[Federal Register Volume 67, Number 80 (Thursday, April 25, 2002)]
[Proposed Rules]
[Pages 20468-20474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10126]



[[Page 20468]]

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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 560, 590 and 591

[No. 2002-17]
RIN 1550-AB51


Alternative Mortgage Transaction Parity Act; Preemption

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Alternative Mortgage Transaction Parity Act (Parity Act) 
authorizes state-chartered housing creditors to make, purchase, and 
enforce alternative mortgage transactions without regard to any state 
constitution, law, or regulation. To rely on the Parity Act, certain 
state-chartered housing creditors must comply with regulations on 
alternative mortgage transactions issued by the Office of Thrift 
Supervision (OTS). In today's rulemaking, OTS proposes to revise its 
rule identifying the OTS regulations that apply to creditors under the 
Parity Act. OTS would no longer identify its regulations on prepayment 
and late charges for state housing creditors.
    OTS is also proposing to revise existing limitations on the amount 
of late charge that may be assessed on loans secured by first liens on 
residential manufactured homes under part 590. Part 590 addresses the 
preemption of certain state usury laws for federally-related 
residential mortgage loans. In addition, OTS is proposing a minor 
technical change to the definition of reverse mortgage in part 591, 
which addresses the preemption of state due-on-sale laws.

DATES: Comments must be received on or before June 24, 2002.

ADDRESSES:
    Mail: Send comments to Regulation Comments, Chief Counsel's Office, 
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: Docket No. 2002-17. Commenters should be aware that there 
have been some unpredictable and lengthy delays in postal deliveries to 
the Washington, DC area in recent weeks and may prefer to make their 
comments via facsimile, e-mail, or hand delivery.
    Delivery: Hand deliver comments to the Guard's Desk, East Lobby 
Entrance, 1700 G Street, NW., from 9:00 a.m. to 4:00 p.m. on business 
days, Attention: Regulation Comments, Chief Counsel's Office, Docket 
No. 2002-17.
    Facsimiles: Send facsimile transmissions to FAX Number (202) 906-
6518, Attention: Docket No. 2002-17.
    E-Mail: Send e-mails to [email protected], Attention: 
Docket No. 2002-17, and include your name and telephone number.
    Availability of comments: OTS will post comments and the related 
index on the OTS Internet Site at www.ots.treas.gov. In addition, you 
may inspect comments at the Public Reading Room, 1700 G St. NW., by 
appointment. To make an appointment for access, call (202) 906-5922, 
send an e-mail to public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile 
transmission to (202) 906-7755. (Please identify the materials you 
would like to inspect to assist us in serving you.) We schedule 
appointments on business days between 10:00 a.m. and 4:00 p.m. In most 
cases, appointments will be available the business day after the date 
we receive a request.

FOR FURTHER INFORMATION CONTACT: Theresa Stark, Senior Project Manager, 
Compliance Policy, (202) 906-7054; Karen Osterloh, Assistant Chief 
Counsel, (202) 906-6639, Regulations and Legislation Division, Office 
of Thrift Supervision, 1700 G Street NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. The Alternative Mortgage Transaction Parity Act Regulations 
(Sec. 560.220)

A. Background

    Congress enacted the Parity Act \1\ in 1982 to stimulate credit in 
an unusually high interest rate environment by encouraging variable 
rate mortgages and other creative financing. In hearings before the 
Senate in 1981, mortgage bankers testified that statutes in 26 states 
barred state-chartered mortgage bankers and lending institutions from 
originating alternative mortgage loans, or imposed significantly higher 
restrictions on such loans than applied to federally chartered lenders 
operating under federal regulations. Congress wanted to make more 
housing credit available by giving those state-chartered housing 
creditors \2\ parity with federally chartered institutions and 
eliminate the discriminatory impact of the state laws by authorizing 
those creditors to make, purchase, and enforce alternative mortgage 
loans.\3\
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    \1\ 12 U.S.C. 3801 et seq.
    \2\ A ``housing creditor'' is a depository institution, a lender 
approved by the Secretary of Housing and Urban Development for 
participation in certain mortgage insurance programs, ``any person 
who regularly makes loans, credit sales or advances secured by 
interests in properties referred to in [the Parity Act]; or . . . 
any transferee of any of them.'' 12 U.S.C. 3802(2).
    \3\ 12 U.S.C. 3801(b). See also National Home Equity Mortgage 
Association v. Face, 64 F. Supp. 2d 584, 587 (E.D. Va. 1999), aff'd, 
239 F.3d 633 (4th Cir. 2001), and cert denied 70 U.S.L.W. 3234 (U.S. 
Oct. 1, 2001) (No. 00-1851).
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    The Parity Act applies to loans with any ``alternative'' payment 
features that vary from conventional fixed-rate, fixed term mortgage 
loans, such as variable rates, balloon payments, or call features. It 
allows state licensed and regulated housing creditors to engage in 
``alternative mortgage transactions'' notwithstanding ``any State 
constitution, law, or regulation,'' provided the transactions are in 
conformity with regulations that would apply to a comparable federally 
chartered housing creditor.\4\
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    \4\ Id.; 12 U.S.C. 3803.
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    To qualify as a state housing creditor and take advantage of 
preemption, the Parity Act specifically provides that the creditor must 
be ``licensed under applicable State law and [remain or become] subject 
to the applicable regulatory requirements and enforcement mechanisms 
provided by State law.'' \5\ Housing creditors, other than state-
chartered banks and state-chartered credit unions,\6\ that wish to make 
an alternative mortgage transaction under the authority of the Parity 
Act, must abide by designated OTS regulations. Those regulations are 
enforced by each state housing creditor's applicable state regulator.
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    \5\ 12 U.S.C. 3802(2).
    \6\ State-chartered commercial banks and state-chartered credit 
unions must comply respectively with regulations of the Office of 
the Comptroller of the Currency (OCC) and the National Credit Union 
Administration (NCUA).
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    The Parity Act directed the Federal Home Loan Bank Board (Bank 
Board), OTS's predecessor agency, to identify, describe, and publish 
those portions of its regulations that were inappropriate for, and thus 
inapplicable to, non-federally chartered, non-bank, non-credit union 
housing creditors.\7\ In 1982, the Bank Board published a ``Notice to 
Housing Creditors'' (1982 Notice).\8\ The 1982 Notice provided that 
state housing creditors, other than commercial banks, credit unions or 
federal associations, may make alternative mortgage loans subject to 
the Bank Board's requirements on adjustments to rate, payment, balance 
or term of maturity and disclosure.
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    \7\ Section 807 of Pub. L. 97-320 (1982).
    \8\ 47 Fed. Reg. 51733 (November 17, 1982).
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    In 1983, the Bank Board published a final rule codifying a revised 
Notice to Housing Creditors. The 1983 final rule identified three 
provisions that were an integral part of, and particular to,

[[Page 20469]]

alternative mortgage transactions. These included provisions governing 
the authority to make partially amortized or non-amortized loans and to 
adjust the interest rate payment, balance or term of maturity; 
limitations on adjustments on loans secured by borrower-occupied 
property; and requirements for disclosures on loans secured by 
borrower-occupied property that are not fixed-rated and fully 
amortized.\9\
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    \9\ 48 Fed. Reg. 23,032, 23053 (May 23, 1983). The notice was 
codified as an appendix to part 545. In 1989, it was moved 12 CFR 
545.33. See 54 FR 49492 (November 30, 1989).
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    When the 1982 Notice was issued, federal savings associations had a 
limited ability to impose prepayment penalties on alternative mortgage 
transactions.\10\ While the ability of federal thrifts to impose 
prepayment penalties was expanded in 1984,\11\ restrictions were not 
removed completely until 1993. At that time OTS allowed prepayment 
penalties at any time and in any amount authorized by the loan contract 
for both adjustable rate and fixed-rate mortgages.\12\
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    \10\ See 12 CFR 545.8-5(b)(1983).
    \11\ See 12 CFR 545.34(c)(1984).
    \12\ 58 FR 4308 (Jan. 14, 1993). Of course, federal thrifts must 
disclose prepayment penalties and late charges under the Federal 
Reserve Board's Regulation Z, which implements the Truth in Lending 
Act (15 U.S.C. 1601 et seq.). See 12 CFR 226.18(k) and (l).
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    In January 1996, OTS proposed to designate additional rules as 
applicable under the Parity Act. Specifically, OTS proposed to 
designate all of proposed part 560 (rules on the lending powers of 
federal savings associations and safety and soundness-based lending 
provisions applicable to all savings associations) and proposed 
Sec. 563.99 (fixed and adjustable-rate mortgage loan disclosures, 
adjustment notices, and interest rate caps).\13\ In the final rule, OTS 
deleted the general reference to part 560, and specifically identified 
applicable regulations, including new references to late charges and 
prepayment provisions.\14\ The list of OTS regulations currently 
applicable to state housing creditors now includes the following 
sections:
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    \13\ 61 FR 1162, at 1166, 1174, and 1181 (January 17, 1996).
    \14\ 61 FR 50951, at 50955, and 50969 (September 30, 1996).
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     Sec. 560.33. This reference permits state housing 
creditors to impose late charges for any delinquent periodic payment 
and sets out certain limitations on the assessment of such late 
charges.
     Sec. 560.34. This reference permits state housing 
creditors to impose a prepayment penalty and indicates how prepayments 
must be applied.
     Sec. 560.35. This section addresses adjustments to 
interest rate, adjustments to the payment and loan balance, and the use 
of indices.
     Sec. 560.210. This reference requires state housing 
creditors to provide initial disclosures and adjustment notices for 
variable rate transactions.
    Housing creditors must comply with these requirements to obtain the 
benefit of the Parity Act's preemption of state laws.
    On April 5, 2000, OTS published an advance notice of proposed 
rulemaking (ANPR) entitled ``Responsible Alternative Mortgage Lending. 
65 FR 17811. The ANPR sought public comment on various questions in 
connection with its review of mortgage lending regulations. OTS 
specifically sought comment about possible amendments to Sec. 560.220. 
To the extent that commenters addressed these issues, they are 
discussed below.

B. Proposed Sec. 560.220

1. Comments on the ANPR
    Consumer groups and states generally urged OTS to limit the 
applicability of the Parity Act regulations to enable the states to 
better regulate non-depository state housing creditors. These 
commenters contended that state housing creditors are taking advantage 
of OTS regulations on prepayment penalties and late fees by structuring 
otherwise fixed-rate, fixed term loans with features to make them 
alternative mortgages and thus avoid state restrictions on these 
charges. These commenters specifically suggested removing prepayment 
penalties and late fees provisions from the list of regulations 
applicable to state housing creditors because those provisions apply to 
all mortgage loans (not just alternative transactions), arguing that 
they allow non-depository institutions to piggy back on federal 
preemption and facilitate predatory practices.\15\
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    \15\ OTS does not collect information on housing creditors that 
take advantage of the Parity Act. Accordingly, OTS sought data on 
the extent to which housing creditors taking advantage of the Parity 
Act are engaged in predatory practices and the effect that the 
Parity Act has the availability of credit. While commenters offered 
anecdotal information, OTS received no comprehensive data in 
response to the ANPR.
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    Financial institutions and their trade organizations generally 
supported the existing Parity Act rules as enhancing credit 
availability and enabling lenders to develop new mortgage options. They 
argued that if the scope of the Parity Act regulations were 
significantly narrowed, state financial institutions potentially could 
be required to comply with 51 sets of state requirements, and that this 
would increase lending costs to consumers. Some commenters argued the 
Parity Act does not limit the scope of regulations applicable to 
housing creditors to those provisions concerning only alternative 
mortgage transactions.
2. Proposed Revisions to Sec. 560.220
    OTS has reviewed the designation of the regulations on prepayments 
and late charges in light of the comments on the ANPR and the purposes 
of the Parity Act, and is proposing to delete these rules from the list 
of provisions that apply to state housing creditors under the Parity 
Act.
    The Parity Act directs the Bank Board (now OTS), OCC and NCUA to 
identify, describe, and publish those regulations that are 
``inappropriate for and inapplicable'' to state housing creditors. The 
Parity Act, however, provides little guidance to the agencies in 
determining which regulations are appropriate. As a result, NCUA, OCC, 
OTS, and the Bank Board have taken substantially different approaches 
to the designation of rules.
    NCUA, for example, has identified all of its lending regulations as 
applicable to alternative mortgage transactions by state-chartered 
credit unions.\16\ These mortgage regulations address such matters as 
the term of the loan, requirements governing security instruments, 
notes, and liens, due-on-sale provisions, and assumptions and, as 
required under the Federal Credit Union Act, specifically prohibit 
prepayment penalties.
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    \16\ 12 CFR 701.21(a) states ``[W]hile Sec. 701.21 generally 
applies to Federal credit unions only, its provisions may be used by 
state-chartered credit unions with respect to alternative mortgage 
transactions in accordance with 12 U.S.C. 3801 et seq.''
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    In contrast, OCC has designated as applicable to state-chartered 
commercial banks its rules that directly relate to adjustable rate 
mortgages.\17\ OCC's designated regulations define ARM loans, authorize 
certain indexes and allow prepayment fees.
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    \17\ 12 CFR 34.24, which applies 12 CFR part 34, subpart B.
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    The Bank Board initially identified as appropriate and applicable 
those regulations that ``describe and define'' alternative mortgage 
transactions and not those regulations intended for the general 
supervision of federal associations. Because agency rules on prepayment 
penalties and late charges applied to loans generally (as distinguished 
from rules that bear directly on the unique features of alternative 
mortgage loans), the Bank Board's Parity Act regulation did not 
identify these provisions.
    In 1996, OTS took a different tack and added provisions on 
prepayment and late charges to the list of designated

[[Page 20470]]

regulations. The designation occurred as part of a larger regulatory 
project to update and reorganize all of its lending and investment 
regulations. The proposed and final rules did not explain the reason 
for OTS departure from its predecessor agency's standard.
    The proposed rule merely stated in one sentence that OTS would 
identify as appropriate and applicable to alternative mortgage 
transactions all of part 560 and Sec. 563.99. The preamble to the final 
rule, again in one sentence, merely stated that the rule was being 
``revised to identify the appropriate sections with greater 
specificity,'' and the rule itself then designated four particular 
provisions.
    Between publication of the proposed and final rules, OTS issued a 
legal opinion to address a particular state law on prepayment 
penalties.\18\ The opinion concluded that the application of the Parity 
Act to a state prepayment provision fell into a gray area between laws 
clearly preempted by the Act (those barring variable rate loans) and 
those clearly not (those governing liens and foreclosures.) The opinion 
recognized that the OTS prepayment provisions applied to all real 
estate loans for federal thrifts not just alternative mortgage 
transactions, but then simply stated that state housing creditors would 
be ``disadvantaged vis-a-vis federal thrifts'' if they had to comply 
with the state law restricting prepayment penalties and so concluded 
that it was preempted.
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    \18\ OTS Op. Chief Counsel (April 30, 1996).
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    The purpose of the Parity Act was to enable all housing creditors 
to provide credit with alternative mortgage vehicles and to preempt 
state laws that would prevent that type of credit.\19\ The designation 
of Sec. 560.35 and Sec. 560.210 is essential to enable state housing 
creditors to continue to provide alternative mortgages. Accordingly, to 
provide parity with federal thrifts, OTS's proposed rule continues to 
designate these two provisions.
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    \19\ It is of note that the Parity Act makes no reference to 
fees or penalties nor does it direct the federal regulators to 
consider their impact on alternative mortgages.
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    On the other hand, the OTS prepayment and late fee provisions are 
not intrinsic to the ability to offer alternative mortgages. We note 
that credit unions are barred by statute from imposing prepayment 
penalties on any loan, while OCC has specifically designated a 
prepayment penalty provision as applying to alternative mortgages. As 
for late fees, NCUA has designated its late fee provision as applying, 
while OCC has not. As these various approaches illustrate, the agencies 
have exercised broad discretion in their designations of appropriate 
regulations under the Parity Act and have struck different balances 
depending upon their statutory and regulatory scheme.
    Certainly there are advantages and disadvantages to each charter 
and licensing scheme for the various types of housing creditors. 
Federal thrifts operate under a uniform system of safety and soundness 
and compliance rules nationwide, with regular examinations and close 
supervision. State thrifts have a somewhat similar system governing 
operations within their own jurisdictions. Other types of housing 
creditors are not bound by these restrictions and have more latitude in 
their operations.
    OTS is proposing to delete Sec. 560.34 and Sec. 560.33 from the 
list of regulations designated for alternative mortgages. These two 
regulations apply to real estate loans in general and are part of a 
broader regulatory scheme governing the lending operations for federal 
thrifts.
    OTS recognizes that state housing creditors may view this proposal 
as having a discriminatory impact on their ability to offer alternative 
mortgages. States that restrict prepayment penalties and late fees 
generally apply those restrictions to all real estate loans, not just 
to alternative mortgage transactions. The states' laws in these areas 
are not directed at restricting alternative mortgage transactions but 
in regulating mortgage transactions in general.
    One of the congressional findings underlying the Parity Act was 
that OTS and the other federal regulators had adopted regulations 
authorizing their federally chartered institutions to offer alternative 
mortgages, and that the purpose of the Act was to eliminate the 
discriminatory impact of those regulations.\20\ OTS regulations on 
prepayment penalties and late fees, however, were not adopted to enable 
federal thrifts to engage in alternative mortgage financing, but rather 
to permit federal thrifts the flexibility to exercise their lending 
powers under a uniform federal scheme. See 12 CFR 560.2(a). Therefore, 
OTS does not believe that Congress intended that regulations such as 
these would offer a basis for claiming discriminatory treatment or were 
needed to provide parity with federally chartered institutions. Indeed, 
OTS broadly allows federal thrifts to impose loan-related fees (e.g., 
initial charges and servicing fees) on any loan including alternative 
mortgages, notwithstanding any state law to the contrary. OTS also 
allows federal thrifts to process and originate any loan including 
alternative mortgages, without regard to state law. There is no basis 
for distinguishing prepayment penalties and late fees from these other 
OTS rules that apply generally to loans.
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    \20\ 12 U.S.C. 3801(a)(3) and (b).
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    Accordingly, OTS proposes to delete the prepayment and late charge 
regulations from the list of regulations that apply to state housing 
creditors under the Parity Act. Under the proposed rule, OTS would 
identify only Sec. 560.35 (adjustments to home loans) and Sec. 560.210 
(disclosures for variable rate transactions) as appropriate and 
applicable for state housing creditors.
    OTS solicits comments on all aspects of this proposal and 
specifically requests comments on the following questions:
    1. Has OTS correctly identified the factors it must weigh in 
determining whether a specific rule should be designated as applicable 
for state housing creditors? If not, which factors should OTS consider?
    2. Has OTS appropriately and fairly applied these factors? Should 
OTS add any other regulations to the proposed list of designated 
regulations? Should OTS delete any regulation from the proposed list?
    3. The Parity Act requires OTS to designate regulations for state 
housing creditors that include both depository institutions (state-
chartered savings associations) and non-depository institutions. By 
contrast, OCC and NCUA designations, like the underlying regulations 
themselves, apply only to depository institutions (i.e., state 
chartered commercial banks and credit unions). Because state-chartered 
savings associations are subject to a safety and soundness regulatory 
scheme that is similar to that of federal thrifts and substantially 
different from other types of state-housing creditors, should OTS treat 
state-chartered savings associations differently under the Parity Act? 
Should OTS, for example, designate Secs. 563.33 and 563.34 for state 
housing creditors that are depository institutions, but not for other 
types of state housing creditors? Does the Parity Act authorize OTS to 
differentiate between state housing creditors on this basis?
    4. Sections 560.33 and 560.34 can be viewed as helping to promote 
safe and sound operations. For example, Sec. 560.34 permits federal 
thrifts to moderate prepayment risk through the assessment of 
prepayment penalties; Sec. 560.33 allows federal thrifts to encourage 
the timely payment of loans and to recover costs associated with late 
payments. In light of this, is it appropriate to apply these rules to 
state-chartered housing

[[Page 20471]]

lenders that are depository institutions? Similarly, based on these 
safety and soundness considerations, should OTS apply these rules to 
all real estate loans made by state savings associations? What studies 
or empirical data exist to support the need to apply these rules to 
state savings associations?

C. Recommendations for Statutory Changes

    The majority of consumer groups and some states commenting on the 
ANPR advocated that OTS recommend that Congress repeal the Parity Act. 
These commenters asserted that the Parity Act is no longer needed to 
circumvent state restrictions on adjustable rate mortgages since nearly 
all states now allow such transactions. These commenters contended that 
state housing creditors are now using the Parity Act to defeat states' 
attempts to impose reasonable consumer protection laws. Financial 
institutions addressing this issue generally opposed repeal of the 
Parity Act, because the Act enables financial institutions to offer 
uniform loan products across state lines, thereby lowering credit costs 
and increasing credit availability. These commenters contended that 
other federal laws exist to address predatory lending and consumer 
issues.
    Legislative actions affecting the Parity Act are, of course, beyond 
the scope of this rulemaking. OTS believes, however, that Congress 
should revisit the Parity Act, possibly in the context of broader 
mortgage reform legislation involving the Real Estate Settlement 
Procedures Act (RESPA),\21\ the Home Ownership and Equity Protection 
Act (HOEPA),\22\ or predatory lending. In contrast to the situation in 
the late 1970s and early 1980s, state regulators tell us that all 
states but one currently allow alternative mortgage transactions. If 
Congress believes that alternative mortgage transactions merit special 
treatment, it may want to consider whether it should enact a statute 
that applies equally to all entities providing alternative mortgage 
transactions, along the model of Regulation Z.
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    \21\ Pub. L. No. 93-533, Sec. 2, (1974), 88 Stat. 1724, 12 
U.S.C. 2601 et seq.
    \22\ Pub. L. No. 103-325 (1994), 108 Stat. 2160, amending the 
Truth in Lending Act, 15 U.S.C. 1601 et seq.
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    OTS has two additional recommendations in the event of 
Congressional review of the Parity Act. First, if the Act remains in 
place, states should be permitted another opportunity to opt out of the 
preemption provided by the Parity Act.\23\ Congress originally gave the 
states a choice to opt out of the preemption provision so that housing 
creditors in that state would be bound by the state's regulations with 
respect to alternative mortgage transactions. Initially, the states had 
three years from the effective date of the Parity Act, from 1982 to 
1985, to opt out of the preemption provisions. At the time, only a 
handful of states decided to reject preemption. However, today, with 
credit more readily available, the acceptance of alternative mortgage 
transactions by the states, and the rising incidence of potentially 
predatory lending practices, additional states might possibly elect to 
opt out of the Parity Act if given the opportunity.
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    \23\ 12 U.S.C. 3804(a).
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    Second, OTS recommends that state housing creditors lending under 
the authority of the Parity Act be required to identify themselves to 
the states. Currently, although the Parity Act provides the states with 
a mechanism to remove its preemption benefits from certain housing 
creditors, it is difficult for the states to do so without a reliable 
means of knowing who is a Parity Act creditor. Housing creditors may 
enjoy preemption benefits on alternative mortgage transactions only if 
those transactions are in substantial compliance with applicable 
federal regulations and the creditor timely cures any error. Loans made 
under the aegis of the Parity Act lose the benefit of preemption and 
therefore must comply with state law if the housing creditor fails to 
cure any error within sixty days of discovery. The recommended 
notification provision would permit the states to better monitor the 
housing creditors taking advantage of the Parity Act preemption 
benefits and those in particular that fail to timely cure any errors.

II. Preemption of State Usury Law (12 CFR Part 590)--Late Fees on 
Federally-Related Residential Manufactured Housing Loans

    Part 590 implements section 501 of the Depository Institutions 
Deregulation and Monetary Control Act of 1980 (DIDMCA) (12 U.S.C. 
1735f-7a),\24\ which provides for the permanent preemption of state 
laws expressly limiting the rate or amount of interest, discount 
points, finance charges, or other charges assessed in connection with 
certain ``federally-related'' residential loans.\25\
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    \24\ Pub. L. 96-221, 94 Stat. 161 (1980).
    \25\ Loans are ``federally-related'' if the originator meets 
certain lender criteria, or the loan is classified as a federal 
agency loan, a federal housing program loan, or a loan eligible for 
purchase by government sponsored enterprises. See 12 CFR 590.2(b).
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    This preemption does not apply to loans secured by a first lien on 
a residential manufactured home unless the terms and conditions of the 
loan comply with consumer protections provisions specified in OTS 
regulations at 12 CFR 590.4. These regulations address such matters as 
balloon payments, prepayment penalties, late charges, deferral fees, 
notice before repossession or foreclosure, and the refund of prepaid 
interest. Section 590.4(f) specifically addresses late charges. Among 
other requirements, this paragraph states: ``To the extent that 
applicable state law does not provide for a lower charge * * * a late 
charge on any installment * * * may not exceed the lesser of $5.00 or 
five percent of the unpaid amount of the installment.''
    Thus, unless the installment on a manufactured housing loan is less 
than $100, OTS's rule permits a maximum $5.00 fee for late payments on 
such loans. Over the years, OTS has received requests from 
representatives of manufactured housing lenders seeking the revision of 
this provision. These lenders argue that the $5 amount is too small to 
deter late payments. They assert that the absence of a tangible penalty 
has contributed to a run-up of delinquencies and repossessions, and to 
increases to their costs of funds. Accordingly, these lenders have 
sought the deletion of the $5.00 limit.
    In today's rule, OTS is proposing to eliminate the $5.00 limit. 
Under the proposed rule, the late fee would be limited to five percent 
of the unpaid amount of the installment, unless applicable state law 
imposes a lesser charge. OTS specifically requests comment whether this 
five percent limitation should also be deleted from the final rule.

III. Preemption of State Due-on-Sale Laws (12 CFR Part 591)--
Definition of Reverse Mortgage

    OTS regulations at 12 CFR 591 implement section 341 of the Garn St 
Germain Depository Institutions Act of 1982 (12 U.S.C.A. 1701j-3).\26\ 
This part governs the permissibility of due-on-sale clauses in real 
estate loans and the preemption of state prohibitions on such clauses.
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    \26\ Pub. L. 97-320, 96 Stat. 1469 (1982).
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    OTS is proposing a minor technical change to the definition of 
reverse mortgage at 12 CFR 591.2(n). The rule would clarify that a 
reverse mortgage is not limited to a loan that provides for periodic 
payments, but also includes a loan that provides for a lump sum

[[Page 20472]]

payment. This change is consistent with OTS legal opinions.\27\
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    \27\ OTS Op. Chief Counsel (June 2, 2000) (reverse mortgage 
loans include those providing for a lump sum payment).
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IV. Solicitation of Comments Regarding the Use of Plain Language

    Section 722 of the Gramm-Leach Bliley Act \28\ requires federal 
banking agencies to use ``plain language'' in all proposed and final 
rules published after January 1, 2000. OTS invites comments on how to 
make this proposed rule easier to understand. For example:
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    \28\ 12 U.S.C. 4809.
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    (1) Have we organized the material to suit your needs? If not, how 
could the material be better organized?
    (2) Do we clearly state the requirements in the rule? If not, how 
could the rule be more clearly stated?
    (3) Does the rule contain technical language or jargon that is not 
clear? If so, what language requires clarification?
    (4) Would a different format (grouping and order of sections, use 
of headings, paragraphing) make the rule easier to understand? If so, 
what changes to the format would make the rule easier to understand?

V. Executive Order 12866

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

VI. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (Unfunded Mandates Act), requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
federal mandate that may result in expenditure by state, local, and 
tribal governments, or by the private sector, of $100 million or more 
in any one year. If a budgetary impact statement is required, Section 
205 of the Unfunded Mandates Act also requires an agency to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule. OTS has determined that the proposed rule will not 
result in expenditures by state, local, or tribal governments or by the 
private sector of $100 million or more. Accordingly, a budgetary impact 
statement is not required under section 202 of the Unfunded Mandates 
Act of 1995.

VII. Regulatory Flexibility Act

    When an agency issues a rulemaking proposal, the Regulatory 
Flexibility Act (RFA) requires the agency to ``prepare and make 
available for public comment an initial regulatory flexibility 
analysis'' which will ``describe the impact of the proposed rule on 
small entities.'' 5 U.S.C. Sec. 603(a). Section 605 of the RFA allows 
an agency to certify a rule, in lieu of preparing an analysis, if the 
proposed rulemaking is not expected to have a significant economic 
impact on a substantial number of small entities.
    Parts 590 and 591. OTS has not prepared an initial regulatory 
flexibility analysis (IRFA) for the proposed revisions to part 590 and 
part 591. The proposed change to part 590 affects creditors making 
federally-related loans secured by first liens on residential 
manufactured housing. The proposed change would provide these creditors 
with greater flexibility in charging late fees, while retaining the 
benefits of preemption of state usury laws under section 501 of DIDMCA. 
The current rule permits a limited late fee of $5, which has proven to 
be too small to deter late payments. The proposed change permitting the 
imposition of a more tangible penalty will benefit all creditors making 
such loans, including small businesses. Part 591 permits all lenders, 
whether federally- or state-chartered, to exercise due-on-sale clauses 
in real property loans without regard to state law. OTS proposes a 
clarifying change broadening the definition of reverse mortgage. Since 
this change codifies an existing OTS interpretation of the term which 
broadens the availability of preemption under part 591, any impact on 
lenders should be beneficial. Accordingly, OTS certifies to the Chief 
Counsel of Advocacy of the Small Business Administration that the 
proposed changes to parts 590 and 591 will not have a significant 
economic impact on a substantial number of small entities.
    Section  560.210. OTS has performed an IRFA for the proposed 
changes to Sec. 560.210.\29\ A description of the reasons why OTS is 
considering the proposed change and a statement of the objectives of, 
and legal basis for, this aspect of the proposed rule are included in 
the supplementary material above. In addition, OTS has addressed the 
following topics.
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    \29\ OTS questions whether an IRFA is required. The RFA does not 
require an agency to analyze the effects of a rule on entities that 
it does not regulate. See American Trucking Association, Inc. v. 
EPA, 175 F.3d 1027 (D.C. Cir. 1999) (The D.C. circuit held that EPA 
was not required to perform a RFA for its national ambient air 
quality standards (NAAQS). The NAAQS themselves imposed no 
regulations on small entities. Instead, the several states regulated 
small entities through the state implementation plans that they were 
required to develop under the Clean Air Act. Because the NAASQ 
regulated small entities only indirectly--that is, insofar as they 
affected the planning decisions of the states--the EPA concluded, 
and the D.C. circuit agreed, that small entities were not subject to 
the rule.)
    As revised, Sec. 560.210 imposes no restrictions or limitations 
on any small entity's ability to impose prepayment penalties or late 
charges. Rather, the proposed OTS rule would leave the regulation of 
these matters entirely to the discretion of the individual states. 
As a result, OTS believes that it may certify that the rule will not 
have a significant impact on a substantial number of small entities.
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A. Small entities to which the proposed rule would apply

    The proposed change to Sec. 560.220 would apply to state housing 
creditors other than credit unions or commercial banks. OTS does not 
compile data on the total number of state housing creditors that may 
utilize Sec. 560.220. Moreover, except for state-chartered savings 
associations, OTS does not have any authority to require state housing 
creditors to identify themselves or submit other data to OTS. 
Similarly, the Parity Act does not require state housing creditors to 
notify the states that they are taking advantage of the Act. As a 
result, OTS has little information regarding how many state housing 
creditors may use Sec. 560.220 or how many of these creditors are small 
businesses.
    Nonetheless, OTS estimates that 6,386 small state housing creditors 
may be affected by this regulation. United States Census data indicates 
that 7,257 firms (excluding depository institutions) engage in real 
estate credit. OTS estimates approximately 6,300 of these firms are 
small businesses.\30\ Based on the most recent TFR data for thrifts, 
OTS estimates that an additional 86 state-chartered savings 
associations are small businesses.\31\ For the purposes of this 
analysis, we have assumed that all 6,386 of these small businesses 
engage in alternative mortgage transactions.
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    \30\ OTS based this figure on firms engaged in real estate 
credit and reported under NAICS 522292. A firm engaged in real 
estate credit is considered to be small if it has total receipts of 
$5 million or less per year. 13 CFR 121.201. OTS has used the 
special tabulation of the 1997 economic census from the United 
States Bureau of the Census to determine the number of these firms 
and their annual receipts.
    \31\ Based on December 2001 TFR data, OTS regulates 138 state 
savings associations. Of these savings associations, 86 have assets 
of $100 million or less. Small depository institutions are generally 
defined, for RFA purposes, as those with assets under $100 million. 
See 13 CFR 121.201.
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    OTS believes that this number may overstate the number of small 
businesses that may be affected by the changes to the proposed rule for 
several reasons. First, the use of the Parity Act is solely at the 
election of the state housing creditors. State housing creditors may, 
for whatever reason,

[[Page 20473]]

decline to use the Parity Act for their alternative mortgage 
transactions. Moreover, many small state housing creditors will conduct 
alternative mortgage transactions that are governed by laws in states 
that either:
     Opted out of the Parity Act. State housing creditors 
conducting alternative mortgage transactions governed by these laws 
currently cannot use Sec. 560.220 to preempt state law; or
     Enacted statutes that do not impose any substantive 
prohibitions and restriction on prepayment penalties or late charges 
for the loans. State housing creditors may continue to charge penalties 
and fees on alternative mortgage transactions in these states, 
notwithstanding the proposed changes to Sec. 560.220.
    OTS's estimate of 6,386 small businesses is based on the best 
information available to it. However, OTS encourages any commenter with 
access to more complete and more accurate data to submit information 
regarding the number of state housing creditors (other than credit 
unions or commercial banks) that may be affected by this rule. OTS also 
requests information regarding how many of these creditors that may be 
small businesses.

B. Requirements of the Proposed Rule

    The Parity Act permits certain state housing creditors to make, 
purchase, and enforce alternative mortgage transactions without regard 
to any state constitution, law or regulation, provided that they comply 
with regulations designated by OTS. As described more fully in the 
supplementary information section, the proposed rule would revise OTS's 
designation of applicable regulations so that it would no longer 
designate rules on prepayment and late charges. As a result, these 
state housing creditors would be subject to state laws limiting 
prepayment penalties and restricting late charges.
    OTS is unable to quantify the impact of the proposed revision on 
small state housing creditors for several reasons. Based on available 
data, it is difficult to determine how many alternative mortgage 
transactions were made under the OTS Parity Act regulations. Industry-
wide data is available only for one type of alternative mortgage 
transaction--adjustable rate mortgages (ARMs). Other types of mortgages 
with alternative features are generally reported as fixed rate 
mortgages. The available data, however, indicates that all housing 
lenders originated $243.6 billion and $256 billion in ARMs in 2001 and 
2000 respectively.\32\ The most recent data available indicated that 
state housing creditors (excluding commercial banks and thrifts) 
account for approximately 56.3 percent of all lending or $137.1 billion 
and $144.1 billion of ARMs in 2001 and 2000.\33\ OTS estimates that 
$14.7 billion and $15.4 billion of these ARM loans were originated by 
small state housing creditors in 2001 and 2000.\34\ This available 
data, however, does not distinguish between transactions that are made 
under the Parity Act, and those that are not. As noted above, OTS has 
no authority to require state housing creditors that use Sec. 560.220 
to provide this information.\35\
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    \32\ Mortgage Bankers Association website at www.mbaa.org 
indicates that the industry originated $2,030 billion in 1-to 4-
family mortgages in 2001, and $1,024 billion of these loans in 2000, 
and that 12% and 25% of these loans were ARMs in 2001 and 2000.
    \33\ This information was also obtained on the Mortgage Bankers' 
Association's website, which indicates that its source was a HUD 
Survey of Mortgage Lending Activity discontinued in 1998. This data 
applies to all lending and is based on 1997.
    \34\ OTS computed this figure using receipts by real estate 
creditors as proxy for originations. Based on these figures, OTS 
estimates that small creditors accounted for 10.7% of all ARM 
originations by real estate creditors.
    \35\ OTS does not currently collect data on the ARM originations 
by the 86 small state savings associations. However, 2000 CMR data 
indicates that these 86 thrifts hold approximately $815 million of 
ARMs in their portfolios. Again, this data does not distinguish 
transactions subject to the Parity Act regulations.
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    In the ANPR, OTS attempted to obtain additional information on the 
extent to which state housing creditors engage in alternative mortgage 
transactions under the Parity Act. Commenters, however, provided no 
reliable information on this subject.\36\ Nonetheless, OTS encourages 
any commenter with access to more complete and more accurate data to 
submit information regarding the extent to which small state housing 
creditors engage in alternative mortgage lending under Sec. 560.220.
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    \36\ Specifically, OTS asked for information regarding predatory 
or abusive lending practices that would be contrary to State law but 
for the Parity Act. One of the commenters, a trade association 
representing a substantial segment of the real estate financing 
community, including national and regional lenders, mortgage 
brokers, mortgage conduits, and service providers stated that it 
``does not have specific numbers regarding the extent to which 
lenders are using the Parity Act to craft alternative mortgage 
products that would otherwise be affected by state law. Furthermore 
[it] knows of no reliable and comprehensive industry data from any 
source.''
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    OTS further requests information concerning the amount of late fees 
and prepayment penalties generated by these alternative mortgage 
transactions. OTS notes, however, that reliable estimates of the amount 
of late fees and prepayment penalties would not accurately reflect the 
impact of the deletion of the preemption of prepayment charge 
provisions and late charge provisions. The 6,386 small state creditors 
that may be affected by the proposed rule would become subject to a 
broad range of state laws. For example, some of these laws would 
continue to permit the imposition of prepayment penalties. Others may 
prohibit or restrict prepayment charges. Still other laws would subject 
prepayment penalties to a range of restrictions, such as prohibiting 
penalties for a set period after execution of the note or mortgage or 
limiting the amount of the prepayment penalty. Based on this wide 
variety of restrictions and the fact that current state laws will 
change over time, it is difficult to estimate how much of the income 
would be lost by small state housing creditors under the proposed 
rule.\37\
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    \37\ See ``The Handbook of Mortgage-Backed Securities,'' 88-101 
(Frank J. Fabozzi, ed. (5th ed. 2001)), which contains a compilation 
of current state laws on prepayment penalties.
---------------------------------------------------------------------------

    Moreover, the impact of the loss of prepayment penalties may be 
ameliorated somewhat through other techniques. For example, lenders 
often impose a higher overall interest rate where prepayment penalties 
are excluded from the loan agreement.\38\ In addition, some 
commentators assert that the payment of points upon origination and the 
imposition of a prepayment penalty are economically equivalent 
transactions. Since a mortgage with points includes an implicit and 
easily calculable prepayment penalty, state housing creditors may 
substitute points where prepayment penalties are prohibited.\39\
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    \38\ In April 2000, one large subprime lender indicated that it 
lowered the interest rate on a loan by 75 basis points for those 
borrowers who accepted a prepayment penalty. See Joint HUD/Treasury 
Report on Recommendations to Curb Predatory Home Mortgage Lending 
(April 20, 2000), citing information from the New Century Mortgage 
Corporation website, www.newcentury.com.
    \39\ Alan L. Feld & Stephan G. Marks, Legal Differences Without 
Economic Distinctions: Points, Penalties, and the Market for 
Mortgages, 77 B.U.L. Rev 405 (1977).
---------------------------------------------------------------------------

    OTS requests information quantifying the impact that the proposed 
revision will have on small state housing creditors.

C. Significant Alternatives

    Section 603(c) of the RFA requires OTS to describe any significant 
alternatives to the proposed rule that accomplish the stated objectives 
of the rule while minimizing any significant economic impact of the 
rule on small entities. Section 603(c) lists several examples of 
significant alternatives,

[[Page 20474]]

including: (1) Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities; (2) clarifying, consolidating, or 
simplifying compliance and reporting requirements for small entities; 
(3) using performance standards rather than design standards; and (4) 
excepting small entities from coverage of the rule or a part of the 
rule.
    OTS considered retaining its current designation of regulations for 
all state housing creditors. For the reasons noted in the preamble 
above, OTS believes that this course is inappropriate. OTS also 
considered whether it should continue to designate the existing 
regulations for small state housing creditors, but not for other state 
housing creditors. However, given its analysis of the purposes and 
goals of the Parity Act, OTS has concluded that it is inappropriate to 
distinguish between small and large state housing creditors. OTS 
solicits comment from any other alternatives that would minimize the 
burdens on small state housing creditors.

D. Other Matters

    Various federal rules or statutes duplicate or overlap with the 
proposed rule. NCUA has identified all of its lending regulations as 
applicable to alternative mortgage transactions by state-chartered 
credit unions. 12 CFR 701.21(a). These regulations address such matters 
as the term of the loan, requirements governing security instruments, 
notes, liens, due-on-sale provisions, and assumptions and, as required 
under the Federal Credit Union Act, specifically prohibit prepayment 
penalties. OCC, on the other hand, had designated as applicable to 
state-chartered commercial banks, its rules that directly relate to 
adjustable rate mortgages. OCC's designated regulations define ARM 
loans, authorize certain indexes, and allow prepayment fees. 12 CFR 
34.24. In addition, other federal statutes and rules may preempt the 
application of state laws on prepayment penalties and late fees for 
alternative mortgage transactions by state housing creditors. See e.g., 
12 CFR part 590 (preemption of state usury laws under section 501 of 
DIDMCA ) and 12 CFR part 591 (preemption of state due on sale clauses 
under section 341 of Garn St Germain Depository Institutions Act of 
1982).
    OTS is aware of no federal rules or statutes that conflict with the 
proposed rule.

VIII. Federalism

    Executive Order 13132 imposes certain requirements on an agency 
when formulating and implementing policies that have federalism 
implications or taking actions that preempt state law. In accordance 
with those requirements, OTS has consulted with the Conference of State 
Bank Supervisors and the National Association of Attorneys General 
concerning this proposed change.

List of Subjects

12 CFR Part 560

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

12 CFR Part 590

    Banks, Banking, Loan programs--housing and community development, 
Manufactured homes, Mortgages, Savings associations.

12 CFR Part 591

    Banks, Banking, Loan programs--housing and community development, 
Mortgages, Savings associations.
    Accordingly, the Office of Thrift Supervision proposes to amend 12 
CFR parts 560, 590, and 591 as set forth below:

PART 560--LENDING AND INVESTMENTS

    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, 3801, 3802, 3803, 3806; 42 U.S.C. 4106.

    2. Revise Sec. 560.220 to read as follows:


Sec. 560.220  Alternative Mortgage Transactions Parity Act.

    (a) Applicable housing creditors. A housing creditor that is not a 
commercial bank, a credit union, or a Federal savings association may 
make alternative mortgage transactions by following the regulations 
identified in paragraph (b) of this section, notwithstanding any state 
constitution, law, or regulation. See 12 U.S.C. 3803.
    (b) Applicable regulations. OTS designates Secs. 560.35 and 560.210 
as appropriate and applicable for state housing creditors. All other 
OTS regulations are not identified, and are inappropriate and 
inapplicable to state housing creditors. State housing creditors 
engaged in credit sales should read the term ``loan'' as ``credit 
sale'' wherever applicable in applying these regulations.

PART 590--PREEMPTION OF STATE USURY LAWS

    3. The authority citation for part 590 continues to read as 
follows:

    Authority: 12 U.S.C. 1735f-7a.

    4. Revise the section heading and paragraph (f)(4) in Sec. 590.4 to 
read as follows:


Sec. 590.4  Federally-related residential manufactured housing loans--
consumer protection provisions.

* * * * *
    (f) * * *
    (4) To the extent that applicable state law does not provide for a 
lower charge or a longer grace period, a late charge on any installment 
not paid in full on or before the 15th day after its scheduled or 
deferred due date may not exceed five percent of the unpaid amount of 
the installment.
* * * * *

PART 591--PREEMPTION OF STATE DUE-ON-SALE LAWS

    5. The authority citation for part 591 continues to read as 
follows:

    Authority: 12 U.S.C. 1464 and 1701j-3.

    6. Revise Sec. 591.2(n) to read as follows


Sec. 591.2  Definitions.

* * * * *
    (n) Reverse mortgage means an instrument that provides for one or 
more payments to a homeowner based on accumulated equity. The lender 
may make payment directly, through the purchase of annuity through an 
insurance company, or in any other manner. The loan may be due either 
on a specific date or when a specified event occurs, such as the sale 
of the property or the death of the borrower.
* * * * *

    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 02-10126 Filed 4-24-02; 8:45 am]
BILLING CODE 6720-01-P