Final rule—amendment to regulation Z - Legal Developments

Federal Reserve Bulletin, June, 2002

The Board of Governors is amending 12 C.F.R. Part 226, its Regulation Z (Truth in Lending). The Board is publishing revisions to the official staff commentary to Regulation Z, which implements the Truth in Lending Act. The commentary applies and interprets the requirements of Regulation Z. The revisions clarify how creditors that place Truth in Lending Act disclosures on the same document with the credit contract may satisfy the requirement for providing the disclosures, in a form the consumer may keep, before consummation. In addition, the revisions provide guidance on disclosing costs for certain credit insurance policies and on the definition of "business day" for purposes of the right to rescind certain home-secured loans.

The Board is also publishing technical corrections to the commentary and regulation.

Effective April 9, 2002, 12 C.F.R. Part 226 is amended as follows:

Part 226--Truth in Lending (Regulation Z)

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

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

Section 226.17--[Amended]

2. Section 226.17, in paragraph (a)(1), footnote 38, is amended by removing "[section] 226.18(f)(4)" and adding "[section] 226.18(f)(1)(iv)" in its place.

3. In Supplement I to Part 226:

a. Under Section 226.2--Definitions and Rules of Construction, under 2(a)(6) Business Day, paragraph 2. is revised.

b. Under Section 226.4--Finance Charge, under 4(d) Insurance and Debt Cancellation Coverage, paragraph 12. is revised.

c. Under Section 226.6--Initial Disclosure Requirements, under Paragraph 6(b), paragraph 1.vi. is amended by removing "comment 4(a)-5" and adding "comment 4(a)-4" in its place.

d. Under Section 226.17--General Disclosure Requirements, under 17(b) Time of Disclosures, a new paragraph 3. is added.

e. Under Section 226.32--Requirements for Certain Closed-End Home Mortgages, under Paragraph 32(c)(3), paragraph 1. is revised; and under Paragraph 32(c)(4), paragraph 1. is amended by removing "[section] 226.19(b)(2)(x)" and adding "[section] 226.19(b)(2)(viii)(B)" in its place.

Supplement I to Part 226--Official Staff Interpretations

Subpart A--General

Section 226.2--Definition and Rules of Construction

2(a)(6) Business day.

2. Rescission rule. A more precise rule for what is a business day (all calendar days except Sundays and the federal legal holidays listed in 5 U.S.C. 6103(a)) applies when the right of rescission or mortgages subject to section 226.32 are involved. (See also comment 31 (c)(1)-1.) Four federal legal holidays are identified in 5 U.S.C. 6103(a) by a specific date: New Year's Day, January 1; Independence Day, July 4; Veterans Day, November 11; and Christmas Day, December 25. When one of these holidays (July 4, for example) falls on a Saturday, federal offices and other entities might observe the holiday on the preceding Friday (July 3). The observed holiday (in the example, July 3) is a business day for purposes of rescission or the delivery of disclosures for certain high-cost mortgages covered by Section 226.32.

Section 226.4--Finance Charge

4(d) Insurance and debt cancellation coverage.

12. Initial term; alternative, i. General. A creditor has the option of providing cost disclosures on the basis of an assumed initial term of one year of insurance or debt- cancellation coverage instead of a longer initial term (provided the premium or fee is clearly labeled as being for one year) if:

A. The initial term is indefinite or not clear, or

B. The consumer has agreed to pay a premium or fee that is assessed periodically but the consumer is under no obligation to continue the coverage, whether or not the consumer has made an initial payment.

ii. Open-end plans. For open-end plans, a creditor also has the option of providing unit-cost disclosure on the basis of a period that is less than one year if the consumer has agreed to pay a premium or fee that is assessed periodically, for example monthly, but the consumer is under no obligation to continue the coverage.

iii. Examples. To illustrate: A. A credit life insurance policy providing coverage for a 30-year mortgage loan has an initial term of 30 years, even though premiums are paid monthly and the consumer is not required to continue the coverage. Disclosures may be based on the initial term, but the creditor also has the option of making disclosures on the basis of coverage for an assumed initial term of one year.

Subpart C--Closed-End Credit

Section 226.17--General Disclosure Requirements

17(b) Time of disclosures.

3. Disclosures provided on credit contracts. Creditors must give the required disclosures to the consumer in writing, in a form that the consumer may keep, before consummation of the transaction. See section 226.17(a)(1) and (b). Sometimes the disclosures are placed on the same document with the credit contract. Creditors are not required to give the consumer two separate copies of the document before consummation, one for the consumer to keep and a second copy for the consumer to execute. The disclosure requirement is satisfied if the creditor gives a copy of the document containing the unexecuted credit contract and disclosures to the consumer to read and sign; and the consumer receives a copy to keep at the time the consumer becomes obligated. It is not sufficient for the creditor merely to show the consumer the document containing the disclosures before the consumer signs and becomes obligated. The consumer must be free to take possession of and review the document in its entirety before signing.