ts described in § 226.20(b) is an assumpthat calls for new disclosures; the disures must be given whether or not the mption is accompanied by changes in terms of the obligation. (See comment (24)-5 for a discussion of assumptions t are not considered residential mortgage sactions.) Existing residential mortgage transac2. A transaction may be a residential rtgage transaction as to one consumer not to the other consumer. In that case, creditor must look to the assuming conher in determining whether a residential rtgage transaction exists. To illustrate: The original consumer obtained a mortge to purchase a home for vacation purses. The loan was not a residential mortge transaction as to that consumer. The ortgage is assumed by a consumer who Il use the home as a principal dwelling. As that consumer, the loan is a residential ortgage transaction. For purposes of 226.20(b), the assumed loan is an “existing sidential mortgage transaction" requiring sclosures, if the other criteria for an asmption are met. 3. Express agreement. "Expressly agrees" eans that the creditor's agreement must elate specifically to the new debtor and ust unequivocally accept that debtor as a rimary obligor. The following events are ot construed to be express agreements beween the creditor and the subsequent con 4. Retention of original consumer. The reEention of the original consumer as an obligor in some capacity does not prevent the change from being an assumption, provided the new consumer becomes a primary obligor. But the mere addition of a guarantor to an obligation for which the original consumer remains primarily liable does not give rise to an assumption. However, if neither party is designated as the primary obligor but the creditor accepts payment from the subsequent consumer, an assumption exists for purposes of § 226.20(b). 5. Status of parties. Section 226.20(b) applies only if the previous debtor was a consumer and the obligation is assumed by another consumer. It does not apply, for example, when an individual takes over the obligation of a corporation. 6. Disclosures. For transactions that are assumptions within this provision, the creditor must make disclosures based on the "remaining obligation." For example: • The amount financed is the remaining principal balance plus any arrearages or other accrued charges from the original transaction. • If the finance charge is computed from time to time by application of a percentage rate to an unpaid balance, in determining the amount of the finance charge and the annual percentage rate to be disclosed, the creditor should disregard any prepaid finance charges paid by the original obligor, but must include in the finance charge any prepaid finance charge imposed in connection with the assumption. If the creditor requires the assuming consumer to pay any charges as a condition of the assumption, those sums are prepaid finance charges as to that consumer, unless exempt from the finance charge under § 226.4. If a transaction involves add-on or discount finance charges, the creditor may make abbreviated disclosures, as outlined in § 226.20(b)(1) through (5). 7. Abbreviated disclosures. The abbreviated disclosures permitted for assumptions of transactions involving add-on or discount finance charges must be made clearly and conspicuously in writing in a form that the consumer may keep. However, the creditor need not comply with the segregation requirement of § 226.17(a)(1). The terms "annual percentage rate" and "total of payments," when disclosed according to § 226.20(b) (4) and (5), are not subject to the description requirements of § 226.18 (e) and (h). The term "annual percentage rate" disclosed under § 226.20(b)(4) need not be more conspicuous than other disclosures. Statute: None. References 226.8(j) Other sections: Section 226.2. Previous regulation: Section through (1), and Interpretation Sections 226.807, 226.811, 226.814, and 226.817. 1981 changes: While the previous regulation treated virtually any change in terms as a refinancing requiring new disclosures, this regulation limits refinancings to transactions in which the entire original obligation is extinguished and replaced by a new one. Redisclosure is no longer required for deferrals or extensions. The assumption provision retains the substance of §226.8(k) and Interpretation § 226.807 of the previous regulation, but limits its scope to residential mortgage transactions. Section 226.21-Treatment of Credit 1. Credit balance. A credit balance arises whenever the creditor receives or holds funds in an account in excess of the total • A substitution of agreements that meets the refinancing definition will require new disclosures, even if the substitution does not substantially alter the prior credit terms. 2. Exceptions. A transaction is subject to § 226.20(a) only if it meets the general definition of a refinancing. Section 226.20(a) (1) through (5) lists 5 events that are not treated as refinancings, even if they are accomplished by cancellation of the old obligation and substitution of a new one. 3. Variable rate. If a variable-rate feature was properly disclosed under the regulation, a rate change in accord with those disclosures is not a refinancing. For example, a renegotiable rate mortgage that was disclosed as a variable-rate transaction is not subject to new disclosure requirements when the variable-rate feature is invoked. However, even if it is not accomplished by the cancellation of the old obligation and substitution of a new one, a new transaction subject to new disclosures results if the creditor either: • Increases the rate based on a variable-rate feature that was not previously disclosed, or • Adds a variable-rate feature to the obligation. 4. Unearned finance charge. In a transaction involving precomputed finance charges, the creditor must include in the finance charge on the refinanced obligation any unearned portion of the original finance charge that is not rebated to the consumer or credited against the underlying obligation. For example, in a transaction with an add-on finance charge, a creditor advances new money to a consumer in a fashion that extinguishes the original obligation and replaces it with a new one. The creditor neither refunds the unearned finance charge on the original obligation to the consumer nor credits it to the remaining balance on the old obligation. Under these circumstances, the unearned finance charge must be included in the finance charge on the new obligation and reflected in the annual percentage rate disclosed on refinancing. Accrued but unpaid finance charges are included in the amount financed in the new obligation. 5. Coverage. Section 226.20(a) applies only to refinancings undertaken by the original creditor or a holder or servicer of the original obligation. A "refinancing" by any other person is a new transaction under the regulation, not a refinancing under this section. Paragraph 20(a)(1). 1. Renewal. This exception applies both to obligations with a single payment of principal and interest and to obligations with periodic payments of interest and a final payment of principal. In determining whether a new obligation replacing an old one is a renewal of the original terms or a 1. Annual percentage rate reduction. A reduction in the annual percentage rate with a corresponding change in the payment schedule is not a refinancing. A corresponding change in the payment schedule could include, for example, a change in the maturity or a reduction in the payment amount or the number of payments. If the annual percentage rate is subsequently increased (even though it remains below its original level) and the increase is effected in such a way that the old obligation is satisfied and replaced, new disclosures must then be made. Paragraph 20(a)(3). 1. Court agreements. This exception includes, for example, agreements such as reaffirmations of debts discharged in bankruptcy, settlement agreements, and postjudgment agreements. (See the commentary to § 226.2(a)(14) for a discussion of court-approved agreements that are not considered "credit.") Paragraph 20(a)(4). 1. Workout agreements. A workout agreement is not a refinancing unless the annual percentage rate is increased or additional credit is advanced beyond amounts already accrued plus insurance premiums. Paragraph 20(a)(5). 1. Insurance renewal. The renewal of optional insurance added to an existing credit transaction is not a refinancing, assuming that appropriate Truth in Lending disclosures were provided for the initial purchase of the insurance. 20(b) Assumptions. 1. General definition. An assumption as defined in § 226.20(b) is a new transaction and new disclosures must be made to the subsequent consumer. An assumption under the regulation requires the following three elements: • A residential mortgage transaction. • An express acceptance of the subsequent consumer by the creditor. • A written agreement. The assumption of a nonexempt consumer credit obligation requires no disclosures unless all three elements are present. For example, an automobile dealer need not provide Truth in Lending disclosures to a customer who assumes an existing obligation secured by an automobile. However, a residential mortgage transaction with the ele ts described in § 226.20(b) is an assumpthat calls for new disclosures; the disures must be given whether or not the mption is accompanied by changes in terms of the obligation. (See comment (24)-5 for a discussion of assumptions t are not considered residential mortgage sactions.) Existing residential mortgage transac2. A transaction may be a residential rtgage transaction as to one consumer not to the other consumer. In that case, creditor must look to the assuming conner in determining whether a residential rtgage transaction exists. To illustrate: The original consumer obtained a mortge to purchase a home for vacation purses. The loan was not a residential mortge transaction as to that consumer. The ortgage is assumed by a consumer who ll use the home as a principal dwelling. As that consumer, the loan is a residential ortgage transaction. For purposes of 226.20(b), the assumed loan is an "existing sidential mortgage transaction" requiring sclosures, if the other criteria for an asamption are met. 3. Express agreement. "Expressly agrees" eans that the creditor's agreement must elate specifically to the new debtor and ust unequivocally accept that debtor as a rimary obligor. The following events are ot construed to be express agreements beween the creditor and the subsequent conumer: 4. Retention of original consumer. The retention of the original consumer as an obligor in some capacity does not prevent the change from being an assumption, provided the new consumer becomes a primary obligor. But the mere addition of a guarantor to an obligation for which the original consumer remains primarily liable does not give rise to an assumption. However, if neither party is designated as the primary obligor but the creditor accepts payment from the subsequent consumer, an assumption exists for purposes of § 226.20(b). 5. Status of parties. Section 226.20(b) applies only if the previous debtor was a consumer and the obligation is assumed by another consumer. It does not apply, for example, when an individual takes over the obligation of a corporation. 6. Disclosures. For transactions that are assumptions within this provision, the creditor must make disclosures based on the "remaining obligation." For example: • The amount financed is the remaining principal balance plus any arrearages or other accrued charges from the original transaction. • If the finance charge is computed from time to time by application of a percentage rate to an unpaid balance, in determining the amount of the finance charge and the annual percentage rate to be disclosed, the creditor should disregard any prepaid finance charges paid by the original obligor, but must include in the finance charge any prepaid finance charge imposed in connection with the assumption. If the creditor requires the assuming consumer to pay any charges as a condition of the assumption, those sums are prepaid finance charges as to that consumer, unless exempt from the finance charge under § 226.4. If a transaction involves add-on or discount finance charges, the creditor may make abbreviated disclosures, as outlined in § 226.20(b)(1) through (5). 7. Abbreviated disclosures. The abbreviated disclosures permitted for assumptions of transactions involving add-on or discount finance charges must be made clearly and conspicuously in writing in a form that the consumer may keep. However, the creditor need not comply with the segregation requirement of § 226.17(a)(1). The terms "annual percentage rate" and "total of payments," when disclosed according to § 226.20(b) (4) and (5), are not subject to the description requirements of § 226.18 (e) and (h). The term "annual percentage rate" disclosed under § 226.20(b)(4) need not be more conspicuous than other disclosures. Statute: None. References 226.8(j) Other sections: Section 226.2. Previous regulation: Section through (1), and Interpretation Sections 226.807, 226.811, 226.814, and 226.817. 1981 changes: While the previous regulation treated virtually any change in terms as a refinancing requiring new disclosures, this regulation limits refinancings to transactions in which the entire original obligation is extinguished and replaced by a new one. Redisclosure is no longer required for deferrals or extensions. The assumption provision retains the substance of § 226.8(k) and Interpretation § 226.807 of the previous regulation, but limits its scope to residential mortgage transactions. Section 226.21-Treatment of Credit 1. Credit balance. A credit balance arises whenever the creditor receives or holds funds in an account in excess of the total balance due from the consumer on that account. A balance might result, for example, from the debtor's paying off a loan by transmitting funds in excess of the total balance owed on the account, or from the early payoff of a loan entitling the consumer to a rebate of insurance premiums and finance charges. However, §226.21 does not determine whether the creditor in fact owes or holds sums for the consumer. For example, if a creditor has no obligation to rebate any portion of precomputed finance charges on prepayment, the consumer's early payoff Iwould not create a credit balance with respect to those charges. Similarly, nothing in this provision interferes with any rights the creditor may have under the contract or under state law with respect to set-off, cross collateralization, or similar provisions. 2. Total balance due. The phrase "total balance due" refers to the total outstanding balance. Thus, this provision does not apply where the consumer has simply paid an amount in excess of the payment due for a given period. 3. Timing of refund. The creditor may also fulfill its obligation under this section by: • Refunding any credit balance to the consumer immediately. • Refunding any credit balance prior to a written request from the consumer. • Making a good faith effort to refund any credit balance before 6 months have passed. If that attempt is unsuccessful, the creditor need not try again to refund the credit balance at the end of the 6-month period. Paragraph 21(b). 1. Written requests-standing orders. The creditor is not required to honor standing orders requesting refunds of any credit balance that may be created on the consumer's account. Paragraph 21(c). 1. Good faith effort to refund. The creditor must take positive steps to return any credit balance that has remained in the account for over 6 months. This includes, if necessary, attempts to trace the consumer through the consumer's last known address or telephone number, or both. 2. Good faith effort unsuccessful. Section 226.21 imposes no further duties on the creditor if a good faith effort to return the balance is unsuccessful. The ultimate disposition of the credit balance (or any credit balance of $1 or less) is to be determined under other applicable law. References Statute: Section 165. Other sections: None. Previous regulation: None. 1981 changes: This section implements section 165 of the Act, which was expanded by the 1980 statutory amendments to apply to closed-end as well as open-end credit. Section 226.22-Determination of the 22(a) Accuracy of the annual percentage rate. Paragraph 22(a)(1). 1. Calculation method. The regulation recognizes both the actuarial method and the United States Rule Method (U.S. Rule) as measures of an exact annual percentage rate. Both methods yield the same annual percentage rate when payment intervals are equal. They differ in their treatment of unpaid accrued interest. 2. Actuarial method. When no payment is made, or when the payment is insufficient to pay the accumulated finance charge, the actuarial method requires that the unpaid finance charge be added to the amount financed and thereby capitalized. Interest is computed on interest since in succeeding periods the interest rate is applied to the unpaid balance including the unpaid finance charge. Appendix J provides instructions and examples for calculating the annual percentage rate using the actuarial method. 3. U.S. Rule. The U.S. Rule produces no compounding of interest in that any unpaid accrued interest is accumulated separately and is not added to principal. In addition, under the U.S. Rule, no interest calculation is made until a payment is received. 4. Basis for calculations. When a transaction involves "step rates" or "split rates"that is, different rates applied at different times or to different portions of the principal balance-a single composite annual percentage rate must be calculated and disclosed for the entire transaction. Assume, for example, a step-rate transaction in which a $10,000 loan is repayable in 5 years at 10 percent interest for the first 2 years, 12 percent for years 3 and 4, and 14 percent for year 5. The monthly payments are $210.71 during the first 2 years of the term, $220.25 for years and 4, and $222.59 for year 5. The composite annual percentage rate, using a calculator with a "discounted cash flow analysis" or "internal rate of return" function, is 10.75 percent. dered accurate if it varies in either din by not more than 4 of 1 percentage from the actual annual percentage This tolerance is intended for more ex transactions that do not call for a è advance and a regular series of equal ents at equal intervals. The 1⁄4 of 1 perge point tolerance may be used, for exe, in a construction loan where ades are made as construction progresses, a transaction where payments vary to ct the consumer's seasonal income. It also be used in transactions with grad payment schedules where the concommits the consumer to several series ayments in different amounts. It does apply, however, to loans with variable features where the initial disclosures based on a regular amortization schedover the life of the loan, even though ments may later change because of the able rate feature. (b) Computation tools. aragraph 22(b)(1). Board tables. Volumes I and II of the rd's Annual Percentage Rate Tables pro= a means of calculating annual percentrates for regular and irregular transacns, respectively. An annual percentage e computed in accordance with the inactions in the tables is deemed to comply h the regulation, even where use of the les produces a rate that falls outside the eral standard of accuracy. To illustrate: Volume I may be used for single advance nsactions with completely regular payent schedules or with payment schedules at are regular except for an odd first payent, odd first period or odd final payment. hen used for a transaction with a large al balloon payment, Volume I may oduce a rate that is considerably higher an the exact rate produced using a comter program based directly on Appendix However, the Volume I rate-produced sing certain adjustments in that volumeconsidered to be in compliance. Paragraph 22(b)(2). 1. Other calculation tools. Creditors need ot use the Board tables in calculating the nnual precentage rates. Any computation bols may be used, so long as they produce nnual percentage rates within % or 4 of 1 ercentage point, as applicable, of the preise actuarial or U.S. Rule annual percent-ge rate. 22(c) Single add-on rate transactions. 1. General rule. Creditors applying a single add-on rate to all transactions up to 50 months in length may disclose the same annual percentage rate for all those transactions, although the actual annual percentage rate varies according to the length of the transaction. Creditors utilizing this provision must show the highest of those rates. For example: 1. General rule. Creditors applying a fixed dollar finance charge to all balances within a specified range of balances may understate the annual percentage rate by up to 8 percent of that rate, by disclosing for all those balances the annual percentage rate computed on the median balance within that range. For example: • If a finance charge of $9 applies to all balances between $91 and $100, an annual percentage rate of 10 percent (the rate on the median balance) may be disclosed as the annual percentage rate for all balances, even though a $9 finance charge applied to the lowest balance ($91) would actually produce an annual percentage rate of 10.7 percent. Section 226.23-Right of Rescission 1. Transactions not covered. Credit extensions that are not subject to the regulation are not covered by § 226.23 even if a customer's principal dwelling is the collateral securing the credit. For example, the right of rescission does not apply to a business purpose loan, even though the loan is secured by the customer's principal dwelling. 23(a) Consumer's right to rescind. Paragraph 23(a)(1). 1. Security interest arising from transaction. In order for the right of rescission to apply, the security interest must be retained as part of the credit transaction. For example: • A security interest that is acquired by a contractor who is also extending the credit in the transaction. • A mechanic's or materialman's lien that is retained by a subcontractor or supplier of the contractor-creditor, even when the |