[Code of Federal Regulations]

[Title 12, Volume 3]

[Revised as of January 1, 2006]

From the U.S. Government Printing Office via GPO Access

[CITE: 12CFR226.32]



[Page 311-313]

 

                       TITLE 12--BANKS AND BANKING

 

                   CHAPTER II--FEDERAL RESERVE SYSTEM

 

PART 226_TRUTH IN LENDING (REGULATION Z)--Table of Contents

 

     Subpart E_Special Rules for Certain Home Mortgage Transactions

 

Sec. 226.32  Requirements for certain closed-end home mortgages.



    (a) Coverage. (1) Except as provided in paragraph (a)(2) of this 

section, the requirements of this section apply to a consumer credit 

transaction that is secured by the consumer's principal dwelling, and in 

which either:

    (i) The annual percentage rate at consummation will exceed by more 

than 8 percentage points for first-lien loans, or by more than 10 

percentage points for subordinate-lien loans, the yield on Treasury 

securities having comparable periods of maturity to the loan maturity as 

of the fifteenth day of the month immediately preceding the month in 

which the application for the extension of credit is received by the 

creditor; or

    (ii) The total points and fees payable by the consumer at or before 

loan closing will exceed the greater of 8 percent of the total loan 

amount, or $400; the $400 figure shall be adjusted annually on January 1 

by the annual percentage change in the Consumer Price Index that was 

reported on the preceding June 1.

    (2) This section does not apply to the following:

    (i) A residential mortgage transaction.

    (ii) A reverse mortgage transaction subject to Sec. 226.33.

    (iii) An open-end credit plan subject to subpart B of this part.

    (b) Definitions. For purposes of this subpart, the following 

definitions apply:

    (1) For purposes of paragraph (a)(1)(ii) of this section, points and 

fees means:

    (i) All items required to be disclosed under Sec. 226.4(a) and 

226.4(b), except interest or the time-price differential;



[[Page 312]]



    (ii) All compensation paid to mortgage brokers;

    (iii) All items listed in Sec. 226.4(c)(7) (other than amounts held 

for future payment of taxes) unless the charge is reasonable, the 

creditor receives no direct or indirect compensation in connection with 

the charge, and the charge is not paid to an affiliate of the creditor; 

and

    (iv) 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, written in connection with the credit transaction.

    (2) Affiliate means any company that controls, is controlled by, or 

is under common control with another company, as set forth in the Bank 

Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).

    (c) Disclosures. In addition to other disclosures required by this 

part, in a mortgage subject to this section, the creditor shall disclose 

the following in conspicuous type size:

    (1) Notices. The following statement: ``You are not required to 

complete this agreement merely because you have received these 

disclosures or have signed a loan application. If you obtain this loan, 

the lender will have a mortgage on your home. You could lose your home, 

and any money you have put into it, if you do not meet your obligations 

under the loan.''

    (2) Annual percentage rate. The annual percentage rate.

    (3) Regular payment; balloon payment. The amount of the regular 

monthly (or other periodic) payment and the amount of any balloon 

payment. The regular payment disclosed under this paragraph shall be 

treated as accurate if it is based on an amount borrowed that is deemed 

accurate and is disclosed under paragraph (c)(5) of this section.

    (4) Variable-rate. For variable-rate transactions, a statement that 

the interest rate and monthly payment may increase, and the amount of 

the single maximum monthly payment, based on the maximum interest rate 

required to be disclosed under Sec. 226.30.

    (5) Amount borrowed. For a mortgage refinancing, the total amount 

the consumer will borrow, as reflected by the face amount of the note; 

and where the amount borrowed includes premiums or other charges for 

optional credit insurance or debt-cancellation coverage, that fact shall 

be stated, grouped together with the disclosure of the amount borrowed. 

The disclosure of the amount borrowed shall be treated as accurate if it 

is not more than $100 above or below the amount required to be 

disclosed.

    (d) Limitations. A mortgage transaction subject to this section 

shall not include the following terms:

    (1)(i) Balloon payment. For a loan with a term of less than five 

years, a payment schedule with regular periodic payments that when 

aggregated do not fully amortize the outstanding principal balance.

    (ii) Exception. The limitations in paragraph (d)(1)(i) of this 

section do not apply to loans with maturities of less than one year, if 

the purpose of the loan is a ``bridge'' loan connected with the 

acquisition or construction of a dwelling intended to become the 

consumer's principal dwelling.

    (2) Negative amortization. A payment schedule with regular periodic 

payments that cause the principal balance to increase.

    (3) Advance payments. A payment schedule that consolidates more than 

two periodic payments and pays them in advance from the proceeds.

    (4) Increased interest rate. An increase in the interest rate after 

default.

    (5) Rebates. A refund calculated by a method less favorable than the 

actuarial method (as defined by section 933(d) of the Housing and 

Community Development Act of 1992, 15 U.S.C. 1615(d)), for rebates of 

interest arising from a loan acceleration due to default.

    (6) Prepayment penalties. Except as allowed under paragraph (d)(7) 

of this section, a penalty for paying all or part of the principal 

before the date on which the principal is due. A prepayment penalty 

includes computing a refund of unearned interest by a method that is 

less favorable to the consumer



[[Page 313]]



than the actuarial method, as defined by section 933(d) of the Housing 

and Community Development Act of 1992.

    (7) Prepayment penalty exception. A mortgage transaction subject to 

this section may provide for a prepayment penalty otherwise permitted by 

law (including a refund calculated according to the rule of 78s) if:

    (i) The penalty can be exercised only for the first five years 

following consummation;

    (ii) The source of the prepayment funds is not a refinancing by the 

creditor or an affiliate of the creditor; and

    (iii) At consummation, the consumer's total monthly debts (including 

amounts owed under the mortgage) do not exceed 50 percent of the 

consumer's monthly gross income, as verified by the consumer's signed 

financial statement, a credit report, and payment records for employment 

income.

    (8) Due-on-demand clause. A demand feature that permits the creditor 

to terminate the loan in advance of the original maturity date and to 

demand repayment of the entire outstanding balance, except in the 

following circumstances:

    (i) There is fraud or material misrepresentation by the consumer in 

connection with the loan;

    (ii) The consumer fails to meet the repayment terms of the agreement 

for any outstanding balance; or

    (iii) There is any action or inaction by the consumer that adversely 

affects the creditor's security for the loan, or any right of the 

creditor in such security.



[Reg. Z, 60 FR 15472, Mar. 24, 1995, as amended at 60 FR 29969, June 7, 

1995; 66 FR 65617, Dec. 20, 2001]