Truth in Lending

FEDERAL RESERVE SYSTEM

[Docket No. R-0864]

Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice; request for comments.

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SUMMARY: The Board is soliciting public comment on whether consumers

would benefit from having greater flexibility in waiving the right of

rescission in transactions with new creditors to refinance or

consolidate home-secured loans (where no additional debt is incurred).

The Riegle Community Development and Regulatory Improvement Act of 1994

directs the Board to make recommendations to the Congress regarding

this narrow expansion of the waiver of the right of rescission, after

consulting with the Consumer Advisory Council to the Board, consumers,

representatives of consumers, lenders, and other interested parties.

Under present law, consumers may waive the right of rescission in

refinancings or consolidations with new creditors only when a bona fide

personal financial emergency exists (whether or not additional debt is

incurred). When a consumer refinances a loan with the same creditor and

no additional debt is incurred, the right of rescission does not apply;

if additional debt is undertaken, the right of rescission applies only

to the new money advanced.

DATES: Comments must be received on or before January 30, 1995.

ADDRESSES: Comments should refer to Docket No. R-0864, and may be

mailed to William W. Wiles, Secretary, Board of Governors of the

Federal Reserve System, 20th Street and Constitution Avenue, N.W.,

Washington, DC 20551. Comments also may be delivered to Room B-2222 of

the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the

guard station in the Eccles Building courtyard on 20th Street, N.W.

(between Constitution Avenue and C Street) at any time. Comments may be

inspected in Room MP-500 of the Martin Building between 9:00 a.m. and

5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's

rules regarding the availability of information.

FOR FURTHER INFORMATION CONTACT: Natalie E. Taylor, Staff Attorney,

Division of Consumer and Community Affairs, Board of Governors of the

Federal Reserve System, at (202) 452-3667 or 452-2412; for the hearing

impaired only, Dorothea Thompson, Telecommunications Device for the

Deaf (TDD), at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

The Truth In Lending Act (TILA), 15 U.S.C. 1601-1666j, and

Regulation Z, 12 CFR 226.15 and 226.23, provide that in a consumer

credit transaction in which the consumer's principal dwelling secures

an extension of credit, the consumer has three business days in which

to rescind the transaction after becoming obligated on the debt. This

right of rescission was created to allow consumers time to reexamine

their credit contracts and cost disclosures and to reconsider whether

they want to place an important asset--the home--at risk by offering it

as security for credit.

Not all credit transactions secured by a consumer's principal

dwelling are subject to the right of rescission. The TILA exempts home

purchase-money loans from the right of rescission. For closed-end

credit transactions, the right also does not apply when a consumer

refinances a home-secured loan with the same creditor ( the

``original'' creditor) and doesn't incur additional debt (no ``new

money'' is advanced). Refinancings by a creditor other than the

original creditor, on the other hand, are completely new transactions

and are subject to the right of rescission.

In a transaction subject to the right of rescission, a consumer

must be given notice of the right to rescind at the time the consumer

becomes legally obligated on the credit transaction. The notice must

disclose that the creditor has a security interest in the consumer's

home, that the consumer may rescind, how the consumer may rescind, the

effects of rescission, and the date the rescission period expires.

To rescind a transaction, a consumer must notify the creditor in

writing within three business days of the last of three events: (1)

Consummation of the loan ; (2) delivery of the TILA disclosures; or (3)

receipt of the required notice of the right to rescind. The creditor

may not disburse any monies or provide services or materials until the

three-day rescission period has lapsed and the creditor is reasonably

satisfied the consumer has not rescinded.

A consumer who rescinds the transaction must be returned to his or

her original position. Specifically, the creditor must refund to the

consumer all monies paid and terminate its security interest in the

consumer's home. Once the creditor has fulfilled its obligations, the

consumer must return any monies or property already delivered to the

consumer in the transaction.

Under present law, a consumer may waive the right of rescission and

receive immediate disbursement of the funds only when the consumer has

a bona fide personal financial emergency. While the consumer provides

the explanation for the bona fide personal financial emergency, in

practice the lender determines the sufficiency of the explanation. The

Board has not given much guidance as to what constitutes a bona fide

personal financial emergency, as that matter is between the consumer

and lender; however, a foreclosure is one example. Given the liability

for failure to comply with the present rescission rules, creditors are

generally reluctant to accept consumer waivers.

II. Riegle Community Development and Regulatory Improvement Act of 1994

Section 344 of the Riegle Community Development and Regulatory

Improvement Act of 1994, Pub. L. 103-325, 108 Stat. 2160, enacted into

law on September 23, 1994, directs the Board, in consultation with its

Consumer Advisory Council, consumers, consumer representatives,

lenders, and interested parties, to submit recommendations to the

Congress on whether consumers would benefit from the ability to more

freely waive the right the rescission in connection with loans with new

creditors to refinance or consolidate debt, where no additional debt is

incurred (no ``new money'' is advanced). The Board is publishing this

notice to solicit the comment of interested parties on this specific

issue.

Waiver of the right to rescind was a topic on the Consumer Advisory

Council agenda at its November 1994 meeting. The Council members

expressed many divergent views, and the Council made no specific

recommendation to the Board on the rescission issue.

Based on the Council discussion, the comments of interested

parties, and its own analysis, the Board will present recommendations

to the Congress in March 1995.

By order of the Board of Governors of the Federal Reserve

System, December 15, 1994.

William W. Wiles,

Secretary of the Board.

[FR Doc. 94-31300 Filed 12-20-94; 8:45 am]

BILLING CODE 6210-01-P