Unsimplification Continues: More changes to Regulation Z

The Federal Reserve Board has proposed revisions to Regulation Z to implement the changes made to the Truth in Lending Act last fall. The statutory changes are supposed to make things easier - and eventually they will. In the meantime, we have more change to deal with.

The statutory change provides an alternative to the historical example. The alternative disclosure would show the worst case scenario by disclosing the maximum interest rate and payment amount under the plan. The disclosure would be based on an initial rate that was in effect within one year of the disclosure and an assumed loan amount of $10,000. A statement that the rate could increase or decrease substantially must accompany this maximum rate and payment example.

Creditors could choose to continue to use the historical example or to use the new "worst case" payment disclosure. The disclosure should fully comply with whichever option is chosen.

This method has several important advantages over the historical example. First, it is easier to prepare. It is shorter and less complex than the historical example. (It is also easier for the customer to understand.) Second, updates would be easier to manage. The FRB is proposing to permit the disclosure to be based on a rate in effect during the year preceding the disclosure. Thus, this particular disclosure could be prepared once a year.

Finally, the disclosure would not reflect historical anomalies that can actually make the disclosure difficult to understand or actually misleading. The effect of rate caps combined with the lower rates of recent years has had the effect of distorting historical example disclosures.

As an additional reduction of burden, the FRB is proposing to permit this disclosure for all Adjustable Rate Mortgages, including refinancings and subordinate liens. The legislative language used the term "residential mortgage transaction" which would limit this approach to purchase money loans. The FRB proposes to use its discretion to interpret this broadly. This broader interpretation would vastly simplify the implementation of this new example. By making the new example available for all mortgage loans, lending staff will not have to provide different program disclosures to purchasers and to customers who are refinancing their existing mortgage. If you write a comment letter, be sure to support this interpretation and to complement the FRB for proposing it. Comments on this proposal are due by February 28, 1997. Refer to Docket No. R-0960.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 2, 2/97