[Federal Register Volume 63, Number 5 (Thursday, January 8, 1998)]
[Rules and Regulations]
[Pages 1051-1054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-443]



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 Rules and Regulations
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  Federal Register / Vol. 63, No. 5 / Thursday, January 8, 1998 / Rules 
and Regulations  

[[Page 1051]]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 560

[No. 97-130]
RIN 1550-AB12


Disclosures for Adjustable-rate Mortgage Loans, Adjustment 
Notices, and Interest-rate Caps

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Office of Thrift Supervision (OTS) is issuing this interim 
final rule revising the initial disclosure requirements for adjustable-
rate mortgage loans (ARMs) by savings associations. These changes 
conform the OTS rule to the parallel provisions in Regulation Z, as 
recently amended by the Federal Reserve Board (FRB). The revised rule 
permits a savings association to provide a borrower either a fifteen-
year historical example of interest rates and payments or a statement 
that the periodic payment may substantially increase or decrease 
(together with the maximum interest rate and payment based on a $10,000 
loan).

DATES: Effective date: January 8, 1998.

    Compliance date: Compliance is optional until October 1, 1998.
    Comment date: Comments must be received by March 9, 1998.

ADDRESSES: Send comments to Manager, Dissemination Branch, Records 
Management and Information Policy, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, D.C. 20552. Attention Docket No. 97-130. These 
submissions may be hand-delivered to 1700 G Street, NW., from 9:00 A.M. 
to 5:00 P.M. on business days; they may be sent by facsimile 
transmission to FAX Number (202) 906-7755; or by e-mail: 
[email protected]. Those commenting by e-mail should include 
their name and phone number. Comments will be available for inspection 
at 1700 G Street, NW., from 9:00 A.M. until 4:00 P.M. on business days.

FOR FURTHER INFORMATION CONTACT: Timothy R. Burniston, Director, (202) 
906-5629, Compliance Policy; Susan Miles, Attorney, (202) 906-6798, or 
Karen Osterloh, Assistant Chief Counsel, (202) 906-6639, Regulations 
and Legislation Division, Chief Counsel's Office, Office of Thrift 
Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    To assist borrowers in making informed decisions on the cost of 
credit, both the OTS and the FRB have issued regulations (12 CFR 
560.210 and 12 CFR 226.19, respectively) imposing disclosure 
requirements on creditors issuing ARMs. The FRB disclosure rules at 12 
CFR Part 226 implement the Truth in Lending Act (TILA) 1 and 
are commonly referred to as Regulation Z. Regulation Z applies to all 
lenders subject to the TILA, including savings associations. Regulation 
Z, however, specifically states that information provided in accordance 
with variable rate regulations of other federal agencies, such as the 
OTS, may be substituted for the disclosures required by Regulation 
Z.2 To this extent, Regulation Z incorporates 12 CFR 
560.210, and the OTS rule serves as an implementing regulation of the 
TILA.
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    \1\ 15 U.S.C. 1601 et seq.
    \2\ 12 CFR 226.19(b) n. 45a and 226.20(c) n. 45c.
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    Section 560.210, which applies to ARMs of more than one year that 
are secured by property occupied by or to be occupied by the borrower, 
derives from a regulation OTS's predecessor agency, the Federal Home 
Loan Bank Board (FHLBB), issued under its authority under the Home 
Owners' Loan Act (HOLA) 3 to ensure that savings 
associations operate in a safe and sound manner. The FHLBB believed 
such a regulation was necessary because ``Safe and sound lending using 
ARMs requires that the borrower have a full understanding of the type 
of obligation being incurred in order to make a reasonable and 
meaningful decision concerning ability to repay.'' 4 
Although originally the FHLBB regulation was more complex than 
Regulation Z, since 1988 the disclosures required under Sec. 560.210 
and its predecessors have been identical to those required under 
Regulation Z.
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    \3\ 12 U.S.C. 1463(a) and 1464(a).
    \4\ 50 FR 32005 (Aug. 8, 1985).
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    Under Regulation Z, if a variable rate transaction exceeds a term 
of one year and is secured by the consumer's principal dwelling, the 
creditor must provide various initial disclosures for each variable 
rate program in which the consumer is interested.5 Until 
amended recently,6 these loan disclosure provisions required 
both: (1) A fifteen-year historical example, based on a $10,000 loan 
amount, illustrating how payments and the loan balance would have been 
affected by interest rate changes implemented according to the terms of 
the loan program; and (2) the maximum interest rate and payment for a 
$10,000 loan originated at the most recent interest rate shown in the 
historical example assuming the maximum periodic increases in rates and 
payments under the loan, and the initial interest rate and payment for 
that loan. OTS's parallel regulation, Sec. 560.210, has contained 
identical disclosure requirements.7
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    \5\ 12 CFR 226.19(b)(2) (1997).
    \6\ 62 FR 63441 (Dec. 1, 1997).
    \7\ Compare 12 CFR 226.19(b)(2) (viii) and (x) (1997) with 12 
CFR 560.210(b)(2) (viii) and (x) (1997).
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    Section 2105 of the Economic Growth and Regulatory Paperwork 
Reduction Act of 1996 (EGRPRA) 8 amended section 128(a) of 
the TILA to permit a creditor the option of providing a statement that 
periodic rates may substantially increase or decrease (together with 
the maximum interest rate and payment amount based on a $10,000 loan 
amount), in lieu of the historical example. On December 1, 1997, the 
FRB published final revisions to Regulation Z implementing section 2105 
of EGRPRA.
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    \8\ Pub. L. 104-208, 110 Stat. 3009 (September 30, 1996).
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II. Description of Interim Final Rule

    To ensure that the initial disclosure requirements under OTS rules 
continue to be consistent with those in Regulation Z, the OTS is making 
the same revisions to its ARM disclosure

[[Page 1052]]

requirements at 12 CFR 560.210(b) as the FRB's recently adopted 
amendments to Regulation Z.
    Existing Sec. 560.210(b) requires a savings association offering an 
ARM to provide a number of initial disclosures for each adjustable-rate 
home loan program in which a consumer expresses an interest. Existing 
Sec. 560.210(b)(2)(viii) requires a savings association to provide a 
fifteen-year historical example. Existing Sec. 560.210(b)(2)(x) 
requires a savings association to provide the maximum interest rate and 
payment for a $10,000 loan.
    The OTS interim final rule revises these disclosure requirements. A 
savings association may now provide either the historical example or 
the maximum interest rate and payment. If the savings association 
chooses the maximum interest rate and payment option, the savings 
association must provide the initial rate and payment amount and a 
statement that the periodic payment may increase or decrease 
substantially.
    Consistent with the FRB final rule, the OTS interim final rule also 
modifies how the maximum interest rate is calculated under the maximum 
interest rate and payment option. Under the existing rule, the maximum 
interest rate is calculated using ``the most recent interest rate shown 
in the historical example.'' Since the savings association is not 
required to provide the historical example when it elects the maximum 
interest rate and payment option, the interim final rule uses ``the 
initial interest rate (index value plus margin, adjusted by the amount 
of any discount or premium) in effect as of an identified month and 
year for the particular loan program disclosure'' to calculate the 
maximum interest rate and payment. Additionally, the interim final rule 
defines the initial interest rate as the rate in effect as of an 
identified month and year for a particular loan program. This change 
eliminates any requirement that a savings association must update the 
maximum rate and payment disclosure more frequently than the loan 
program disclosure.
    Under existing Sec. 560.210(b)(2)(ix), a savings association must 
explain how a customer may calculate the payments for the loan amount, 
based on the most recent payment shown in the historical example. To 
allow customers to understand the relationship between their 
transactions and the disclosures made under the maximum interest rate 
and payment option, the revised rule requires a savings association to 
provide a similar explanation when it elects this option. See new 
Sec. 560.210(b)(2)(ix). The FRB made a similar change to Regulation Z.

III. Public Comment

A. Revisions to Conform Sec. 560.210 to New Sec. 226.19

    The OTS has determined that advance notice and comment ordinarily 
mandated by the Administrative Procedure Act (APA), 5 U.S.C. 553(b), 
are not required in this interim final rulemaking. The APA authorizes 
agencies to waive notice and comment procedures when the agency ``for 
good cause finds * * * that notice and public procedure thereon are 
impracticable, unnecessary, or contrary to the public interest.'' 
9
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    \9\ 5 U.S.C. 553(b)(B).
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    The OTS, for good cause, finds that notice and comment procedures 
for this interim rule are impracticable, unnecessary, and contrary to 
the public interest. The changes in the interim rule will reduce 
regulatory confusion by conforming the OTS disclosure rules (which, as 
discussed above, serve as an implementing regulation of the TILA), more 
closely to those of the FRB under TILA. The changes will not have an 
adverse impact on savings associations because the revisions reduce 
regulatory burden. Moreover, savings associations subject to 
Sec. 560.210 have the option of complying with the revised disclosure 
requirements through October 1, 1998, the date on which compliance 
under new Sec. 226.19 becomes mandatory. The OTS has also determined 
that the revised regulation will not have an adverse impact on 
consumers obtaining ARMs from savings associations, because while 
disclosure requirements have changed under the interim rule, the new 
disclosures conform to the disclosures authorized by section 2105 of 
EGRPRA and provided under the revised FRB rule. To the extent that the 
interim rule raises consumer issues, these issues have already been 
subject to public notice and comment in the related FRB rulemaking, a 
proceeding affecting a much wider spectrum of lenders and borrowers. 
Only one consumer organization commented on the FRB proposal and the 
FRB considered that comment in preparing its final rule. It is unlikely 
that public comment on the disclosure changes will raise new issues 
specific to savings associations. Nevertheless, the OTS seeks the 
benefit of public comment on these revisions.

B. Should the OTS Retain Sec. 560.210?

    The OTS also solicits public comment on both the scope and 
continued usefulness of Sec. 560.210. Specifically, some commenters on 
OTS's 1996 Lending and Investment rulemaking argued that Sec. 560.210 
should be deleted because it unnecessarily duplicates the FRB 
disclosure requirements in Regulation Z.10 This would 
conform OTS's regulations with those of the Office of the Comptroller 
of the Currency and the Federal Deposit Insurance Corporation, which do 
not contain provisions on ARMs disclosures and rely on Regulation Z. It 
would also be consistent with section 303 of the Community Development 
and Regulatory Improvement Act of 1994 (CDRIA), which instructs each 
Federal banking agency to review its regulations and remove duplicative 
requirements.
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    \10\ See 61 FR 50951, 50963 (Sept. 30, 1996).
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    There are several arguments for retaining Sec. 560.210, however. 
First, although the disclosure requirements are identical, unlike 
Regulation Z, Sec. 560.210 applies both to liens on the consumer's 
principal dwelling and to the financing of second homes, including 
vacation homes. Removing this regulation might lessen the disclosures 
savings associations provide to borrowers financing second homes.
    Additionally, by retaining its own regulation that is grounded in 
the HOLA rather than the TILA, the OTS may have greater flexibility in 
fashioning appropriate relief for violations of ARMs disclosure 
requirements. Section 165 of the TILA authorizes agencies to seek 
restitution only in certain instances where the creditor inaccurately 
discloses the annual percentage rate or finance charge or where section 
165 itself requires a refund or credit.11 Certain inaccurate 
disclosures (such as non-disclosure of an interest rate floor or 
disclosure of a non-existent interest rate floor) or actions by an 
association (such as using an incorrect index after issuing the initial 
disclosure statement or failing to adjust interest rates and loan 
payments on the date required by the loan contract) would not 
themselves constitute inaccurate disclosures of the annual percentage 
rate or finance charge. Any of these disclosures or actions might, 
however, result in the customer paying an overcharge on its ARM. The 
FRB's Commentary on Regulation Z indicates that section 165 requires 
refunds and/or credits only when a borrower's account balance exceeds 
the entire outstanding loan balance and ``does not apply where the 
consumer has simply paid an amount in excess of the payment due for a 
given

[[Page 1053]]

period.'' 12 Thus, section 165 would not apply to 
overcharges on loans that have substantial remaining principal 
balances, although it would appear to impose an affirmative obligation 
on mortgage lenders to refund or credit any excess payments collected 
over the life of a loan when the loan is either prepaid or fully 
amortized.
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    \11\ 15 U.S.C. 1607(e)(5).
    \12\ 12 CFR part 226, Supp. I, Official Staff Interpretations, 
Sec. 226.21, Comment 2.
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    In contrast, in enforcing Sec. 560.210, as with any other HOLA-
based OTS regulations, the agency has available to it the full panoply 
of enforcement actions available under section 8 of the Federal Deposit 
Insurance Act.13 This includes seeking restitution when a 
savings association has been unjustly enriched or acted with reckless 
disregard.14 This remedy may therefore be available for ARMs 
overcharges during the life of the loan, in contrast to section 165 of 
the TILA and Regulation Z.
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    \13\ 12 U.S.C. 1818.
    \14\ 12 U.S.C. 1818(b)(6).
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IV. Effective Date

    The OTS has determined that the 30-day delay of effectiveness 
provisions of the APA may be waived in this rulemaking. The APA at 12 
U.S.C. 553(d) permits waiver of the 30-day delayed effective date 
requirement for, inter alia, good cause or where a rule relieves a 
restriction. The OTS finds that good cause exists for the same reason 
as discussed in Section III above. The OTS further finds that the 30-
day delayed effective date requirement may be waived because this 
interim final rule relieves regulatory restrictions by reducing the 
number of disclosures required for certain ARMs.
    Section 302 of the CDRIA requires that new regulations and 
amendments to regulations that impose additional reporting, disclosure, 
or other new requirements take effect on the first date of the calendar 
quarter following publication of the rule unless, among other things, 
the agency determines, for good cause, that the regulations should 
become effective before that date. OTS believes that an immediate 
effective date is appropriate since the interim rule relieves 
regulatory burden on savings associations. An immediate effective date 
will permit savings associations to reduce the number of disclosures 
they must provide and will reduce regulatory confusion by conforming 
OTS regulations more closely to those of the FRB. OTS does not 
anticipate that the immediate application of the rules will present a 
hardship to institutions. Indeed, OTS believes that CDRIA does not 
apply to this interim rule because it imposes no new burdens or 
requirements on thrifts. For these reasons, OTS has determined that the 
interim final rule should be effective upon publication in the Federal 
Register. Like the FRB rule, however, compliance with the OTS rule is 
optional until October 1, 1998.

V. Paperwork Reduction Act of 1995

    The OTS invites comments on:
    (1) Whether the proposed collection of information contained in 
this interim final rulemaking is necessary for the proper performance 
of the agency's functions, including whether the information has 
practical utility;
    (2) The accuracy of the agency's estimate of the burden of the 
proposed information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (4) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (5) Estimates of capital and start-up costs of operation, 
maintenance and purchases of services to provide information.
    Under the Paperwork Reduction Act of 1995, as codified at 44 U.S.C. 
3507, no persons are required to respond to a collection of information 
unless it displays a currently valid OMB control number. The valid OMB 
control number assigned to the collection of information in this 
interim final rule will be displayed in the table at 12 CFR 506.1(b).
    The OTS has received emergency approval for the recordkeeping 
requirements contained in this interim final rule from the Office of 
Management and Budget. Comments on all aspects of this information 
collection should be sent to the Office of Management and Budget, 
Paperwork Reduction Project (1550), Washington, D.C. 20503, with copies 
to the OTS, 1700 G Street, N.W., Washington, D.C. 20552.
    The reporting/recordkeeping requirements contained in this interim 
final rule are found at 12 CFR 560.210. The likely respondents/
recordkeepers are OTS-regulated savings associations. The OTS needs the 
disclosures made by savings associations in order to ensure that 
associations comply with a statutory TILA requirement and to otherwise 
supervise savings associations.
    Estimated number of respondents: 1,238.
    Estimated average annual burden hours per respondent: 53.
    Estimated number of total annual burden hours: 65,639.
    Start-up costs to respondents: $160.
    Records are to be maintained for the period of time respondent/
recordkeeper owns the loan plus three years.

VI. Executive Order 12866

    The Director of the OTS has determined that this interim final rule 
does not constitute a ``significant regulatory action'' for the 
purposes of Executive Order 12866.

VII. Regulatory Flexibility Act Analysis

    Because no notice of proposed rulemaking is required for this rule, 
the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) 
do not apply. The interim final rule does not impose any additional 
burdens or requirements upon small entities. Rather, the rule reduces 
the number of disclosures required for ARMs and eases the compliance 
burden on all savings associations, including small savings 
associations. Accordingly, a regulatory flexibility analysis is not 
required.

VIII. Unfunded Mandates Act of 1995

    The OTS has determined that the requirements of this interim final 
rule will not result in expenditures by State, local, and tribal 
governments, or by the private sector, of more than $100 million in any 
one year. Accordingly, a budgetary impact statement is not required 
under section 202 of the Unfunded Mandates Act of 1995, as codified at 
2 U.S.C. 1571(a).

List of Subjects in 12 CFR Part 560

    Consumer protection, Investments, Manufactured homes, Mortgages, 
Reporting and recordkeeping requirements, Savings associations.

    Accordingly, the Office of Thrift Supervision hereby amends title 
12, chapter V, of the Code of Federal Regulations as set forth below:

PART 560--LENDING AND INVESTMENT

    1. The authority citation for part 560 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806; 42 U.S.C. 4106.

    2. Section 560.210 is amended by:
    a. Revising the introductory text of paragraph (b)(2) including 
footnote 2;
    b. Revising paragraph (b)(2)(viii);
    c. Revising paragraph (b)(2)(ix);
    d. Removing paragraph (b)(2)(x); and
    e. Redesignating paragraphs (b)(2)(xi), (b)(2)(xii), and 
(b)(2)(xiii) as paragraphs

[[Page 1054]]

(b)(2)(x), (b)(2)(xi), and (b)(2)(xii), respectively.
    The revisions read as follows:


Sec. 560.210  Disclosures for adjustable-rate mortgage loans, 
adjustment notices, and interest-rate caps.

* * * * *
    (b) * * *
    (2) A loan program disclosure for each adjustable-rate home loan 
program in which the consumer expresses an interest. The following 
disclosures, as applicable, shall be provided: 2
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    \2\ A sample disclosure form may be found in 12 CFR part 226, 
Appendix H-14.
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* * * * *
    (viii) At the option of the savings association, either of the 
following:
    (A) An historical example, based on a $10,000 loan amount, 
illustrating how payments and the loan balance would have been affected 
by interest rate changes implemented according to the terms of the loan 
program disclosure. The example shall reflect the most recent 15 years 
of index values. The example shall reflect all significant loan program 
terms, such as negative amortization, interest rate carryover, interest 
rate discounts, and interest rate and payment limitations, that would 
have been affected by the index movement during the period; or
    (B) The maximum interest rate and payment for a $10,000 loan 
originated at the initial interest rate (index value plus margin, 
adjusted by the amount of any discount or premium) in effect as of an 
identified month and year for the loan program disclosure assuming the 
maximum periodic increases in rates and payments under the program; and 
the initial interest rate and payment for that loan and a statement 
that the periodic payment may increase or decrease substantially 
depending on changes in the rate.
    (ix) An explanation of how the consumer may calculate the payments 
for the loan amount to be borrowed based on either:
    (A) The most recent payment shown in the historical example in 
paragraph (b)(2)(viii)(A) of this section; or
    (B) The initial interest rate used to calculate the maximum 
interest rate and payment in paragraph (b)(2)(viii)(B) of this section.
* * * * *
    Dated: December 30, 1997.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-443 Filed 1-7-98; 8:45 am]
BILLING CODE 6720-01-P