[Federal Register Volume 67, Number 187 (Thursday, September 26, 2002)]
[Rules and Regulations]
[Pages 60542-60555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24407]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 560, 590, and 591

[No. 2002-43]
RIN 1550-AB51


Alternative Mortgage Transaction Parity Act; Preemption

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Alternative Mortgage Transaction Parity Act (AMTPA) 
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 AMTPA, 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 revises its rules identifying the OTS 
regulations that apply under AMTPA. OTS will no longer identify its 
regulations on prepayments and late charges for state chartered housing 
creditors.
    OTS is also revising its limits on the amount of late charges that 
may be assessed on loans secured by first liens on residential 
manufactured homes under part 590, which addresses the preemption of 
state usury laws. In addition, OTS is making a minor technical change 
to the definition of reverse mortgage in part 591, which addresses the 
preemption of state due-on-sale laws.

EFFECTIVE DATE: January 1, 2003.

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

SUPPLEMENTARY INFORMATION:

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

    The Alternative Mortgage Transaction Parity Act (AMTPA) \1\ permits 
state chartered housing creditors \2\ to make, purchase, and enforce 
alternative mortgage transactions if the creditors comply with 
regulations governing such transactions issued by federal regulators. 
AMTPA 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 
chartered housing creditors to engage in alternative mortgage 
transactions notwithstanding ``any State constitution, law, or 
regulation,'' provided the transactions are made in conformity with 
regulations issued by one of three federal regulators.\3\ Housing 
creditors, other than state chartered commercial banks and state 
chartered

[[Page 60543]]

credit unions, that wish to make an alternative mortgage transaction 
under the authority of AMTPA, must comply with OTS regulations. State 
chartered commercial banks and state chartered credit unions must 
comply with regulations of the Office of the Comptroller of the 
Currency (OCC) and the National Credit Union Administration (NCUA), 
respectively.\4\
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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 [AMTPA]; or * * * any 
transferee of any of them.'' To qualify as a state housing creditor 
and take advantage of preemption, AMTPA 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.'' 12 U.S.C. 
3802(2).
    \3\ 12 U.S.C. 3803(c).
    \4\ 12 U.S.C. 3803(a).
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    AMTPA directed the Federal Home Loan Bank Board (Bank Board), OTS's 
predecessor agency, OCC, and NCUA to identify, describe, and publish 
those portions of their regulations that are inappropriate for, and 
thus inapplicable to, their respective state chartered housing 
creditors.\5\ The identified regulations are enforced by each state 
housing creditor's applicable state regulator.
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    \5\ Section 807(b) of Pub. L. 97-320 (1982).
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    Currently, OTS's regulation at Sec.  560.220 identifies the 
following regulations as appropriate for, and applicable to, state 
housing creditors:
    [sbull] 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.
    [sbull] Sec.  560.34. This reference permits state housing 
creditors to impose a prepayment penalty and indicates how prepayments 
must be applied.
    [sbull] Sec.  560.35. This section addresses adjustments to 
interest rate, adjustments to the payment and loan balance, and the use 
of indices.
    [sbull] 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 AMTPA's preemption of state laws. All other OTS regulations 
are inappropriate and inapplicable to state housing creditors.
    On April 5, 2000, OTS published an advance notice of proposed 
rulemaking (ANPR) entitled ``Responsible Alternative Mortgage 
Lending.'' \6\ The ANPR sought public comment on various questions in 
connection with a review of mortgage lending regulations, including 
comments on possible amendments to Sec.  560.220.
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    \6\ 65 FR 17811 (Apr. 5, 2000).
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    On April 25, 2002, OTS issued a notice of proposed rulemaking 
(NPRM).\7\ OTS proposed to delete the late charge and prepayment rules 
(Sec. Sec.  560.33 and 560.34) from the list of regulations that apply 
to state housing creditors under AMTPA. OTS proposed to continue to 
identify the other two rules (Sec. Sec.  560.35 and 560.210) as 
appropriate and applicable for state housing creditors.
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    \7\ 67 FR 20468 (Apr. 25, 2002).
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    OTS received 298 comments on the proposed rule and 293 of these 
commenters addressed changes to AMTPA provisions. The commenters were 
equally divided between support and opposition for the rule. About 
three-quarters of the commenters filed one of five form letters.

A. OTS Authority Under AMTPA

1. Background
    Congress enacted AMTPA 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 incorporated this factual background at 12 U.S.C. 3801(a). 
Congress found that increasingly volatile and dynamic changes in 
interest rates had seriously impaired the ability of housing creditors 
to provide consumers with fixed-term, fixed-rate credit secured by 
interests in real property, and that alternative mortgage transactions 
were essential to an adequate supply of credit. AMTPA also noted that 
OCC, NCUA, and OTS had recognized the importance of alternative 
mortgage transactions and had adopted ``regulations authorizing 
federally chartered depository institutions to engage in alternative 
mortgage financing.'' AMTPA indicated that:

It is the purpose of this chapter to eliminate the discriminatory 
impact that those regulations have upon nonfederally chartered 
housing creditors and provide them with parity with federally 
chartered institutions by authorizing all housing creditors to make, 
purchase, and enforce alternative mortgage transactions so long as 
the transactions are in conformity with the regulations issued by 
the Federal agencies. 12 U.S.C. 3801(b).

Section 3803(a) states that state housing creditors may comply with 
regulations governing alternative mortgage transactions issued by NCUA, 
OCC, or OTS. Section 807(b) of AMTPA directs the three federal 
regulators to identify, describe, and publish those portions or 
provisions of their respective regulations that are ``inappropriate for 
(and thus inapplicable to)'' nonfederally chartered housing creditors.
    Apart from references to federal regulations governing alternative 
mortgage transactions and regulations authorizing federally chartered 
lenders to engage in alternative mortgage transactions, neither the 
statute nor the legislative history details how the three federal 
agencies are to exercise their authority under section 807(b). For 
example, AMTPA and the legislative history do not reference or provide 
examples of specific types of regulations that the agencies should 
identify for state housing creditors.
    As a result of this inconclusive direction, OTS and the Bank Board 
have wrestled with the proper scope of the identification of 
regulations for state housing creditors under AMTPA. At times, the 
agency has taken a narrow view of AMTPA and its legislative history. 
For example, the Bank Board initially identified as appropriate and 
applicable only those regulations that ``describe and define'' 
alternative mortgage transactions and did not identify regulations 
intended for the general supervision of federal savings associations. 
As a result, the Bank Board declined to identify rules that applied to 
loans generally (as distinguished from rules that bear directly on the 
unique features of alternative mortgage loans).\8\
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    \8\ 47 FR 51732 (Nov. 17, 1982) and 48 FR 23032, 23053 (May 23, 
1983).
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    In 1996, however, OTS reviewed its AMTPA authority and identified 
two general lending rules--the prepayment and late charge provisions at 
issue in this rulemaking.\9\ The apparent rationale, contained in a 
contemporaneous legal opinion, but not in the rulemaking, was the 
conclusion that state housing creditors would be ``disadvantaged vis-
[agrave]-vis federal thrifts'' if they were required to comply with 
state laws restricting prepayment penalties and late charges.\10\ Even 
the contemporaneous legal opinion, however, conceded that the state 
laws on these subjects fell somewhere between laws clearly preempted by 
AMTPA (state laws barring variable rate mortgage loan transactions) and 
laws clearly not preempted (state laws governing liens and 
foreclosures).
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    \9\ 61 FR 50951 (Sept. 30, 1996).
    \10\ OTS Op. Chief Counsel (Apr. 30, 1996).
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    NCUA and OCC regulations also reflect various interpretations of 
the scope of section 807(b) of AMTPA. NCUA has interpreted section 
807(b) to permit the identification of all of its lending regulations 
as applicable to alternative mortgage transactions by state chartered 
credit unions. These mortgage regulations address such matters as the 
term of the loan;

[[Page 60544]]

requirements governing security instruments, notes, and liens; due-on-
sale provisions; and assumptions. NCUA rules specifically preempt state 
laws addressing certain areas. 12 CFR 701.21. OCC, on the other hand, 
has identified as applicable for state commercial banks a narrow band 
of rules. These rules: define adjustable rate mortgages (ARMs); state 
that ARMS may be made, sold, purchased, participated in, or otherwise 
dealt in without regard to any state law limitation on those 
activities; authorize certain indices; and specifically allow 
prepayment fees. 12 CFR part 34, subpart B.
    As these various approaches illustrate, section 807(b) is 
susceptible to a number of interpretations. Each of the agencies has 
exercised broad discretion in its identification of appropriate 
regulations under AMTPA and has struck a different balance depending on 
its applicable statutory and regulatory scheme. Under the current 
rules, each of the three agencies has advanced a different 
interpretation of its responsibilities under section 807(b) of AMTPA.
2. OTS's Approach
    In the NPRM, OTS reexamined its 1996 interpretation. OTS noted that 
the purpose of AMTPA was to enable all housing creditors to provide 
credit through alternative mortgages and to preempt state laws that 
would prevent that type of credit. OTS found that its regulations 
governing adjustments to the interest rate, adjustments to the payment 
and loan balance, the use of indices, initial disclosures, and 
adjustment notices were essential or intrinsic to the ability of state 
housing creditors to continue to provide alternative mortgage 
transactions. To provide parity with federal thrifts, OTS proposed to 
continue to identify Sec. Sec.  560.35 and 560.210 for state housing 
creditors.
    On the other hand, OTS tentatively noted, upon further reflection, 
that the prepayment and late fee provisions were not essential or 
intrinsic to the ability to offer alternative mortgages. Rather, these 
regulations apply to real estate lending in general and are part of the 
broader regulatory scheme governing the lending operations of thrifts. 
OTS noted that one of the congressional findings underlying AMTPA was 
that the various federal regulators had adopted regulations authorizing 
federal institutions to offer alternative mortgages, and that the 
purpose of AMTPA was to eliminate the discriminatory impact of those 
regulations. OTS tentatively found that its regulations on prepayments 
and late fees were not adopted to enable federal thrifts to engage in 
alternative mortgage financing, but rather to permit federal thrifts to 
operate safely and soundly under a uniform federal scheme. See 12 CFR 
560.2(a). Therefore, OTS tentatively concluded that these regulations 
did not offer a basis for claiming discriminatory treatment or were not 
needed to provide parity with federally chartered institutions. 
Accordingly, OTS tentatively concluded that there was no basis to 
distinguish prepayment and late charge provisions from other general 
lending rules and proposed to delete the two provisions from the list 
of identified rules for state housing creditors. As we explain in this 
statement of supplementary information, after reviewing the comments 
and further considering the issues, OTS adopts these findings and 
conclusions.
3. Comments on OTS's Approach
    Several commenters argued that if AMTPA is to be given its proper 
effect, state housing creditors should be governed by the same 
regulations that address alternative mortgage transactions by federal 
savings associations. According to commenters, these rules include 
Sec.  560.2(a), which states OTS's intent to occupy the entire field of 
lending regulation for federal savings associations in preemption of 
state law, and Sec.  560.2(b), which expressly preempts state laws that 
address such matters as private mortgage insurance requirements, loan-
to-value ratios, terms of credit, loan-related fees (including late 
charges and prepayment penalties), access to credit reports, 
disclosures, and advertising laws.
    OTS has never identified its preemption rules as applicable to 
state housing creditors under AMTPA. While commenters argued that the 
failure to apply these preemptive regulations would disadvantage state 
housing creditors vis-[agrave]-vis federal thrifts, OTS believes that 
this position would lead to an inappropriate result under its 
regulatory framework.
    To enhance safety and soundness and to enable federal savings 
associations to conduct their operations in accordance with best 
practices, OTS has occupied the entire field of lending regulation for 
federal thrifts and has given federal savings associations the maximum 
flexibility to exercise their lending powers in accordance with a 
uniform federal scheme. See 12 CFR 560.2(a). This complex uniform 
regulatory scheme benefits federal thrifts by preempting most state 
laws that otherwise would impose on federal savings associations 
different regulatory requirements from state-to-state. The system, 
however, also imposes various obligations on federal savings 
associations. For example, thrifts must comply with an array of 
regulatory limitations designed to ensure that their mortgage lending 
operations are conducted in a safe and sound manner. These limitations 
include appraisal requirements, real estate lending standards, 
underwriting guidelines, limits on loans to one borrower, and 
documentation requirements. Thrifts are also subject to regular 
examination, supervision, and enforcement of their lending activities.
    OTS does not believe that it may impose these concomitant 
obligations on state housing creditors in this rulemaking given the 
instructions in the legislative history that it was not Congress' 
intent to place state housing creditors under the supervision of the 
federal agencies.\11\ However, preemption under Sec.  560.2, without 
the application of the related duties, would lead to an unreasonable 
regulatory result, i.e., the perverse situation where state housing 
creditors could engage in mortgage lending--an area that is 
traditionally highly regulated--unfettered by most state or federal 
restrictions, thereby creating a regulatory vacuum. Accordingly, OTS 
declines to identify its preemption rules as applicable to state 
housing creditors.
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    \11\ Sen. Rep. 97-463, at 55 (1982). This interpretation is also 
contrary to other expressions of congressional intent, which left 
room for state action by specifically reserving specific areas to 
the states. 12 U.S.C. 3802(2), for example, indicates that state 
housing creditors must comply with applicable state licensing 
requirements and must remain or become subject to the applicable 
regulatory requirements and enforcement mechanisms provided by state 
law.
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    Other general lending rules, such as Sec. Sec.  560.33 and 560.34, 
are also a part of the broader regulatory scheme governing OTS 
supervision of the lending operations of federal thrifts. The states 
have, to a greater or lesser degree, adopted laws and regulations 
similarly designed to supervise the lending operations of state housing 
creditors. States that restrict prepayment penalties and late charges 
usually apply those restrictions to all real estate loans, not just to 
alternative mortgage transactions. As a result, the state laws in these 
areas are not directed at restricting alternative mortgage 
transactions, but in regulating mortgage transactions in general. OTS 
is reluctant to encroach upon this state authority, given the cited 
statutory direction and the statements of legislative intent.
    For these reasons, OTS declines to identify its rules preempting 
state lending regulations or any other rule

[[Page 60545]]

that applies to real estate lending in general. Rather, OTS will 
identify only those regulations that OTS deems to be intrinsic to the 
ability to offer alternative loans.\12\
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    \12\ One commenter warned that this focus could undermine the 
broad preemption available for federal thrifts, i.e., that state law 
may be preempted for federal thrifts only when preemption is 
``intrinsic'' to the effectuation of a federal policy or goal. Other 
commenters sought assurance that the final rule would not erode or 
impair the scope of preemption available to, or the lending powers 
of, federal savings associations under the Home Owners' Loan Act 
(HOLA). This rule addresses OTS authority to identify rules for 
state housing creditors under AMTPA and has no impact on preemption 
available to, or the lending powers of, federal thrifts under the 
HOLA. The preemption principles under the HOLA are well settled. See 
e.g., 12 CFR 545.2, 557.11, and 560.2; and OTS Op. Chief Counsel 
(Nov. 22, 1999).
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    A number of commenters alleged that this interpretation of AMTPA 
would subject state housing creditors to state laws on prepayments and 
late charges while federal thrifts would remain subject to more 
permissive OTS regulations in these areas. As a result, these 
commenters argued that the proposed rule is inconsistent with the twin 
purposes of AMTPA--the elimination of discriminatory impact that 
federal regulations have on state housing creditors and the promotion 
of parity for state housing creditors. Specifically, commenters 
speculated that the proposed rule would discriminate against state 
housing creditors vis-[agrave]-vis federal savings associations in the 
following ways:
    [sbull] Limit the range of products offered by state housing 
creditors. Some state housing creditors would no longer be able to 
offer lower rates to consumers who agree to take a loan with a 
prepayment penalty. In addition, restrictions on late charges would 
deny lenders flexibility in loan pricing and prohibit lenders from 
placing the cost of late payments on delinquent borrowers.
    [sbull] Increase compliance costs, risk of document error, and 
litigation risk. Rather than complying with uniform OTS rules, 
creditors with multi-state operations would have to comply with 
inconsistent state and local laws.
    [sbull] Reduce the ability to minimize prepayment risk. Prepayment 
penalties protect state housing creditors (and secondary market 
purchasers) from extreme changes in their portfolios.
    [sbull] Reduce the value of their loans in the secondary market. 
Investors will be less able to protect against prepayment risk, and 
will incur additional due diligence costs (and risks) to review pools 
against widely varying state law. These costs will be passed on to 
state housing creditors. The secondary market also may have to create 
separate pools for federally chartered lenders and state chartered 
lenders to accommodate these differences.
    Commenters also speculated that some lenders may choose not to 
offer alternative mortgage transactions in jurisdictions with 
restrictive laws, may cease all lending operations within those 
jurisdictions, or exit the industry entirely. This reduced competition, 
they argue, would reduce the availability of affordable credit to 
consumers contrary to the goals of AMTPA.
    Contrary to commenters' speculation, historical evidence indicates 
that the final rule should not have a significant detrimental effect on 
state housing creditors' ability to compete against federal thrifts in 
the alternative mortgage market. State housing creditors functioned for 
14 years (1982-1996) without applying OTS regulations on late charges 
and prepayments. While various prepayment regulations were applicable 
during this period, federal thrifts were relatively free to impose 
prepayment penalties since 1983.\13\ Additionally, the regulations on 
late charges have not changed substantially during this period, other 
than to eliminate limitations on the amount of the late charge.\14\ 
Accordingly, OTS has concluded that these provisions are not essential 
for parity.
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    \13\ Until May 23, 1983, federal savings associations were 
permitted to impose prepayment penalties under limited 
circumstances. See 12 CFR 545.8-5(b) (1983) summarized below at note 
19. On May 23, 1983, the Bank Board changed this rule to permit a 
federal savings association to impose prepayment penalties as 
provided in the loan contract. Penalties on loans secured by owner-
occupied homes, however, were prohibited for a 90-day period 
following the issuance of a notice of adjustment of interest rate, 
payment balance, or term to maturity. 12 CFR 545.34(c) (1984). In 
1993, OTS removed even these limited restrictions and allowed 
federal thrifts to impose prepayment penalties at any time and in 
any amount authorized in the loan contract for both adjustable rate 
and fixed rate loans. 58 FR 4308 (Jan. 14, 1993). This rule is now 
codified at 12 CFR 560.34 (2002).
    \14\ Compare 12 CFR 545.8-3(e) (1983) with 12 CFR 560.33 (2002).
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    OTS also notes that state housing creditors were vigorous 
competitors in mortgage lending throughout this time period. While 
relative market share in the alternative mortgage market is not 
available, OTS does have information regarding the relative 
participation in the one- to four-family mortgage market. In 1982, 
commercial banks and thrifts dominated this market by originating 
approximately 66.0 percent of one- to four-family mortgages. Mortgage 
companies' market share was significantly smaller at 28.9 percent of 
the market. By 1996, when OTS changed its AMTPA rules, these positions 
had reversed with mortgage companies originating 56.8 percent and 
commercial banks and thrifts originating 42.5 percent of all one- to 
four-family mortgages.\15\
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    \15\ This information was obtained on the Mortgage Bankers' 
Association's Web site, which indicates that its source was a HUD 
Survey of Mortgage Lending Activity discontinued in 1998. OTS notes 
that at least one commenter asserts that state housing creditors now 
originate approximately 80 percent of all mortgages.
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    Moreover, it is not clear that Congress viewed prepayment penalties 
and late charges as essential to parity. Neither AMTPA nor its 
legislative history provides any useful guidance concerning this issue. 
However, if Congress had viewed these provisions as essential to 
parity, it is unlikely that Congress would have adopted the statutory 
scheme found in AMTPA. As noted above, AMTPA does not place all state 
housing creditors within the jurisdiction of one federal regulator, but 
assigns state housing creditors to three federal agencies in a way that 
``recogniz[es] traditional industry lines.''\16\ When AMTPA was 
enacted, however, NCUA, OCC, and the Bank Board had different 
requirements regarding prepayment penalties. Congress banned federal 
credit unions from imposing prepayment penalties, which suggests that, 
at least for credit unions, Congress recognized that prepayment 
penalties were not essential to the ability to make, purchase, or 
enforce alternative mortgage transactions.\17\ OCC regulations, on the 
other hand, permitted national banks to impose prepayment penalties on 
ARMs until 30 days prior to the first scheduled interest rate 
adjustment date.\18\ Bank Board regulations permitted federal savings 
associations to impose prepayment penalties on alternative mortgage 
transactions under other limited circumstances.\19\ If Congress had

[[Page 60546]]

viewed the regulation of prepayment penalties as essential to parity, 
it is unlikely that Congress would have imposed a regulatory scheme 
that, at the time of enactment, ensured different treatment among the 
various state creditors.
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    \16\ Sen. Rep. 97-463, at 55 (1982).
    \17\ 12 U.S.C. 1757(5)(A)(viii) (1982).
    \18\ 12 CFR 29.6 (1983). Shortly after AMTPA was enacted, OCC 
revised this rule to permit prepayment fees without regard to the 
first scheduled interest rate adjustment. 48 FR 28970 (June 24, 
1983).
    \19\ 12 CFR 545.8-5(b) (1983) provided: ``a borrower on a loan 
secured by a home or combination of home and business property may 
prepay the loan without penalty unless the loan contract expressly 
provides for all of the following: (1) A prepayment penalty, (2) an 
interest rate that, after loan closing and after any interest-rate 
adjustment, remains fixed for a period of at least five years, and 
(3) only such increases in the loan balance as result from the 
deferral and capitalization of interest pursuant to Sec.  545.6-
2(a)(2)(iv) of this part. The prepayment penalty for a loan secured 
by a home or combination of home and business property shall not be 
more than six months' advance interest on that part of the aggregate 
amount of all prepayments made on such loan in any 12-month period 
which exceeds 20 percent of the original principal amount of the 
loan.''
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    The agencies also took different approaches to the regulation of 
late charges in 1982. The Bank Board limited the amount of late 
charges, prescribed a minimum grace period, and set other restrictions 
for loans made on the security of a home occupied or to be occupied by 
the borrower.\20\ By contrast, NCUA rules on alternative mortgage 
lending did not specifically address late fees, although a federal 
credit union was permitted by statute to levy late charges in 
accordance with its by-laws for failure of a member to meet promptly 
its obligations.\21\ OCC's ARM rule also did not specifically address 
late charges.
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    \20\ 12 CFR 545.8-3(d) and (e) (1983).
    \21\ 12 CFR 701.21-6 and 701.21-6B, 12 U.S.C. 1757(10) (1982).
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    The federal regulators continue to have divergent policies 
regarding prepayment penalties and late charges under AMTPA. For 
example, OCC has promulgated a prepayment provision that applies only 
to ARM lending. This rule permits national banks to impose prepayment 
fees in connection with ARM loans notwithstanding contrary state laws. 
OCC applies this rule to state chartered commercial banks under 
AMTPA.\22\ NCUA's statute, on the other hand, continues to bar federal 
credit unions from imposing prepayment fees on any loan. 12 U.S.C. 
1757(5)(A)(viii). NCUA identifies its regulation implementing this ban 
and its regulation preempting state laws on prepayment limits for state 
chartered credit unions under AMTPA.\23\
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    \22\ 12 CFR 34.23 and 34.24.
    \23\ 12 CFR 701.21(a) and (b).
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    OTS notes that absolute competitive equality is simply not 
attainable through any unilateral OTS action in this rulemaking. While 
commenters argued that this rule would have a detrimental impact on the 
ability of state housing creditors to compete, state housing creditors 
have had, and will continue to have, a competitive advantage over 
federal depository institutions in other areas. Unlike national banks, 
federal credit unions, and federal savings associations, state housing 
creditors are not required to follow federal regulations for any 
particular transaction. If a state housing creditor makes an 
alternative mortgage transaction in a state that has a more favorable 
regulatory environment, it may elect to ignore the federal regulations 
and comply with appropriate state laws. Federally chartered 
institutions have only one choice of law.
    OTS also notes that the 1996 rulemaking may have introduced other 
new inequalities into the alternative mortgage market by giving state 
housing creditors within OTS's jurisdiction a competitive advantage 
over depository institution competitors. For example, these state 
housing creditors may have gained an edge over state credit unions 
using AMTPA and federal credit unions, which are precluded from 
imposing prepayment fees. Moreover, while the 1996 rule permitted these 
state housing creditors to impose prepayment penalties to the same 
extent as national banks and federal savings associations, these 
depository institutions may have been disadvantaged since they remained 
subject to various federal restrictions on their ability to compete 
freely in the alternative mortgage market.\24\ These same restrictions 
do not apply to non-depository institution state housing creditors.
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    \24\ These restrictions include restrictions on loans to one 
borrower, real estate lending standards governing such matters as 
loans-to-value ratios and underwriting standards, and appraisal 
requirements.
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    Thus, given the statutory scheme underlying AMTPA, complete 
competitive parity is impossible. Within this imperfect system, 
however, OTS has attempted to appropriately identify those regulations 
necessary for making alternative mortgages.
    Commenters also speculated that the final rule would have a 
significant negative impact on the availability of affordable credit to 
borrowers. In AMTPA, Congress found that ``alternative mortgage 
transactions are essential to the provision of an adequate supply of 
credit secured by residential property necessary to meet the [expected] 
demand * * *'' 12 U.S.C. 3801(a)(2). This goal has been accomplished 
through AMTPA and other innovations in the mortgage market. In 1982, 
the mortgage industry relied on fixed-rate, fixed-term mortgage 
instruments that lenders, primarily depository institutions, funded 
through relatively short-term deposits. AMTPA addressed one side of 
this equation by increasing the availability of alternative mortgage 
transactions from state housing creditors.\25\ the other side of the 
equation--the liquidity of the mortgage market `` has been enhanced 
through the government sponsored entities that fostered the creation of 
government-guaranteed mortgage-backed securities and through the 
emergence of private mortgage-backed securitization channels. 
Widespread securitization began in the 1980's and lenders now routinely 
originate loans for sale in the secondary market. The constant flow of 
money into the home mortgage market has dramatically altered the 
business of mortgage lending, significantly reducing liquidity issues 
for banks, thrifts, and other lenders. Securitization has also created 
opportunities for non-depository institutions. Lenders no longer need 
to be financial institutions with significant deposits and 
capitalization. Instead, thinly capitalized creditors can originate 
loans for sale on the secondary market.\26\ As a result of these 
innovations, mortgage credit of all types is widely available and 
should not be significantly affected by this final rule.
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    \25\ The Depository Institutions Deregulation and Monetary 
Control Act of 1980 (DIDMCA) also facilitated new mortgage products 
by extending the variable rate ceiling for national banks to all 
federally insured banks and thrifts (12 U.S.C. 85, 1463(g), 1785(g), 
1831d(a)), and by providing for the preemption of state usury 
ceilings on ``interest, discount points, finance charges and other 
charges'' for loans secured by first mortgages on borrowers' homes. 
12 U.S.C. 1735f-7a. See Kathleen C. Engel & Patricia A. McCoy, A 
Tale of Three Markets: The Law and Economics of Predatory Lending, 
80 Tex. L. Rev. 1255, 1275 (May 2002).
    \26\ Id. at 1273-74.
---------------------------------------------------------------------------

    Commenters also claimed that the proposed rule conflicts with the 
decisions in National Home Equity Mortgage Ass'n v. Face, 239 F.3d 633 
(4th Cir. 2001); and Shinn v. Encore Mortgage Services Inc., 96 
F.Supp.2d 419 (D.N.J. 2000). Commenters noted that Face and Shinn held 
that state housing creditors within OTS jurisdiction may charge 
prepayment fees under Sec.  560.34, notwithstanding any restrictions in 
state law.
    OTS's analysis is consistent with these two decisions. In the Face 
case, the United States Court of Appeals for the Fourth Circuit held 
that non-federally chartered housing creditors could elect to have 
alternative mortgage transactions governed by OTS regulations on 
prepayment fees because OTS had identified its prepayment fee 
regulation as applicable to alternative mortgage transactions. The 
court explained as follows:

    The particular issue presented in this case is whether a non-
federally chartered institution in Virginia may require and enforce 
a prepayment fee in a mortgage agreement notwithstanding Virginia's 
limitation on prepayment penalties as contained in Virginia Code 
Sec. Sec.  6.1-330.83 and 6.1-330.85. The resolution of this issue 
depends on whether the OTS has issued regulations authorizing 
prepayment fees as part of its regulations for alternative mortgage 
transactions, because if it has authorized the collection of 
prepayment fees

[[Page 60547]]

in alternative mortgage transactions, then Virginia may not apply 
its law proscribing such prepayment fees if the non-federally 
chartered housing creditor has otherwise complied with the 
requirements of the Parity Act.

239 F.3d at 638 (emphasis added). In short, the Court's ruling 
correctly rested on whether OTS had designated its prepayment fee 
regulation as applicable to alternative mortgage transactions. Under 
this analysis, if OTS did not so designate the prepayment fee 
regulation, then that regulation would not apply to alternative 
mortgage transactions, and non-federally chartered housing lenders 
would be subjected to state laws concerning prepayment fees.
    Shinn addressed the limited issue of whether OTS acted reasonably 
and within the scope of its authority when it identified the prepayment 
provisions for alternative mortgage transactions under AMTPA. The Shinn 
case held that OTS rules reflected ``a permissible interpretation of 
the congressional authority vested in OTS'' under AMTPA.\27\ The Shinn 
ruling does not preclude a different interpretation by the agency under 
AMTPA.
---------------------------------------------------------------------------

    \27\ 96 F. Supp. 2d at 425.
---------------------------------------------------------------------------

    Accordingly, the removal of the prepayment and late charge rules 
from its list of identified regulations for state housing creditors is 
consistent with OTS's authority under AMTPA.

B. Impact on Predatory Lending

    Commenters opposing the rule asserted that OTS initiated the 
proposed rule to respond to allegations that state housing creditors 
use the AMTPA regulations to avoid state consumer protection laws 
governing prepayments and late charges and to engage in abusive lending 
practices. These commenters argued that the proposed rule would do 
little to address predatory lending. They noted that no single loan 
term or practice is the hallmark of a predatory loan and that 
prepayment penalties and late fees are not inherently predatory. These 
commenters observed that non-predatory loans often provide for 
prepayment penalties or late fees and that, under certain 
circumstances, these terms can make it more difficult for lenders to 
engage in certain types of predatory lending, such as loan flipping.
    Other commenters, however, indicate that two key indicia of 
predatory lending are prepayment penalties and late charges.\28\ 
Prepayment penalties may inhibit the borrower's ability to refinance 
his or her loan at a lower rate. Prepayment penalties in sub-prime 
loans also function as deferred fees. Commenters indicated that over 
one-half of all sub-prime loans with prepayment penalties are 
eventually paid off with a penalty. These penalties typically are 5-7 
percent of the loan amount.
---------------------------------------------------------------------------

    \28\ A national representative of community reinvestment groups 
provided this information based on data obtained from its consumer 
rescue fund. The fund provides prime rate refinance loans for 
victims of predatory lending.
---------------------------------------------------------------------------

    Lenders may also impose excessive charges for untimely payments. 
Some alternative mortgage transactions regularly call for late fees of 
up to 10 percent of the monthly payment. Many states limit late fees to 
4-5 percent of the payment amount.
    Commenters opposing the proposed rule also argued that OTS cited no 
hard evidence indicating that prepayment penalties or late fees are 
subject to abuse under AMTPA regulations. Indeed, one commenter, 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, reported that it is 
unaware of any comprehensive report demonstrating that AMTPA rules are 
used to defraud or abuse customers. These commenters asserted that the 
anecdotal information provided in support of the ANPR is inadequate and 
that OTS should not proceed with this rule until it gains a more 
thorough understanding.
    Because OTS does not directly regulate state housing creditors, it 
cannot collect information on state housing creditors that take 
advantage of AMTPA. OTS has found no comprehensive data available 
addressing this issue. However, as discussed below, the data sources 
cited and additional data submitted by commenters suggest that 
unregulated prepayment penalties and late charges may be subject to 
abuse.
    1. A joint report issued by the Department of Housing and Urban 
Development (HUD) and the Department of the Treasury found that 
prepayment penalties in high cost loans can inhibit borrowers from 
refinancing at lower rates when their credit improves.\29\
---------------------------------------------------------------------------

    \29\ The Joint HUD/Treasury Report on Recommendations to Curb 
Predatory Home Mortgage Lending (Apr. 20, 2000) (HUD/Treasury 
Report) at 94.
---------------------------------------------------------------------------

    2. Prepayment penalties are becoming more common in sub-prime 
loans. One commenter estimated that the frequency of prepayment 
penalties in sub-prime loans was 10 percent in 1995. Yet the HUD/
Treasury Report indicates that four years later approximately 70 to 76 
percent of sub-prime mortgage originations carried prepayment 
penalties.\30\ Several commenters cited data from nationally recognized 
statistical rating agencies confirming the HUD/Treasury Report 
estimate. By contrast, between 1 and 2 percent of prime borrowers 
currently are subject to such penalties.\31\
---------------------------------------------------------------------------

    \30\ Id. at 93.
    \31\ Id. As noted elsewhere in this document, some commenters 
argued that creditors often offer lower rates in return for 
prepayment penalties. Other commenters disputed the notion that sub-
prime borrowers freely accept prepayment penalties as a means to 
lower their interest rates. These commenters noted that the vast 
majority of sub-prime applicants are never offered one rate without 
a prepayment penalty and a lower rate with a penalty. Even if these 
offers were made, commenters alleged that interest rates on sub-
prime loans are not standardized and it is extremely difficult to 
comparison shop. Commenters further argued that it is implausible 
that sub-prime borrowers choose prepayment penalties such a high 
percentage of the time and prime borrowers do so only 2 percent of 
the time, particularly if one is describing a market that is driven 
by price competition.
---------------------------------------------------------------------------

    3. Various commenters provided data to demonstrate the extent to 
which prepayment penalties and late charges are used in predatory 
lending. Although OTS has not independently verified the accuracy of 
this information, commenters included the following data. One 
commenter, a national representative of community reinvestment groups, 
sampled 30 loans drawn from its rescue fund files. The commenter found 
that the vast majority of the loans were high cost loans with 
burdensome monthly payments that consumed unreasonable portions of 
borrower income and included prepayment penalties. The commenter 
observed that a significant portion of the loans also had high late 
fees of 10 percent of the overdue payment. To expand their sample, the 
commenter reviewed two prospectus statements for loan securitizations 
by major sub-prime lenders available on the SEC's Web site and 
concluded that over 80 percent of the loans in the pools had prepayment 
penalties. In addition, the commenter suggested that high delinquency 
rates showed a failure to adequately document borrower income levels 
and pricing inefficiencies. Numerous commenters offered anecdotal 
information of predatory lending in their communities, including 
practices directed at minorities and the elderly. For example, one fair 
housing center indicated that it had 417 predatory lending cases in 
2001 and that all of the loans in these cases included a prepayment 
penalty for a period of at least five years. Ninety-seven percent of 
these cases involved ARMs.
    The above information leads to the reasonable conclusion that sub-
prime

[[Page 60548]]

lenders often include prepayment penalties in sub-prime loans. OTS 
recognizes that there is some disagreement as to the extent that 
prepayment penalties may affect a borrower's ability or willingness to 
refinance. It is reported that one unidentified study found that sub-
prime loans with prepayment penalties are prepaid at about 90 percent 
of the rate of sub-prime loans without prepayment penalties.\32\ 
Nevertheless, common sense dictates that the existence of a prepayment 
penalty may well inhibit a borrower from refinancing his or her loan, 
which can be problematic where a good payment history may allow the 
borrower to graduate to a lower cost loan.\33\ Equally important, 
prepayment penalties may also be problematic in the sub-prime market 
where a borrower may be forced to refinance on less favorable terms in 
order to avoid default.\34\ Indeed, those circumstances may account for 
the prepayment of many sub-prime loans. Additionally, the cost of the 
prepayment penalty may be refinanced in the new loan balance, which 
drives up the overall price of the loan to the borrower. High penalties 
that are repeatedly financed into the cost of successive loans may be 
used by lenders to strip borrowers' equity in the home.\35\
---------------------------------------------------------------------------

    \32\ HUD/Treasury Report supra note 29, at 94.
    \33\ Id.
    \34\ Engel & McCoy, supra note 25, at 1285.
    \35\ HUD/Treasury Report supra note 29, at 73-75, 94. The 
practice of repeated refinancing of a mortgage loan within a short 
time period with little or no benefit to the borrower is referred to 
as loan flipping. Loan flipping typically occurs when a borrower is 
unable to meet scheduled payments or repeatedly consolidates other 
unsecured debts into a new home-secured loan at the urging of a 
lender. In addition to the origination fees, each refinancing may 
trigger prepayment fees. Such fees may be refinanced as a part of 
the total loan amount and ultimately strip borrowers' equity out of 
the borrower's home. Id.
---------------------------------------------------------------------------

    In short, OTS can properly conclude that the wide-spread use of 
prepayment penalties not only may deter consumers from seeking to 
refinance high cost loans that have burdensome provisions, but also may 
have other adverse consequences for sub-prime borrowers, such as 
increasing the overall lending cost for a consumer who refinances to 
avoid default.
    OTS believes that laws on prepayment penalties and late charges are 
a key component in states' regulation of predatory lending. Because 
these laws reflect each state legislature's judgment, after due 
consideration, about appropriate consumer protections applicable to 
state chartered lenders, OTS will not construe its authority under 
AMTPA to frustrate these state efforts where another less intrusive 
construction of AMTPA is permissible.

C. Scope of Preemption Under AMTPA

    One commenter requested OTS to specifically state that creditors 
offering mortgages under AMTPA must comply with all state laws relating 
to alternative mortgages, except those that expressly conflict with 
regulations identified by OTS.
    AMTPA provides little explicit guidance regarding the types of 
state laws that Congress intended to preempt. A few conclusions, 
however, may be drawn. AMTPA preempts state laws that would ban a state 
housing creditor from entering into an alternative mortgage (e.g., a 
law that bars variable rate loans). Similarly, state laws that 
conflict, or are inconsistent, with identified OTS regulations would be 
preempted. Because OTS is no longer identifying its regulations on 
prepayment penalties and late charges, state laws addressing 
prepayments or late charges generally would not be preempted by 
AMTPA.\36\
---------------------------------------------------------------------------

    \36\ The OTS April 30, 1996 legal opinion stated that AMTPA 
would preempt a state law even in the absence of a designated OTS 
regulation, if state housing creditors would be disadvantaged. Based 
on these statements, the commenter asserted that state laws 
addressing prepayment penalties would continue to be preempted even 
if OTS no longer designated Sec. Sec.  560.33 and 560.34 as 
applicable. As noted above, OTS reviewed its prior position and, 
after further consideration, concluded that prepayment penalties and 
late charges are not essential to parity; that state housing 
creditors would not be disadvantaged within the meaning of AMTPA if 
state laws on these subjects applied to their loans; and that state 
laws on these subjects are not preempted.
---------------------------------------------------------------------------

D. Alternatives, Modifications, and Clarifications

    Commenters addressed the following alternatives, modifications, and 
clarifications of the proposed rule.
1. Modify Regulations Applicable to Federal Thrifts
    As an alternative to the proposed rule, a number of commenters 
urged OTS to revise Sec. Sec.  560.33 and 560.34. Commenters urged OTS 
to impose reasonable limitations on prepayment penalties and late 
charges by federal thrifts and apply these limitations to state housing 
creditors under AMTPA. Commenters suggested: (1) Banning prepayment 
penalties and late charges on all mortgage transactions or on high-cost 
alternative mortgage transactions; (2) Permitting prepayment penalties 
only during the first two years after origination of the alternative 
mortgage transaction; (3) Restricting the amount of prepayment 
penalties; and (4) Requiring a lender that wishes to impose a 
prepayment penalty to demonstrate that it has offered the customer a 
loan with a prepayment penalty and an identical loan (at a lower rate) 
without a prepayment penalty.
    OTS declines to adopt any of these alternatives. OTS oversight and 
review of federal savings associations have not revealed a level of 
abusive practices that would warrant industry-wide regulation. Rather, 
OTS believes that the current prepayment and late charge regulations, 
when combined with the OTS comprehensive regime of regular examination 
and supervision of the lending activities of federal savings 
associations and its related enforcement activities, are adequate to 
address the operations of federal thrifts and to discourage their 
participation in predatory practices. In light of these factors, OTS is 
disinclined to impose new regulatory burdens on the federal savings 
associations within its jurisdiction.
    Additionally, OTS notes that the suggested changes, to the extent 
they would regulate the operations of federal savings associations, 
fall beyond the scope of the proposed rule and would require additional 
public comment under the Administrative Procedure Act. 5 U.S.C. 553.
2. Apply Sec. Sec.  560.33 and 560.34 to State Savings Associations
    AMTPA requires OTS to identify regulations for state housing 
creditors, which includes both depository institutions and non-
depository institutions. By contrast, OCC and NCUA regulations apply 
only to depository institutions (i.e., state chartered commercial banks 
and credit unions). The NPRM noted that state savings associations are 
subject to a safety and soundness regulatory scheme that is similar to 
the regulation of federal thrifts and substantially different from 
other state housing creditors. On this basis, OTS asked whether it 
should treat state chartered savings associations differently under 
AMTPA. OTS also asked whether AMTPA authorizes the agency to 
differentiate between state housing creditors on this basis.
    The NPRM also noted that Sec. Sec.  560.33 and 560.34 could be 
viewed as safety and soundness-based regulations. For example, Sec.  
560.34 permits federal thrifts to moderate prepayment risk through the 
assessment of prepayment penalties. Similarly, Sec.  560.33 allows 
federal savings associations to encourage the timely payment of loans 
and to recover costs associated with late payment. Accordingly, OTS 
asked whether it was appropriate to apply these rules to some or all 
mortgage transactions by state chartered housing lenders that are 
depository institutions.

[[Page 60549]]

    Commenters supporting this alternative observed that federal laws 
governing state and federal savings associations have become more 
similar since 1989 and that OTS has increasingly applied many federal 
thrift operational and supervisory regulations to state savings 
associations. Commenters also remarked that state and federal savings 
associations pursue similar strategies within a similar corporate and 
regulatory structure. As a result, the lending authority of these two 
types of depository institutions should be similar. Commenters also 
asserted that state savings associations were less likely to engage in 
predatory practices than unregulated lenders and mortgage brokers.
    OTS is authorized under the HOLA to provide for the examination, 
safe and sound operation, and regulation of federal and state savings 
associations, and to issue appropriate regulations addressing these 
subjects. 12 U.S.C. 1462a(b)(2), 1463(a) and 1464(a).\37\ However, 
state savings associations are also creatures of state law. States have 
responsibility for addressing safety and soundness, as well as 
legislating consumer protection for their citizens. OTS rules must 
strike a reasonable regulatory balance to permit the dual banking 
system to operate. Many state laws permit state chartered institutions 
to comply with laws and regulations governing federally chartered 
institutions as an alternative to state regulation. OTS believes that 
this choice should remain within state discretion and that state 
thrifts should be required to comply with state law, except where 
federal regulation is necessary.\38\
---------------------------------------------------------------------------

    \37\ While OTS has authority to apply these two regulations to 
state chartered savings associations, it has no authority under the 
HOLA over state savings banks. Therefore, OTS's application of these 
rules to state chartered savings associations would still result in 
disparate treatment for one type of depository institution, state 
chartered savings banks.
    \38\ Most states addressing the area have restricted the 
imposition of prepayment penalties, rather than imposed outright 
prohibitions against all such penalties for alternative mortgages. 
OTS is not aware of any state that prohibits all late charges. This 
illustrates that each state has weighed and struck its own balance 
regarding the regulation of state housing creditors and the 
protection of state consumers.
---------------------------------------------------------------------------

    At this point, OTS has concluded that AMTPA does not permit it to 
distinguish between state chartered savings associations and other 
state housing creditors. AMTPA states that transactions by all state 
housing creditors, other than banks and credit unions, must be made in 
accordance with regulations governing alternative mortgage transactions 
issued by OTS. 12 U.S.C. 3803(a). While the statute indicates that 
state housing creditors include savings and loan associations, mutual 
savings banks, and savings banks, nothing in AMTPA or its legislative 
history permits OTS to identify different regulations for state housing 
creditors that are depository institutions. Accordingly, OTS has 
concluded that AMTPA does not permit the proposed distinction.
    OTS, however, will continue to review the impact of these changes 
on state chartered savings associations and will consider suggestions 
from interested persons as to whether additional changes are 
permissible and necessary. If appropriate, OTS may address this matter 
in a separate rulemaking at some future date.
3. Definition of Alternative Mortgage Transaction
    AMTPA defines an alternative mortgage transaction as a loan or 
credit sale secured by an interest in residential real property--

(A) in which the interest rate or finance charge may be adjusted or 
renegotiated;
(B) involving a fixed-rate, but which implicitly permits rate 
adjustments by having the debt mature at the end of an interval 
shorter than the term of the amortization schedule; or
(C) involving any similar type of rate, method of determining 
return, term, repayment, or other variation not common to 
traditional fixed-rate, fixed-term transactions, including without 
limitation, transactions that involve the sharing of equity or 
appreciation;

described and defined by applicable regulation * * * .\39\
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 3802(1).

Thus, AMTPA applies to all manner of mortgage instruments that do not 
conform to the traditional fully-amortized, fixed-interest rate 
mortgage loan. OTS rules adopt this statutory definition without 
elaboration.\40\
---------------------------------------------------------------------------

    \40\ The current regulation at 12 CFR 560.220 includes a 
specific cross-reference to the statutory definition, but the 
proposed rule text did not. To clarify this point, OTS has revised 
the final rule to include the statutory reference.
---------------------------------------------------------------------------

    Several commenters requested OTS to clarify whether loans with 
certain terms are alternative mortgage transactions under OTS rules. 
Specifically, commenters seek clarification regarding the following 
loan terms:
    [sbull] Interest rates that reduce if the borrower pays on time. 
OTS has opined that loans that permit rate adjustments to reflect a 
borrowers' actual payment performance can be alternative mortgage 
transactions under paragraph (A) or (C) of the definition.\41\
---------------------------------------------------------------------------

    \41\ See OTS Op. Chief Counsel (Nov. 27, 1996) (A loan that 
explicitly provides for a specified increase in the interest rate if 
the borrower becomes delinquent for more than 30 days twice in a 
revolving twelve month period is an alternative mortgage transaction 
under paragraph (A) or (C) of the definition).
---------------------------------------------------------------------------

    [sbull] Balloon payments. To the extent that a loan has a fixed 
rate, but permits rate adjustments by having the debt mature at the end 
of an interval shorter than the term of the amortization schedule 
(e.g., a balloon loan), a loan may be an alternative mortgage 
transaction under paragraph (B).\42\
---------------------------------------------------------------------------

    \42\ See OTS Op. Chief Counsel (Feb. 10, 1997). But see Hays v. 
Bankers Trust Co., 46 F. Supp. 2d 490, 499 (S.D.W.V. 1999) (footnote 
17 states that AMTPA applies only to ARMs and does not cover the 
loan at issue, which was a balloon loan. This footnote appears to be 
erroneous in light of paragraph (B) of the definition).
---------------------------------------------------------------------------

    [sbull] Shared appreciation. Shared appreciation loans are 
specifically included in the definition at paragraph (C) and can be an 
alternative mortgage transaction.
    [sbull] Prepayment penalties and late charges. While prepayment 
penalties and late fees may affect a creditor's rate of return on a 
loan, conventional prepayment penalties and late charges are ``common 
to traditional fixed-rate, fixed-term transactions'' and do not 
transform a fixed-rate, fixed-term loan into an alternative mortgage 
transaction.
    [sbull] Negative amortization. Some mortgages, such as ARMs and 
graduated payment loans, are designed to negatively amortize or have 
the potential to negatively amortize, in the absence of delinquency or 
default. OTS believes that these transactions are alternative mortgages 
under AMTPA.
    Several commenters asked whether loans with interest rates that 
adjust insignificantly or within a very narrow range would fall within 
the definition of an alternative mortgage transaction. The AMTPA 
definition does not expressly require a loan to adjust by a minimum 
amount before it may be considered to be an alternative mortgage 
transaction. However, creditors issuing loans that are alternative in 
form, but not substance, solely to obtain the benefits of preemption, 
assume the risk that the loans may not be found to be alternative 
mortgage transactions within the AMTPA definition.
4. Definition of State Housing Creditor
    One commenter cautioned that certain statements in the NPRM were 
misleading to the extent they indicated that a housing creditor must 
hold a state license to be eligible to make a loan under AMTPA. The 
commenter observed that state laws exempt certain creditors from state 
licensing obligations. AMTPA does not unconditionally require a housing

[[Page 60550]]

creditor to hold a state license.\43\ Rather, it merely requires a 
creditor to hold a state license where the underlying state law imposes 
a licensing requirement.
---------------------------------------------------------------------------

    \43\ 12 U.S.C. 3802(2) states: ``A person is not a `housing 
creditor' with respect to a specific alternative mortgage 
transaction if, except for this chapter, in order to enter into that 
transaction, the person would be required to comply with licensing 
requirements imposed under State law, unless that person is licensed 
under applicable State law and such person remains, or becomes, 
subject to the applicable regulatory requirements and enforcement 
mechanisms provided by State law.''
---------------------------------------------------------------------------

5. Preemption for Operating Subsidiaries
    Two commenters asked OTS to confirm that operating subsidiaries of 
federal thrifts have the same lending authority and benefits of federal 
preemption as federal thrifts and, thus, do not need to use AMTPA to 
preempt state law. Another commenter, however, hinted that operating 
subsidiaries of federal thrifts should be treated like other state 
housing creditors under AMTPA.
    Under OTS rules, operating subsidiaries of federal thrifts are 
subject to the same requirements as federal thrifts. For example, an 
operating subsidiary is permitted to engage in any activity that the 
federal savings association may conduct directly. 12 CFR 559.3(e)(1). 
Unless specifically provided by statute, regulation, or OTS policy, all 
federal statutes and regulations apply to operating subsidiaries in the 
same manner as they apply to federal savings associations. 12 CFR 
559.3(h)(1). In addition, state laws apply to operating subsidiaries 
only to the extent that they apply to a federal savings association. 12 
CFR 559.3(n)(1). OTS has taken these positions because operating 
subsidiaries, which may only engage in activities permissible for its 
parent federal savings association and must be controlled by the 
thrift, are treated as the equivalent of the parent thrift for 
regulatory and reporting purposes.\44\ Because operating subsidiaries 
of federal savings associations have the same lending authority and 
benefits of federal preemption, they do not need to use AMTPA to 
preempt state law.
---------------------------------------------------------------------------

    \44\ See 61 FR 66561, 66563 (Dec. 18, 1996).
---------------------------------------------------------------------------

6. Retroactive Application
    One commenter asked whether the final rule will apply to loans 
consummated before the effective date. The commenter warned that 
borrowers would argue that the new rule must apply retroactively to 
existing transactions because OTS was ``incorrect'' when it revised the 
rules in 1996. In this final rule, OTS has selected between two 
permissible interpretations of AMTPA based upon a reevaluation of the 
statute. OTS has, in no way, concluded that the 1996 rule changes 
reflected an impermissible construction of its statute. Accordingly, 
there is no basis for arguing that the final rule applies retroactively 
to transactions consummated before the effective date.
    Even if OTS were to assume that it had the ability to apply this 
rule retroactively, such a position would seriously disrupt the 
mortgage markets. Borrowers and originating lenders have made pricing 
decisions regarding the interest rates and conditions and terms of 
mortgages based on the inclusion or exclusion of prepayment penalties. 
Similar pricing decisions have been made regarding secondary sales of 
these mortgages, either on a whole loan basis or as a part of mortgage 
pools backing securities. OTS does not believe that it may take away or 
impair vested rights acquired under a lawfully issued and effective 
regulation.

E. Legislative Recommendations

    Numerous commenters on the NPRM urged OTS to recommend that 
Congress repeal AMTPA. These commenters noted that AMTPA was passed in 
a high interest rate environment and was designed to permit state 
chartered institutions to offer alternative mortgage transactions that 
were otherwise prohibited under state law. Because all states, except 
one, permit alternative mortgage transactions, these commenters 
asserted that AMTPA has outlived its usefulness and may be repealed. 
Other commenters, however, supported the retention of AMTPA. These 
commenters noted that state laws continue to restrict or prohibit 
alternative mortgage transactions and that local governments are 
beginning to regulate this area.
    Legislative actions affecting AMTPA are beyond the scope of this 
rulemaking. In OTS's view, however, piecemeal legislative and 
regulatory solutions aimed at the various complex issues raised under 
AMTPA--predatory lending, the availability of credit, and parity among 
housing creditors--are not the best way to approach this problematic 
area. Accordingly, OTS and a substantial number of commenters on the 
NPRM believe that that Congress should revisit AMTPA, in the context of 
broader mortgage reform legislation involving the Real Estate 
Settlement Procedures Act,\45\ the Truth In Lending Act,\46\ and 
predatory lending. Only comprehensive reform can guarantee that 
borrowers receive meaningful information in a comprehensive and 
comprehensible form, that healthy competition between housing creditors 
is stimulated so that affordable housing credit continues to be 
available to consumers, and that statutory and regulatory burdens are 
minimized. OTS continues to advocate broad-based reform in this area as 
well as a review of existing laws that have inconsistencies and 
duplications that make the mortgage process more complicated and 
expensive for consumers than is needed.
---------------------------------------------------------------------------

    \45\ 12 U.S.C. 2601 et seq.
    \46\ 15 U.S.C. 1601 et seq.
---------------------------------------------------------------------------

    OTS also indicated that it would make two recommendations if 
Congress decides to retain AMTPA. First, OTS suggested that Congress 
should give states a new opportunity to opt out from AMTPA preemption. 
Congress originally gave the states three years to opt out of AMTPA 
preemption. If a state opted out, state housing creditors would 
continue to be bound by the state's regulations on alternative mortgage 
transactions.\47\ Only a handful of states decided to reject 
preemption.
---------------------------------------------------------------------------

    \47\ 12 U.S.C. 3804(a).
---------------------------------------------------------------------------

    Commenters opposing a new opt out period argued that this change 
would increase costs to consumers, raise new compliance issues, reduce 
certainty in the markets, and raise the possibility that Congress would 
add new opt out periods to other statutes including DIDMCA. One 
commenter feared that many states would opt out, which would gut the 
application of what was intended as a uniform law.
    The mortgage loan market has seen dramatic and fundamental changes 
since the original opt out period closed in 1985. Certain changes, such 
as the general acceptance of alternative mortgage transactions under 
state law and the increased availability of housing credit, may have 
been anticipated. The states, however, could not have anticipated other 
changes, such as the explosion in sub-prime lending, increases in 
predatory practices by lenders, and the breadth of preemption of state 
law permitted under AMTPA. Given these changes, OTS believes that the 
states should have a new opportunity to opt out of AMTPA.
    OTS also indicated that it would recommend that Congress require 
state housing creditors making loans under AMTPA to identify themselves 
to the states. Several commenters observed that this disclosure would 
enhance enforcement and monitoring activities by state supervisory 
agencies, fair housing organizations, and others. One commenter, 
however, argued that this revision is unnecessary because AMTPA

[[Page 60551]]

requires state housing creditors to comply with state licensing 
requirements and states have the authority to require these creditors 
to identify themselves to the state regulator.
    OTS continues to believe that enforcement is difficult unless 
states have a reliable means of identifying AMTPA creditors. OTS will 
continue to make this recommendation to ensure that all states have the 
ability to utilize their applicable enforcement mechanisms.

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

    Part 590 implements section 501 of DIDMCA.\48\ Section 501 provides 
for the permanent preemption of state laws that expressly limit the 
rate or amount of interest, discount points, finance charges, or other 
charges assessed in connection with certain federally-related 
residential loans. This preemption does not apply to loans secured by a 
first lien on a residential manufactured home unless the loan complies 
with consumer protections in Sec.  590.4. This regulation addresses 
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. Paragraph (f)(4) 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.''
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 1735f-7a.
---------------------------------------------------------------------------

    OTS proposed to eliminate the $5.00 limit. Two commenters opposed 
this change. They noted that this change would permit lenders to 
increase allowable late fees several times over the current levels and 
would facilitate predatory lending. Commenters also observed that low-
income borrowers, including limited-income seniors, are more likely to 
live in manufactured homes and would be adversely affected by the rule 
change. Four commenters supported the proposed change because it would: 
(1) Ensure that lenders are adequately compensated; (2) provide a 
stronger self-adjusting incentive for consumers to pay on time; and (3) 
provide parity with late charges permitted under state laws.
    OTS has not adjusted the $5 limit on late fees in 20 years. As a 
result, the limit has not kept pace with lenders' costs and is too 
small to serve as an effective deterrent to late payment. According to 
commenters, the $5 limit is an effective percentage rate of only 1.3 
percent of the average manufactured home loan payment. This amount is 
well below the prevailing state late fee for manufactured housing, 
which commenters assert is 5 percent of the loan installment payment. 
By contrast, the proposed limit is within the mix of late fee 
structures established under state law.
    While some commenters feared that the proposed rule would 
facilitate predatory lending, the revised regulation continues to 
impose effective limitations on such practices. As revised, Sec.  590.4 
limits the late charge to 5 percent of the unpaid amount of the 
installment unless the state provides for a lower amount. In addition, 
the rule would continue to provide that:
    [sbull] No late charge may be assessed, imposed, or collected 
unless the written contract between the borrower and the lender 
provides for the charge (Sec.  590.4(f)(1)).
    [sbull] No late charge may be collected if an installment is paid 
in full on or before the 15th day after its scheduled or deferred due 
date, unless state law permits a longer period (Sec.  590.4(f)(2)).
    [sbull] A late charge may be imposed only once on an installment, 
and may not be collected if an installment has been deferred Sec.  
590.4(f)(3).
    The NPRM asked whether OTS should also eliminate the 5 percent 
limit on the amount of the late fee and permit state law to govern the 
amount of late charges. One commenter supported and one commenter 
opposed this change. A third noted that this alternative would not have 
a significant impact since few states allow late charges in excess of 5 
percent.
    OTS has retained the 5 percent late fee limitation. While few 
states permit a lower charge, OTS believes that the 5 percent fee 
serves as an effective consumer safeguard to the extent that states 
permit late fees in excess of 5 percent of the unpaid amount.

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

    OTS proposed a minor technical change to part 591, which implements 
section 341 of the Garn St. Germain Depository Institutions Act of 1982 
(12 U.S.C. 1701j-3).\49\ Part 591 governs due-on-sale clauses in real 
estate loans and the preemption of state prohibitions on such clauses. 
OTS proposed to revise the definition of reverse mortgage at Sec.  
591.2(n) to 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 payment. This change is consistent with OTS 
legal opinions,\50\ and no commenter addressed the issue. The proposed 
rule is adopted without change.
---------------------------------------------------------------------------

    \49\ Pub. L. 97-320, 96 Stat. 1469 (1982).
    \50\ OTS Op. Chief Counsel (June 2, 2000) (reverse mortgage 
loans include an instrument providing for a lump sum payment).
---------------------------------------------------------------------------

IV. Regulatory Certifications

A. Executive Order 12866

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

B. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (Unfunded Mandates Act), requires an agency to 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 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.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612) requires 
federal agencies to prepare a final regulatory flexibility analysis 
with a final rule that was subject to notice and comment, unless the 
agency certifies that the rule will not have a significant impact on a 
substantial number of small entities.
    Parts 590 and 591. OTS did not prepare an initial or final 
regulatory flexibility analysis for the revisions to parts 590 and 591. 
The change to part 590 affects creditors making federally-related loans 
secured by first liens on residential manufactured housing. The final 
rule provides 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 limits late fees to $5, 
which has proven to be too small to deter late

[[Page 60552]]

payments. The final rule permits the imposition of a more tangible 
penalty and 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. The final rule makes a clarifying change 
that broadens the definition of reverse mortgage and codifies an 
existing OTS interpretation. OTS believes that the impact of the final 
rule on lenders should be beneficial. Thus, OTS certifies to the Chief 
Counsel of Advocacy of the Small Business Administration that the 
changes to parts 590 and 591 will not have a significant economic 
impact on a substantial number of small entities.
    Section 560.220. OTS has performed a final regulatory flexibility 
act analysis for the changes to Sec.  560.220. A description of the 
reasons why OTS is adopting the final rule, a statement of the 
objectives of, and legal basis for, this aspect of the final rule are 
included in the supplementary material above. In addition, OTS has 
addressed the following topics.
1. Small Entities to Which the Rule Applies
    Section 560.220 applies 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, AMTPA does not 
require state housing creditors to notify the states that they are 
taking advantage of it. 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 6,757 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 6,457 of these firms are 
small businesses.\51\ Based on the most recent TFR and Call Report 
data, OTS estimates that an additional 300 state chartered savings 
associations and state savings banks are small businesses.\52\ For 
purposes of this analysis, we have assumed that all 6,757 of these 
small businesses engage in alternative mortgage transactions.
---------------------------------------------------------------------------

    \51\ OTS based this figure on firms reported under NAICS 522292 
and the special tabulation of the 1997 economic census from the 
United States Bureau of the Census. The initial regulatory 
flexibility analysis estimated that 6,300 of the 7,257 firms were 
small businesses. OTS has revised this figure to reflect recent 
increases to SBA's thresholds defining small businesses. A firm 
engaged in real estate credit is now considered small if it has 
total receipts of $6 million or less per year. 67 FR 3041 (Jan. 23, 
2002) to be codified at 13 CFR 121.201. The threshold previously was 
$5 million. 13 CFR 121.201 (2002). While the 1997 special tabulation 
does not indicate the number of real estate credit firms that had 
less than $6 million in receipts, it indicates that an additional 
157 firms had less than $7.5 million in receipts. Recognizing that 
this number will overstate the number of small businesses satisfying 
the $6 million threshold, OTS has estimated that there are 6,457 
small firms engaged in real estate credit.
    \52\ OTS originally estimated that an additional 86 depository 
institutions were small state chartered housing creditors. This 
number has been revised to 300. The number used in the initial 
regulatory flexibility analysis did not include state savings banks, 
and must be recalculated to reflect recent changes to the SBA's 
thresholds defining small depository institutions. Until recently, 
small depository institutions were defined, for RFA purposes, as 
depository institutions with assets under $100 million. 13 CFR 
121.201 (2002). The threshold amount, however, was increased to $150 
million. See 67 FR 3041 (Jan. 23, 2002) to be codified at 13 CFR 
121.201. Based on March 2002 TFR data, OTS regulates 135 state 
savings associations. Of these savings associations, 93 have assets 
of $150 million or less. Based on March 2002 Call Report data, the 
FDIC regulates 508 state savings banks. Of these state savings 
banks, 207 have assets of $150 million or less.
---------------------------------------------------------------------------

    OTS believes that this number may overstate the number of small 
businesses that may be affected by the changes to the final rule for 
several reasons. First, the use of AMTPA is solely at the election of 
the state housing creditor. State housing creditors may, for whatever 
reason, decline to use AMTPA 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:
    [sbull] Opted out of AMTPA. State housing creditors conducting 
alternative mortgage transactions governed by these laws currently 
cannot use Sec.  560.220 to preempt state law; or
    [sbull] Enacted statutes that do not impose any substantive 
prohibitions and restrictions on prepayments 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 final rule.
    OTS's original estimate of small businesses was based on the best 
information available to it. OTS encouraged commenters 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 requested 
information regarding how many of these creditors may be small 
businesses.
    One commenter argued that OTS underestimated the number of small 
businesses affected by the rule. The commenter asserted that OTS 
excluded 40,000 to 50,000 mortgage brokers who originate the majority 
of residential loans in the United States. The commenter also asserted 
that thousands of appraisers and title companies would also see 
diminished revenues.
    OTS used United States Census data to determine the number of non-
depository institutions that would be effected by the rule. 
Specifically, OTS used the Census classification--NAICS 522292--Real 
Estate Credit, which is a subcategory within NAICS 5222--Non-Depository 
Credit Intermediation. NAICS 5222 includes establishments that are 
primarily engaged in extending credit or lending funds raised by credit 
market borrowing. Within this group, industries are broken out based on 
the type of credit extended. The selected classification--NAICS 
522292--comprises non-depository institutions that are engaged in 
lending funds with real estate as collateral and includes mortgage 
bankers and loan correspondents.
    The Regulatory Flexibility Act requires an agency to consider 
direct effects that a regulation may have on small businesses that it 
regulates. OTS is not, however, required to analyze the effects of its 
rule on entities that it does not regulate. Arguably, OTS regulates 
state housing creditors that make loans, credit sales, or advances 
secured by interests in real property.\53\ However, it does not 
directly impose any regulation on those entities that garner fees 
through brokerage services or through other services that facilitate 
the credit intermediation process. Accordingly,

[[Page 60553]]

OTS has not included within its tabulation entities that appear within 
the classification NAICS 5223--Activities Related to Credit 
Intermediation. This classification includes establishments that are 
primarily engaged in facilitating credit intermediation by performing 
activities, such as arranging loans by bringing borrowers and lenders 
together on a commission or fee basis.\54\
---------------------------------------------------------------------------

    \53\ OTS questions whether a regulatory flexibility analysis is 
required for the rule. Revised 12 CFR 560.220 imposes no restriction 
or limitation on any small entity's ability to impose prepayment 
penalties or late charges. Rather, the rule leaves 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. 
See American Trucking Ass'n, Inc. v. EPA, 175 F.3d 1027 (D.C. Cir. 
1999) (The D.C. Circuit held that EPA was not required to perform a 
regulatory flexibility analysis for its national ambient air quality 
standards (NAAQS). The NAAQS imposed no regulations on small 
entities. Instead, each state regulated small entities through the 
state implementation plans that they were required to develop under 
the Clean Air Act. Because the NAAQS 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).
    \54\ Mortgage and non-mortgage loan brokers are included within 
a subcategory of this classification--NAICS 52231.
---------------------------------------------------------------------------

2. Requirements of the Rule
    AMTPA 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 identified by OTS. As described more fully in the 
supplementary information section, the final rule no longer identifies 
rules on prepayment and late charges for state housing creditors under 
AMTPA. As a result, these state housing creditors will likely be 
subject to state laws addressing prepayment and restricting late 
charges.
    OTS is unable to quantify the impact of the final rule 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 OTS AMTPA regulations. Industry-wide data is available 
only for one type of alternative mortgage transaction--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.\55\ The most recent data available 
indicates 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.\56\ OTS 
estimates that $17.0 billion and $17.9 billion of these ARM loans were 
originated by small state housing creditors in 2001 and 2000.\57\ This 
available data, however, does not distinguish between transactions that 
are made under AMTPA, 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.\58\
---------------------------------------------------------------------------

    \55\ The Mortgage Bankers Association's Web site 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 percent and 25 percent of these loans were ARMs in 2001 
and 2000, respectively.
    \56\ This information was also obtained on the Mortgage Bankers 
Association's Web site, which indicates that its source was a HUD 
Survey of Mortgage Lending Activity discontinued in 1998.
    \57\ 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 12.4 percent of all ARM 
originations by real estate creditors.
    \58\ OTS does not currently collect data on the ARM originations 
by the small state savings associations. However, March 2002 CMR 
data indicates that these 93 thrifts hold approximately $1.04 
billion of ARMs in their portfolios. Again, this data does not 
distinguish transactions subject to AMTPA regulations.
---------------------------------------------------------------------------

    In the ANPR and NPRM, OTS attempted to obtain more complete and 
accurate information regarding the extent to which state housing 
creditors and small state housing creditors engage in alternative 
mortgage transactions under AMTPA. OTS also requested information 
concerning the amount of late fees and prepayment penalties generated 
by these alternative mortgage transactions. Commenters, however, 
provided no reliable additional information on this subject.\59\
---------------------------------------------------------------------------

    \59\ One of the commenters on the ANPR, 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 AMTPA 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.''
---------------------------------------------------------------------------

    Even if reliable estimates were available, these amounts would not 
accurately reflect the impact of the deletion of the preemption of 
prepayment charge provisions and late charge provisions. The 6,757 
small state housing creditors that may be affected by the final rule 
will become subject to a broad range of state laws. For example, some 
of these laws may 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 state laws will change over time, OTS cannot determine how 
much income would be lost by small state housing creditors under the 
rule.\60\
---------------------------------------------------------------------------

    \60\ 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.\61\ 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.\62\
---------------------------------------------------------------------------

    \61\ In April 2000, one large sub-prime 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 supra note 29, at 93, citing information from the New Century 
Mortgage Corporation Web site, www.newcentury.com.
    \62\ Alan L. Feld & Stephan G. Marks, Legal Differences Without 
Economic Distinctions: Points, Penalties, and the Market for 
Mortgages, 77 B.U. L. Rev. 405 (1997). Some commenters objected to 
OTS's suggestion that state housing creditors can ``ameliorate loss 
of income by substituting points or simply raising rates.'' They 
argued that a point is an immediate, out-of-pocket cost to a 
borrower. That cost is fixed regardless of whether the borrower 
keeps the loan for its full term, or chooses to repay or refinance 
the loan at some earlier date. By contrast, a prepayment penalty 
does not necessarily cost the borrower anything if the loan is 
retained through the prepayment penalty period. Commenters asserted 
that state housing creditors would be at a distinct disadvantage 
because they must charge higher rates and points. Even if one 
assumes that the average loan will prepay and cost a penalty, such 
costs in the aggregate will be less than if lenders are forced to 
ameliorate. Even if competitive equality were not the issue, state 
housing creditors would still be limited by state caps on rates.
---------------------------------------------------------------------------

    Some commenters indicated that OTS did not fully consider all 
impacts on small businesses, such as increased compliance costs to 
conform to newly applicable states laws, and the negative economic 
effects on small entities' ability to offer a competitive product, to 
address prepayment risk, or to access the secondary loan markets. 
Commenters, however, did not provide any reliable estimates or sources 
of information regarding the magnitude of these impacts on small 
entities.
3. Significant Alternatives
    Section 603(c) of the RFA requires OTS to describe any significant 
alternatives 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, 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.

[[Page 60554]]

    OTS considered retaining its current identification of regulations 
for all state housing creditors. For the reasons discussed above, OTS 
believes that this course is inappropriate. OTS also considered whether 
it should continue to identify 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 AMTPA, OTS has 
concluded that it is inappropriate to distinguish between small and 
large state housing creditors.
    OTS solicited comments on other alternatives that would minimize 
the burdens on small state housing creditors. The commenters did not 
suggest any alternatives aimed at small housing creditors. Other 
alternatives, however, are discussed in the supplementary information 
section above.
4. Other Matters
    Various federal rules or statutes duplicate or overlap with the 
final 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. These rules 
specifically prohibit prepayment penalties and preempt state laws on 
prepayment limits and late charges. OCC, on the other hand, has 
identified as applicable to state chartered commercial banks, its rules 
that directly relate to ARMs. OCC's identified regulations define ARM 
loans; state that ARMs may be made, sold, purchased, participated in, 
or dealt in without regard to any state law limitation on those 
activities; authorize certain indexes; and allow prepayment fees. 12 
CFR 34.24.
    In addition, the Home Ownership and Equity Protection Act (HOEPA) 
\63\ imposes limits on certain high cost mortgage loans by state 
housing creditors. These limits include restrictions on balloon 
payments, prepayment penalties, and other matters. Other federal 
statutes and rules may also preempt the application of state laws on 
prepayments and late fees for alternative mortgage transactions by 
state housing creditors. See e.g., 12 CFR 590.4 (preemption of state 
usury laws under section 501 of DIDMCA--first liens on residential 
mobile homes) and 12 CFR part 591 (preemption of state due-on-sale 
clauses under section 341 of Garn St. Germain Depository Institutions 
Act of 1982).\64\
---------------------------------------------------------------------------

    \63\ Pub. L. No. 103-325 (1994), 108 Stat. 2160, amending the 
Truth in Lending Act, 15 U.S.C. 1601 et seq. The reference to HOEPA 
was not included in the initial regulatory flexibility analysis.
    \64\ One commenter argued that the initial regulatory 
flexibility analysis incorrectly listed part 590 as an overlapping 
or duplicative provision because 12 U.S.C. 3805 states that the 
consumer protections in section 501(c)(1) of DIDMCA do not apply to 
alternative mortgage transactions under AMTPA. State housing 
creditors, however, may rely on state law rather than AMTPA for 
authority to make alternative mortgage transactions. If they do, 
they may assert preemption under section 501 under DIDMCA.
---------------------------------------------------------------------------

    OTS is aware of no federal rules or statutes that conflict with the 
final rule.

D. 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 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 amends 12 CFR parts 
560, 590, and 591 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. Revise Sec.  560.220 to read as follows:


Sec.  560.220  Alternative Mortgage Transaction 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 an alternative mortgage transaction as defined at 12 U.S.C. 
3802(1), 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 identifies Sec. Sec.  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 for 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 is revised 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 an 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.
* * * * *

    Dated: September 20, 2002.


[[Page 60555]]


    By the Office of Thrift Supervision.
James E. Gilleran,
Director.
[FR Doc. 02-24407 Filed 9-25-02; 8:45 am]
BILLING CODE 6720-01-P