Truth in Lending, 43428-43613 [E9-18121]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 74, Number 164 (Wednesday, August 26, 2009)]
[Proposed Rules]
[Pages 43428-43613]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-18121]



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Part III





Federal Reserve System





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12 CFR Part 226



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Truth in Lending; Proposed Rule

Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 / 
Proposed Rules

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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1367]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board proposes to amend Regulation Z, which implements the 
Truth in Lending Act (TILA), and the Official Staff Commentary to the 
regulation, following a comprehensive review of TILA's rules for open-
end home-secured credit, or home-equity lines of credit (HELOCs).
    The Board proposes changes to the format, timing, and content 
requirements for the four main types of HELOC disclosures required by 
Regulation Z: disclosures at application; disclosures at account 
opening; periodic statements; and change-in-terms notices. The Board 
proposes to replace disclosures required at the time that a consumer 
applies for a HELOC with a one-page, Board-published summary of basic 
information and risks regarding HELOCs. The Board also proposes to move 
the timing of disclosures regarding a creditor's HELOC plan from the 
time of application to within three business days after application, 
and to require the disclosures to include significant transaction-
specific rates and terms.
    The Board also proposes to provide additional guidance on when a 
creditor may temporarily suspend advances on a HELOC or reduce the 
credit limit, and what a creditor's obligations are concerning 
reinstating such accounts. In addition, the proposal would limit the 
ability of a creditor to terminate a HELOC for payment-related reasons; 
a creditor could do so only if the consumer failed to make a required 
minimum payment more than 30 days after the due date for that payment. 
Changes to disclosure requirements related to suspension of HELOC 
advances, reduction of the credit limit, and account terminations are 
also proposed.

DATES: Comments must be received on or before December 24, 2009.

ADDRESSES: You may submit comments, identified by Docket No. R-1367, by 
any of the following methods:
     Agency Web Site: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Lorna M. Neill, Attorney; John Wood or 
Krista Ayoub, Counsel; or Jelena McWilliams, Attorney, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, at (202) 452-3667 or 452-2412; for users of 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.

SUPPLEMENTARY INFORMATION: The Board proposes changes to the format, 
timing, and content requirements for the four main types of home equity 
line of credit (HELOC) disclosures required by Regulation Z: (1) 
Disclosures at application; (2) disclosures at account opening; (3) 
periodic statements; and (4) change-in-terms notices. The Board 
proposes to replace disclosures required at the time that a consumer 
applies for a HELOC with a one-page, Board-published summary of basic 
information and risks regarding HELOCs. The Board also proposes to move 
the timing of disclosures regarding a creditor's HELOC plan from the 
time of application to within three business days after application, 
and to require the disclosures to include significant transaction-
specific rates and terms. At the time of account opening, the creditor 
would be required to provide a disclosure with formatting similar to 
that provided within three business days after application, but with 
certain changes such as additional information regarding fees. 
Formatting and other changes are proposed for the periodic statement, 
such as elimination of the requirement to disclose the effective annual 
percentage rate (APR) and a requirement to disclose the total of 
interest and fees for both the period and the year to date. HELOC 
creditors would be required to give consumers notice of a change in a 
HELOC term at least 45 days in advance of the effective date of the 
change.
    The Board also proposes to provide additional guidance on when a 
creditor may temporarily suspend advances on a HELOC or reduce the 
credit limit, and what a creditor's obligations are concerning 
reinstating such accounts. In addition, the proposal would limit the 
ability of a creditor to terminate a HELOC for payment-related reasons; 
a creditor could do so only if the consumer failed to make a required 
minimum payment more than 30 days after the due date for that payment. 
Changes to disclosure requirements related to suspension of HELOC 
advances, reduction of the credit limit, and account terminations are 
also proposed.

I. Background

A. TILA and Regulation Z

    Congress enacted TILA based on findings that economic stability 
would be enhanced and competition among consumer credit providers 
strengthened by the informed use of credit resulting from consumers' 
awareness of the cost of credit. The purposes of TILA are (1) to 
provide meaningful disclosure of credit terms to enable consumers to 
compare credit terms available in the marketplace more readily and 
avoid the uninformed use of credit; and (2) to protect consumers 
against inaccurate and unfair credit billing.
    TILA's disclosures differ depending on whether consumer credit is 
an open-end (revolving) plan or a closed-end (installment) loan. TILA 
also contains procedural and substantive protections for consumers. 
TILA is implemented by the Board's Regulation Z. An Official Staff 
Commentary interprets the requirements of Regulation Z. By statute, 
creditors that follow in good faith Board or official staff 
interpretations are insulated from civil liability, criminal penalties, 
or administrative sanction.

B. TILA and Regulation Z Provisions on Open-end Credit Secured by a 
Consumer's Dwelling

    In 1989, the Board revised Regulation Z to implement the Home 
Equity Loan Consumer Protection Act of 1988 (Home Equity Loan Act) 
(Pub. L. 100-709, enacted on Nov. 23, 1988). See 15 U.S.C. 1637a, 1647, 
implemented by 54 FR 24670 (June 9, 1989) (1989 HELOC Final

[[Page 43429]]

Rule). The 1989 revisions required creditors to disclose extensive 
information about HELOCs to consumers at the time of application and 
again when consumers open a HELOC plan. They also imposed substantive 
limitations on HELOC creditors--principally by prohibiting changing the 
interest rate and other terms except under very limited circumstances. 
Since 1989, the Board has revised the HELOC provisions in the 
regulation and staff commentary from time to time as necessary, 
although the disclosure requirements and substantive limitations have 
remained substantially the same. See, e.g., 56 FR 13751 (April 4, 
1991); 60 FR 15463 (March 24, 1995); 63 FR 16669 (April 6, 1998); 66 FR 
17329 (March 30, 2001); 72 FR 63462 (November 9, 2007).
    In January 2009, the Board published final rules regarding open-end 
(not home-secured) credit (74 FR 5244 (January 29, 2009)) (January 2009 
Regulation Z Rule), which were the result of the Board's comprehensive 
review of Regulation Z's open-end (not home-secured) credit rules. At 
that time, the Board indicated that it was also reviewing open-end 
home-secured credit rules. This proposal reflects the Board's review of 
all aspects of Regulation Z and accompanying Official Staff Commentary 
related to open-end home-secured credit, or HELOCs. The Board is not at 
this time, however, specifically addressing issues related to 
rescinding HELOCs, and requests comment in the proposal on any needed 
changes to Regulation Z provisions and commentary regarding reverse 
mortgages.

C. HELOC Market Trends

    Board and other research has tracked a number of changes in the 
HELOC market since 1989. One important trend is that HELOCs have become 
much more popular with consumers: in 1988, 5.6% of homeowners had 
HELOCs; \1\ in 1998, 10.6% of homeowners had HELOCs; and by 2007, the 
percentage of homeowners with HELOCs had jumped to 18.4%.\2\ A number 
of factors may have contributed to this trend, such as low interest 
rates compared with other forms of consumer credit, appreciation in 
home values, the deductibility of interest payments on mortgage debt, 
and changes in mortgage practices.\3\ The uses of HELOCs have remained 
relatively constant, with the highest uses in the areas of home 
improvement and debt consolidation.\4\ Beginning in the late 1990s, 
consumers increased their use of HELOCs for expenses such as vehicle 
purchases, education, and vacations.\5\ Many HELOC consumers today, as 
in the past, use their lines as an emergency source of funds.\6\
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    \1\ Glenn Canner, Charles Luckett, and Thomas Durken, ``Home 
Equity Lending,'' Federal Reserve Bulletin (May 1989).
    \2\ Brian Bucks, Arthur Kennickell, Traci Mach, Kevin Moore, 
``Changes in U.S. Family Finances from 2004 to 2007: Evidence from 
the Survey of Consumer Finances,'' Federal Reserve Bulletin (Feb. 
2009) and accompanying tables at https://www.federalreserve.gov/Pubs/OSS/oss2/2007/scf2007home.html.
    \3\ Id.
    \4\ Glenn Canner, Charles Luckett, and Thomas Durken, ``Recent 
Developments in Home Equity Lending,'' Federal Reserve Bulletin 
(April 1998); see also Brian Bucks, Arthur Kennickell, Traci Mach, 
Kevin Moore, ``Changes in U.S. Family Finances from 2004 to 2007: 
Evidence from the Survey of Consumer Finances,'' Federal Reserve 
Bulletin (Feb. 2009) and accompanying tables at https://www.federalreserve.gov/Pubs/OSS/oss2/2007/scf2007home.html.
    \5\ Id.
    \6\ Supra note 2.
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    As home prices rose in the past decade, more creditors entered the 
HELOC market and creditors became more willing to extend HELOCs to 
consumers with little equity in their homes.\7\ When the Board 
published the 1989 HELOC Final Rule, it was commonly expected that most 
HELOC borrowers would, at their maximum credit line limit, retain 
around 20 percent of their home equity. See comment 5b(f)(3)(vi)-6. By 
the mid-2000s, more creditors were willing to lend HELOCs at a combined 
loan-to-value ratio of 100 percent or more, and, despite home value 
appreciation, the overall percentage of equity remaining in homes was 
appreciably lower than in earlier years.\8\ The Board's Survey of 
Consumer Finances indicates that the average outstanding dollar amount 
of a HELOC grew from $24,000 in 1998 to $39,000 in 2007.\9\
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    \7\ Id.
    \8\ Id.
    \9\ Id.
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    The recent economic downturn, a central component of which has been 
declining property values, has dampened the availability of HELOCs and 
reversed some of the overall trends in the HELOC market. The Board 
believes, however, that a resurgence of these trends may occur once 
property values stabilize. The Board expects that factors such as the 
flexibility HELOC borrowers have to draw on a line as needed and the 
tax deductibility of interest on home-secured debt should continue to 
make HELOCs appealing to consumers over the long term.
    Finally, in response to the economic challenges of the last few 
years, creditors have relied more than in the past on provisions in 
Regulation Z that allow them to terminate HELOC plans, suspend advances 
on lines, and reduce the credit limit. As a result, many questions 
regarding the requirements and limitations of these provisions have 
been raised with the Board.

II. Summary of Major Proposed Changes

    The Board proposes content, format, and timing changes to the four 
main types of HELOC disclosures governed by Regulation Z: (1) 
Disclosures at application; (2) disclosures at account opening; (3) 
periodic statements; and (4) change-in-terms notices. The proposal also 
provides additional guidance and protections, as well as revised 
disclosure requirements, related to account terminations, line 
suspensions and credit limit reductions, and reinstatement of accounts.
    Disclosures at Application. Format, timing, and content changes are 
proposed to make the disclosures currently required at application more 
meaningful and easy for consumers to use. The proposed changes include:
     Eliminating the requirement to provide a multiple-page 
disclosure of generic rates and terms of the creditor's HELOC products, 
as well as the requirement to provide the Board-published brochure 
explaining HELOC products and risks entitled, ``What You Should Know 
about Home Equity Lines of Credit.'' (HELOC brochure)
     Requiring creditors to provide a new one-page Board 
publication summarizing basic information and risks regarding HELOCs 
entitled, ``Key Questions to Ask about Home Equity Lines of Credit.''
     Replacing the application disclosure of generic rates and 
terms with a transaction-specific disclosure that must be given within 
three days after application. This disclosure would:
     Provide information about rates and fees, payments, and 
risks in a tabular format.
     Highlight whether the consumer will be responsible for a 
balloon payment.
     Present payment examples based on both the current rate 
available and the maximum possible rate for the HELOC.
    Disclosures at Account Opening. The proposal would retain the 
existing requirement to provide consumers with transaction-specific 
information about rates, terms, payments, and risks at the time of 
account opening. To facilitate comparison between terms provided within 
three business days after application and terms available at account-
opening, the proposal would prescribe formatting for this information 
similar to that of the proposed

[[Page 43430]]

disclosure to be provided within three business days after application.
    Periodic Statements. To make disclosures on periodic statements 
more understandable, the proposal would revise the format and content 
of the periodic statement for HELOCs, largely conforming to the 
periodic statement provisions finalized in the January 2009 Regulation 
Z Rule for credit cards. The proposed changes include:
     Eliminating the disclosure of the effective APR.
     Grouping fees and interest charges separately, and 
requiring disclosure of separate totals of interest and fees for both 
the period and the year to date.
    Change-in-Terms Notices. The proposal would revise the format and 
content of the change-in-terms notice, largely conforming to the 
change-in-terms provisions finalized in the January 2009 Regulation Z 
Rule. To improve consumer protection, proposed changes include:
     Expanding the circumstances under which advance written 
notice of a rate change is required.
     Increasing advance notice of a change in a HELOC term from 
15 to 45 days in advance of the effective date of the change.
    Account Terminations. The proposal would prohibit creditors from 
terminating an account for payment-related reasons until the consumer 
has failed to make a required minimum periodic payment more than 30 
days after the due date for that payment. The Board is requesting 
comment on whether a delinquency threshold of more than 30 days or some 
other time period is appropriate.
    Suspensions and Credit Limit Reductions. The proposal contains a 
number of additional consumer protections related to temporary 
suspensions of advances and credit limit reductions. The proposed 
changes include:
     Establishing a new safe harbor for suspending or reducing 
a line of credit based on a ``significant'' decline in property value. 
For HELOCs with a combined loan-to-value ratio at origination of 90 
percent or higher, a five percent decline in the property value would 
be ``significant.''
     Providing additional guidance regarding the information on 
which a creditor may rely to take action based on a material change in 
the consumer's financial circumstances, such as the type of credit 
report information that would be appropriate to consider.
    Reinstatement of Accounts. The proposal contains additional 
requirements regarding reinstating accounts that have been temporarily 
suspended or reduced. The proposed changes include:
     Requiring additional information in notices of suspension 
or reduction about consumers' ongoing right to request reinstatement 
and creditors' obligation to investigate this request.
     Requiring creditors to complete an investigation of a 
request for reinstatement within 30 days of receiving a request for 
reinstatement and to give a notice of the investigation results to 
consumers whose lines will not be reinstated.

III. The Board's Review of Open-End Credit Rules

A. Advance Notices of Proposed Rulemakings

    December 2004 ANPR. The Board's current review of Regulation Z's 
open-end credit rules was initiated in December 2004 with an advance 
notice of proposed rulemaking.\10\ 69 FR 70925 (December 8, 2004). At 
that time, the Board announced its intent to conduct its review of 
Regulation Z in stages, focusing first on the rules for open-end 
(revolving) credit accounts that are not home-secured, chiefly general-
purpose credit cards and retailer credit card plans. The December 2004 
ANPR sought public comment on a variety of specific issues relating to 
three broad categories: the format of open-end credit disclosures, the 
content of those disclosures, and the substantive protections provided 
for open-end credit under the regulation. The December 2004 ANPR 
solicited comment on the scope of the Board's review, and also 
requested commenters to identify other issues that the Board should 
address in the review.
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    \10\ The review was initiated pursuant to requirements of 
section 303 of the Riegle Community Development and Regulatory 
Improvement Act of 1994, section 610(c) of the Regulatory 
Flexibility Act of 1980, and section 2222 of the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996. An announced notice of 
proposed rulemaking is published to obtain preliminary information 
prior to issuing a proposed rule or, in some cases, deciding whether 
to issue a proposed rule.
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    October 2005 ANPR. The Bankruptcy Abuse Prevention and Consumer 
Protection Act of 2005, Public Law 109-8, enacted on April 20, 2005 
(the Bankruptcy Act) primarily amended the federal bankruptcy code, but 
also contained several provisions amending TILA. The Bankruptcy Act's 
TILA amendments principally deal with open-end credit accounts and 
require new disclosures on periodic statements, on credit card 
applications and solicitations, and in advertisements.
    In October 2005, the Board published a second ANPR to solicit 
comment on implementing the Bankruptcy Act amendments (October 2005 
ANPR). 70 FR 60235, October 17, 2005. In the October 2005 ANPR, the 
Board stated its intent to implement the Bankruptcy Act amendments as 
part of the Board's ongoing review of Regulation Z's open-end credit 
rules.

B. Notices of Proposed Rulemakings

    June 2007 Proposal. The Board published proposed amendments to 
Regulation Z's rules for open-end plans that are not home-secured in 
June 2007. 72 FR 32948 (June 14, 2007). The goal of the proposed 
amendments was to improve the effectiveness of the disclosures that 
creditors provide to consumers at application and throughout the life 
of an open-end (not home-secured) account. In developing the proposal, 
the Board conducted consumer research, in addition to considering 
comments received on the two ANPRs. Specifically, the Board retained a 
research and consulting firm (ICF Macro) to assist the Board in using 
consumer testing to develop proposed model forms. The proposal would 
have made changes to format, timing, and content requirements for the 
five main types of open-end credit disclosures governed by Regulation 
Z: (1) Credit and charge card application and solicitation disclosures; 
(2) account-opening disclosures; (3) periodic statement disclosures; 
(4) change-in-terms notices; and (5) advertising provisions.
    May 2008 Proposal. In May 2008, the Board published revisions to 
several disclosures in the June 2007 Proposal (May 2008 Proposal). 73 
FR 28866 (May 19, 2008). In developing these revisions the Board 
conducted additional consumer testing in consultation with ICF Macro. 
In addition, the May 2008 Proposal contained proposed amendments to 
Regulation Z that complemented a proposal published by the Board, along 
with the Office of Thrift Supervision and the National Credit Union 
Administration, to adopt rules prohibiting specific unfair acts or 
practices regarding credit card accounts under their authority under 
the Federal Trade Commission Act. See 15 U.S.C. 57a(f)(1). 73 FR 28904 
(May 19, 2008).
    May 2009 Proposal. In May 2009, the Board issued proposals to 
clarify provisions of the January 2009 Final Rule (see below). 74 FR 
20784 (May 5, 2009). Along with other federal banking agencies, the 
Board also issued proposals to clarify provisions of the January 2009 
UDAP Final Rule (see below). 74 FR 20804 (May 5, 2009).

[[Page 43431]]

C. Final Rulemakings

    January 2009 Final Rule. In January 2009, the Board issued final 
rules for open-end credit that is not home-secured (i.e., the January 
2009 Regulation Z Rule). The goal of the amendments to Regulation Z was 
to improve the effectiveness of the disclosures that creditors provide 
to consumers at application and throughout the life of an open-end (not 
home-secured) account. The Board adopted changes to format, timing, and 
content requirements for the five main types of open-end credit 
disclosures governed by Regulation Z: (1) Credit and charge card 
application and solicitation disclosures; (2) account-opening 
disclosures; (3) periodic statement disclosures; (4) change-in-terms 
notices; and (5) advertising provisions. Certain additional protections 
for consumers were adopted as well.
    January 2009 UDAP Final Rule. In January 2009, the Board and other 
federal banking agencies jointly issued rules to prohibit institutions 
from engaging in certain acts or practices regarding consumer credit 
card accounts. 74 FR 5498 (January 29, 2009).

D. Consumer Testing

    A principal goal for the Regulation Z review is to produce revised 
and improved disclosures that consumers will be more likely to 
understand and use in their decisions, while at the same time not 
creating undue burdens for creditors. Currently, Regulation Z requires 
HELOC creditors to provide generic disclosures regarding various terms 
and features of the creditor's HELOC plans at application, along with a 
lengthy, Board-published brochure explaining HELOC products. The 
creditor does not have to provide a transaction-specific disclosure for 
HELOCs until the consumer opens the account. During the life of the 
plan, the creditor is required to provide periodic statements and 
change-in-terms notices as applicable.
    In 2007, the Board retained ICF Macro, a research and consulting 
firm that specializes in designing and testing documents to conduct 
consumer testing to help the Board's review of Regulation Z's 
disclosures. Beginning in the fall of 2008, ICF Macro worked closely 
with the Board to conduct several tests on HELOC disclosures in 
different cities throughout the United States. The HELOC testing 
consisted of five rounds of one-on-one cognitive interviews. The goals 
of these interviews were to learn more about what information consumers 
read when they receive HELOC disclosures, to research how easily 
consumers can find various pieces of information in these disclosures, 
and to test consumers' understanding of certain HELOC-related words and 
phrases.
    Some of the key methods and findings of the consumer testing are 
summarized below. ICF Macro also issued a report of the results of the 
testing for HELOCs, which is available on the Board's public Web site: 
https://www.federalreserve.gov.
    Development and testing of Regulation Z disclosures. The Board 
worked with ICF Macro to develop and test several types of disclosures, 
including:
     A Board publication to be provided at application, 
entitled ``Key Questions to Ask about Home Equity Lines of Credit'';
     A transaction-specific TILA disclosure to be provided 
within three business days of application, but no later than at 
account-opening; and
     A transaction-specific TILA disclosure to be provided at 
the time the consumer opens the account.
    The Board revised two additional HELOC disclosures: a periodic 
statement and a change-in-terms notice that must be provided after 
account opening as applicable. The Board intends to test these two 
disclosures during the comment period. In addition, the Board developed 
model clauses for proposed notices required in connection with 
terminating, suspending or reducing a HELOC, as well as reinstating 
suspended or reduced HELOCS, and may test these clauses during the 
comment period.
    Testing. The primary goal of the Board's consumer testing was to 
develop clear and conspicuous model HELOC disclosure forms that would 
enable borrowers easily to identify material terms of the plan and to 
compare such terms among various plans in order to make informed 
decisions about HELOCs. The Board also wanted to gain a better 
understanding of what information consumers need to receive early in 
the process when shopping for HELOCs, when such information should be 
provided, what form it should take, and how it can be integrated into 
the overall shopping process to facilitate informed consumer decision-
making regarding HELOCs.
    Beginning in the fall of 2008, five rounds of one-on-one cognitive 
interviews with a total of 50 participants were conducted in different 
cities throughout the United States. The consumer testing groups 
comprised participants representing a range of ethnicities, ages, 
educational levels, and levels of experience with home equity 
borrowing. Each round of testing involved testing a set of model 
disclosure forms, including currently required disclosures described 
above. Interview participants were asked to review model forms and 
provide their reactions, and were then asked a series of questions 
designed to test their understanding of the content. Data were 
collected on which elements and features of each form were most 
successful in providing information clearly and effectively. The 
findings from each round of interviews were incorporated in revisions 
to the model forms for the following round of testing.
    Cognitive interviews on existing disclosures. Participants in the 
first two rounds of testing were shown an application disclosure based 
on a sample disclosure conforming to the existing HELOC application 
disclosure samples in Appendix G of Regulation Z and currently used by 
a financial institution. This form provided required information in a 
mostly narrative format. The goals of these interviews were to learn 
more about what information consumers read when they receive current 
disclosures; to research how easily consumers can find various pieces 
of information in these disclosures; and to test consumers' 
understanding of certain HELOC-related words and phrases.
    Participants found this form difficult to read and understand, and 
their responses to follow-up questions showed that it was also 
difficult for them to identify information in the text. For example, 
several participants in the first two rounds of testing became confused 
when reviewing the application disclosure because they could not find 
their interest rate, and were surprised when told that the rate was not 
on the form. Other participants incorrectly assumed that one of the 
rates shown in a payment example on the application disclosure was 
being offered to them, when in fact that rate was used for illustrative 
purposes. When the same information was presented in a tabular format, 
participants commented that the information was easier to understand 
and had more success answering comprehension questions. As a result, 
after the second round of testing, the decision was made to use a 
tabular format for all model disclosure forms.
    1. Initial design of disclosures for testing. The results from the 
first two rounds of testing, and similar findings from testing of 
closed-end mortgage disclosures conducted by the Board at the same 
time, called into question the usefulness of the current generic 
application disclosures for consumers. As a result, three new types of 
disclosure were developed and tested:

[[Page 43432]]

    (1) A one-page disclosure developed by the Board entitled, ``Key 
Questions to Ask about Home Equity Lines of Credit'' (``Key Questions'' 
document) that summarized the most important information in the HELOC 
brochure in a shorter, question-and-answer format found effective with 
consumers;
    (2) A disclosure to be provided not later than three business days 
after application that would include information about the terms and 
features of the creditor's HELOC plans currently required at 
application, but also transaction-specific information; and
    (3) A similar form that would be provided when the consumer opens 
the account. The content of the new transaction-specific HELOC 
disclosure that would be provided three days after application would be 
similar to that of the current application disclosure, except that it 
would include information specific to the consumer based on initial 
underwriting--most notably, the specific APR and credit limit. The 
content of the account opening disclosure would be similar, except that 
it would provide additional information about fees.
    2. Additional cognitive interviews and revisions to disclosures. 
The ``Key Questions'' document tested very well in subsequent rounds; 
all participants indicated that they would find it useful, and most 
found it very clear and easy-to-read. As a result, the Board is 
proposing to require lenders to provide the ``Key Questions'' document 
to prospective borrowers instead of the HELOC brochure.
    Model forms for the transaction-specific HELOC disclosures to be 
provided three days after application were first tested in the third 
round and participants overwhelmingly indicated that they would prefer 
to receive a transaction-specific disclosure soon after application, 
even if it meant that they would not receive a disclosure of terms 
before they applied. The remaining two rounds of testing focused on 
developing, testing and refining the two transaction-specific 
disclosures (i.e., that would be provided within three business days of 
application and at account opening), rather than variations of the 
generic application disclosure currently required.
    Testing results. Specific findings from the consumer testing are 
discussed in detail throughout the SUPPLEMENTARY INFORMATION where 
relevant.\11\ This section highlights certain key findings.
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    \11\ The report by ICF Macro summarizing the findings from the 
consumer testing is available on the Board's Web site at https://www.federalreserve.gov.
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    Consumer testing showed that consumers seldom contact more than one 
loan originator when looking for a HELOC and generally go to their 
current mortgage provider, a prior lender, or a bank with which they 
have an existing banking relationship. Consumer testing indicated that 
consumers generally do not comprehend how HELOCs work, especially the 
draw and repayment periods. Consumer comprehension of the costs and 
effects of various terms significantly increased when consumers 
reviewed model forms developed by the Board and ICF Macro. Most 
participants agreed that they would prefer to receive specific 
information about the HELOC terms that would apply to them shortly 
after application rather a generic disclosure currently provided to all 
borrowers on or with the application. Consumer testing also showed that 
consumers prefer to receive a detailed breakdown of fees required to 
open the account early in the application process to help them 
understand what costs to anticipate in obtaining a HELOC. Thus, the 
Board is proposing to replace the generic program disclosure required 
at application with disclosures that include key terms specific to the 
consumer, such as the APR and credit limit, within three business days 
after application.
    Most consumers tested found the generic HELOC program disclosures 
and HELOC brochure required at application too dense and difficult to 
understand. When the same information was presented in plain language, 
segregated in a tabular format, participants found the information 
easier to understand and had more success answering comprehension 
questions. Thus, under the proposal, the revised TILA disclosure would 
explain more complicated terms in plain language and present them in a 
tabular format.
    A large number of participants erroneously concluded that the rate 
and payment information shown in the currently required historical 
example table showed their exact monthly payments when in fact it 
showed how the interest rate and monthly payments fluctuated over the 
preceding 15 years based on a $10,000 example. Most participants 
identified the interest rate fluctuation as the most important 
information in the historical payment example. For these reasons, the 
proposed disclosures include a statement providing the high and low 
interest rates for the preceding 15 years but do not include the table 
showing the interest rate and corresponding monthly payments for each 
year.
    Creditors typically incorporate disclosures required at the time a 
HELOC account is opened into the account agreement. Consumer testing 
indicated, however, that consumers commonly do not review their account 
agreements, which are often in small print and dense prose. When 
consumers were presented with a revised account-opening disclosure 
based on the tabular format of the revised early disclosure, their 
comprehension of complex terms significantly increased. Thus, the 
proposal would require creditors to provide a table summary of key 
terms applicable to the account at account opening, with similar 
formatting as the disclosure proposed to be provided within three days 
after application. Consumer testing showed that setting apart the most 
important terms in this way better ensures that consumers are apprised 
of those terms. Moreover, the similarity in presentation and structure 
of the early and account-opening disclosures enables consumers to focus 
on and compare key terms at both stages of the process.
    The Board did not test model periodic statement and change-in-terms 
notices for HELOCs, but intends to do so during the comment period for 
this proposal. The Board worked with ICF Macro, however, to develop 
model periodic statements and change-in-terms notices for HELOCs 
largely based on the results of consumer testing conducted for credit 
cards for the Board's January 2009 Regulation Z rule. Many consumers 
more easily noticed the number and amount of fees when the fees were 
itemized and grouped together with interest charges. Consumers also 
noticed fees and interest charges more readily when they were located 
near the disclosure of the transactions on the account. Thus, under the 
proposal, creditors would be required to group all charges together and 
describe them in a manner consistent with consumers' general 
understanding of costs (``interest charge'' or ``fee''), without regard 
to whether the charges would be considered ``finance charges,'' ``other 
charges'' or neither under the regulation.
    Regarding change-in-terms notices, consumer testing for the Board's 
January 2009 Regulation Z Rule on credit cards indicated that, much 
like the account-opening disclosures, consumers may not typically read 
such notices because they are often in small print and dense prose. To 
enhance the effectiveness of change-in-terms notices, the proposed 
rules would require the creditor to include a table summarizing any 
changed terms. Consumer testing indicates that consumers may not 
typically look at the notices if they are provided as separate inserts 
given with periodic statements.

[[Page 43433]]

Thus, under the proposal, a table summarizing the change would have to 
appear on the periodic statement, where consumers are more likely to 
notice the changes.
    Additional testing during and after comment period. During the 
comment period, the Board will work with ICF Macro to conduct 
additional testing of model disclosures. After receiving comments from 
the public on the proposal and the proposed disclosure forms, the Board 
will work with ICF Macro to further revise model disclosures based on 
comments received, and to conduct additional rounds of cognitive 
interviews to test the revised disclosures. After the cognitive 
interviews, quantitative testing will be conducted. The goal of the 
quantitative testing is to measure consumers' comprehension of the 
newly-developed disclosures relative to existing disclosures and 
formats.

E. Other Outreach and Research

    Throughout the review process leading to this proposal, the Board 
met or conducted conference calls with industry and consumer group 
representatives, as well as consulted with other federal banking 
agencies. The Board also reviewed HELOC disclosures currently used by 
creditors, internal Board research on home equity lending, and surveys 
on HELOC usage and trends.\12\
---------------------------------------------------------------------------

    \12\ Surveys reviewed include: Brian Bucks, Arthur Kennickell, 
Traci Mach, Kevin Moore, ``Changes in U.S. Family Finances from 2004 
to 2007: Evidence from the Survey of Consumer Finances,'' Federal 
Reserve Bulletin (Feb. 2009); Alan Greenspan and James Kennedy, 
``Sources and Uses of Equity Extracted from Homes,'' Finance and 
Economics Discussion Series, Divisions of Research & Statistics and 
Monetary Affairs, Federal Reserve Board (2007-20); Glenn Canner et 
al., ``Recent Developments in Home Equity Lending,'' Federal Reserve 
Bulletin (April 1998); Consumer Bankers Ass'n, ``Home Equity Loan 
Study'' (2005, 2007); and American Bankers Ass'n, ``ABA Home Equity 
Lending Survey Report'' (2005).
---------------------------------------------------------------------------

F. Reviewing Regulation Z in Stages

    Based on the comments received and its own analysis, the Board is 
proceeding with a review of Regulation Z in stages. In January 2009, 
the Board published final rules regarding open-end (not home-secured) 
credit (74 FR 5244 (January 29, 2009) (January 2009 Regulation Z Rule), 
which were the result of the Board's comprehensive review of Regulation 
Z's open-end (not home-secured) credit rules. At that time, the Board 
indicated that it was also reviewing open-end home-secured credit 
rules. This proposal reflects the Board's review of all aspects of 
Regulation Z and accompanying Official Staff Commentary related to 
open-end home-secured credit. The Board is not at this time, however, 
specifically addressing issues related to rescinding HELOCs, and 
requests comment in the proposal on any needed changes to Regulation Z 
provisions and commentary regarding reverse mortgages.

G. Implementation Period

    The Board contemplates providing creditors sufficient time to 
implement any revisions that may be adopted. The Board seeks comment on 
an appropriate implementation period.

IV. The Board's Rulemaking Authority

    TILA mandates that the Board prescribe regulations to carry out the 
purposes of the act. TILA also specifically authorizes the Board, among 
other things, to do the following:
     Issue regulations that contain such classifications, 
differentiations, or other provisions, or that provide for such 
adjustments and exceptions for any class of transactions, that in the 
Board's judgment are necessary or proper to effectuate the purposes of 
TILA, facilitate compliance with the act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in the act and 
publish its rationale at the time it proposes an exemption for comment. 
15 U.S.C. 1604(f).
     Require additional disclosures for HELOC plans. 15 U.S.C. 
1637(a)(8), 1637a(a)(14).
    In the course of developing the proposal, the Board has considered 
information gathered from industry and consumer representatives during 
outreach meetings and calls, consultations with other federal banking 
agencies, the Board's experience in implementing and enforcing 
Regulation Z, and the results obtained from testing various disclosure 
options in controlled consumer tests. For the reasons discussed in this 
proposal, the Board believes this proposal is appropriate pursuant to 
the authorities noted above.

V. Discussion of Major Proposed Revisions

    The goal of the proposed revisions is to improve the effectiveness 
of the Regulation Z disclosures that must be provided to consumers for 
open-end credit transactions secured by the consumer's dwelling, and to 
strengthen substantive protections for HELOC consumers. To shop for and 
understand the cost of credit, consumers must be able to identify and 
understand the key terms of a HELOC, which can be very complex. The 
proposed revisions to Regulation Z are intended to provide the most 
essential information to consumers when the information would be most 
useful to them, as clearly and conspicuously as possible. The proposed 
revisions are expected to improve consumers' ability to make informed 
credit decisions and enhance competition among HELOC originators. Many 
of the changes are based on consumer testing for this proposal and the 
Board's overall review of Regulation Z.
    In considering the proposed revisions, the Board sought to ensure 
that the proposal would not reduce access to credit, and sought to 
balance the potential benefits for consumers with the compliance 
burdens imposed on creditors. For example, the proposed revisions seek 
to provide greater certainty to creditors in identifying what costs 
must be disclosed for HELOCs, and how those costs must be disclosed. 
More effective disclosures may also reduce confusion and 
misunderstanding, which may ease creditors' costs relating to consumer 
complaints and inquiries.

A. Disclosures at Application

    Regulation Z requires creditors to provide to the consumer two 
types of disclosures at the time of application: a set of disclosures 
describing various features of a creditor's HELOC plans (the 
``application disclosures'') and a home-equity brochure published by 
the Board (the ``HELOC brochure''), which provides information about 
how HELOCs work. Neither contains transaction-specific information 
about the terms of the HELOC dependent on underwriting, such as the APR 
or credit limit.
Summary of Proposed Revisions
    The proposal would require a creditor to provide to consumers at 
application a new one-page document published by the Board entitled, 
``Key Questions to Ask about Home Equity Lines of Credit'' (the ``Key 
Questions'' document). The Board proposes eliminating the requirement 
for creditors to provide the HELOC brochure at application. In 
addition, the proposal would replace the application disclosures with 
transaction-specific HELOC disclosures (``early HELOC disclosures'') 
that must be given within three business days after application (but no 
later than account opening).

[[Page 43434]]

    ``Key Questions'' document. Currently, a creditor is required to 
provide to a consumer the HELOC brochure or a suitable substitute at 
the time an application for a HELOC is provided to the consumer. The 
HELOC brochure is around 20 pages long and provides general information 
about HELOCs and how they work, as well as a glossary of relevant terms 
and a description of various features that can apply to HELOCs.
    The proposal would eliminate the requirement for creditors to 
provide to consumers the HELOC brochure with applications. The Board's 
consumer testing on HELOC disclosures has shown that consumers are 
unlikely to read the HELOC brochure because of its length. Instead, the 
proposal would require a creditor to provide the new ``Key Questions'' 
document that would be published by the Board. This one-page document 
is intended to be a simple, straightforward and concise disclosure 
informing consumers about HELOC terms and risks that are important to 
consider when selecting a home-equity product, including potentially 
risky features such as variable rates and balloon payments. The ``Key 
Questions'' document was designed based on consumers' preference for a 
question-and-answer tabular format, and refined in several rounds of 
consumer testing.

B. Disclosures Within Three Days After Application

    Regulation Z currently requires the disclosures that must be 
provided on or with an application to contain information about the 
creditor's HELOC plans, including the length of the draw and repayment 
periods, how the minimum required payment is calculated, whether a 
balloon payment will be owed if a consumer only makes minimum required 
payments, payment examples, and what fees are charged by the creditor 
to open, use, or maintain the plan. These disclosures do not include 
information dependent on a specific borrower's creditworthiness or the 
value of the dwelling, such as a credit limit or the APRs offered to 
the consumer, because the application disclosures are provided before 
underwriting takes place.
Summary of Proposed Revisions
    The Board's consumer testing on HELOC disclosures has shown that, 
because the current application disclosures do not contain transaction-
specific information applicable to the consumer, these disclosures may 
not provide meaningful information to consumers to enable them to 
compare different HELOC products and to make informed decisions about 
whether to open an HELOC plan. Thus, the proposal would replace the 
application disclosures with transaction-specific ``early HELOC 
disclosures'' that must be given within three business days after 
application (but no later than account opening), and revise the format 
and content of the disclosures to make them more clear and conspicuous.
    Content of proposed early HELOC disclosures. The proposal would 
require creditors to include several additional disclosures in the 
early HELOC disclosures not currently required to be disclosed as part 
of the application disclosures, such as (1) the APRs and credit limit 
being offered; (2) a statement that the consumer has no obligation to 
accept the terms disclosed in the early HELOC disclosures; and (3) if 
the creditor has a provision for the consumer's signature, a statement 
that a signature by the consumer only confirms receipt of the 
disclosure statement. Based on consumer testing conducted by the Board 
on HELOC disclosures, the Board believes that these new disclosures 
would provide meaningful information to consumers in deciding whether 
to open a HELOC plan.
    The proposal would not require creditors to provide certain 
disclosures currently required to be disclosed as part of the 
application disclosures. For example, currently creditors must disclose 
a 15-year historical payment example table, a statement that the APR 
does not include costs other than interest, and a statement of the 
earliest time the maximum rate could be reached. Based on consumer 
testing, the Board believes that these disclosures do not provide 
meaningful information to consumers in deciding whether to open a HELOC 
plan. Other information that consumer testing demonstrated would be 
helpful to consumers, however, would be required to be disclosed.
    Moreover, the proposal would revise certain information currently 
required to be disclosed in the application disclosures. For example, 
the application disclosures currently must include several payment 
examples based on a $10,000 outstanding balance. Under the proposal, 
the Board would require in the early HELOC disclosures payment examples 
based on the full credit line. Also, to prevent ``information 
overload'' for consumers, the proposal would allow a creditor to 
disclose information about only two payment plan options. Based on 
consumer testing, the Board believes that the above revisions to the 
payment examples, and other revisions to the existing application 
disclosures, would effectively provide meaningful information to 
consumers in deciding whether to open a HELOC plan.
    Format requirements for the proposed early HELOC disclosures. The 
proposal would impose stricter format requirements for the proposed 
early HELOC disclosures than currently are required for the application 
disclosures. The application disclosures may be provided in a narrative 
form; under the proposal, the early HELOC disclosures must be provided 
in the form of a table with headings, content, and format developed 
through multiple rounds of consumer testing. In consumer testing, 
participants found information in a structured, tabular format easier 
to understand and had more success answering comprehension questions 
than when these participants reviewed application disclosures in a 
narrative form.

C. Disclosures at Account Opening

    Regulation Z requires creditors to disclose costs and terms before 
the first transaction is made for a HELOC. The disclosures must specify 
the circumstances under which a ``finance charge'' may be imposed and 
how it will be determined, including charges such as interest, 
transaction charges, minimum charges, each periodic rate of interest 
that may be applied to an outstanding balance (e.g., for purchases or 
cash advances) as well as the corresponding APR. In addition, creditors 
must disclose the amount of certain charges other than finance charges, 
such as a late-payment charge. Currently, few format requirements apply 
to account-opening disclosures; typically they are interspersed among 
other contractual terms in the creditor's account agreement.
Summary of Proposed Revisions
    The proposal would revise the account-opening disclosure 
requirements in two significant ways. First, the proposal would require 
a tabular summary of key terms. Second, the proposal would reform how 
and when cost disclosures must be made.
    Account-opening summary table. The proposal seeks to make the cost 
disclosures provided at account opening more conspicuous and easier to 
read. Accordingly, the proposal identifies specific costs and terms 
that creditors would be required to summarize in a table. This account 
opening table would be substantially similar to the early HELOC 
disclosure table that would be provided within three business days 
after application, with two major exceptions. First, the account-
opening

[[Page 43435]]

table would show only the payment plan chosen by the consumer, rather 
than a maximum of two plans required in the early HELOC disclosures. 
Second, the account-opening table would contain transaction fees and 
penalty fees not required to be disclosed in the early HELOC disclosure 
table. Despite these differences between the two tables, the Board 
believes that consumers could use the new table provided at account 
opening to compare the terms of their accounts to the early HELOC 
disclosure table. Consumers would no longer be required to search for 
the information in the credit agreement.
    How charges are disclosed. Under the current rules, a creditor must 
disclose any ``finance charge'' or ``other charge'' in the written 
account-opening disclosures. In addition, the regulation identifies 
fees that are not considered to be either ``finance charges'' or 
``other charges'' and, therefore, need not be included in the account-
opening disclosures. The distinctions among finance charges, other 
charges, and charges that do not fall into either category are not 
always clear. Examples of included or excluded charges are in the 
regulation and commentary, but these examples cannot provide definitive 
guidance in all cases. This uncertainty can pose legal risks for 
creditors that act in good faith to comply with the law. Creditors are 
subject to civil liability and administrative enforcement for under-
disclosing the finance charge or otherwise making erroneous 
disclosures, so the consequences of an error can be significant. 
Furthermore, over-disclosure of rates and finance charges is not 
permitted by Regulation Z for open-end credit.
    The fee disclosure rules also have been criticized as being 
outdated and impractical. These rules require creditors to provide fee 
disclosures at account opening, which may be months, and possibly 
years, before a particular disclosure is relevant to the consumer, such 
as when the consumer calls the creditor to request a service for which 
a fee is imposed. In addition, an account-related transaction may occur 
by telephone, when a written disclosure is not feasible.
    The proposed rule is intended to respond to these criticisms while 
still giving full effect to TILA's requirement to disclose credit 
charges before they are imposed. Accordingly, under the proposal, the 
revised rules would (1) specify precisely the charges that creditors 
must disclose in writing at account opening (e.g., interest, account-
opening fees, transaction fees, annual fees, and penalty fees such as 
for paying late), which would be listed in the summary table, and; (2) 
permit creditors to disclose certain optional charges orally or in 
writing before the consumer agrees to or becomes obligated to pay the 
charge. These proposed changes correspond to amendments adopted in the 
January 2009 Regulation Z Rule applicable to open-end (not home-
secured) credit, but would not change current substantive restrictions 
on permissible changes in HELOC terms.

D. Periodic Statements

    Currently, Regulation Z requires creditors to provide periodic 
statements reflecting the account activity for the billing cycle 
(typically, one month). In addition to identifying each transaction on 
the account, creditors must identify each ``finance charge'' using that 
term, and each ``other charge'' assessed against the account during the 
statement period. Creditors must disclose the periodic rate that 
applies to an outstanding balance and its corresponding APR. Creditors 
also must disclose an ``effective'' or ``historical'' APR for the 
billing cycle, which includes not just interest but also finance 
charges imposed in the form of fees.
Summary of Proposed Revisions
    The proposal contains a number of significant revisions to periodic 
statement disclosures. First, the Board recommends eliminating the 
requirement to disclose the effective APR for HELOCs. Second, creditors 
would no longer be required to characterize particular costs on the 
periodic statement as ``finance charges.'' Instead, costs would be 
described either as ``interest'' or as a ``fee.'' Third, interest 
charges and fees imposed as part of the plan must be grouped together 
and totals disclosed for the statement period and year to date. To 
facilitate compliance, the proposal would include sample forms 
illustrating the revisions.
    The effective APR. The ``effective'' APR disclosed on periodic 
statements reflects the cost of interest and certain other finance 
charges imposed during the statement period. For example, for a cash 
advance, the effective APR reflects both interest and any flat or 
proportional fee assessed for the advance. For the reasons discussed 
below, the Board recommends eliminating the requirement to disclose the 
effective APR.
    In general, creditors believe that the effective APR should be 
eliminated. They believe that consumers do not understand the effective 
APR, including how it differs from the corresponding (interest rate) 
APR, why it is often ``high,'' and which fees the effective APR 
reflects. Creditors say that they find it difficult, if not impossible, 
to explain the effective APR to consumers who call them with questions 
or concerns. They note that callers sometimes believe, erroneously, 
that the effective APR signals a prospective increase in their interest 
rate, and they may make uninformed decisions as a result. And, 
creditors say, even if the consumer does understand the effective APR, 
the disclosure does not provide any more information than a disclosure 
of the total dollar costs for the billing cycle. Moreover, creditors 
say the effective APR is arbitrary and inherently inaccurate, 
principally because it amortizes the cost for credit over only one 
month (billing cycle) even though the consumer may take several months 
(or longer) to repay the debt.
    Consumer groups acknowledge that the effective APR is not well 
understood, but argue that it nonetheless serves a useful purpose by 
showing the higher cost of some credit transactions. They contend the 
effective APR helps consumers decide each month whether to continue 
using the account, to shop for another credit product, or to use an 
alternative means of payment such as a debit card. Consumer groups also 
contend that reflecting costs, such as cash advance fees, in the 
effective APR creates a ``sticker shock'' and alerts consumers that the 
overall cost of a transaction for the cycle is high and exceeds the 
advertised corresponding APR. This shock, they say, may persuade some 
consumers not to use certain features on the account, such as cash 
advances, in the future. In their view, the utility of the effective 
APR would be maximized if it reflected all costs imposed during the 
cycle (rather than only some costs as is currently the case).
    As part of consumer testing conducted by the Board on credit cards 
in relation to the January 2009 Regulation Z Rule, consumer awareness 
and understanding of the effective APR was evaluated, as well as 
whether changes to the presentation of the disclosure could increase 
awareness and understanding. The overall results of this testing 
demonstrated that most consumers do not correctly understand the 
effective APR.
    Based on this consumer testing and other factors, the Board 
proposes to eliminate the requirement to disclose the effective APR. 
Under this proposal, creditors offering HELOCs would be required to 
disclose interest and fees in a manner that is more readily 
understandable and comparable across

[[Page 43436]]

institutions. The Board believes that this approach can more 
effectively further the goals of consumer protection and the informed 
use of credit for HELOCs.
    Fees and interest costs. Currently, creditors must identify on 
periodic statements any ``finance charges'' that have been added to the 
account during the billing cycle; creditors typically list these 
charges with other transactions, such as purchases or cash advances, 
chronologically on the statement. The finance charges must be itemized 
by type. Thus, interest charges might be described as ``finance charges 
due to periodic rates.'' Charges such as late-payment fees, which are 
not ``finance charges,'' are typically disclosed individually and 
interspersed among other transactions.
    The Board drew on consumer testing for open-end (not home-secured) 
credit, the results of which the Board believes apply equally to 
HELOCs, to recommend a number of changes to the required HELOC 
disclosures related to finance charges. As under rules adopted in the 
January 2009 Regulation Z Rule for open-end (not home-secured) credit, 
this proposal would require HELOC creditors to group all charges 
together and describe them in a manner consistent with consumers' 
general understanding of costs (``interest charge'' or ``fee''), 
without regard to whether the charges would be considered ``finance 
charges,'' ``other charges,'' or neither. If different periodic rates 
apply to different types of transactions, creditors would be required 
to itemize interest charges for the statement period by type of 
transaction (for example, interest on cash advances) or group of 
transactions subject to different periodic rates.
    In addition, the proposal would require creditors to disclose the 
(1) total fees and (2) total interest imposed for the cycle, as well as 
year-to-date totals for interest charges and fees. The year-to-date 
figures are intended to help consumers understand annualized costs and 
the overall cost of their HELOC better than does the effective APR. The 
Board intends to conduct consumer testing of periodic statement notices 
for HELOCs during the comment period for this proposal.

E. Change-in-Terms Notices

    Currently, Regulation Z requires creditors to send, in most cases, 
notices 15 days before the effective date of certain changes in the 
account terms. Advance notice is not required in all cases; for 
example, if an interest rate increases due to a consumer's default or 
delinquency, notice has been required, but not in advance of the rate 
increase. In addition, no notice (either advance or contemporaneous) 
has been required if the specific change is set forth in the account 
agreement.
Summary of Proposed Revisions
    The Board proposes to revise the change-in-terms rules for HELOCs 
to parallel in most respects the revisions adopted for open-end (not 
home-secured) credit in the January 2009 Regulation Z Rule, including 
the content, timing, and format of such notices. The Proposed revisions 
to change-in-terms notice requirements for HELOCs are intended to 
improve consumers' awareness about changes to their account terms or 
increased rates due to delinquency, default, or other reason disclosed 
in the agreement, and to enhance consumers' ability to make alternative 
financial choices if necessary.
    There are three major components of the proposal regarding change-
in-terms notices. First, the proposal would expand the circumstances in 
which consumers receive advance notice of changed terms, including 
increased rates. Second, the proposal would provide consumers with 
earlier notice--45 days in advance of the effective date of the change 
rather than 15 days. Third, the proposal would introduce fo