The Federal Reserve Board staff is drafting a proposal to change truth-in-lending regulations to require that sellers' points be included by lenders calculating finance charges and annual percentage rates on mortgage loans.
The Board recently agreed to publish the staff proposal for comment but asked that several details in it be changed before comments are sought.
The growing use of a variety of below-market financing techniques has raised a question about whether a significant loophole in the present regulations exists since points do not have to be included in the finance charge and rate calculation, even if the seller's points are added to the sales price of a house.
"In the sale of a house, for example, the seller often makes a payment to a lender to 'buy down' the purchaser's interest rate for all or a portion of the term of a loan and may add some portion or all of that amount to the purchase price," the staff of the Fed's division of consumer and community affairs told the board.
"The effect of the seller's points rule in certain of these transactions is to increase the purchase price of the house as an indirect way of paying for the credit," the staff continued. "To the extent the increase is not treated as a finance charge and reflected in the annual percentage rate, a cost of credit is removed from the credit disclosures, making the annual percentage rate less useful as a uniform measure of credit cost."
Returning to an earlier form of the regulation--Regulation Z, which required inclusion of sellers' points--"would not prevent the new types of financing from being used, but would require more accurate disclosures to be given," the staff said.
Several members of the board, including Chairman Paul A. Volcker, questioned the staff closely about whether it would be possible to determine accurately the extent to which the availability of below-market financing actually affected the selling price of a house.
The staff acknowledged this difficulty, and for that reason recommended that the creditor be allowed to assume that all points are paid by the buyer. And the staff added, "Allowing all seller's points to be included in the finance charge and reflected in the annual percentage rate has one drawback; the calculation that it permits will overstate the annual percentage rate when the seller's points have not been passed on entirely. Staff nevertheless recommends allowing this overstatement because of the practical problems of determining the precise amount of seller's points acutally passed on to the buyer, the potential for litigation, and because of its belief that a possible overstatement of the annual percentage rate is better than a rule encouraging understatement of the annual percentage rate."
Actual publication of the proposed change in the rule is expected within a few weeks, board officials said.