal

Division (202) 898–3723. Federal

Deposit Insurance Corporation, 550 17th

St., N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

Background

Section 303 of the Riegle Community

Development and Regulatory

Improvement Act of 1994 (CDRI Act)

The FDIC is conducting a systematic

review of its regulations and written

policies. Section 303(a) of the CDRI Act

(12 U.S.C. 4803(a)) requires that each

Federal banking agency review its

regulations to streamline them to

improve efficiency, reduce unnecessary

costs and eliminate unwarranted

constraints on credit availability.

Section 303(a) also requires the Federal

banking agencies to work jointly to

make uniform all regulations and

guidelines implementing common

statutory or supervisory policies. As

part of the section 303 process, the FDIC

published in December of 1995 a notice

in the Federal Register describing the

section 303 requirements and inviting

the general public and interested parties

to comment on FDIC regulations and

policy statements. 60 FR 62345

(December 6, 1995).

On July 24, 1979 the FDIC and the

other Federal banking agencies

promulgated regulations addressing

recordkeeping and confirmation

requirements for securities transactions

effected by banks. See 44 FR 43261 (July

24, 1979) (FDIC), 44 FR 43252 (July 24,

1979 (OCC) and 44 FR 43258 (July 24,

1979) (FRB). These regulations were,

and are, virtually identical. With the

exception of two amendments, the

FDIC’s part 344 has remained

unchanged since it was promulgated in

1979. See 45 FR 12777 (February 27,

1980), 60 FR 7111 (February 7, 1995).

The FDIC wishes to review its

recordkeeping and confirmation

requirements for securities transactions

in part 344 with the purposes of section

303 of the CDRI in mind. The Office of

the Comptroller of the Currency (OCC)

and the Board of Governors of the

Federal Reserve System (FRB) have

already proposed amendments to their

regulations concerning recordkeeping

and confirmation requirements for

securities transactions by national and

state member banks, respectively. See

60 FR 66517 (December 22, 1995) and

60 FR 66759 (December 26, 1995).

Before drafting and publishing a

proposed regulation, the FDIC wishes to

receive public comment on several basic

issues underlying the purposes of part

344. The FDIC requests comments at

this stage of regulatory review to assist

development of a specific proposal.