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6500 - Consumer Protection
Subpart E--Special Rules for Certain Home Mortgage
Transactions
Section 226.31--General Rules
31(c) Timing of disclosure.
1. Furnishing disclosures. Disclosures are considered
furnished when received by the consumer.
Paragraph 31(c)(1) Disclosures for certain closed-end home
mortgages.
1. Pre-consummation waiting period. A creditor must
furnish § 226.32 disclosures at least three business days prior to
consummation. Under § 226.32, "business day" has the same
meaning as the rescission rule in comment 2(a)(6)-2--all calendar days
except Sundays and the federal legal holidays listed in 5 USC 6103(a).
However, while the disclosure rule under §§ 226.15 and 226.23
extends to midnight of the third business day, the rule under
§ 226.32 does not. For example, under § 226.32, if disclosures were
provided on a Friday, consummation could occur any time on Tuesday, the
third business day following receipt of the disclosures. If the timing
of the rescission rule were to be used, consummation could not occur
until after midnight on Tuesday.
Paragraph 31(c)(1)(i) Change in terms.
1. Redisclosure required. Creditors must provide new
disclosures when a change in terms makes disclosures previously
provided under § 226.32(c) inaccurate, including disclosures based on
and labeled as an estimate. A change in terms may result from a formal
written agreement or otherwise.
2. Sale of optional products at consummation. If the
consumer finances the purchase of optional products such as credit
insurance and as a result the monthly payment differs from what was
previously disclosed under § 226.32, redisclosure is required and a
new three-day waiting period applies. (See comment 32(c)(3)--1 on when
optional items may be included in the regular payment disclosure.)
Paragraph 31(c)(1)(ii) Telephone disclosures.
1. Telephone disclosures. Disclosures by telephone
must be furnished at least three business days prior to consummation,
calculated in accord with the timing rules under § 226.31(c)(1).
Paragraph 31(c)(1)(iii) Consumer's waiver of waiting period
before consummation.
1. Modification or waiver. A consumer may modify or
waive the right to the three-day waiting period only after receiving
the disclosures required by § 226.32 and only if the circumstances
meet the criteria for establishing a bona fide personal financial
emergency under § 226.23(e). Whether these criteria are met is
determined by the facts surrounding individual situations. The imminent
sale of the consumer's home at foreclosure during the three-day period
is one example of a bona fide personal financial emergency. Each
consumer entitled to the three-day waiting period must sign the
handwritten statement for the waiver to be effective.
Paragraph 31(c)(2) Disclosures for reverse mortgages.
1. Business days. For purposes of providing reverse
mortgage disclosures, "business day" has the same meaning as in
comment 31(c)(1)-2--all calendar days except Sundays and the federal
legal holidays listed in 5 USC 6103(a). This means if disclosures are
provided on a Friday, consummation could occur any time on Tuesday, the
third business day following receipt of the disclosures.
2. Open-end plans. Disclosures for open-end reverse
mortgages must be provided at least three business days before the
first transaction under the plan (see § 226.5(b)(1)).
31(d) Basis of disclosures and use of estimates.
1. Redisclosure. Section 226.31(d) allows the use of
estimates when information necessary for an accurate disclosure is
unknown to the creditor, provided that the disclosure is clearly
identified as an estimate. For purposes of Subpart E, the rule in
§ 226.31(c)(1)(i) requiring new disclosures when the creditor changes
terms also applies to disclosures labeled as estimates.
{{8-29-08 p.6980}}
31(d)(3) Per-diem interest.
1. Per-diem interest. This paragraph applies to the
disclosure of any numerical amount (such as the finance charge, annual
percentage rate, or payment amount) that is affected by the amount of
the per-diem interest charge that will be collected at consummation. If
the amount of per-diem interest used in preparing the disclosures for
consummation is basedon the information known to the creditor at the
time the disclosure document is prepared, the disclosures are
considered accurate under this rule, and affected disclosures are also
considered accurate, even if the disclosures were not labeled as
estimates. (See comment 17(c)(2)(ii)--1 generally.)
Section 226.32—Requirements for Certain Closed-End Home
Mortgages
32(a) Coverage.
Paragraph 32(a)(1)(i).
1. Application date. An application is deemed received
when it reaches the creditor in any of the ways applications are
normally transmitted. (See § 226.19(a).) For example, if a borrower
applies for a 10-year loan on September 30 and the creditor
counteroffers with a 7-year loan on October 10, the application is
deemed received in September and the creditor must measure the annual
percentage rate against the appropriate Treasury security yield as of
August 15. An application transmitted through an intermediary agent or
broker is received when it reaches the creditor, rather than when it
reaches the agent or broker. (See comment 19(b)-3 to determine whether
a transaction involves an intermediary agent or broker.)
2. When fifteenth not a business day. If the 15th day
of the month immediately preceding the application date is not a
business day, the creditor must use the yield as of the business day
immediately preceding the 15th.
3. Calculating annual percentage rates for variable-rate
loans and discount loans. Creditors must use the rules set out in
the commentary to § 226.17(c)(1) in calculating the annual percentage
rate for variable-rate loans (assume the rate in effect at the time of
disclosure remains unchanged) and for discount, premium, and
stepped-rate transactions (which must reflect composite annual
percentage rates).
4. Treasury securities. To determine the yield on
comparable Treasury securities for the annual percentage rate test,
creditors may use the yield on actively traded issues adjusted to
constant maturities published in the Board's "Selected Interest
Rates" (statistical release H-15). Creditors must use the yield
corresponding to the constant maturity that is closest to the loan's
maturity. If the loan's maturity is exactly halfway between security
maturities, the annual percentage rate on the loan should be compared
with the yield for Treasury securities having the lower yield. In
determining the loan's maturity, creditors may rely on the rules in
§ 226.17(c)(4) regarding irregular first payment periods. For
example:
i. If the H-15 contains a yield for Treasury securities with
constant maturities of 7 years and 10 years and no maturity in between,
the annual percentage rate for an 8-year mortgage loan is compared with
the yield of securities having a 7-year maturity, and the annual
percentage rate for a 9-year mortgage loan is compared with the yield
of securities having a 10-year maturity.
ii. If a mortgage loan has a term of 15 years, and the H-15
contains a yield of 5.21 percent for constant maturities of 10 years,
and also contains a yield of 6.33 percent for constant maturities of 20
years, then the creditor compares the annual percentage rate for a
15-year mortgage loan with the yield for constant maturities of 10
years.
iii. If a mortgage loan has a term of 30 years, and the H-15 does
not contain a yield for 30-year constant maturities, but contains a
yield for 20-year constant maturities, and an average yield for
securities with remaining terms to maturity of 25 years and over, then
the annual percentage rate on the loan is compared with the yield for
20-year constant maturities.
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 § 226.18(b), and
deducting any cost listed in § 226.32(b)(1)(iii) and
§ 226.32(b)(1)(iv) that is both included as points and fees under
§ 226.32(b)(1) and financed by the creditor. Some
{{8-29-08 p.6981}}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.
i. If the consumer finances a $300 fee for a creditor-conducted
appraisal and pays $400 in points at closing, the amount financed under
§ 226.18(b) is $9,900 ($10,000 plus the $300 appraisal fee that is
paid to and financed by the creditor, less $400 in prepaid finance
charges). The $300 appraisal fee paid to the creditor is added to other
points and fees under § 226.32(b)(1)(iii). It is deducted from the
amount financed ($9,900) to derive a total loan amount of $9,600.
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 § 226.18(b). In this case, the
amount financed is the same as the total loan amount: $9,600 ($10,000,
less $400 in prepaid finance charges).
iii. If the consumer finances a $300 fee for an
appraisal conducted by someone other than the creditor or an affiliate,
the $300 fee is not included with other points and fees under
§ 226.32(b)(1)(iii). The amount financed under § 226.18(b) is
$9,900 ($10,000 plus the $300 fee for an independently-conducted
appraisal that is financed by the creditor, less the $400 paid in cash
and deducted as prepaid financed charges).
iv. If the consumer finances a $300 fee for a
creditor-conducted appraisal and a $500 single premium for optional
credit life insurance, and pays $400 in points at closing, the amount
financed under § 226.18(b) is $10,400 ($10,000, plus the $300
appraisal fee that is paid to and financed by the creditor, plus the
$500 insurance premium that is financed by the creditor, less $400 in
prepaid finance charges). The $300 appraisal fee paid to the creditor
is added to other points and fees under § 226.32(b)(1)(iii) and the
$500 insurance premium is added under 226.32(b)(1)(iv). The $300 and
$500 costs are deducted from the amount financed ($10,400) to derive a
total loan amount of $9,600.
2. Annual adjustment of $400 amount. A
mortgage loan is covered by § 226.32 if the total points and fees
payable by the consumer at or before loan consummation exceed the
greater of $400 or 8 percent of the total loan amount. The $400 figure
is adjusted annually on January 1 by the annual percentage change in
the CPI that was in effect on the preceding June 1. The Board will
publish adjustments after the June figures become available each year.
The adjustment for the upcoming year will be included in any proposed
commentary published in the fall, and incorporated into the commentary
the following spring. The adjusted figures are:
i. For 1996, $412, reflecting a 3.00 percent increase in
the CPI--U from June 1994 to June 1995, rounded to the nearest whole
dollar.
ii. For 1997, $424, reflecting a 2.9 percent increase in
the CPI--U from June 1995 to June 1996, rounded to the nearest whole
dollar.
iii. For 1998, $435, reflecting a 2.5 percent increase in
the CPI--U from June 1996 to June 1997, rounded to the nearest whole
dollar.
iv. For 1999, $441, reflecting a 1.4 percent increase in
the CPI--U from June 1997 to June 1998, rounded to the nearest whole
dollar.
v. For 2000, $451, reflecting a 2.3 percent increase in
the CPI--U from June 1998 to June 1999, rounded to the nearest whole
dollar.
vi. For 2001, $465, reflecting a 3.1 percent increase in
the CPI--U from June 1999 to June 2000, rounded to the nearest whole
dollar.
vii. For 2002, $480, reflecting a 3.27 percent increase in
the CPI--U from June 2000 to June 2001, rounded to the nearest whole
dollar.
viii. For 2003, $488, reflecting a 1.64 percent increase
in the CPI--U from June 2001 to June 2002, rounded to the nearest whole
dollar.
ix. For 2004, $499, reflecting a 2.22 percent increase in
the CPI--U from June 2002 to June 2003, rounded to the nearest whole
dollar.
x. For 2005, $510, reflecting a 2.29 percent increase in
the CPI--U from June 2003 to June 2004, rounded to the nearest whole
dollar.
xi. For 2006, $528, reflecting a 3.51 percent increase in
the CPI--U from June 2004 to June 2005, rounded to the nearest whole
dollar.
xii. For 2007, $547, reflecting a 3.55 percent increase in
the CPI--U from June 2005 to June 2006, rounded to the nearest whole
dollar.
xiii. For 2008, $561, reflecting a 2.56 percent increase
in the CPI-U from June 2006 to June 2007, rounded to the nearest whole
dollar.
{{8-29-08 p.6982}}
xiv. For 2009, $583, reflecting a 3.94 percent increase in
the CPI--U from June 2007 to June 2008, rounded to the nearest whole
dollar.
Paragraph 32(a)(2).
1. Exemption limited. Section 226.32(a)(2) lists
certain transactions exempt from the provisions of § 226.32.
Nevertheless, those transactions may be subject to the provisions of
§ 226.35, including any provisions of § 226.32 to which § 226.35
refers. See 12 CFR 226.35(a).
32(b) Definitions
Paragraph 32(b)(1)(i).
1. General. Section 226.32(b)(1)(i) includes in
the total "points and fees" items defined as finance charges
under §§ 226.4(a) and 226.(4)(b). Items excluded from the finance
charge under other provisions of § 226.4 are not included in the
total "points and fees" under paragraph 32(b)(1)(i), but may be
included in "points and fees" under paragraphs32(b)(1)(ii) and
32(b)(1)(iii). Interest, including per-diem interest, is excluded from
"points and fees" under § 226.32(b)(1).
Paragraph 32(b)(1)(ii).
1. Mortgage broker fees. In determining
"points and fees" for purposes of this section, compensation paid
by a consumer to a mortgage broker (directly or through the creditor
for delivery to the broker) is included in the calculation whether or
not the amount is disclosed as a finance charge. Mortgage broker fees
that are not paid by the consumer are not included. Mortgage broker
fees already included in the calculation as finance charges under
§ 226.32(b)(1)(i) need not be counted again under
§ 226.32(b)(1)(ii).
2. Example. Section 226.32(b)(1)(iii)
defines "points and fees" to include all items listed in
§ 226.4(c)(7), other than amounts held for the future payment of
taxes. An item listed in § 226.4(c)(7) may be excluded from the
"points and fees" calculation, however, if the charge is
reasonable, the creditor receives no direct or indirect compensation
from the charge, and the charge is not paid to an affiliate of the
creditor. For example, a reasonable fee paid by the consumer to an
independent, third-party appraiser may be excluded from the "points
and fees" calculation (assuming no compensation is paid to the
creditor). A fee paid by the consumer for an appraisal performed by the
creditor must be included in the calculation, even though the fee may
be excluded from the finance charge if it is bona fide and reasonable
in amount.
Paragraph 32(b)(1)(iv).
1. Premium amount. In determining "points
and fees" for purposes of this section, premiums paid at or before
closing for credit insurance are included whether they are paid in cash
or financed, and whether the amount represents the entire premium for
the coverage or an initial payment.
32(c) Disclosures.
1. Format. The disclosures must be clear and
conspicuous but need not be in any particular type size or typeface,
nor presented in any particular manner. The disclosures need not be a
part of the note or mortgage document.
Paragraph 32(c)(3) Regular payment; balloon
payment.
1. General. The regular payment is the
amount due from the borrower at regular intervals, such as monthly,
bimonthly, quarterly, or annually. There must be at least two payments,
and the payments must be in an amount and at such intervals that they
fully amortize the amount owed. In disclosing the regular payment,
creditors may rely on the rules set forth in § 226.18(g); however,
the amounts for voluntary items, such as credit life insurance, may be
included in the regular payment disclosure only if the consumer has
previously agreed to the amounts.
i. If the loan has more than one payment level, the
regular payment for each level must be disclosed. For example:
A. In a 30-year graduated payment mortgage where there
will be payments of $300 for the first 120 months, $400 for the next
120 months, and $500 for the last 120 months, each payment amount must
be disclosed, along with the length of time that the payment will be in
effect.
B. If interest and principal are paid at different
times, the regular amount for each must be disclosed.
C. In discounted or premium variable-rate transactions
where the creditor sets the initial interest rate and later rate
adjustments are determined by an index or formula, the
{{8-29-08 p.6982.01}}creditor must disclose both the initial
payment based on the discount or premium and the payment that will be
in effect thereafter. Additional explanatory material which does not
detract from the required disclosures may accompany the disclosed
amounts. For example, if a monthly payment is $250 for the first six
months and then increases based on an index and margin, the creditor
could use language such as the following: "Your regular monthly
payment will be $250 for six months. After six months your regular
monthly payment will be based on an index and margin, which currently
would make your payment $350. Your actual payment at that time may be
higher or lower."
Paragraph 32(c)(4) Variable-rate.
1. Calculating "worst-case" payment example.
Creditors may rely on instructions in § 226.19(b)(2)(viii)(B)
for calculating the maximum possible increases in rates in the shortest
possible timeframe, based on the face amount of the note (not the
hypothetical loan amount of $10,000 required by
§ 226.19(b)(2)(viii)(B)). The creditor must provide a maximum payment
for each payment level, where a payment schedule provides for more than
one payment level and more than one maximum payment amount is possible.
Paragraph 32(c)(5) Amount borrowed.
1. Optional insurance; debt-cancellation coverage.
This disclosure is required when the amount borrowed in a
refinancing includes premiums or other charges for credit life,
accident, health, or loss-of-income insurance, or debt-cancellation
coverage (whether or not the debt-cancellation coverage is insurance
under applicable law) that provides for cancellation of all or part of
the consumer's liability in the event of the loss of life, health, or
income or in the case of accident. See comment 4(d)(3)--2 and comment
app. G and H--2 regarding terminology for debt-cancellation coverage.
32(d) Limitations
1. Additional prohibitions applicable under other
sections. Section 226.34 sets forth certain prohibitions in
connection with mortgage credit subject to § 226.32, in addition to
the limitations in § 226.32(d). Further, § 226.35(b) prohibits
certain practices in connection with transactions that meet the
coverage test in § 226.35(a). Because the coverage test in
§ 226.35(a) is generally broader than the coverage test in
§ 226.32(a), most § 226.32 mortgage loans are also subject to the
prohibitions set forth in § 226.35(b) (such as escrows), in addition
to the limitations in § 226.32(d).
2. Effective date. For guidance on the application of
the Board's revisions published on July 30, 2008 to § 226.32, see
comment 1(d)(5)--1.
Paragraph 32(d)(1)(i) Balloon payment.
1. Regular periodic payments. The repayment schedule
for a § 226.32 mortgage loan with a term of less than five years must
fully amortize the outstanding principal balance through "regular
periodic payments." A payment is a "regular periodic payment"
if it is not more than twice the amount of other payments.
Paragraph 32(d)(2) Negative amortization.
1. Negative amortization. The prohibition against
negative amortization in a mortgage covered by § 226.32 does not
preclude reasonable increases in the principal balance that result from
events permitted by the legal obligation unrelated to the payment
schedule. For example, when a consumer fails to obtain property
insurance and the creditor purchases insurance, the creditor may add a
reasonable premium to the consumer's principal balance, to the extent
permitted by the legal obligation.
Paragraph 32(d)(4) Increased interest rate.
1. Variable-rate transactions. The limitation on
interest rate increases does not apply to rate increases resulting from
changes in accordance with the legal obligation in a variable-rate
transaction, even if the increase occurs after default by the consumer.
Paragraph 32(d)(5) Rebates.
1. Calculation of refunds. The limitation applies only
to refunds of precomputed (such as add-on) interest and not to any
other charges that are considered finance charges under § 226.4 (for
example, points and fees paid at closing). The calculation of the
refund of interest includes odd-days interest, whether paid at or after
consummation.
Paragraph 32(d)(6) Prepayment penalties.
1. State law. For purposes of computing a refund of
unearned interest, if using the actuarial method defined by applicable
state law results in a refund that is greater than the refund
calculated by using the method described in section 933(d) of the
Housing and
{{8-29-08 p.6982.02}}Community Development Act of 1992, creditors
should use the state law definition in determining if a refund is a
prepayment penalty.
32(d)(7) Prepayment penalty exception.
Paragraph 32(d)(7)(iii).
1. Calculating debt-to-income ratio. "Debt" does
not include amounts paid by the borrower in cash at closing or amounts
from the loan proceeds that directly repay an existing debt. Creditors
may consider combined debt-to-income ratios for transactions involving
joint applicants. For more information about obligations and inflows
that may constitute "debt" or "income" for purposes of
§ 226.32(d)(7)(iii). see comment 34(a)(4)--6 and comment
34(a)(4)(iii)(C)--1.
2. Verification. Creditors shall verify income in the
manner described in § 226.34(a)(4)(ii) and the related comments.
Creditors may verify debt with a credit report. However, a credit
report may not reflect certain obligations undertaken just before or at
consummation of the transaction and secured by the same dwelling that
secures the transaction. Section 226.34(a)(4) may require creditors to
consider such obligations; see comment 34(a)(4)--3 and comment
34(a)(4)(ii)(C)--1.
3. Interaction with Regulation B. Section
226.32(d)(7)(iii) does not require or permit the creditor to make
inquiries or verifications that would be prohibited by Regulation B, 12
CFR part 202.
Paragraph 32(d)(7)(iv).
1. Payment change. Section 226.32(d)(7) sets forth
the conditions under which a mortgage transaction subject to this
section may have a prepayment penalty. Section 226.32(d)(7)(iv) lists
as a condition that the amount of the periodic payment of principal or
interest or both may not change during the four-year period following
consummation. The following examples show whether prepayment penalties
are permitted or prohibited under § 226.32(d)(7)(iv) in particular
circumstances.
i. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month. Under the loan agreement, the
first possible date that a payment in a different amount may be due is
January 1, 2014. A prepayment penalty is permitted with this mortgage
transaction provided that the other § 226.32(d)(7) conditions are
met, that is: provided that the prepayment penalty is permitted by
other applicable law, the penalty expires on or before Dec. 31, 2011,
the penalty will not apply if the source of the prepayment funds is a
refinancing by the creditor or its affiliate, and at consummation the
consumer's total monthly debts do not exceed 50 percent of the
consumer's month gross income, as verified.
ii. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month. Under the loan agreement, the
first possible date that a payment in a different amount may be due is
December 31, 2013. A prepayment penalty is prohibited with this
mortgage transaction because the payment may change within the
four-year period following consummation.
iii. Initial payments for graduated-payment transaction
consummated on January 1, 2010 are $1,000 per month. Under the loan
agreement, the first possible date that a payment in a different amount
may be due is January 1, 2014. A prepayment penalty is permitted with
this mortgage transaction provided that the other § 226.32(d)(7)
conditions are met, that is: provided that the prepayment penalty is
permitted by other applicable law, the penalty expires on or before
December 31, 2011, the penalty will not apply if the source of the
prepayment funds is a refinancing by the creditor or its affiliate, and
at consummation the consumer's total monthly debts do not exceed 50
percent of the consumer's monthly gross income, as verified.
iv. Initial payments for a step-rate transaction consummated on
January 1, 2010 are $1,000 per month. Under the loan agreement, the
first possible date that a payment in a different amount may be due is
December 31, 2013. A prepayment penalty is prohibited with this
mortgage transaction because the payment may change within the
four-year period following consummation.
2. Payment changes excluded. Payment changes due to
the following circumstances are not considered payment changes for
purposes of this section:
i. A change in the amount of a periodic payment that is allocated
to principal or interest that does not change the total amount of the
periodic payment.
{{8-29-08 p.6982.02-A}}
ii. The borrower's actual unanticipated late payment,
delinquency, or default; and
iii. The borrower's voluntary payment of additional amounts (for
example when a consumer chooses to make a payment of interest and
principal on a loan that only requires the consumer to pay interest).
32(d)(8) Due-on-demand clause.
Paragraph 32(d)(8)(ii).
1. Failure to meet repayment terms. A creditor may
terminate a loan and accelerate the balance when the consumer fails to
meet the repayment terms provided for in the agreement; a creditor may
do so, however, only if the consumer actually fails to make payments.
For example, a creditor may not terminate and accelerate if the
consumer, in error, sends a payment to the wrong location, such as a
branch rather than the main office of the creditor. If a consumer files
for or is placed in bankruptcy, the creditor may terminate and
accelerate under this provision if the consumer fails to meet the
repayment terms of the agreement. Section 226.32(d)(8)(ii) does not
override any state or other law that requires a creditor to notify a
borrower of a right to cure, or otherwise places a duty on the creditor
before it can terminate a loan and accelerate the balance.
Paragraph 32(d)(8)(iii).
1. Impairment of security. A creditor may terminate a
loan and accelerate the balance if the consumer's action or inaction
adversely affects the creditor's security for the loan, or any right
of the creditor in that security. Action or inaction by third parties
does not, in itself, permit the creditor to terminate and accelerate.
2. Examples. i. A creditor may terminate and
accelerate, for example, if:
A. The consumer transfers title to the property or sells the
property without the permission of the creditor.
B. The consumer fails to maintain required insurance on the
dwelling.
C. The consumer fails to pay taxes on the property.
D. The consumer permits the filing of a lien senior to that held
by the creditor.
E. The sole consumer obligated on the credit dies.
F. The property is taken through eminent domain.
G. A prior lienholder forecloses.
ii. By contrast, the filing of a judgment against the consumer
would permit termination and acceleration only if the amount of the
judgment and collateral subject to the judgment is such that the
creditor's security is adversely affected. If the consumer commits
waste or otherwise destructively uses or fails to maintain the property
such that the action adversely affects the security, the loan may be
terminated and the balance accelerated.
Illegal use of the property by the consumer would permit termination
and acceleration if it subjects the property to seizure. If one of two
consumers obligated on a loan dies, the creditor may terminate the loan
and accelerate the balance if the security is adversely affected. If
the consumer moves out of the dwelling that secures the loan and that
action adversely affects the security, the creditor may terminate a
loan and accelerate the balance.
Section 226.33—Requirements for Reverse Mortgages
33(a) Definition.
1. Nonrecourse transaction. A nonrecourse reverse
mortgage transaction limits the homeowner's liability to the proceeds
of the sale of the home (or any lesser amount specified in the credit
obligation). If a transaction structured as a closed-end reverse
mortgage transaction allows recourse against the consumer, and the
annual percentage rate or the points and fees exceed those specified
under § 226.32(a)(1), the transaction is subject to all the
requirements of § 226.32, including the limitations concerning
balloon payments and negative amortization.
Paragraph 33(a)(2).
1. Default. Default is not defined by the statute or
regulation, but rather by the legal obligation between the parties and
state or other law.
2. Definite term or maturity date. To meet the
definition of a reverse mortgage transaction, a creditor cannot require
any principal, interest, or shared appreciation or equity to be due and
payable (other than in the case of default) until after the consumer's
death, transfer of the dwelling, or the consumer ceases to occupy the
dwelling as a principal dwelling. Some state laws require legal
obligations secured by a mortgage to specify a
{{8-29-08 p.6982.02-B}}definite maturity date or term of repayment
in the instrument. An obligation may state a definite maturity date or
term of repayment and still meet the definition of a reverse-mortgage
transaction if the maturity date or term of repayment used would not
operate to cause maturity prior to the occurrence of any of the events
recognized in the regulation. For example, some reverse mortgage
programs specify that the final maturity date is the borrower's 150th
birthday; other programs include a shorter term but provide that the
term is automatically extended for consecutive periods if none of the
other maturity events has yet occurred. These programs would be
permissible.
33(c) Projected total cost of credit.
Paragraph 33(c)(1) Costs to consumer.
1. Costs and charges to consumer--relation to finance
charge. All costs and charges to the consumer that are incurred in
a reverse mortgage transaction are included in the projected total cost
of credit, and thus in the total annual loan cost rates, whether or not
the cost or charge is a finance charge under § 226.4.
2. Annuity costs. As part of the credit transaction,
some creditors require or permit a consumer to purchase an annuity that
immediately--or at some future time--supplements or replaces the
creditor's payments. The amount paid by the consumer for the annuity is
a cost to the consumer under this section, regardless of whether the
annuity is purchased through the creditor or a third party, or whether
the purchase is mandatory or voluntary. For example, this includes the
costs of an annuity that a creditor offers, arranges, assists the
consumer in purchasing, or that the creditor is aware the consumer is
purchasing as a part of the transaction.
3. Disposition costs excluded. Disposition costs
incurred in connection with the sale or transfer of the property
subject to the reverse mortgage are not included in the costs to the
consumer under this paragraph. (However, see the definition of Valn
in appendix K to the regulation to determine the effect certain
disposition costs may have on the total annual loan cost rates.)
Paragraph 33(c)(2) Payments to consumer.
1. Payments upon a specified event. The projected
total cost of credit should not reflect contingent payments in which a
credit to the outstanding loan balance or a payment to the consumer's
estate is made upon the occurrence of an event (for example, a
"death benefit" payable if the consumer's death occurs within a
certain period of time). Thus, the table of total annual loan cost
rates required under § 226.33(b)(2) would not reflect such payments.
At its option, however, a creditor may put an asterisk, footnote, or
similar type of notation in the table next to the applicable total
annual loan cost rate, and state in the body of the note, apart from
the table, the assumption upon which the total annual loan cost is made
and any different rate that would apply if the contingent benefit were
paid.
Paragraph 33(c)(3) Additional creditor compensation.
2. Shared appreciation or equity. Any shared
appreciation or equity that the creditor is entitled to receive
pursuant to the legal obligation must be included in the total cost of
a reverse mortgage loan. For example, if a creditor agrees to a reduced
interest rate on the transaction in exchange for a portion of the
appreciation or equity that may be realized when the dwelling is sold,
that portion is included in the projected total cost of credit.
Paragraph 33(c)(4) Limitations on consumer liability.
1. In general. Creditors must include any limitation
on the consumer's liability (such as a nonrecourse limit or an equity
conservation agreement) in the projected total cost of credit. These
limits and agreements protect a portion of the equity in the dwelling
for the consumer or the consumer's estate. For example, the following
are limitations on the consumer's liability that must be included in
the projected total cost of credit:
i. A limit on the consumer's liability to a certain percentage of
the projected value of the home.
ii. A limit on the consumer's liability to the net proceeds from
the sale of the property subject to the reverse mortgage.
2. Uniform assumption for "net proceeds" recourse
limitations. If the legal obligation between the parties does not
specify a percentage for the "net proceeds" liability of the
consumer, for purposes of the disclosures required by § 226.33, a
creditor must assume that the costs associated with selling the
property will equal 7 percent of the projected sale price (see the
definition of the Valn symbol under appendix K(b)(6)).
{{8-29-08 p.6982.02-C}}
Section 226.34—Prohibited Acts or Practices in Connection
with Credit Subject to § 226.32
34(a) Prohibited acts or practices for loans subject to
§ 226.32.
Paragraph 34(a)(1)(i).
1. Joint payees. If a creditor pays a
contractor with an instrument jointly payable to the contractor and the
consumer, the instrument must name as payee each consumer who is
primarily obligated on the note.
Paragraph 34(a)(2) Notice to Assignee.
1. Subsequent sellers or assignors. Any person,
whether or not the original creditor, that sells or assigns a mortgage
subject to § 226.32 must furnish the notice of potential liability to
the purchaser or assignee.
2. Format. While the notice of potential liability
need not be in any particular format, the notice must be prominent.
Placing it on the face of the note, such as with a stamp, is one means
of satisfying the prominence requirement.
3. Assignee liability. Pursuant to section 131(d) of
the act, the act's general holder-in-due course protections do not
apply to purchasers and assignees of loans covered by § 226.32. For
such loans, a purchaser's or other assignee's liability for all
claims and defenses that the consumer could assert against the creditor
is not limited to violations of the act.
Paragraph 34(a)(3) Refinancings within one-year period.
1. In the borrower's interest. The
determination of whether or not a refinancing covered by
§ 226.34(a)(3) is the borrower's interest is based on the totality
of the circumstances, at the time the credit is extended. A written
statement by the borrower that "this loan is in my interest"
alone does not meet this standard.
i. A refinancing would be in the borrower's interest if needed
to meet the borrower's "bona fide personal financial emergency"
(see generally § 226.23(e) and § 226.31(c)(1)(iii)).
ii. In connection with a refinancing that provides additional
funds to the borrower, in determining whether a loan is in the
borrower's interest consideration should be given to whether the loan
fees and charges are commensurate with the amount of new funds
advanced, and whether the real estate-related charges are bona fide and
reasonable in amount (see generally § 226.4(c)(7)).
2. Application of the one-year refinancing prohibition to
creditors and assignees. The prohibition in § 226.34(a)(3)
applies where an extension of credit subject to § 226.32 is
refinanced into another loan subject to § 226.32. The prohibition is
illustrated by the following examples. Assume that Creditor A makes a
loan subject to § 226.32 on January 15, 2003, secured by a first
lien; this loan is assigned to Creditor B on February 15, 2003:
i. Creditor A is prohibited from refinancing the January 2003
loan (or any other loan subject to § 226.32 to the same borrower)
into a loan subject to § 226.32, until January 15, 2004. Creditor B
is restricted until January 15, 2004, or such date prior to January 15,
2004 that Creditor B ceases to hold or service the loan. During the
prohibition period, Creditors A and B may make a subordinate lien loan
that does not refinance a loan subject to § 226.32. Assume that on
April 1, 2003, Creditor A makes but does not assign a second-lien loan
subject to § 226.32. In that case, Creditor A would be prohibited
from refinancing either the first-lien or second-lien loans (or any
other loans to that borrower subject to § 226.32) into another loan
subject to § 226.32 until April 1, 2004.
ii. The loan made by Creditor A on January 15, 2003 (and assigned
to Creditor B) may be refinanced by Creditor C at any time. If Creditor
C refinances this loan on March 1, 2003 into a new loan subject to
§ 226.32, Creditor A is prohibited from refinancing the loan made by
Creditor C (or any other loan subject to § 226.32 to the same
borrower) into another loan subject to § 226.32 until January 15,
2004. Creditor C is similarly prohibited from refinancing any loan
subject to § 226.32 to that borrower into another until March 1,
2004. The limitations of § 226.34(a)(3) no longer apply to Creditor B
after Creditor C refinanced the January 2003 loan and Creditor B ceased
to hold or service the loan.)
34(a)(4) Repayment ability.
1. Application of repayment ability rule. The
§ 226.34(a)(4) prohibition against making loans without regard to
consumers' repayment ability applies to mortgage loans described in
§ 226.32(a). In addition, the § 226.34(a)(4) prohibition applies to
higher-priced mortgage loans described in § 226.35(a). See
12 CFR 226.35(b)(1). For guidance on the
{{8-29-08 p.6982.02-D}}application of the Board's revisions to
§ 226.34(a)(4) published on July 30, 2008, see comment 1(d)(5)--1.
2. General prohibition. Section 226.34(a)(4)
prohibits a creditor from extending credit subject to § 226.32 to a
consumer based on the value of the consumer's collateral without
regard to the consumer's repayment ability as of consummation,
including the consumer's current and reasonably expected income,
employment, assets other than the collateral, current obligations, and
property tax and insurance obligations. A creditor may base its
determination of repayment ability on current or reasonably expected
income from employment or other sources, on assets other than the
collateral, or both.
3. Other dwelling-secured obligations. For purposes
of § 226.34(a)(4), current obligations include another credit
obligation of which the creditor has knowledge undertaken prior to or
at consummation of the transaction and secured by the same dwelling
that secures the transaction subject to § 226.32 or § 226.35. For
example, where a transaction subject to § 226.35 is a first-lien
transaction for the purchase of a home, a creditor must consider a
"piggyback" second-lien transaction of which it has knowledge
that is used to finance part of the down payment on the house.
4. Discounted introductory rates and non-amortizing or
negatively-amortizing payments. A credit agreement may determine
a consumer's initial payments using a temporarily discounted interest
rate or permit the consumer to make initial payments that are
non-amortizing or negatively amortizing. (Negative amortization is
permissible for loans covered by § 226.35(a), but not § 226.32). In
such cases the creditor may determine repayment ability using the
assumptions provided in § 226.34(a)(4)(iv).
5. Repayment ability as of consummation. Section
226.34(a)(4) prohibits a creditor from disregarding repayment ability
based on the facts and circumstances known to the creditor as of
consummation. In general, a creditor does not violate this provision if
a consumer defaults because of a significant reduction in income (for
example, a job loss) or a significant obligation (for example, an
obligation arising from a major medical expense) that occurs after
consummation. However, if a creditor has knowledge as of consummation
of reductions in income, for example, if a consumer's written
application states that the consumer plans to retire within twelve
months, without obtaining new employment, or states that the consumer
will transition from full-time to part-time employment, the creditor
must consider that information.
6. Income, assets, and employment. Any current or
reasonably expected assets or income may be considered by the creditor,
except the collateral itself. For example, a creditor may use
information about current or expected salary, wages, bonus pay, tips,
and commissions. Employment may be full-time, part-time, seasonal,
irregular, military, or self-employment. Other sources of income could
include interest or dividends; retirement benefits; public assistance;
and alimony, child support, or separate maintenance payments. A
creditor may also take into account assets such as savings accounts or
investments that the consumer can or will be able to use.
7. Interaction with Regulation B. Section
226.34(a)(4) does not require or permit the creditor to make inquiries
or verifications that would be prohibited by Regulation B, 12 CFR part
202.
34(a)(4)(i) Mortgage-related obligations.
1. Mortgage-related obligations. A creditor must
include in its repayment ability analysis the expected property taxes
and premiums for mortgage-related insurance required by the creditor as
set forth in § 226.35(b)(3)(i), as well as similar mortgage-related
expenses. Similar mortgage-related expenses include homeowners'
association dues and condominium or cooperative fees.
34(a)(4)(ii) Verification of repayment ability.
1. Income and assets relied on. A creditor must
verify the income and assets the creditor relies on to evaluate the
consumer's repayment ability. For example, if a consumer earns a
salary and also states that he or she is paid an annual bonus, but the
creditor only relies on the applicant's salary to evaluate repayment
ability, the creditor need only verify the salary.
2. Income and assets--co-applicant. If two persons
jointly apply for credit and both list income or assets on the
application, the creditor must verify repayment ability with respect to
both applicants unless the credit relies only on the income or assets
of one of the applicants in determining repayment ability.
{{8-29-08 p.6982.02-E}}
3. Expected income. If a creditor relies on expected
income, the expectation must be reasonable and it must be verified with
third-party documents that provide reasonably reliable evidence of the
consumer's expected income. For example, if the creditor relies on an
expectation that a consumer will receive an annual bonus, the creditor
may verify the basis for that expectation with documents that show the
consumer's past annual bonuses and the expected bonus must bear a
reasonable relationship to past bonuses. Similarly, if the creditor
relies on a consumer's expected salary following the consumer's
receipt of an educational degree, the creditor may verify that
expectation with a written statement from an employer indicating that
the consumer will be employed upon graduation at a specified salary.
Paragraph 34(a)(4)(ii)(A).
1. Internal Revenue Service (IRS) Form W--2. A
creditor may verify a consumer's income using a consumer's IRS Form
W--2 (or any subsequent revisions or similar IRS Forms used for
reporting wages and tax withholding). The creditor may also use an
electronic retrieval service for obtaining the consumer's W--2
information.
2. Tax returns. A creditor may verify a consumer's
income or assets using the consumer's tax return. A creditor may also
use IRS Form 4506 "Request for Copy of Tax Return," Form 4506--T
"Request for Transcript of Tax Return," or Form 8821 "Tax
Information Authorization" (or any subsequent revisions or similar
IRS Forms appropriate for obtaining tax return information directly
from the IRS) to verify the consumer's income or assets. The creditor
may also use an electronic retrieval service for obtaining tax return
information.
3. Other third-party documents that provide reasonably
reliable evidence of consumer's income or assets. Creditors may
verify income and assets using documents produced by third parties.
Creditors may not rely on information provided orally by third parties,
but may rely on correspondence from the third party, such as by letter
or e-mail. The creditor may relay on any third-party document that
provides reasonably reliable evidence of the consumer's income or
assets. For example, creditors may verify the consumer's income using
receipts from a check-cashing or remittance service, or by obtaining a
written statement from the consumer's employer that states the
consumer's income.
4. Information specific to the consumer. Creditors
must verify a consumer's income or assets using information that is
specific to the individual consumer. Creditors may use third-party
databases that contain individual-specific data about a consumer's
income or assets, such as a third-party database service used by the
consumer's employer for the purpose of centralizing income
verification requests, so long as the information is reasonably current
and accurate. Information about average incomes for the consumer's
occupation in the consumer's geographic location or information about
average incomes paid by the consumer's employer, however, would not be
specific to the individual consumer.
5. Duplicative collection of documentation. A
creditor that has made a loan to a consumer and is refinancing or
extending new credit to the same consumer need not collect from the
consumer a document the creditor previously obtained if the creditor
has no information that would reasonably lead the creditor to believe
that document has changed since it was initially collected. For
example, if the creditor has obtained the consumer's 2006 tax return
to make a home purchase loan in May 2007, the creditor may rely on the
2006 tax return if the creditor makes a home equity loan to the same
consumer in August 2007. Similarly, if the creditor has obtained the
consumer's bank statement for May 2007 in making the first loan, the
creditor may rely on that bank statement for that month in making the
subsequent loan in August 2007.
Paragraph 34(a)(4)(ii)(B).
1. No violation if income or assets relied on not
materially greater than verifiable amounts. A creditor that does
not verify income or assets used to determine repayment ability with
reasonably reliable third-party documents does not violate
§ 226.34(a)(4)(ii) if the creditor demonstrates that the income or
assets it relied upon were not materially greater than the amounts that
the creditor would have been able to verify pursuant to
§ 226.34(a)(4)(ii). For example, if a creditor determines a
consumer's repayment ability by relying on the consumer's annual
income of $40,000 but fails to obtain documentation of that amount
before extending the credit, the creditor will not have violated this
section if the creditor later obtains evidence that would satisfy
§ 226.34(a)(4)(ii)(A), such as tax return
{{8-29-08 p.6982.02-F}}information, showing that the creditor could
have documented, at the time the loan was consummated, that the
consumer had an annual income not materially less than $40,000.
2. Materially greater than. Amounts of income or
assets relied on are not materially greater than amounts that could
have been verified at consummation if relying on the verifiable amounts
would not have altered a reasonable creditor's decision to extend
credit or the terms of the credit.
Paragraph 34(a)(4)(ii)(C).
1. In general. A credit report may be used to verify
current obligations. A credit report, however, might not reflect an
obligation that a consumer has listed on an application. The creditor
is responsible for considering such an obligation, but the creditor is
not required to independently verify the obligation. Similarly, a
creditor is responsible for considering certain obligations undertaken
just before or at consummation of the transaction and secured by the
same dwelling that secures the transaction (for example, a "piggy
back" loan), of which the creditor knows, even if not reflected on a
credit report. See comment 34(a)(4)--3.
34(a)(4)(iii) Presumption of compliance.
1. In general. A creditor is presumed to have
complied with § 226.34(a)(4) if the creditor follows the three
underwriting procedures specified in paragraph 34(a)(4)(iii) for
verifying repayment ability, determining the payment obligation, and
measuring the relationship of obligations to income. The procedures for
verifying repayment ability are required under paragraph 34(a)(4)(ii);
the other procedures are not required but, if followed along with the
required procedures, create a presumption that the creditor has
complied with § 226.34(a)(4). The consumer may rebut the presumption
with evidence that the creditor nonetheless disregarded repayment
ability despite following these procedures. For example, evidence of a
very high debt-to-income ratio and a very limited residual income could
be sufficient to rebut the presumption, depending on all of the facts
and circumstances. If a creditor fails to follow one of the
non-required procedures set forth in paragraph 34(a)(4)(iii), then the
creditor's compliance is determined based on all of the facts and
circumstances without there being a presumption of either compliance or
violation.
Paragraph 34(a)(4)(iii)(B).
1. Determination of payment schedule. To retain a
presumption of compliance under § 226.34(a)(4)(iii), a creditor must
determine the consumer's ability to pay the principal and interest
obligation based on the maximum scheduled payment in the first seven
years following consummation. In general, a creditor should determine a
payment schedule for purposes of § 226.34(a)(4)(iii)(B) based on the
guidance in the staff commentary to § 226.17(c)(1). Examples of how
to determine the maximum scheduled payment in the first seven years are
provided as follows (all payment amounts are rounded):
i. Balloon-payment loan; fixed interest rate. A loan
in an amount of $100,000 with a fixed interest rate of 8.0 percent (no
points) has a 7-year term but is amortized over 30 years. The monthly
payment scheduled for 7 years is $733 with a balloon payment of
remaining principal due at the end of 7 years. The creditor will retain
the presumption of compliance if it assesses repayment ability based on
the payment of $733.
ii. Fixed-rate loan with interest-only payment for five
years. A loan in an amount of $100,000 with a fixed interest rate
of 8.0 percent (no points) has a 30-year term. The monthly payment of
$667 scheduled for the first 5 years would cover only the interest due.
After the fifth year, the scheduled payment would increase to $772, an
amount that fully amortizes the principal balance over the remaining 25
years. The creditor will retain the presumption of compliance if it
assess repayment ability based on the payment of $772.
iii. Fixed-rate loan with interest-only payment for seven
years. A loan in an amount of $100,000 with a fixed interest rate
of 8.0 percent (no points) has a 30-year term. The monthly payment of
$667 scheduled for the first 7 years would cover only the interest due.
After the seventh year, the scheduled payment would increase to $793,
an amount that fully amortizes the principal balance over the remaining
23 years. The creditor will retain the presumption of compliance if it
assesses repayment ability based on the interest-only payment of $667.
iv. Variable-rate loan with discount for five
years. A loan in an amount of $100,000 has a 30-year term. The
loan agreement provides for a fixed interest rate of 7.0 percent for an
initial period of 5 years. Accordingly, the payment scheduled for the
first 5 years is $665. The agreement provides that, after 5 years, the
interest rate will adjust each
{{10-31-08 p.6982.02-G}}year based on a specified index and margin.
As of consummation, the sum of the index value and margin (the
fully-indexed rate) is 8.0 percent. Accordingly, the payment scheduled
for the remaining 25 years is $727. The creditor will retain the
presumption of compliance if it assesses repayment ability based on the
payment of $727.
v. Variable-rate loan with discount for seven
years. A loan in an amount of $100,000 has a 30-year term. The
loan agreement provides for a fixed interest rate of 7.125 percent for
an initial period of 7 years. Accordingly, the payment scheduled for
the first 7 years is $674. After 7 years, the agreement provides that
the interest rate will adjust each year based on a specified index and
margin. As of consummation, the sum of the index value and margin (the
fully-indexed rate) is 8.0 percent. Accordingly, the payment scheduled
for the remaining years is $725. The creditor will retain the
presumption of compliance if it assesses repayment ability based on the
payment of $674.
vi. Step-rate loan. A loan in an amount of $100,000
has a 30-year term. The agreement provides that the interest rate will
be 5 percent for two years, 6 percent for three years, and 7 percent
thereafter. Accordingly, the payment amounts are $537 for two years,
$597 for three years, and $654 thereafter. To retain the presumption of
compliance, the creditor must assess repayment ability based on the
payment of $654.
Paragraph 34(a)(4)(iii)(C).
1. "Income" and "debt". To determine
whether to classify particular inflows or obligations as "income"
or "debt," creditors may look to widely accepted governmental and
non-governmental underwriting standards, including, for example, those
set forth in the Federal Housing Administration's handbook on Mortgage
Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage
Loans.
34(a)(4)(iv) Exclusions from the presumption of
compliance.
1. In general. The exclusions from the presumption of
compliance should be interpreted consistent with staff comments
32(d)(1)(i)--1 and 32(d)(2)--1.
2. Renewable balloon loan. If a creditor is
unconditionally obligated to renew a balloon-payment loan at the
consumer's option (or is obligated to renew subject to conditions
within the consumer's control), the full term resulting from such
renewal is the relevant term for purposes of the exclusion of certain
balloon-payment loans. See comment 17(c)(1)--11 for a discussion of
conditions within a consumer's control in connection with renewable
balloon-payment loans.
Paragraph 34(b) Prohibited acts or practices for
dwelling-secured loans; open-end credit.
1. Amount of credit extended. Where a loan is
documented as open-end credit but the features and terms or other
circumstances demonstrate that it does not meet the definition of
open-end credit, the loan is subject to the rules for closed-end
credit, including § 226.32 if the rate or fee trigger is met. In
applying the triggers under § 226.32, the "amount financed,"
including the "principal loan amount" must be determined. In
making the determination, the amount of credit that would have been
extended if the loan had been documented as a closed-end loan is a
factual determination to be made in each case. Factors to be considered
include the amount of money the consumer originally requested, the
amount of the first advance or the highest outstanding balance, or the
amount of the credit line. The full amount of the credit line is
considered only to the extent that it is reasonable to expect that the
consumer might use the full amount of credit.
Section 226.35—Prohibited Acts or Practices in
Connection With Higher-priced Mortgage Loans
35(a) Higher-priced mortgage loans.
Paragraph 35(a)(2).
1. Average prime-offer rate. Average prime offer
rates are annual percentage rates derived from average interest rates,
points, and other loan pricing terms currently offered to consumers by
a representative sample of creditors for mortgage transactions that
have low-risk pricing characteristics. Other pricing terms include
commonly used indices, margins, and initial fixed-rate periods for
variable-rate transactions. Relevant pricing characteristics include a
consumer's credit history and transaction characteristics such as the
loan-to-value ratio, owner-occupant status, and purpose of the
transaction. To obtain average prime offer rates, the Board uses a
survey of creditors that both meets the criteria of § 226.35(a)(2)
and provides pricing terms for at least two types of variable-rate
transactions
{{10-31-08 p.6982.02-H}}and at least two types of non-variable-rate
transactions. An example of such a survey is the Freddie Mac Primary
Mortgage Market Survey®.
2. Comparable transaction. A higher-priced mortgage
loan is a consumer credit transaction secured by the consumer's
principal dwelling with an annual percentage rate that exceeds the
average prime offer rate for a comparable transaction as of the date
the interest rate is set by the specified margin. The table of average
prime offer rates published by the Board indicates how to identify the
comparable transaction.
3. Rate set. A transaction's annual percentage rate
is compared to the average prime offer rate as of the date the
transaction's interest rate is set (or "locked") before
consummation. Sometimes a creditor sets the interest rate initially and
then re-sets it at a different level before consummation. The creditor
should use the last date the interest rate is set before consummation.
4. Board table. The Board publishes on the Internet,
in table form, average prime offer rates for a wide variety of
transaction types. The Board calculates an annual percentage rate,
consistent with Regulation Z (see § 226.22 and appendix J), for each
transaction type for which pricing terms are available from a survey.
The Board estimates annual percentage rates for other types of
transactions for which direct survey data are not available based on
the loan pricing terms available in the survey and other information.
The Board publishes on the Internet the methodology it uses to arrive
at these estimates.
35(b) Rules for higher-priced mortgage loans.
1. Effective date. For guidance on the applicability
of the rules in § 226.35(b), see comment 1(d)(5)--1.
Paragraph 35(b)(2)(ii)(C).
1. Payment change. Section 226.35(b)(2) provides that
a loan subject to this section may not have a penalty described by
§ 226.32(d)(6) unless certain conditions are met. Section
226.35(b)(2)(ii)(C) lists as a condition that the amount of the
periodic payment of principal or interest or both may not change during
the four-year period following consummation. For examples showing
whether a prepayment penalty is permitted or prohibited in connection
with particular payment changes, see comment 32(d)(7)(iv)--1. Those
examples, however, include a condition that § 226.35(b)(2) does not
include: the condition that, at consummation, the consumer's total
monthly debt payments may not exceed 50 percent of the consumer's
monthly gross income. For guidance about circumstances in which payment
changes are not considered payment changes for purposes of this
section, see comment 32(d)(7)(iv)--2.
2. Negative amortization. Section 226.32(d)(2)
provides that a loan described in § 226.32(a) may not have a payment
schedule with regular periodic payments that cause the principal
balance to increase. Therefore, the commentary to § 226.32(d)(7)(iv)
does not include examples of payment changes in connection with
negative amortization. The following examples show whether, under
§ 226.35(b)(2), prepayment penalties are permitted or prohibited in
connection with particular payment changes, when a loan agreement
permits negative amortization:
i. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month and the loan agreement permits
negative amortization to occur. Under the loan agreement, the first
date that a scheduled payment in a different amount may be due is
January 1, 2014 and the creditor does not have the right to change
scheduled payments prior to that date even if negative amortization
occurs. A prepayment penalty is permitted with this mortgage
transaction provided that the other § 226.35(b)(2) conditions are
met, that is: provided that the prepayment penalty is permitted by
other applicable law, the penalty expires on or before December 31,
2011, and the penalty will not apply if the source of the prepayment
funds is a refinancing by the creditor or its affiliate.
ii. Initial payments for a variable-rate transaction consummated
on January 1, 2010 are $1,000 per month and the loan agreement permits
negative amortization to occur. Under the loan agreement, the first
date that a scheduled payment in a different amount may be due is
January 1, 2014, but the creditor has the right to change scheduled
payments prior to that date if negative amortization occurs. A
prepayment penalty is prohibited with this mortgage transaction because
the payment may change within the four-year period following
consummation.
{{8-29-08 p.6982.02-I}}
35(b)(3) Escrows.
Paragraph 35(b)(3)(i).
1. Section 226.35(b)(3) applies to principal dwellings, including
structures that are classified as personal property under state law.
For example, an escrow account must be established on a higher-priced
mortgage loan secured by a first-lien on a mobile home, boat or trailer
used as the consumer's principal dwelling. See the
commentary under §§ 226.2(a)(19), 226.2(a)(24), 226.15 and 226.23.
Section 226.35(b)(3) also applies to higher-priced mortgage loans
secured by a first lien on a condominium or a cooperative unit if it is
in fact used as principal residence.
2. Administration of escrow accounts. Section
226.35(b)(3) requires creditors to establish before the consummation of
a loan secured by a first lien on a principal dwelling an escrow
account for payment of property taxes and premiums for mortgage-related
insurance required by creditor. Section 6 of RESPA, 12 U.S.C. 2605, and
Regulation X address how escrow accounts must be administered.
3. Optional insurance items. Section 226.35(b)(3)
does not require that escrow accounts be established for premiums for
mortgage-related insurance that the creditor does not require in
connection with the credit transaction, such as an earthquake insurance
or debt-protection insurance.
Paragraph 35(b)(3)(ii)(B).
1. Limited exception. A creditor is required to
escrow for payment of property taxes for all first lien loans secured
by condominimum units regardless of whether the creditors escrows
insurance premiums for condominium unit.
Section 226.36—Prohibited Acts or Practices in Connection
With Credit Secured by a Consumer's Principal Dwelling
1. Effective date. For guidance on the applicability of
the rules in § 226.36, see comment 1(d)(5)--1.
36(a) Mortgage broker defined.
1. Meaning of mortgage broker. Section 226.36(a)
provides that a mortgage broker is any person who for compensation or
other monetary gain arranges, negotiates, or otherwise obtains an
extension of consumer credit for another person, but it is not an
employee of a creditor. In addition, this definition expressly includes
any person that satisfies this definition but makes use of "table
funding." Table funding occurs when a transaction is consummated
with the debt obligation initially payable by its terms to one person,
but another person provides the funds for the transaction at
consummation and receives an immediate assignment of the note, loan
contract, or other evidence of the debt obligation. Although
§ 226.2(a)(17)(1)(B) provides that a person to whom a debt obligation
is initially payable on its face generally is a creditor, § 226.36(a)
provides that, solely for the purposes of § 226.36, such a person is
considered a mortgage broker. In addition, although consumers
themselves often arrange, negotiate, or otherwise obtain extensions of
consumer credit on their own behalf, they do not do so for compensation
or other monetary gain or for another person and, therefore, are not
mortgage brokers under this section.
36(b) Misrepresentation of value of consumer's principal
dwelling.
36(b)(2) When extension of credit prohibited.
1. Reasonable diligence. A creditor will be deemed to
have acted with reasonable diligence under § 226.36(b)(2) if the
creditor extends credit based on an appraisal other than the one
subject to the restriction in § 226.36(b)(2).
2. Material misstatement or
misrepresentation. Section 226.(b)(2) prohibits a creditor who
knows of a violation of § 226.36(b)(1) in connection with an
appraisal from extending credit based on such appraisal, unless the
creditor documents that it has acted with reasonable diligence to
determine that the appraisal does not materially misstate or
misrepresent the value of such dwelling. A misstatement or
misrepresentation of such dwelling's value is not material if it does
not affect the credit decision or the terms on which credit is
extended.
36(c) Servicing practices.
Paragraph 36(c)(1)(i).
1. Crediting of payments. Under § 226.36(c)(1)(i),
a mortgage servicer must credit a payment to a consumer's loan account
as of the date of receipt. This does not require that a mortgage
servicer post the payment to the consumer's loan account on a
particular date; the
{{8-29-08 p.6982.02-J}}servicer is only required to credit the
payment as of the date of receipt. Accordingly, a servicer
that receives a payment on or before its due date (or within any grace
period), and does not enter the payment on its books or in its system
until after the payment's due date (or expiration of any grace
period), does not violate this rule as long as the entry does not
result in the imposition of a late charge, additional interest, or
similar penalty to the consumer, or in the reporting of negative
information to a consumer reporting agency.
2. Payments to be credited. Payments should be
credited based on the legal obligation between the creditor and
consumer. The legal obligation is determined by applicable state or
other law.
3. Date of receipt. The "date of receipt" is
the date that the payment instrument or other means of payment reaches
the mortgage servicer. For example, payment by check is received when
the mortgage servicer receives it, not when the funds are collected. If
the consumer elects to have payment made by a third-party payor such as
a financial institution, through a preauthorized payment or telephone
bill-payment arrangement, payment is received when the mortgage
servicer receives the third-party payor's check or other transfer
medium, such as an electronic fund transfer.
Paragraph 36(c)(1)(ii).
1. Pyramiding of late fees. The prohibition on
pyramiding of late fees in this subjection should be construed
consistently with the "credit practices rule" of Regulation AA,
12 CFR 227.15.
Paragraph 36(c)(1)(iii).
1. Reasonable time. The payoff statement must be
provided to the consumer, or person acting on behalf of the consumer,
within a reasonable time after the request. For example, it would be
reasonable under most circumstances to provide the statement within
five business days of receipt of a consumer's request. This time frame
might be longer, for example, when the servicer is experiencing an
unusually high volume of refinancing requests.
2. Person acting on behalf of the consumer. For
purposes of § 226.36(c)(1)(iii), a person acting on behalf of the
consumer may include the consumer's representative, such as an
attorney representing the individual, a non-profit consumer counseling
or similar organization, or a creditor with which the consumer is
refinancing and which requires the payoff statement to complete the
refinancing. A servicer may take reasonable measures to verify the
identity of any person acting on behalf of the consumer and to obtain
the consumer's authorization to release information to any such person
before the "reasonable time" period begins to run.
3. Payment requirements. The servicer may specify
reasonable requirements for making payoff requests, such as requiring
requests to be in writing and directed to a mailing address, e-mail
address or fax number specified by the servicer or orally to a
telephone number specified by the servicer, or any other reasonable
requirement or method. If the consumer does not follow these
requirements, a longer time frame for responding to the request would
be reasonable.
4. Accuracy of payoff statements. Payoff statements
must be accurate when issued.
Paragraph 36(c)(2).
1. Payment requirements. The servicer may specify
reasonable requirements for making payments in writing, such as
requiring that payments be accompanied by the account number or payment
coupon; setting a cut-off hour for payment to be received, or setting
different hours for payment by mail and payments made in person;
specifying that only checks or money orders should be sent by mail;
specifying that payment is to be made in U.S. dollars; or specifying
one particular address for receiving payments, such as a post office
box. The servicer may be prohibited, however, from requiring payment
solely by preauthorized electronic fund transfer. (See
section 913 of the Electronic Fund Transfer Act, 15 U.S.C. 1693k).
2. Payment requirements--limitations. Requirements
for making payments must be reasonable; it should not be difficult for
most consumers to make conforming payments. For example it would be
reasonable to require a cut-off time of 5 p.m. for receipt of a mailed
check at the location specified by the servicer for receipt of such
check.
{{8-29-08 p.6982.02-K}}
3. Implied guidelines for payments. In the absence of
specified requirements for making payments, payments may be made at any
location where the servicer conducts business; any time during the
servicer's normal business hours; and by cash, money order, draft, or
other similar instrument in properly negotiable form, or by electronic
fund transfer if the servicer and consumer have so
agreed.
Appendix A—Effect on State Laws
1. Who may make requests. Appendix A sets forth the
procedures for preemption determinations. As discussed in § 226.28,
which contains the standards for preemption, a
{{10-31-00 p.6982.03}}request for a determination of
whether a state law is inconsistent with the requirements of chapters
1, 2, or 3 may be made by creditors, states, or any interested party.
However, only states may request and receive determinations in
connection with the fair credit billing provisions of chapter 4.
References
Statute: Secs. 111 and 171(a).
Other sections: § 226.28.
Previous regulation: §§ 226.6(b) and 226.70
(supplement V, section II).
1981 changes: The procedures in appendix A were largely
adapted from supplement V, section II of the previous regulation
(§ 226.70), with changes made to streamline the
procedures.
Appendix B—State Exemptions
1. General. Appendix B sets forth the procedures for
exemption applications. The exemption standards are found in § 226.29
and are discussed in the commentary to that section.
References
Statute: Secs. 123 and 171(b).
Other sections: § 226.29.
Previous regulation: §§ 226.12, 226.50 (supplement
II), 226.60 (supplement IV), and 226.70 (supplement V, section I).
1981 changes: The procedures in appendix B represent a
combination and streamlining of the procedures set forth in the
supplements to the previous regulation.
Appendix C—Issuance of Staff Interpretations
1. General. This commentary is the vehicle for
providing official staff interpretations. Individual interpretations
generally will not be issued separately from the commentary.
References
Statute: Secs. 105 and 130(f).
Other sections: None.
Previous regulation: § 226.1(d).
1981 changes: Appendix C reflects the Board's intention
that this commentary serve as the vehicle for interpreting the
regulation, rather than individual interpretive
letters.
Appendix D—Multiple-Advance Construction Loans
1. General rule. Appendix D provides a special
procedure that creditors may use, at their option, to estimate and
disclose the terms of multiple advance construction loans when the
amounts and timing of advances are unknown at consummation of the
transaction. This appendix reflects the approach taken in
§ 226.17(c)(6)(ii), which permits creditors to provide separate or
combined disclosures for the construction period and for the permanent
financing, if any; i.e., the construction phase and the permanent phase
may be treated as one transaction or more than one transaction.
Appendix D may also be used in multiple-advance transactions other than
construction loans, when the amounts or timing of advances is unknown
at consummation.
2. Variable-rate multiple-advance loans. The
hypothetical disclosure required in variable-rate transactions by
§ 226.18(f)(1)(iv) is not required for multiple-advance loans
disclosed pursuant to appendix D, part I.
3. Calculation of the total of payments. When
disclosures are made pursuant to appendix D, the total of payments may
reflect either the sum of the payments or the sum of the amount
financed and the finance charge.
4. Annual percentage rate. Appendix D does not require
the use of Volume I of the Board's Annual Percentage Rate Tables for
calculation of the annual percentage rate. Creditors utilizing appendix
D in making calculations and disclosures may use other
{{10-31-00 p.6982.04}}computation tools to determine the
estimated annual percentage rate, based on the finance charge and
payment schedule obtained by use of the appendix.
References
5. Interest reserves. In a multiple-advance
construction loan, a creditor may establish an "interest reserve"
to ensure that interest is paid as it accrues by designating a portion
of the loan to be used for paying the interest that accrues on the
loan. An interest reserve is not treated as a prepaid finance charge,
whether the interest reserve is the same as or different from the
estimated interest figure calculated under appendix D.
• If a creditor permits a consumer to make interest payments as
they become due, the interest reserve should be disregarded in the
disclosures and calculations under appendix D.
• If a creditor requires the establishment of an interest
reserve and automatically deducts interest payments from the reserve
amount rather than allow the consumer to make interest payments as they
become due, the fact that interest will accrue on those interest
payments as well as the other loan proceeds must be reflected in the
calculations and disclosures. To reflect the effects of such
compounding, a creditor should first calculate interest on the
commitment amount (exclusive of the interest reserve) and then add the
figure obtained by assuming that one-half of that interest is
outstanding at the contract interest rate for the entire construction
period. For example, using the example shown under paragraph A, part I
of appendix D, the estimated interest would be $1,117.68 ($1093.75 plus
an additional $23.93 calculated by assuming half of $1093.75 is
outstanding at the contract interest rate for the entire construction
period), and the estimated annual percentage rate would be 21.18%.
Statute: None.
Other sections: §§ 226.17 and 226.22.
Previous regulation: Interpretation § 226.813.
1981 changes: The use of appendix D is limited to
multiple-advance loans for construction purposes or analogous types of
transactions.
Appendix E—Rules for Card Issuers That Bill on a
Transaction-by-Transaction Basis
Statute: None.
Previous regulation: Interpretation § 226.709.
Other sections: §§ 226.6 through 226.13, and 226.15.
1981 changes: The rules in this appendix have been
streamlined and clarified to indicate how certain card issuers that
bill on a transaction basis may comply with the requirements of subpart
B.
Appendix F—Annual Percentage Rate Computations for Certain
Open-End Credit Plans
1. Daily rate with specific transaction charge. If the
finance charge results from a charge relating to a specific transaction
and the application of a daily periodic rate, see comment 14(c)--6 for
guidance on an appropriate calculation method.
Statute: Section 107.
Previous regulation: § 226.5(a)(3)(ii), footnote 5(a).
Other sections: § 226.14.
1981 changes: This appendix incorporates a sixth example
in which the transaction amount exceeds the amount of the balance
subject to the periodic rate.
Appendices G and H—Open-End and Closed-End Model Forms and
Clauses
1. Permissible changes. Although use of the model forms
and clauses is not required, creditors using them properly will be
deemed to be in compliance with the regulation with regard to those
disclosures. Creditors may make certain changes in the format or
content of the forms and clauses and may delete any disclosures that
are inapplicable to a transaction or a plan without losing the act's
protection from liability. (But see Appendix G comment 5 for special
rules concerning certain disclosures required under § 226.5a for
credit and charge card applications and solicitations). The
rearrangement of the model forms and clauses may
{{10-31-00 p.6982.05}}not be so extensive as to affect the
substance, clarity, or meaningful sequence of the forms and clauses.
Creditors making revisions with that effect will lose their protection
from civil liability. Acceptable changes include, for example:
• Using the first person, instead of the second person, in
referring to the borrower.
• Using "borrower" and "creditor" instead of
pronouns.
• Rearranging the sequence of the disclosures.
• Not using bold type for headings.
• Incorporating certain state "plain English"
requirements.
• Deleting inapplicable disclosures by whiting out,
blocking out, filling in "N/A" (not applicable) or "0",
crossing out, leaving blanks, checking a box for applicable items, or
circling applicable items. (This should permit use of multipurpose
standard forms.)
• Substituting appropriate references, such as
"bank," "we," or a specific name for "creditor" in
the initial open-end disclosures.
• Using a vertical, rather than a horizontal, format for
the boxes in the closed-end disclosures.
2. Debt cancellation coverage. This regulation does not
authorize creditors to characterize debt cancellation fees as insurance
premiums for purposes of this regulation. Creditors may provide a
disclosure that refers to debt cancellation coverage whether or not the
coverage is considered insurance. Creditors may use the model credit
insurance disclosures only if the debt cancellation coverage
constitutes insurance under state law.
Appendix G—Open-End Model Forms and Clauses
1. Model G--1. The model disclosures in G--1 (different
balance computation methods) may be used in both the initial
disclosures under § 226.6 and the periodic disclosures under
§ 226.7. As is clear from the models given, "shorthand"
descriptions of the balance computation methods are not sufficient. The
phrase "a portion of" the finance charge should be included if
the total finance charge includes other amounts, such as transaction
charges, that are not due to the application of a periodic rate. In
addition, if unpaid finance charges are subtracted in calculating the
balance, that fact must be stated so that the disclosure of the
computation method is accurate. Only model G--1(b) contains a final
sentence appearing in brackets which reflects the total dollar amount
of payments and credits received during the billing cycle. The other
models do not contain this language because they reflect plans in which
payments and credits received during the billing cycle are subtracted.
If this is not the case, however, the language relating to payments and
credits should be changed, and the creditor should add either the
disclosure of the dollar amount as in model G--1(b) or an indication of
which credits (disclosed elsewhere on the periodic statement) will not
be deducted in determining the balance. (Such an indication may also
substitute for the bracketed sentence in model G--1(b).) See the
commentary to § 226.7(e).
2. Model G--2. This model contains the notice of
liability for unauthorized use of a credit card.
3. Models G--3 and G--4. These set out models for the
long form billing error rights statement (for use with the initial
disclosures and as an annual disclosure or, at the creditor's option,
with each periodic statement) and the alternative billing error rights
statement (for use with each periodic statement), respectively.
Creditors must provide the billing error rights statements in a form
substantially similar to the models in order to comply with the
regulation. The model billing rights statements may be modified in any
of the ways set forth in the first paragraph to the commentary on
appendices G and H. The models may, furthermore, be modified by
deleting inapplicable information, such as:
• The paragraph concerning stopping a debit in relation to
a disputed amount, if the creditor does not have the ability to debit
automatically the consumer's saving or checking account for payment.
• The rights stated in the special rule for credit card
purchases and any limitations on those rights.
{{10-31-00 p.6982.06}}
The model billing rights statements also contain optional language
that creditors may use. For example, the creditor may:
• Include a statement to the effect that notice of a
billing error must be submitted on something other than the payment
ticket or other material accompanying the periodic disclosures.
• Insert its address or refer to the address that appears
elsewhere on the bill.
Additional information may be included on the statements as long as
it does not detract from the required disclosures. For instance,
information concerning the reporting of errors in connection with a
checking account may be included on a combined statement as long as the
disclosures required by the regulation remain clear and conspicuous.
4. Models G--5 through G--9. These models set out
notices of the right to rescind that would be used at different times
in an open-end plan. The last paragraph of each of the rescission model
forms contains a blank for the date by which the consumer's notice of
cancellation must be sent or delivered. A parenthetical is included to
address the situation in which the consumer's right to rescind the
transaction exists beyond three business days following the date of the
transaction, for example, when the notice or material disclosures are
delivered late or when the date of the transaction in paragraph 1 of
the notice is an estimate. The language of the parenthetical is not
optional. See the commentary to section 226.2(a)(25) regarding the
specificity of the security interest disclosure for model form G--7.
5. Model G--10(A), Sample G--10(B) and Model G--10(C). i. Model
G--10(A) and Sample G--10(B) illustrate, in the tabular format, all of
the disclosures required under § 226.5a for applications and
solicitations for credit cards other than charge cards. Model G--10(B)
is a sample disclosure illustrating an account with a lower
introductory rate and penalty rate. Model G--10(C) illustrates the
tabular format disclosure for charge card applications and
solicitations and reflects all of the disclosures in the table.
ii. Except as otherwise permitted, disclosures must be
substantially similar in sequence and format to model forms G--10(A)
and (C). The disclosures may, however, be arranged vertically or
horizontally and need not be highlighted aside from being included in
the table. While proper use of the model forms will be deemed in
compliance with the regulation, card issuers are permitted to use
headings and disclosures other than those in the forms (with an
exception relating to the use of "grace period") if they are
clear and concise and are substantially similar to the headings and
disclosures contained in model forms. For further discussion of
requirements relating to form, see the commentary to § 226.5a(a)(2).
6. Models G--11 and G--12. Model G--11 contains clauses
that illustrates the general disclosures required under § 226.5a(e)
in applications and solicitations made available to the general public.
Model G--12 is a model clause for the disclosure required under
§ 226.5a(f) when a charge card accesses an open-end plan offered by
another creditor.
7. Models G--13(A) and G--13(B). These model forms
illustrate the disclosures required under § 226.9(f) when the
card issuer changes the entity providing insurance on a credit card
account. Model G--13(A) contains the items set forth in § 226.9(f)(3)
as examples of significant terms of coverage that may be affected by
the change in insurance provider. The card issuer may either list all
of these potential changes in coverage and place a check mark by the
applicable changes, or list only the actual changes in coverage. Under
either approach, the card issuer must either explain the changes or
refer to an accompanying copy of the policy or group certificate for
details of the new terms of coverage. Model G--13(A) also illustrates
the permissible combination of the two notices required by
§ 226.9(f)--the notice required for a planned change in provider and
the notice required once a change has occurred. This form may be
modified for use in providing only the disclosures required before the
change if the card issuer chooses to send two separate
{{2-27-98 p.6982.07}}notices. Thus, for example, the
references to the attached policy or certificate would not be required
in a separate notice prior to a change in the insurance provider since
the policy or certificate need not be provided at that time. Model
G--13(B) illustrates the disclosures required under § 226.9(f)(2)
when the insurance provider is changed.
Appendix H—Closed-End Model Forms and Clauses
1. Models H--1 and H--2. Creditors may make several
types of changes to closed-end model forms H--1 (credit sale) and H--2
(loan) and still be deemed to be in compliance with the regulation,
provided that the required disclosures are made clearly and
conspicuously. Permissible changes include the addition of the
information permitted by footnote 37 to § 226.17 and ``directly
related'' information as set forth in the commentary to § 226.17(a).
The creditor may also delete or, on multi-purpose forms, indicate
inapplicable disclosures, such as:
• The itemization of the amount financed option. (See
samples H--12 through H--15.)
• The credit life and disability insurance disclosures.
(See samples H--11 and H--12.)
• The property insurance disclosures. (See samples H--10
through H--12, and H--14.)
• The "filing fees" and "non-filing insurance"
disclosures. (See samples H--11 and H--12.)
• The prepayment penalty or rebate disclosures. (See
samples H--12 and H--14.)
• The total sale price. (See samples H--11 through H--15.)
Other permissible changes include:
• Adding the creditor's address or telephone number. (See
the commentary to § 226.18(a).)
• Combining required terms where several numerical
disclosures are the same, for instance, if the "total of
payments" equals the "total sale price." (See the commentary
to § 226.18.)
• Rearranging the sequence or location of the
disclosures--for instance, by placing the descriptive phrases outside
the boxes containing the corresponding disclosures, or by grouping the
descriptors together as a glossary of terms in a separate section of
the segregated disclosures; by placing the payment schedule at the top
of the form; or by changing the order of the disclosures in the boxes,
including the annual percentage rate and finance charge boxes.
• Using brackets, instead of checkboxes, to indicate
inapplicable disclosures.
• Using a line for the consumer to initial, rather than a
checkbox, to indicate an election to receive an itemization of the
amount financed.
• Deleting captions for disclosures.
• Using a symbol, such as an asterisk, for estimated
disclosures, instead of an "e."
• Adding a signature line to the insurance disclosures to
reflect joint policies.
• Separately itemizing the filing fees.
• Revising the late charge disclosure in accordance with
the commentary to § 226.18(l).
2. Model H--3. Creditors have considerable flexibility
in filling out model H--3 (itemization of the amount financed).
Appropriate revisions, such as those set out in the commentary to
§ 226.18(c), may be made to this form without loss of protection from
civil liability for proper use of the model forms.
3. Models H--4 through H--7. The model clauses are not
included in the model forms although they are mandatory for certain
transactions. Creditors using the model clauses when applicable to a
transaction are deemed to be in compliance with the regulation with
regard to that disclosure.
4. Model H--4(A). This model contains the variable-rate
model clauses applicable to transactions subject to § 226.18(f)(1)
and is intended to give creditors considerable flexibility in
structuring variable-rate disclosures to fit individual plans. The
information about circumstances, limitations, and effects of an
increase may be given in terms of the contract interest rate or the
annual percentage rate. Clauses are shown for hypothetical examples
based on the specific amount of the transaction and based on a
representative amount. Creditors may preprint the variable rate
disclosures based on a representative
{{2-27-98 p.6982.08}}amount for similar types of
transactions, instead of constructing an individualized example for
each transaction. In both representative examples and
transaction-specific examples, creditors may refer either to the
incremental change in rate, payment amount, or number of payments, or
to the resulting rate, payment amount, or number of payments. For
example, creditors may state that the rate will increase by 2%, with a
corresponding $150 increase in the payment, or creditors may state that
the rate will increase to 16%, with a corresponding payment of $850.
5. Model H--4(B). This model clause illustrates the
variable-rate disclosure required under § 226.18(f)(2), which would
alert consumers to the fact that the transaction contains a
variable-rate feature and that disclosures were provided earlier.
6. Model H--4(C). This model clause illustrates the
early disclosures required generally under § 226.19(b). It includes
information on how the consumer's interest rate is determined and how
it can change over the term of the loan, and explains changes that may
occur in the borrower's monthly payment. It contains an example of how
to disclose historical changes in the index or formula values used to
compute interest rates for the preceding 15 years. The model clause
also illustrates the disclosure of the initial and maximum interest
rates and payments based on an initial interest rate (index value plus
margin, adjusted by the amount of any discount or premium) in effect as
of an identified month and year for the loan program disclosure and
illustrates how to provide consumers with a method for calculating the
monthly payment for the loan amount to be borrowed.
7. Model H--4(D). This model clause illustrates the
adjustment notice required under § 226.20(c), and provides examples
of payment change notices and annual notices of interest rate changes.
8. Model H--5. This contains the demand feature clause.
9. Model H--6. This contains the assumption clause.
10. Model H--7. This contains the required deposit
clause.
11. Models H--8 and H--9. These models contain the
rescission notices for a typical closed-end transaction and a
refinancing, respectively. The last paragraph of each model form
contains a blank for the date by which the consumer's notice of
cancellation must be sent or delivered. A parenthetical is included to
address the situation in which the consumer's right to rescind the
transaction exists beyond three business days following the date of the
transaction, for example, where the notice or material disclosures are
delivered late or where the date of the transaction in paragraph 1 of
the notice is an estimate. The language of the parenthetical is not
optional. See the commentary to section 226.2(a)(25) regarding the
specificity of the security interest disclosure for model form H--9.
The prior version of model form H--9 is substantially similar to the
current version and creditors may continue to use it, as appropriate.
Creditors are encouraged, however, to use the current version when
reordering or reprinting forms.
12. Sample forms. The sample forms (H--10 through
H--15) serve a different purpose than the model forms. The samples
illustrate various ways of adapting the model forms to the individual
transactions described in the commentary to appendix H. The deletions
and rearrangments shown relate only to the specific transactions
described. As a result, the samples do not provide the general
protection from civil liability provided by the model forms and
clauses.
13. Sample H--10. This sample illustrates an automobile
credit sale. The cash price is $7,500 with a downpayment of $1,500.
There is an 8% add-on interest rate and a term of three years, with 36
equal monthly payments. The credit life insurance premium and the
filing fees are financed by the creditor. There is a $25 credit report
fee paid by the consumer before consummation, which is a prepaid
finance charge.
14. Sample H--11. This sample illustrates an
installment loan. The amount of the loan is $5,000. There is a 12%
simple interest rate and a term of two years. The date of the
transaction is expected to be April 15, 1981, with the first payment
due on June 1, 1981. The first payment amount is labelled as an
estimate since the transaction date is uncertain. The odd days'
interest ($26.67) is collected with the first payment. The remaining 23
monthly payments are equal.
{{12-31-01 p.6983}}
15. Sample H--12. This sample illustrates a refinancing
and consolidation loan. The amount of the loan is $5,000. There is a
15% simple interest rate and a term of three years. The date of the
transaction is April 1, 1981, with the first payment due on May 1,
1981. The first 35 monthly payments are equal, with an odd final
payment. The credit disability insurance premium is financed. In
calculating the annual percentage rate, the U.S. Rule has been used.
Since an itemization of the amount financed is included with the
disclosures, the statement regarding the consumer's option to receive
an itemization is deleted.
16. Samples H--13 through H--15. These samples
illustrate various mortgage transactions. They assume that the
mortgages are subject to the Real Estate Settlement Procedures Act
(RESPA). As a result, no option regarding the itemization of the amount
financed has been included in the samples, because providing the good
faith estimates of settlement costs required by RESPA satisfies Truth
in Lending's amount financed itemization requirement. (See footnote 39
to § 226.18(c).)
17. Sample H--13. This sample illustrates a mortgage
with a demand feature. The loan amount is $44,900, payable in 360
monthly installments at a simple interest rate of 14.75%. The 15 days
of interim interest ($294.34) is collected as a prepaid finance charge
at the time of consummation of the loan (April 15, 1981). In
calculating the disclosure amounts, the minor irregularities provision
in § 226.17(c)(4) has been used. The property insurance premiums are
not included in the payment schedule. This disclosure statement could
be used for notes with the seven-year call option required by the
Federal National Mortgage Association (FNMA) in states where
due-on-sale clauses are prohibited.
18. Sample H--14. This sample disclosure form
illustrates the disclosures under § 226.19(b) for a variable-rate
transaction secured by the consumer's principal dwelling with a term
greater than one year. The sample form shows a creditor how to adapt
the model clauses in Appendix H--4(C) to the creditor's own particular
variable-rate program. The sample disclosure form describes the
features of a specific variable-rate mortgage program and alerts the
consumer to the fact that information on the creditor's other
closed-end variable-rate programs is available upon request. It
includes information on how the interest rate is determined and how it
can change over time. Section 226.19(b)(2)(viii) permits creditors the
option to provide either a historical example or an initial and maximum
interest rates and payments disclosure; both are illustrated in the
sample disclosure. The historical example explains how the monthly
payment can change based on a $10,000 loan amount, payable in 360
monthly installments, based on historical changes in the values for the
weekly average yield on U.S. Treasury Securities adjusted to a constant
maturity of one year. Index values are measured for 15 years, as of the
first week ending in July. This reflects the requirement that the index
history be based on values for the same date or period each year in the
example. The sample disclosure also illustrates the alternative
disclosure under § 226.19(b)(2)(viii)(B) that the initial and the
maximum interest rates and payments be shown for a $10,000 loan
originated at an initial interest rate of 12.41 percent (which was in
effect July 1996) and to have 2 percentage point annual (and 5
percentage point overall) interest rate limitations or caps. Thus, the
maximum amount that the interest rate could rise under this program is
5 percentage points higher than the 12.41 percent initial rate to 17.41
percent, and the monthly payment could rise from $106.03 to a maximum
of $145.34. The loan would not reach the maximum interest rate until
its fourth year because of the 2 percentage point annual rate
limitations, and the maximum payment disclosed reflects the
amortization of the loan during that period. The sample form also
illustrates how to provide consumers with a method for calculating
their actual monthly payment for a loan amount other than $10,000.
19. Sample H--15. This sample illustrates a
graduated payment mortgage with a five- year graduation period and a
71/2 percent yearly increase in payments. The loan amount is
$44,900, payable in 360 monthly installments at a simple interest rate
of 14.75%. Two points ($898), as well as an initial mortgage guarantee
insurance premium of $225.00, are included in the prepaid finance
charge. The mortgage guarantee insurance premiums are calculated on the
basis of 1/4 of 1% of the outstanding principal balance under
an annual reduction plan. The abbreviated disclosure permitted under
§ 226.18(g)(2) is used for the payment schedule for years six through
30. The prepayment disclosure refers to both penalties and rebates
because information about penalties is required for the simple interest
portion of the
{{12-31-01 p.6984}}obligation and information about
rebates is required for the mortgage insurance portion of the
obligation.
20. Sample H--16. This sample illustrates the
disclosures required under § 226.32(c). The sample illustrates the
amount borrowed and the disclosures about optional insurance that are
required for mortgage refinancings under § 226.32(c)(5). Creditors
may, at their option, include these disclosures for all loans subject
to § 226.32. The sample also includes disclosures required under
§ 226.32(c)(3) when the legal obligation includes a balloon payment.
21. HRSA--500--1 9--82. Pursuant to section 113(a) of
the Truth in Lending Act, Form HRSA--500--1 9--82 issued by the U.S.
Department of Health and Human Services for certain student loans has
been approved. The form may be used for all Health Education Assistance
Loans (HEAL) with a variable interest rate that are interim student
credit extensions as defined in Regulation Z.
22. HRSA--500--2 9--82. Pursuant to section 113(a) of
the Truth in Lending Act, Form HRSA--500--2 9--82 issued by the U.S.
Department of Health and Human Services for certain student loans has
been approved. The form may be used for all HEAL loans with a fixed
interest rate that are interim student credit extensions as defined in
Regulation Z.
23. HRSA--502--1 9--82. Pursuant to section 113(a) of
the Truth in Lending Act, Form HRSA--502--1 9--82 issued by the U.S.
Department of Health and Human Services for certain student loans has
been approved. The form may be used for all HEAL loans with a variable
interest rate in which the borrower has reached repayment status and is
making payments of both interest and principal.
24. HRSA--502--2 9--82. Pursuant to section 113(a) of
the Truth in Lending Act, Form HRSA--502--2 9--82 issued by the U.S.
Department of Health and Human Services for certain student loans has
been approved. The form may be used for all HEAL loans with a fixed
interest rate in which the borrower has reached repayment status and is
making payments of both interest and principal.
References
Statute: Secs. 105 and 130.
Other sections: §§ 226.6, 226.7, 226.9, 226.12,
226.15, 226.18, and 226.23.
Previous regulation: None.
1981 changes: The model forms and clauses have no
counterpart in the previous regulation.
Appendix I—Federal Enforcement Agencies
Statute: Section 108.
Other sections: None.
Previous regulation: § 226.1(b).
1981 changes: None.
Appendix J—Annual Percentage Rate Computations for Closed-End
Credit Transactions
1. Use of Appendix J. Appendix J sets forth the
actuarial equations and instructions for calculating the annual
percentage rate in closed-end credit transactions. While the formulas
contained in this appendix may be directly applied to calculate the
annual percentage rate for an individual transaction, they may also be
utilized to program calculators and computers to perform the
calculations.
2. Relation to Board tables. The Board's Annual
Percentage Rate Tables also provide creditors with a calculation tool
that applies the technical information in appendix J. An annual
percentage rate computed in accordance with the instructions in the
tables is deemed to comply with the regulation. Volume I of the tables
may be used for credit transactions involving equal payment amounts and
periods, as well as for transactions involving any of the following
irregularities: odd first period, odd first payment and odd last
payment. Volume II of the tables may be used for transactions that
involve any type of irregularities.
{{12-31-07 p.6984.01}}These tables may be obtained from any
Federal Reserve Bank or from the Board in Washington, D.C. 20551, upon
request.
References
Statute: Section 107.
Other sections: § 226.22.
Previous regulation: § 226.40 (supplement
I).
{{12-31-07 p.6985}}
1981 changes: Paragraph (b)(2) has been revised to
clarify that the term of the transaction never begins earlier than
consummation of the transaction. Paragraph (b)(5)(vi) has been revised
to permit creditors in single-advance, single-payment transaction in
which the term is less than a year and is equal to a whole number of
months, to use either the 12-month method or the 365-day method to
compute the number of unit-periods per
year.
Appendix K—Total Annual Loan Cost Rate Computations for
Reverse Mortgage Transactions
1. General. The calculation of total annual loan cost
rates under appendix K is based on the principles set forth and the
estimation or "iteration" procedure used to compute annual
percentage rates under appendix J. Rather than restate this iteration
process in full, the regulation cross-references the procedures found
in appendix J. In other aspects the appendix reflects the special
nature of reverse mortgage transactions. Special definitions and
instructions are included where appropriate.
(b) Instructions and equations for the total annual loan cost
rate.
(b)(5) Number of unit-periods between two given dates.
1. Assumption as to when transaction beings. The
computation of the total annual loan cost rate is based on the
assumption that the reverse mortgage transaction begins on the first
day of the month in which consummation is estimated to occur.
Therefore, fractional unit-periods (used under appendix J for
calculating annual percentage rates) are not used.
(b)(9) Assumption for discretionary cash advances.
1. Amount of credit. Creditors should compute the
total annual loan cost rates for transactions involving discretionary
cash advances by assuming that 50 percent of the initial amount of the
credit available under the transaction is advanced at closing or, in an
open-end transaction, when the consumer becomes obligated under the
plan. (For the purposes of this assumption, the initial amount of the
credit is the principal loan amount less any costs to the consumer
under section 226.33(c)(1).)
(b)(10) Assumption for variable-rate reverse mortgage
transactions.
1. Initial discount or premium rate. Where a
variable-rate reverse mortgage transaction includes an initial discount
or premium rate, the creditor should apply the same rules for
calculating the total annual loan cost rate as are applied when
calculating the annual percentage rate for a loan with an initial
discount or premium rate (see the commentary to § 226.17(c)).
(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. 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.
Appendix L—Assumed Loan Periods for Computations of
Total
Annual Loan Cost Rates
1. General. The life expectancy figures used in
appendix L are those found in the U.S. Decennial Life Tables for women,
as rounded to the nearest whole year and as published by the U.S.
Department of Health and Human Services. The figures contained in
appendix L must be used by creditors for all consumers (men and women).
Appendix L will be revised periodically by the Board to incorporate
revisions to the figures made in the Decennial Tables.
[The page following this is 6987.]
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