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FEDER AL RESERVE BANK

OF NEW YORK

rCircular No. 88331L May 21, 1980 J

TRUTH IN LENDING SIMPLIFICATION AND REFORM

—Amendments to Regulation Z, Effective May 21, 1980

—Comment Invited on Proposal To Amend Regulation Z

To All Banking Institutions, and Others Concerned,

in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has adopted amendments, effective

May 21, 1980, to its Regulation Z, “Truth in Lending,” and has announced a proposal to amend

that regulation. Comments on the proposal should be submitted by June 20, 1980, and may be sent

to our Consumer Affairs and Bank Regulations Department.

The Board’s actions are designed to implement provisions of the Truth in Lending Simplifica-tion and Reform Act (Title VI of the Depository Institutions Deregulation and Monetary Control

Act). The following is quoted from the text of the Board’s announcement:

The Truth in Lending Simplification and Reform Act, signed into law March 31, 1980, becomes fullyeffective April 1, 1982. The Act requires the Board to have implementing regulations in place by April 1,1981. Cred itors may however comply with the Bo ar d’s regulations un der the S implification Act when the

Board has taken final action on regulations to implement the Act.

The four actions announced today follow:

R u le s e f fe c ti v e im m e d ia te ly :

1. An amendment to Regulation Z that exempts all extensions of credit for agricultural purposes from

the disclosure requirements of Truth in Lending.

Currently, only agricultural extensions over $25,000 are exempt from Truth in Lending disclosure re-quirements. The Board’s action eliminates the need for any Regulation Z disclosures for agricultural credit ofany amount. However, since certain State laws governing agricultural credit have been preempted under Reg-ulation Z and since the Congress wished to give creditors time to adjust their practices, the Board, in elimi-nating the disclosure requirement for agricultural credit, gave creditors two options. They may either (1 ) cease to m ake disclosures under Regulation Z, but comply with any curre ntly preempted S tate laws, or (2) continue to provide the Federal Truth in Lending disclosures, disregarding any inconsistent State lawsuntil the effective date of the Simplification Act.

2. An amendment to the regulation to eliminate disclosure requirements currently imposed upon pe

riodic statements that lenders provide in connection with closed end credit transactions (such as mortgage and personal loans).

Since there appear to be no State laws that would complicate immediate discontinuation of disclosure re-quirements for closed end credit periodic statements and since the intent of Congress was to simplify Truthin Lending by eliminating those disclosures, the Board believes pro mp t implem entation is appropriate . (T hedisclosure requirements for open end credit periodic statements are not affected.)

3. Extension of the life of the Board’s rule regarding the right of rescission.

A provision of Regulation Z that allows an exception to the “cooling off” period for consum ers who pledge th ei r homes as co lla tera l in open end cr ed it ar ra ngem en ts was schedu led to be revoke d on M ay 31.

Since the Simplification Act, when effective, will provide a similar exception to the rescission rule, theBoard has extended the life of its rescission rule until the Act becomes effective.

The Board noted that adoption of these three rules effective on May 21 does not mean that creditors maynow follow other provisions of the Simplification Act. Cre ditors may follow the p rovisions of the revised A ctonly when the proposals published by the Board on April 28 (May 5 in the Federal Register) to overhaul

( o v e r )

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Regulation Z in light of the Simplification Act have been adopted in final form. These proposals included proposed model forms. These forms are not in effect until the Board takes final action upon them.

Proposa l

The Board requested comment by June 20, 1980 on a proposal to amend Regulation Z that would increase the tolerance for accuracy in disclosure of the annual percentage rate in mortgage transactions involving irregular payments or advances.

If adopted, the proposal, as suggested in the legislative history of the Simplification Act, would be in effect until April 1, 1981.

It would allow for a tolerance of one half of one percentage point above or below the actual annual percentage rate. This is the maximum tolerance suggested in the report of the conference committee that preparedthe Simplification Act for consideration by the Congress. However, the Board specifically solicited commenton whether an increased tolerance is needed; whether a smaller tolerance would be appropriate; and whetherthe definition of irregular mortgage transaction is appropriate.

This definition, in the proposal, is a mortgage transaction involving multiple advances or irregular payment schedules other than the first payment period or the first or last payment amount. Further detail is provided in the attached notice of proposed rule making.

The proposed amendment is intended to give mortgage lenders time to acquire calculation tools neededto determine an accurate annual percentage rate for such complex transactions. It would take the place of,and would not be in addition to, the presently allowed variance of one eighth of one percentage point above

or below the actual rate.

Enclosed—for banking institutions and others concerned in this District—is the text of the

proposal and of the amendments; additional copies will be furnished upon request directed to our

Circulars Division. Questions on this matter may be directed to our Consumer Affairs and Bank

Regulations Department (Tel. No. 212-791-5914).

A n t h o n y M. S o l o m o n ,

President.

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-

Proposed Rulemaking

FEDERAL RESERVE SYSTEM

[12 CFR Part 226]

[Reg. Z; Docket No. R-0295]

TRUTH IN LENDING

Increased Tolerance for Annual Percentage

Rates In Irregular Mortgage Transactions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

SUMMARY: The Board seeks comment on a proposed amendment to Regulation Z

that would increase the tolerance for accuracy in disclosing the annual

percentage rate in irregular mortgage transactions. If adopted, the more

generous tolerance would be available only until April 1, 1981; after that

date, the annual percentage rates for those transactions would have to meet

the general standard of accuracy. The proposed amendment follows the recom

mendation in the Conference Report on the recent Truth in Lending Simplifi

cation and Reform Act, and is intended to insulate certain creditors from

civil liability temporarily while they acquire the calculation tools necessary

to determine rates more accurately.

DATE: Comments must be received on or before June 20, 1980.

ADDRESS: Comments may be mailed to the Secretary, Board of Governors of the

Federal Reserve System, Washington, D.C. 20551, or delivered to Room B-2223, 20th and Constitution Avenue, N.W., Washington, D.C., between 8:45 a.m. and

5:15 p.ra. Comments may also be inspected at Room B-1122 between 8:45 a.m.

and 5:15 p.m. The comments should refer to docket number R-0295.

FOR FURTHER INFORMATION CONTACT: Ellen Mai and, Senior Attorney, Division of

Consumer and Community Affairs, Board of Governors of the Federal Reserve

System, Washington, D.C. 20551 (202-452-3867).

SUPPLEMENTARY INFORMATION: The Truth in Lending Simplification and Reform

Act (Title VI of Public Law 96-221, the Depository Institutions Deregulation

and Monetary Control Act of 1980) was signed into law by the President on

March 31, 1980. Although the simplification act does not become fully effec

tive until April 1, 1982, it requires the Board to adopt implementing regula

tions no later than April 1, 1981. The Board recently proposed for comment

a completely revised version of Regulation Z (45 FR 29702, May 5, 1980) to

implement the statutory amendments. The proposal discussed in this notice,

although occasioned by the new act, is a special matter that the Board believes

merits prompt and separate consideration.

[Enc. Cir. No. 8833]

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- 2 -

The Conference Report on the Truth in Lending Simplification and

Reform Act recommends that the Board consider a temporary relaxation of the

rules for accuracy of annual percentage rates in irregular mortgage trans

actions. It suggests

that, for a period of one year from the date of enactment of

the restitution provision [March 31, 1980], the Federal

Reserve Board may allow a tolerance increased by one quarter

of one percentage point for calculation of the APR on

irregular mortgage transactions. However, the tolerance shall

be no greater than one half of one percent between the dis

closed rate and the actual rate.

An irregular mortgage transaction is a loan secured by

real estate for which the APR cannot be calculated using

Volume I of the Federal Reserve System's Truth in Lending,

Regulation Z, Annual Percentage Rate Tables.

H. R. Rep. No. 96-842, 96th Cong., 2nd Sess. 81 (1980).

The general standard of accuracy for an annual percentage rate

under Regulation Z is 1/8 of a percentage point; that is, the disclosed rate

must be within 1/8 of a percentage point above or below the actual rate.

The increased tolerance suggested in the Conference Report for lenders making

complex mortgage loans is intended to give them time to acquire the calcula

tion tools needed to determine accurate annual percentage rates. The effect

of the special rule would be to insulate those lenders from civil liability

for errors within the tolerance limits for a limited time.

The Board is therefore proposing for comment an amendment to the

annual percentage rate provisions of Regulation Z to provide a greater

tolerance for irregular mortgage transactions until April 1, 1981. The pro

posal allows for a tolerance of 1/2 of a percentage point, thus permitting

disclosure of an annual percentage rate for such a transaction to be consid

ered accurate under the regulation as long as it is within 1/2 of one percent

age point above or below the actual rate. The maximum tolerance mentioned

in the Conference Report is being proposed, but the Board specifically solicits

comment on whether a smaller tolerance would be appropriate. If adopted,

the tolerance for irregular mortgage transactions would be in lieu of, not

in addition to, the general 1/8 percentage point tolerance.

Irregular mortgage transactions are defined in the proposal as

those involving multiple advances or irregular payment schedules (other than

an irregular first period or an irregular first or last payment amount).

The annual percentage rate for those types of transactions cannot be deter

mined by use of Volume I of the Board's APR tables, which is designed for

regular transactions. The category of irregular mortgage transactions

includes, for example, construction financing involving multiple advances,

loans with government or private mortgage insurance premiums that vary

during the loan term, graduated payment and step-rate mortgages, and mortgages

involving required deposit balances.

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- 3 -

The proposal would add a new paragraph to § 226.5 of Regulation Z,

as that section was amended in January 1980.

The Board solicits comment on the following questions, as well as

on any other aspect of the proposal:

— Is an increased tolerance needed by mortgage lenders?

— Is the size of the proposed tolerance (1/2 of one percentage

point) appropriate or should it be smaller? Should the tol

erance be expressed as a percent of the actual rate or, as

stated in the proposal, as a fraction of a percentage point?

— Is the definition of an irregular mortgage transaction an

appropriate one?

The comment period for this proposal is only 30 days rather than

the normal 60 days. The Board has decided that a shorter comment period is

advisable in order to expedite consideration of the matter since any special

tolerance would expire on April 1, 1981, under the amended act.

In consideration of the foregoing and pursuant to the authority

granted in § 105 of the Truth in Lending Act (15 U.S.C. 1604, as amended),

the Board proposes to amend Regulation Z (12 CFR Part 226) by adding a new

paragraph (d) to § 226.5, to read as follows:

§ 226.5 Determination of annual percentage rate.

* * * * *

(d) Special rule for irregular mortgage transactions. Notwithstanding any other provision in this section, the annual percentage rate in

an irregular mortgage transaction shall be considered accurate if it is not

more than 1/2 of 1 percentage point above or below the annual percentage rate

determined in accordance with either the actuarial method or the United States

Rule method. For the purpose of this paragraph, an irregular mortgage trans

action is a real property transaction involving one or more of the following

features: multiple advances, irregular payment periods (other than an irregu

lar first period, as defined in footnote 5c), and irregular payment amounts

(other than irregular first and last payment amounts). This paragraph shall

cease to be effective on April 1, 1981, after which date the general standard

of accuracy in paragraph (b) of this section will apply.

By order of the Board of Governors, May 14, 1980.

(signed) Theodore E. Allison ______

Theodore E. Allison

Secretary of the Board

[SEAL]

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Final Rulemaking

Title 12-Banks and Banking

CHAPTER II-FEDERAL RESERVE SYSTEM

SUBCHAPTER A-BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

[Reg. Z; Docket No. R-0294]

PART 226-TRUTH IN LENDING

Agricultural Credit and Closed-End Periodic Statements

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board is amending Regulation Z effective immediately to implement two provisions of the recently enacted Truth in Lending Simplification and Reform Act. The first provision being implemented is the exemption of all extensions of credit for agricultural purposes from disclosure

requirements. The second is the elimination of disclosures currently required for periodic statements provided in connection with closed-end credit transactions.

The implementation of these amendments does not mean, however,

that creditors may comply with any other provision of the simplification

act immediately. Creditors may follow the revised act only when the proposal

published by the Board in the Federal Register on May 5, 1980 (45 FR 29702),

is adopted in final form. Until that time, the current act and regulation must be followed.

EFFECTIVE DATE: May 21, 1980.

FOR FURTHER INFORMATION CONTACT: Ellen Mai and, Senior Attorney, Divisionof Consumer and Community Affairs, Board of Governors of the Federal Reserve

System, Washington, D.C. 20551 (202-452-3867).

SUPPLEMENTARY INFORMATION: The Truth in Lending Simplification and Reform Act (Title VI of Public Law 96-221, the Depository Institutions Deregulation

and Monetary Control Act of 1980) was signed into law by the President on

March 31, 1980. That act exempts agricultural credit from disclosure requirements. Currently, only agricultural credit extensions of more than

$25,000 are exempt. The act also eliminates the disclosure requirements for periodic statements in closed-end credit transactions. Although the simplification act does not become fully effective until April 1, 1982,§ 625 of the act states that "any creditor may comply with the amendments

made by [the act], in accordance with the regulations . . . prescribed by the Board, prior to such effective date." The purpose of the two year delayed effective date is to allow creditors sufficient time to changetheir practices and forms as necessary to achieve compliance with the amended

Truth in Lending Act and regulations. The Congress has decided that "because agricultural credit is essentially commercial in nature, the type of protections provided by the act are unnecessary and add needless complexity"(S. Rep. No. 96-73, 96th Cong., 1st Sess. 10 (1979)); it has also determined

that disclosures are no longer necessary in connection with periodic state ments for closed-end credit transactions. Therefore, the Board believes

there is no sound reason why those exemptions should not be implemented now.[Enc. Cir. No. 8833]

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<3

T h e B o a r d r e c o g n i z e s t ha t a n i m m e d i a t e m a n d a t o r y e x e m p t i o n o f

agricultu ral credit might create problems for some creditors. Ce rtain state

statutes may require disclosur es for agricul tural credit that are inconsistent

with those curre ntly manda ted by Regu lati on Z. Those inconsis tent state laws

have been p reempted by federal Truth in Lendin g law to the extent of their

inconsistenc y. Once agricult ural credit is exempted from federal Truth in

Lending law, those state laws will again apply. Unless creditors subject

to those laws are given an adequate o ppor tunit y to prepare to comply with

them, the creditors would have to either tem porar ily suspend all agricultural

lending that was prev iously exempt from the state laws or be in nonco mpli

ance wit h the state laws. On the other hand, cr edit ors not aff ecte d by

such state laws would be required to continue to comply with Regul ation Z

durin g any delay in implementin g the exemption.

Therefo re, the amendment to § 226.3 of Regula tion Z gives creditors

two options: (1) cease maki ng federal Truth in Lend ing disclosu res for

agric ultura l credit and compl y with any previo usly preempted state laws; or

(2) contin ue providi ng federal Truth in Lendi ng disclosur es and disre gard

any inconsistent state law. This election accom modate s all credito rs extend

ing agricul tural credit and comports with the intent of the simplifi cation

act to all ow credit ors two years to con for m their prac tices to the new act.

The el ection may be made by a creditor at any time and for any transa ction

b e fo r e A pr il 1, 1982.

The Board is elimin ating the disclo sure r equirem ents for periodic

statemen ts for closed -end credit trans actions im media tely since there appears

to be no state law complicat ion. This action implement s the congress ional

intent that closed -end periodic statements are not a nece ssary consumer

prot ect ion . It does not affect the p eri od i c stateme nt r e q u i re m en t s fo r

open-end credit.

The Board believes that both of these changes facili tate

impl ement ation of the simpli ficati on act and do not impose any additional

b u r d e n or liability. Th er ef o re , the Boar d finds that th e p u b l i c a t i o n of

the changes for public comment and a delay in their effective date are neither

nec ess ary nor require d under 5 U.S.C. §§ 553(b) and 553(d), and that immedi

ate imple ment ation is in the public interest.

In conside ratio n of the foregoing and pursuant to the authori ty

gran ted in § 105 the Tr uth in Lend ing Act (15 U.S.C. § 1604, as amended),

the Board amends Re gul ati on Z (12 CFR Part 226) as follows:

1. Sect ion 226.3(e) is amende d by del etin g the period at the end

of the paragrap h and inserting the follow ing phrase:

and, at the cre dito r's opti on, any credit tran s

action prima rily for agric ultural purposes in which

the amount financed does not exceed $25 ,000."

2. Sect ion 226.8 is amende d by del eti ng the catc hlin e and text of

p ar a g r a p h (n), and inser tin g the following in its place:

" [ R e s e r v e d . ]"

By ord er of the Board of Govern ors, May 14, 1980.

(signed) The odore E. Allis on

Theodor e E. Allison

Secr etary of the Board

[SEAL]

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Notice

Title 12-Banks and Banking

C H A P T E R I I - F E D E R A L R E S E R V E S Y S T E M

S U B C H A P T E R A - B O A R D OF G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M

[Reg. Z; Dock et No. R-0202]

P A R T 2 2 6 - T R U T H I N L E N D I N G

R i g h t o f R e s c i s s i o n

AGENCY: Boa rd of G o ve r n o r s of the F ed era l R es e r v e System.

ACTION: D e f e r ra l of e ff e c ti v e date.

SUMMARY: On Septemb er 19, 1979, the Board revoked an amendment to Regu la

tion Z (Truth in Lending) that created an altern ativ e in certain circum

stances to the three-da y canc ella tion right otherwise app licabl e to each

individual advance under open-end credit account s secured by consumers'

residences. The revocation, which also included the revo cati on of related

Board and Offici al Sta ff Interp retatio ns, was to become e ffective on Mar ch 31,

1980. On Febr uary 29, 1980, the Board delayed impl emen tati on of its revo ca

tion action until May 31, 1980. This action permits the open-en d resciss ion

amendme nt to continue in effect until the Board complete s the Regul ati on Z

r u l e m a k i n g p r o c e e d i n g c o m m e n c e d p u r s u a n t t o th e T r u t h i n L e n d i n g S i m p l i f i

cation and Reform Act. See the Federal Re gister of May 5, 1980 (43 FR 29702).

A p r o v i s i o n s i mil ar to the B oar d ' s a me n d me n t is c o n t ai n e d in the s i m p l i f i c a

tion act.

EFF ECT IVE DATE: May 21 , 1980.

F O R F U R T H E R I N F O R M A T I O N CO N T A C T: M a u r e e n P . E ng l i s h , S e c t i o n C h i e f, D i v i s i o n

of Consu mer and Comm unit y Affairs, Board of Gover nors of the Federal Res erve

System, Washington, D.C. 20551 (202-452-386 7).

SUPP LEMEN TARY INFORMATION: On Septe mber 19, 1979, the Board revoked

§ 226.9(g)(6) of Regu lati on Z (12 CFR Part 226), Board In terp retati on

§ 226.904, and Officia l S taff Int erpre tation FC-0159 (44 FR 55553,

Sept ember 27, 1979), which relate to the appl icat ion of the Truth in

Lending res ciss ion rules to advances under open-end credit plans secured

b y consumers' princi pa l r e sid en ces . In o rde r to pr ov id e ample time for

the order ly mod ifi cat ion or terminat ion of the limited number of such

open-end credit plans, the Board delayed the effecti ve date of its actio n

until March 31, 1980. Durin g this time period, however, credito rs were

instructed by Public In forma tion l etter 1354 not to offer new plans or to

expand exi sti ng plans (44 FR 61587). On Feb rua ry 29, 1980, the Board

further delayed until May 31, 1980, the effective date of its revocat ion

a c t i o n b e c a u s e c o n g r e s s i o n a l a c t i o n e x p r e s s l y a u t h o r i z i n g a r e s c i s s i o n

exem pti on similiar to the Board's amendment appeared imminent. That action

continued the prohi bitio n against offering new plans or expandi ng exis ting

plans (45 F R 14539, M ar c h 6, 1980).

T h e T r u t h i n L e n d i n g S i m p l i f i c a t i o n a n d R e f o r m A ct ( T i t l e VI o f

P u b l i c L a w 9 6 - 22 1 , t he D e p o s i t o r y I n s t i t u t i o n s D e r e g u l a t i o n a n d M o n e t a r y

Cont rol Act of 1980) was signed into law by the Pres ide nt on Ma rch 31, 1980.

Sect ion 125 of the act, like the Board's amendment, eases the resciss ion

require ments (for an experimen tal three-ye ar period) for open-end credit

plans i nv o lv i n g a dva nce s that are s ecu re d by consumers' pr inc ip al resi de nce s.

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The act re quires the Board to implement the new law by April 1,

1981, and per mits a cre dit or to com ply with the new law as soon as a regu

lation has been adopted. The Board rece ntly published for comment a com

p l e t e l y r e vi s e d v e r s i o n of R e g u l a t i o n Z (45 FR 29702, M a y 5, 1980), w hi ch

i m p l e m e n t s t he s t a t u t o r y a m e n d m e n t s , i n c l u d i n g a p r o v i s i o n r e g a r d i n g o p en -

e n d c r e d i t r e s c i s s i o n r e q u i r e m e n t s .

The Board 's present act ion permits the current open-en d credit

resc iss ion amen dment to contin ue in effect until the Board adopts a new

o p e n - e n d cr e d i t r e s c i s s i o n p r o v i s i o n . M o r e o v e r , t h e B o a r d c o n t i n u e s t h e

p r o h i b i t i o n aga i ns t o f fe r i n g n e w plans or e x pa n d i n g ex i s ti n g pla ns d u ri ng

the interi m period. In taking this action, the Board conside red the hard

ship that would res ult to both consumer s and creditors if mod ifi cat ion or

termi natio n of existing open-end credit plans was required by May 31, 1980,

despi te the express statut ory author izat ion for such plans.

The Board has deter mine d that complia nce with the provis ions of

5 U.S.C. § 553 relatin g to notice, public par tici pati on and deferred effec

tive date would be imprac ticab le and the delay would be contrary to the

public in terest, since d i s r u p t i v e m o d i f i c a t i o n or t e r mi n a t i o n of e x ist in g

open-e nd credit plans would occur during the compl etio n of the general

p ro c e du r e s re q u i r e d by § 553. Boar d a c t i o n r e g a r d i n g the e f f e c ti v e date of

the revoc atio n was not warranted until the recent enactment of the simplifi

cation act. Theref ore, pursuant to 5 U.S.C. §§ 553(b)(3)(B) and 553(d)(3),

the Board is extending the termin ation date of May 31, 1980, without notice

and prior opp ort uni ty for comment.

Pur sua nt to § 105 of the Tru th in Len din g Act (15 U.S.C. § 1604

(1970)), the Board delays the effec tive date of the revoc atio n of § 226.9(g)(6)

of Regula tion Z (12 CFR Part 226), Boa rd Inte rpre tati on § 226.904, and

O f f i c i a l S t a f f I n t e r p r e t a t i o n F C - 0 1 5 9 , a n d c o n t i n u e s t h e e f f e c t i v e n e s s o f

Public Inf orma tion letter 1354 during the delay until the Board adopts a

new open- end credit re scis sio n provision, pursu ant to the Trut h in Lendin g

S i m p l i f i c a t i o n a nd R e f o r m A c t, T i t l e V I o f P u b l i c L a w 9 6 - 2 2 1 .

By ord er of the Board of Gov ern ors , Ma y 14, 1980.

(signed) Theodor e E. Alli son

T h e o d o r e E . A l l i s o n

Secr etary of the Board

[SEAL]

nycirc_1980_08833.pdf

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