[Federal Register: December 10, 2003 (Volume 68, Number 237)]
[Proposed Rules]
[Page 68793-68799]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10de03-17]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1167]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board is proposing to amend Regulation Z, which implements
the Truth in Lending Act, and the staff commentary to the regulation.
Regulation Z would be revised to define more specifically the standard
for providing ``clear and conspicuous'' disclosures, and to provide a
more uniform standard among the Board's regulations. The staff
commentary would be revised to include examples of how to meet this
standard. Similar proposed revisions to Regulations B, E, M, and DD
appear elsewhere in today's Federal Register. These revisions are
intended to help ensure that consumers receive noticeable and
understandable information that is required by law in connection with
obtaining consumer financial products and services. In addition,
consistency among the regulations should facilitate compliance by
institutions. The Board also is proposing to add an interpretative rule
of construction to state that the word ``amount'' represents a
numerical amount throughout Regulation Z. The proposed updates to the
staff commentary also provide guidance on consumers' exercise of the
right to rescind certain home-secured loans. In addition, the proposal
includes several technical revisions to the staff commentary.
DATES: Comments must be received on or before January 30, 2004.
ADDRESSES: Comments should refer to Docket No. R-1167 and should be
mailed to Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551. However, because paper mail in the Washington
area and at the Board of Governors is subject to delay, please consider submitting your comments by e-mail to regs.comments@federalreserve.gov,
or faxing them to the Office of the Secretary at (202) 452-3819 or 452-
3102. Members of the public may inspect comments in Room MP-500 of the
Martin Building between 9 a.m. and 5 p.m. on weekdays pursuant to Sec.
261.12, except as provided in Sec. 261.14, of the Board's Rules
Regarding Availability of Information, 12 CFR 261.12 and 261.14.
FOR FURTHER INFORMATION CONTACT: Krista P. DeLargy and Elizabeth A.
Eurgubian, 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, contact (202) 263-4869.
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 providing
for disclosures about its terms and cost. The act requires creditors to
disclose the cost of credit as a dollar amount (the finance charge) and
as an annual percentage rate (APR). Uniformity in creditors'
disclosures is intended to assist consumers in comparison shopping for
credit. TILA requires additional disclosures for loans secured by
consumers' homes and permits consumers to rescind certain transactions
that involve their principal dwelling. In addition, the act regulates
certain practices of creditors. TILA is implemented by the Board's
Regulation Z (12 CFR part 226). An official staff
[[Page 68794]]
commentary interprets the requirements of Regulation Z (12 CFR part 226
(Supp. I)).
II. Proposed Revisions
Subpart A--General
Section 226.2--Definitions and Rules of Construction
2(a)(27) Clear and Conspicuous
Section 122(a) of TILA requires disclosures to be made clearly and
conspicuously. See 15 U.S.C. 1632. This standard is implemented in
Regulation Z. See Sec. 226.5(a)(1); Sec. 226.17(a)(1); Sec.
226.31(b). Guidance on how creditors may comply with the clear and
conspicuous standard is contained in the staff commentary. See comment
5(a)(1)-1; 17(a)(1)-1. The commentary states that under this standard,
disclosures must be in a reasonably understandable form. For purposes
of the disclosures provided with credit card solicitations and
applications, the commentary also notes that disclosures must be
readily noticeable to the consumer. See comment 5a(a)(2)-1.
Consumer financial services and fair lending laws and the Board
regulations that implement them contain similar but not identical
standards for providing disclosures that consumers will notice and
understand. Generally, disclosures must be ``clear and conspicuous''
under Regulations B (Equal Credit Opportunity), M (Consumer Leasing),
Regulation P (Privacy of Consumer Financial Information), Z (Truth in
Lending) and DD (Truth in Savings), and ``clear and readily
understandable'' under Regulation E (Electronic Fund Transfers). In
interpreting the ``clear and conspicuous'' standard, the staff
commentaries to Regulations B, M and Z provide that disclosures must be
``in a reasonably understandable'' form; similarly, under Regulation DD
disclosures must be in a format that allows consumers ``to readily
understand the terms of their account.'' In contrast, the Board's
Regulation P (Privacy of Consumer Financial Information) defines the
``clear and conspicuous'' standard to mean that a disclosure is
``reasonably understandable and designed to call attention to the
nature and significance of the information'' in the disclosure. 12 CFR
216.3(b)(1). Regulation P also provides a series of examples of how to
satisfy the standard. 12 CFR 216.3(b)(2).
The Board believes that the recently implemented standard in
Regulation P (65 FR 35162, June 1, 2000), articulates with greater
precision than the other regulations the concepts underlying the duty
to provide disclosures that consumers will notice and understand.
Therefore, to provide consistent guidance on the clear and conspicuous
standard among its regulations, the Board is proposing to amend
Regulation Z by adding a definition for clear and conspicuous in Sec.
226.2(a)(27), consistent with the ``clear and conspicuous'' definition
in Regulation P. The staff commentary to Regulation Z also would be
revised to add comments 2(a)(27)-1 and -2, consistent with Regulation
P's examples of how to meet the clear and conspicuous standard. Similar
proposed revisions to Regulations B, E, M, and DD appear elsewhere in
today's Federal Register. These revisions are intended to help ensure
that consumers receive noticeable and understandable information that
is required by law in connection with obtaining consumer financial
products and services. In addition, consistency among the regulations
should facilitate compliance by institutions.
Proposed comments 2(a)(27)-3 and -4 contain guidance currently in
comment 5(a)(1)-1. The ``clear and conspicuous'' standard does not
prohibit adding other items to the federally required disclosures (such
as contractual provisions or state-required disclosures); nor does it
prohibit sending promotional material with the disclosures. Proposed
comment 2(a)(27)-3 would clarify, however, that the presence of other
information may be a factor in determining whether the ``clear and
conspicuous'' standard is met. Generally, segregating federally
mandated disclosures from other information is more likely to satisfy
the clear and conspicuous standard.
The Board also proposes to adopt for Regulations B, E, M, Z and DD,
guidance concerning type-sizes that are deemed to meet the ``clear and
conspicuous'' standard and those that would likely be too small (this
guidance currently applies only to credit card solicitations and
applications under Regulation Z). See proposed comment 2(a)(27)-2(ii).
The proposal does not add special format requirements to the
regulation where none currently exist. Accordingly, even though the
revisions clarify that type size can be one factor to consider in
determining whether a disclosure is conspicuous, the proposal would not
add a specific type size requirement. Similarly, the proposal also
would not affect other format rules, such as the existing requirement
for making some disclosures more conspicuous than others (See Sec.
226.5(a)(2); Sec. 226.17(a)(2)), or segregating some specific
information (See Sec. 226.17(a)(1)).
To eliminate redundancy with proposed Sec. 226.2(a)(27) and its
accompanying commentary, the Board also proposes to revise the
following commentary provisions in Regulation Z that address the
``clear and conspicuous'' standard: comments 5(a)(1)-1, 5a(a)(2)-1, 16-
1, 24-1, and Appendix K (d)(2)-1. In this regard, in comment 5a(a)(2)-
1, the guidance regarding disclosures for credit card applications and
solicitations that are transmitted by electronic communication, has
been deleted. Guidance regarding the ``clear and conspicuous'' standard
for disclosures transmitted by electronic communication will be
considered in the context of rulemakings dealing specifically with
electronic delivery of disclosures.
2(b) Rules of Construction
The Board proposes to add an interpretative rule of construction in
Sec. 226.2(b)(5) stating that where the word ``amount'' is used to
describe a disclosure requirement it refers to a numerical amount
throughout Regulation Z. This interpretation addresses a matter
discussed in a recent court decision regarding the disclosure of
payments scheduled to repay a closed-end credit transaction. See 15
U.S.C. 1638(a)(6); 12 CFR 226.18(g). The Board believes that the
decision, by endorsing narrative descriptions of amounts rather than
numerical amounts, may lead to confusion in disclosures.
The term ``amount'' has general applicability throughout Regulation
Z and the term ``amount'' is used throughout TILA, for example, to
describe disclosures such as the amount financed, the amounts being
disbursed to the consumer and to third parties, and the total of
payments, which is defined as the amount the consumer will have paid
after making all scheduled payments. A broad interpretation of the term
suggesting that narrative descriptions may replace numerical
``amounts'' contravenes TILA's purpose to provide consumers with clear
and uniform credit disclosures. Proposed comment 2(b)-2 would provide
examples of how the interpretative rule of construction for ``amount''
applies in certain disclosures required by Regulation Z.
Subpart B--Open-end Credit
Section 226.15--Right of Rescission
15(a) Consumer's Right To Rescind
15(a)(2)
Section 125(a) of TILA provides that, in certain credit
transactions in which
[[Page 68795]]
the consumer's principal dwelling secures an extension of credit, the
consumer may rescind the transaction for three business days after
becoming obligated on the debt (and for open-end plans, after opening
or increasing the credit limit on the plan). See 15 U.S.C. 1635(a); 12
CFR 226.15(a)(1). The rescission period may extend up to three years in
certain cases. The right of rescission was created to allow consumers
time to reexamine their credit contracts and cost disclosures and to
reconsider whether they want to place their home at risk by offering it
as security for the credit. A consumer exercises the right to rescind
by notifying the creditor of the rescission by mail, telegram, or other
means of written communication. Creditors must provide consumers with a
form to use in exercising the right to rescind, which must include the
name and address of the creditor or agent of the creditor to receive
the notice. See Sec. 226.15(b). Notice is considered given when
mailed, or when filed for telegraphic transmission, or, if sent by
other means, when delivered to the creditor's designated place of
business. See Sec. 226.15(a)(2).
Comment 15(a)(2)-1 states that a creditor may designate an agent to
receive the notification so long as the agent's name and address appear
on the notice provided to the consumer under Sec. 226.15(b). The
comment would be revised to address situations where a creditor fails
to provide the required form or designate an address for sending the
notice. The proposed comment would provide that in such cases, if a
consumer sends the notice to someone other than the creditor or
assignee, such as a third-party loan servicer acting as the creditor's
agent, the consumer's notice of rescission may be effective if under
the applicable state law, delivery to that person would be deemed to
constitute delivery to the creditor or assignee.
15(d) Effects of Rescission
When a consumer exercises the right to rescind a mortgage
transaction, the consumer is not liable for any finance charges or
other charges and any security interest in the consumer's home becomes
void. See 15 U.S.C. 1635(b); Sec. 226.15(d)(1). After the transaction
is rescinded, the creditor must tender any money or property given to
anyone in connection with the transaction within a specified time
frame, which triggers the consumer's duty to return any money or
property that the creditor delivered to the consumer, although a court
may modify these procedures. See Sec. 226.15(d)(2)-(4).
Comment 15(d)(4)-1 would be revised to state expressly that a
consumer's substantive right to rescind under Sec. 226.15(a)(1) and
Sec. 226.15(d)(1) is not affected by the procedures referred to in
Sec. 226.15(d)(2) and (3), or the modification of those procedures by
a court. Accordingly, where consumers seek rescission and the matter is
contested by the creditor, a determination regarding consumers' right
to rescind would normally be made before a court determines the amounts
owed and establishes the procedures for the parties to tender any money
or property. The sequence of procedures should not affect consumers'
ability under TILA to establish their substantive right to rescind and
to have the lien amount reduced, which may be necessary before
consumers are able to establish how they will refinance or otherwise
repay the loan.
Subpart C--Closed-End Credit
Section 226.18--Content of Disclosures
18(c) Itemization of Amount Financed
A technical revision would be made to comment 18(c)(1)(iii)-1, to
conform a citation to footnote 41 of Regulation Z. No substantive
change is intended. Section 226.19--Certain Residential Mortgage and
Variable-Rate Transactions
19(b) Certain Variable-Rate Transactions
Section 226.19(b) applies to all closed-end variable-rate
transactions that are secured by the consumer's principal dwelling and
have a term greater than one year. Guidance about the applicability of
Sec. 226.19 to construction loans was published in comment 19(b)-1. 54
FR 9422, March 7, 1989. That guidance has been inadvertently appended
to comment 19(b)(1)-1 in the Code of Federal Regulations. The two
comments are restated in their correct form for reprinting in the Code
of Federal Regulations. No substantive change is intended.
Section 226.23--Right of Rescission
23(a) Consumer's Right To Rescind
For the reasons discussed above, comment 23(a)(2)-1 would be
revised to state the rule for effective delivery of a rescission notice
when the creditor fails to provide the required form or designate an
address for sending the notice (See supplementary information to
proposed comment 15(a)(2)-1.)
Section 226.23--Right of Rescission
23(d) Effects of Rescission
For the reasons discussed above, comment 23(d)(4)-1 would be
revised to expressly state that a consumer's substantive right to
rescind under Sec. 226.23(a)(1) and Sec. 226.23(d)(1) is not affected
by the procedures referred to in Sec. 226.23(d)(2) and (3), or the
modification of those procedures by a court. (See supplementary
information to proposed comment 15(d)(4)-1.)
Subpart D--Miscellaneous
Section 226.27--Language of Disclosures
In March 2001, the Board revised Sec. 226.27 to permit creditors
to provide disclosures in languages other than English as long as
disclosures in English are available to consumers who request them. 66
FR 1739, March 30, 2001. Technical revisions would be made to comment
27-1, and comment 27-2 would be deleted to conform the commentary to
Sec. 226.27, as amended. No substantive change is intended.
Subpart E--Special Rules for Certain Home Mortgage Transactions
Section 226.32--Requirements for Certain Closed-End Home Mortgages
32(a) Coverage
Rules for certain closed-end mortgage loans in Sec. 226.32 are
triggered, in part, by the amount of ``points and fees'' payable by the
consumer at or before loan closing and the ``total loan amount.'' See
Sec. 226.32(a)(1)(ii). Comment 32(a)(1)(ii)-1, which was added in
1996, provides examples for calculating the ``total loan amount.'' 61
FR 14952, April 4, 1996. A technical revision would be made to comment
32(a)(1)(ii)-1, to correct a dollar amount given in one of the
examples. No substantive change is intended.
Request for Information Regarding Debt Cancellation and Debt Suspension
Agreements
Some lenders have replaced credit insurance products with products
known as debt cancellation agreements and debt suspension agreements.
Under a debt cancellation agreement or debt suspension agreement, a
creditor agrees to cancel, or temporarily suspend, all or part of the
borrower's repayment obligation upon the occurrence of a specified
event, such as death, disability, or unemployment. The fee for a debt
cancellation or debt suspension agreement can be collected monthly or
in a lump sum.
At least one state has said it will regulate debt cancellation and
[[Page 68796]]
suspension products as insurance, other states have said they will
regulate the products as bank products and not as insurance, and still
others have not yet announced positions. The Office of the Comptroller
of the Currency (OCC) has recently issued regulations governing sales
of debt cancellation and suspension agreements by national banks. See
12 CFR 37.1 et seq.
Under the TILA and Regulation Z, debt cancellation agreements are
generally subject to the same disclosure rules as credit insurance. In
1996, the Board revised Regulation Z to establish essentially identical
disclosure rules for credit insurance and debt cancellation agreements.
Accordingly, although debt cancellation fees satisfy the definition of
a ``finance charge,'' they may be excluded from the finance charge on
the same conditions as credit insurance premiums (without regard to
whether debt cancellation agreements are deemed to be insurance
contracts under state law). The types of debt cancellation agreements
eligible for the exclusion are limited to those that provide for
cancellation of or all or part of a debtor's liability (1) in case of
accident or loss of life, health, or income or (2) for amounts
exceeding the value of collateral securing the debt (commonly referred
to as ``gap'' coverage, frequently sold in connection with motor
vehicle loans). See Sec. 226.4(b)(7) and (10), 4(d)(1) and (3).
Industry representatives have asked the Board to address disclosure
issues under TILA and Regulation Z that may be raised by the sale of
debt cancellation and debt suspension products. Anecdotal evidence
suggests that the sale of those products in lieu of credit insurance
has increased and that creditors are offering expanded coverage, for
example to suspend repayment obligations for life-cycle events such as
marriage and divorce. Some industry representatives have stated that
additional guidance may be useful in clarifying the circumstances in
which products offering expanded coverage qualify for the exclusions in
Sec. 226.4(d)(3) for debt cancellation fees, and in clarifying what
disclosures should be provided to consumers in certain circumstances.
To consider the requests for guidance more fully, information and
comment are solicited as follows:
[sbull] What are the similarities and differences among credit
insurance, debt cancellation coverage, and debt suspension coverage, in
the case of both closed-end and open-end credit?
[sbull] With what types of closed-end and open-end credit are debt
cancellation and debt suspension products sold? Do creditors typically
package multiple types of coverage (e.g., disability and divorce), or
sell them separately? Do creditors typically sell the products at, or
after, consummation (for closed-end credit) or account opening (for
open-end credit plans)?
[sbull] What disclosures are made with the sale of a product or
upon conversion from one product to another, whether required by TILA
or other laws? How are monthly or other periodic fees disclosed to
consumers?
[sbull] Under Regulation Z, fees for credit protection programs
written in connection with a credit transaction are finance charges but
some fees may be excluded from the disclosed finance charge if required
disclosures are made and the consumer affirmatively elects the optional
coverage in writing. See Sec. 226.4(b)(7) and (10), 4(d)(1) and (3).
Is there a need for guidance concerning the applicability of those
provisions to certain types of coverage now available? Are the required
disclosures adequate for all types of products subject to Sec. 4(d)(1)
or 4(d)(3)?
[sbull] Under TILA, a credit card issuer must notify a consumer
before changing the consumer's credit insurance provider. See 15 U.S.C.
1637(g); 12 CFR 226.9(f). Card issuers that intend to change credit
insurance providers need only notify consumers that they may opt out of
the new coverage. Should the Board interpret or amend Sec. 226.9(f) to
address conversions from credit insurance to debt cancellation or debt
suspension agreements? If so, is there a need to address conversions
other than for credit card accounts?
[sbull] OCC regulations for national bank sales of debt
cancellation and suspension agreements require a customer's affirmative
election of the product. If the Board interprets or amends Sec.
226.9(f) to address conversions from credit insurance to debt
cancellation or debt suspension agreements, what additional guidance
would card issuers need, if any, to comply with both rules?
III. Form of Comment Letters
Comment letters should refer to Docket No. R-1167 and, when
possible, should use a standard typeface with a font size of 10 or 12;
this will enable the Board to convert text submitted in paper form to
machine-readable form through electronic scanning, and will facilitate
automated retrieval of comments for review. Comments may be mailed electronically to regs.comments@federalreserve.gov.
IV. Solicitation of Comments Regarding the Use of ``Plain Language''
Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the
Board to use ``plain language'' in all proposed and final rules
published after January 1, 2000. The Board invites comments on whether
the proposed rules are clearly stated and effectively organized, and
how the Board might make the proposed text easier to understand.
V. Initial Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act,
the Board has reviewed the proposed amendments to Regulation Z. The
proposed amendments are not expected to have any significant impact on
small entities. 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.
3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the rule under
the authority delegated to the Board by the Office of Management and
Budget. The Federal Reserve may not conduct or sponsor, and an
organization is not required to respond to, this information collection
unless it displays a currently valid OMB control number. The OMB
control number is 7100-0199.
The collection of information that is revised by this rulemaking is
found in 12 CFR part 226. This collection is mandatory (15 U.S.C. 1601
et seq.) to evidence compliance with the requirements of Regulation Z
and the Truth in Lending Act (TILA). The respondents and recordkeepers
are for-profit financial institutions, including small businesses.
Institutions are required to retain records for twenty-four months.
This regulation applies to all types of creditors, not just state
member banks; however, under Paperwork Reduction Act regulations, the
Federal Reserve accounts for the burden of the paperwork associated
with the regulation only for state member banks. Other agencies account
for the paperwork burden on their respective constituencies under this
regulation.
The proposed revisions would provide creditors with a more uniform
definition of providing ``clear and conspicuous'' disclosures and
examples of how to satisfy the ``clear and conspicuous'' standard. The
proposed revisions also would provide that the term ``amount''
represents a numerical
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amount throughout Regulation Z. The proposed updates to the staff
commentary also provide guidance on consumers' exercise of rescission
for certain home-secured loans. While the proposal would amend
Regulation Z and the staff commentary, it is expected that these
revisions would not increase the paperwork burden of creditors. With
respect to state member banks, there are 1,312 respondents and
recordkeepers. Current annual burden is estimated to be 618,398 hours.
Because the records would be maintained at state member banks and
the notices are not provided to the Federal Reserve, no issue of
confidentiality arises under the Freedom of Information Act.
Comments on the collection of information should be sent to the
Office of Management and Budget, Paperwork Reduction Project (7100-
0199), Washington, DC 20503, with copies of such comments sent to
Cynthia Ayouch, Federal Reserve Board Clearance Officer, Division of
Research and Statistics, Mail Stop 41, Board of Governors of the
Federal Reserve System, Washington, DC 20551.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside bold-faced arrows while
language that would be deleted is set off with bold-faced brackets.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System, Reporting
and recordkeeping requirements, Truth in Lending.
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 would continue to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637(c)(5).
2. Section 226.2 is amended by adding a new paragraph (a)(27) and
adding a new paragraph (b)(5) to read as follows:
Subpart A--General
* * * * *
Sec. 226.2 Definitions and rules of construction.
(a) Definitions. For purposes of this regulation, the following
definitions apply:
* * * * *
(27) Clear and conspicuous means that a disclosure is reasonably
understandable and designed to call attention to the nature and
significance of the information in the disclosure.
* * * * *
(b) Rules of construction. For purposes of this regulation, the
following rules of construction apply:
* * * * *
(5) Where the word ``amount'' is used in this regulation to
describe disclosure requirements, it refers to a numerical amount.
3. In Supplement I to Part 226:
a. Under Section 226.2 Definitions and Rules of Construction, under
2(a) Definitions, a new paragraph title 2(a)(27) Clear and conspicuous
is added, and new paragraphs (27) 1. through (27) 4. are added; and
under 2(b) Rules of Construction, a new paragraph (b)2. is added.
b. Under Section 226.5 General Disclosure Requirements, under
Paragraph 5(a)(1), paragraph 1. is revised.
c. Under Section 226.5a Credit and Charge Card Applications and
Solicitations, under Paragraph 5a(a)(2), paragraph 1. is revised.
d. Under Section 226.15 Right of Rescission, under Paragraph
15(a)(2), paragraph 1. is revised, and under Paragraph 15(d)(4),
paragraph 1. is revised.
e. Under Section 226.16 Advertising, paragraph 1. is revised.
f. Under Section 226.18 Content of Disclosures, under Paragraph
18(c)(1)(iii), paragraph 1. is revised.
g. Under Section 226.19 Certain Residential Mortgage and Variable-
Rate Transactions, under 19(b) Certain variable-rate transactions,
paragraph 1. is revised, and under Paragraph 19(b)(1), paragraph 1. is
revised.
h. Under Section 226.23 Right of Rescission, under Paragraph
23(a)(2), paragraph 1. is revised, and under Paragraph 23(d)(4),
paragraph 1. is revised.
i. Under Section 226.24 Advertising, paragraph 1. is revised.
j. Under Section 226.27, the section title is revised, paragraph 1.
is revised, and paragraph 2. is removed and reserved.
k. Under Section 226.32 Requirements for Certain Closed-End Home
Mortgages, under Paragraph 32(a)(1)(ii), paragraph 1.ii. is revised.
l. Under Appendix K--Total Annual Loan Cost Rate Computations for
Reverse Mortgage Transaction, under (d) Reverse mortgage model form and
sample form, under (d)(2), paragraph 1. would be revised.
Supplement I To Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.2--Definitions and Rules of Construction
2(a) Definitions.
* * * * *
2(a)(27) Clear and conspicuous.
1. Reasonably understandable. Examples of disclosures that are
reasonably understandable include disclosures that:
i. Present the information in the disclosure in clear, concise
sentences, paragraphs, and sections;
ii. Use short explanatory sentences or bullet lists whenever
possible;
iii. Use definite, concrete, everyday words and active voice
whenever possible;
iv. Avoid multiple negatives;
v. Avoid legal and highly technical business terminology
whenever possible; and
vi. Avoid explanations that are imprecise and readily subject to
different interpretations.
2. Designed to call attention. Examples of disclosures that are
designed to call attention to the nature and significance of the
information include disclosures that:
i. Use a plain-language heading to call attention to the
disclosure;
ii. Use a typeface and type size that are easy to read.
Disclosures in 12-point type generally meet this standard.
Disclosures printed in less than 12-point type do not automatically
violate the standard; however, disclosures in less than 8-point type
would likely be too small to satisfy the standard;
iii. Provide wide margins and ample line spacing;
iv. Use boldface or italics for key words; and
v. In a document that combines disclosures with other
information, use distinctive type size, style, and graphic devices,
such as shading or sidebars, to call attention to the disclosures.
3. Other information. Except as otherwise provided, the ``clear
and conspicuous'' standard does not prohibit adding to the required
disclosures such items as contractual provisions, explanations of
contract terms, state disclosures, and translations; or sending
promotional material with the required disclosures. However, the
presence of this other information may be a factor in determining
whether the ``clear and conspicuous'' standard is met.
4. Use of codes or symbols. The ``clear and conspicuous''
standard does not prohibit using codes or symbols such as APR (for
annual percentage rate), FC (for finance charge), or Cr (for credit
balance), so long as
[[Page 68798]]
a legend or description of the code or symbol is provided on the
disclosure statement.
* * * * *
2(b) Rules of Construction
* * * * *
2. Amount. A creditor would state a dollar amount when
disclosing the amount financed, finance charge, or the amount of any
payment for a closed-end transaction (Subpart C). A creditor might
explain how the amount of any finance charge will be determined by
stating a percentage (for example, where the fee is a percentage of
each cash advance) or a dollar amount (for example, a minimum
finance charge of $1.00) in disclosures provided before the first
transaction under an open-end plan (Subpart B).
* * * * *
Subpart B--Open-End Credit
* * * * *
Section 226.5--General Disclosure Requirements
5(a) Form of Disclosures
Paragraph 5(a)(1).
1. Clear and conspicuous. See Sec. 226.2(a)(27) and
accompanying comments. [The ``clear and conspicuous'' standard
requires that disclosures be in a reasonably understandable form.
Except where otherwise provided, the standard does not require that
disclosures be segregated from other material or located in any
particular place on the disclosure statement, or that numerical
amounts or percentages be in any particular type size. (But see
comments 5a(a)(2)-1 and -2 for special rules concerning section
226.5a disclosures for credit card applications and solicitations.)
The standard does not prohibit:
[sbull] Pluralizing required terminology (finance charge and
annual percentage rate).
[sbull] Adding to the required disclosures such items as
contractual provisions, explanations of contract terms, state
disclosures, and translations.
[sbull] Sending promotional material with the required
disclosures.
[sbull] Using commonly accepted or readily understandable
abbreviations (such as mo. for month or Tx. for Texas) in making any
required disclosures.
[sbull] Using codes or symbols such as APR (for annual
percentage rate), FC (for finance charge), or Cr (for credit
balance), so long as a legend or description of the code or symbol
is provided on the disclosure statement.]
* * * * *
Section 226.5a--Credit and Charge Card Applications and
Solicitations
* * * * *
5a(a) General Rules
5a(a)(2) Form of Disclosures
1. Clear and conspicuous standard. See Sec. 226.2(a)(27) and
accompanying comments. [For purposes of Sec. 226.5a disclosures,
``clear and conspicuous'' means in a reasonably understandable form
and readily noticeable to the consumer. As to type size, disclosures
in 12-point type are deemed to be readily noticeable for purposes of
section 226.5a. Disclosures printed in less than 12-point type do
not automatically violate the standard; however, disclosures in less
than 8-point type would likely be too small to satisfy the standard.
Disclosures that are transmitted by electronic communication are
judged for purposes of the clear-and-conspicuous standard based on
the form in which they are provided even though they may be viewed
by the consumer in a different form.]
* * * * *
Section 226.15--Right of Rescission
15(a) Consumer's Right to Rescind
* * * * *
Paragraph 15(a)(2).
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing but not necessarily on the notice
supplied under Sec. 226.15(b). Whatever the means of sending the
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.
226.15(d)(2) does not begin to run until the notification has been
received. The creditor may designate an agent to receive the
notification so long as the agent's name and address appear on the
notice provided to the consumer under Sec. 226.15(b). Where the
creditor fails to provide the consumer with a designated address for
sending the notification of rescission and the consumer sends the
notification to someone other than the creditor or assignee, such as
a third-party loan servicer acting as the creditor's agent, state
law determines whether delivery to that person constitutes delivery
to the creditor or assignee.
* * * * *
15(d) Effects of Rescission
* * * * *
Paragraph 15(d)(4).
1. Modifications. The procedures outlined in Sec. 226.15(d)(2)
and (3) may be modified by a court. For example, when a consumer is
in bankruptcy proceedings and prohibited from returning anything to
the creditor, or when the equities dictate, a modification might be
made. The consumer s substantive right to rescind under Sec.
226.15(a)(1) and Sec. 226.15(d)(1) is not affected by the
procedures referred to in Sec. 226.15(d)(2) and (3), or the
modification of those procedures by a court.
* * * * *
Section 226.16--Advertising
1. Clear and conspicuous standard. See Sec. 226.2(a)(27) and
accompanying comments. [Section 226.16 is subject to the general
``clear and conspicuous'' standard for subpart B (see Sec.
226.5(a)(1)) but prescribes no specific rules for the format of the
necessary disclosures. The credit terms need not be printed in a
certain type size nor need they appear in any particular place in
the advertisement.]
* * * * *
Subpart C--Closed-End Credit
* * * * *
Section 226.18--Content of Disclosures
* * * * *
18(c) Itemization of Amount Financed
* * * * *
Paragraph 18(c)(1)(iii).
1. Amounts paid to others. This includes, for example, tag and
title fees; amounts paid to insurance companies for insurance
premiums; security interest fees, and amounts paid to credit
bureaus, appraisers or public officials. When several types of
insurance premiums are financed, they may, at the creditor's option,
be combined and listed in one sum, labeled ``insurance'' or similar
term. This includes, but is not limited to, different types of
insurance premiums paid to one company and different types of
insurance premiums paid to different companies. Except for insurance
companies and other categories noted in footnote [40] 41, third
parties must be identified by name.
* * * * *
Section 226.19--Certain Residential Mortgage and Variable-Rate
Transactions
* * * * *
19(b) Certain Variable-Rate Transactions
1. Coverage. Section 226.19(b) applies to all closed-end
variable-rate transactions that are secured by the consumer's
principal dwelling and have a term greater than one year. The
requirements of this section apply not only to transactions
financing the initial acquisition of the consumer's principal
dwelling, but also to any other closed-end variable-rate transaction
secured by the principal dwelling. Closed-end variable-rate
transactions that are not secured by the principal dwelling, or are
secured by the principal dwelling but have a term of one year or
less, are subject to the disclosure requirements of Sec.
226.18(f)(1) rather than those of Sec. 226.19(b). (Furthermore,
``shared-equity'' or ``shared-appreciation'' mortgages are subject
to the disclosure requirements of Sec. 226.18(f)(1) rather than
those of Sec. 226.19(b) regardless of the general coverage of those
sections.) For purposes of this section, the term of a variable-rate
demand loan is determined in accordance with the commentary to Sec.
226.17(c)(5). In determining whether a construction loan that may be
permanently financed by the same creditor is covered under this
section, the creditor may treat the construction and the permanent
phases as separate transactions with distinct terms to maturity or
as a single combined transaction. For purposes of the disclosures
required under Sec. 226.18, the creditor may nevertheless treat the
two phases either as separate transactions or as a single combined
transaction in accordance with Sec. 226.17(c)(6). Finally, in any
assumption of a variable-rate transaction secured by the consumer's
principal dwelling with a term greater than one year, disclosures
need not be provided under Sec. Sec. 226.18(f)(2)(ii) or 226.19(b).
* * * * *
Paragraph 19(b)(1).
1. Substitute. Creditors who wish to use publications other than
the Consumer Handbook on Adjustable Rate Mortgages must make a good
faith determination that their brochures are suitable substitutes to
the
[[Page 68799]]
Consumer Handbook. A substitute is suitable if it is, at a minimum,
comparable to the Consumer Handbook in substance and
comprehensiveness. Creditors are permitted to provide more detailed
information than is contained in the Consumer Handbook. [In
determining whether a construction loan that may be permanently
financed by the same creditor is covered under this section, the
creditor may treat the construction and the permanent phases as
separate transactions with distinct terms to maturity or as a single
combined transaction. For purposes of the disclosures required under
Sec. 226.18, the creditor may nevertheless treat the two phases
either as separate transactions or as a single combined transaction
in accordance with Sec. 226.17(c)(6). Finally, in any assumption of
a variable-rate transaction secured by the consumer's principal
dwelling with a term greater than one year, disclosures need not be
provided under Sec. Sec. 226.18(f)(2)(ii) or 226.19(b).]
* * * * *
Section 226.23--Right of Rescission
23(a) Consumer's Right To Rescind
* * * * *
Paragraph 23(a)(2).
1. Consumer's exercise of right. The consumer must exercise the
right of rescission in writing but not necessarily on the notice
supplied under Sec. 226.23(b). Whatever the means of sending the
notification of rescission--mail, telegram or other written means--
the time period for the creditor's performance under Sec.
226.23(d)(2) does not begin to run until the notification has been
received. The creditor may designate an agent to receive the
notification so long as the agent's name and address appear on the
notice provided to the consumer under Sec. 226.23(b). Where the
creditor fails to provide the consumer with a designated address for
sending the notification of rescission and the consumer sends the
notification to someone other than the creditor or assignee, such as
a third-party loan servicer acting as the creditor's agent, state
law determines whether delivery to that person constitutes delivery
to the creditor or assignee.
* * * * *
23(d) Effects of Rescission.
* * * * *
Paragraph 23(d)(4).
1. Modifications. The procedures outlined in Sec. 226.23(d)(2)
and (3) may be modified by a court. For example, when a consumer is
in bankruptcy proceedings and prohibited from returning anything to
the creditor, or when the equities dictate, a modification might be
made. The consumer's substantive right to rescind under Sec.
226.23(a)(1) and Sec. 226.23(d)(1) is not affected by the
procedures referred to in Sec. 226.23(d)(2) and (3), or the
modification of those procedures by a court.
* * * * *
Section 226.24--Advertising
1. Clear and conspicuous standard. See Sec. 226.2(a)(27) and
accompanying comments. On a merchandise tag that is an advertisement
under the regulation, a creditor is not prohibited under the ``clear
and conspicuous'' standard from including the necessary credit terms
on both sides of the tag, so long as each side is accessible. [This
section is subject to the general ``clear and conspicuous'' standard
for this subpart but prescribes no specific rules for the format of
the necessary disclosures. The credit terms need not be printed in a
certain type size nor need they appear in any particular place in
the advertisement. For example, a merchandise tag that is an
advertisement under the regulation complies with this section if the
necessary credit terms are on both sides of the tag, so long as each
side is accessible.]
* * * * *
Subpart D--Miscellaneous
* * * * *
Section 226.27--[Spanish] Language of Disclosures
1. Subsequent disclosures. If a creditor [in Puerto Rico]
provides initial disclosures in [Spanish] a language other than
English, subsequent disclosures need not be in [Spanish] that other
language. For example, if the creditor gave Spanish-language initial
disclosures, periodic statements and change-in-terms notices may be
made in English.
2. [Removed and reserved.]
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
Section 226.32--Requirements for Certain Closed-End Home Mortgages
* * * * *
Paragraph 32(a)(1)(ii).
1. Total loan amount. For purposes of the ``points and fees''
test, the total loan amount is calculated by taking the amount
financed, as determined according to section 226.18(b), and
deducting any cost listed in section 226.32(b)(1)(iii) and section
226.32(b)(1)(iv) that is both included as points and fees under
section 226.32(b)(1) and financed by the creditor. Some examples
follow, each using a $10,000 amount borrowed, a $300 appraisal fee,
and $400 in points. A $500 premium for optional credit life
insurance is used in one example.
* * * * *
ii. If the consumer pays the $300 fee for the creditor-conducted
appraisal in cash at closing, the $300 is included in the points and
fees calculation because it is paid to the creditor. However,
because the $300 is not financed by the creditor, the fee is not
part of the amount financed under section 226.18(b) [($10,000, in
this case)]. In this case, the amount financed is the same as the
total loan amount [is] $9,600 ($10,000, less $400 in prepaid finance
charges).
* * * * *
Appendix K--Total-Annual-Loan-Cost Rate Computations for Reverse-
Mortgage Transactions
* * * * *
(d) Reverse-Mortgage Model Form and Sample Form
* * * * *
(d)(2) Sample Form
1. General. [The ``clear and conspicuous'' standard for reverse-
mortgage disclosures does not require disclosures to be printed in
any particular type size.] The ``clear and conspicuous'' standard
applies to disclosures required by Sec. 226.33. Disclosures may be
made on more than one page, and use both the front and the reverse
sides, as long as the pages constitute an integrated document and
the table disclosing the total annual loan-cost rates is on a single
page.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, November 25, 2003.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 03-29945 Filed 12-9-03; 8:45 am]
BILLING CODE 6210-01-P