[Federal Register Volume 73, Number 104 (Thursday, May 29, 2008)]
[Notices]
[Pages 30997-31005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-11850]



[[Page 30997]]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2008-0007]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1292]

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket No. OTS-2008-0003]

NATIONAL CREDIT UNION ADMINISTRATION


Illustrations of Consumer Information for Hybrid Adjustable Rate 
Mortgage Products

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (Board); Federal 
Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, 
Treasury (OTS); and National Credit Union Administration (NCUA) 
(collectively, the Agencies).

ACTION: Final Guidance--Illustrations of Consumer Information for 
Hybrid Adjustable Rate Mortgage Products.

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SUMMARY: The Agencies are publishing four documents that set forth 
Illustrations of Consumer Information for Hybrid Adjustable Rate 
Mortgage Products. The illustrations are intended to assist 
institutions in implementing the consumer protection portion of the 
Interagency Statement on Subprime Mortgage Lending adopted on July 10, 
2007, and in providing information to consumers on hybrid adjustable 
rate mortgage (ARM) products as recommended by that interagency 
statement. The illustrations are not model forms and institutions may 
choose not to use them.

EFFECTIVE DATE: May 29, 2008.

FOR FURTHER INFORMATION CONTACT:
    OCC: Michael Bylsma, Director, Stephen Van Meter, Assistant 
Director, Carolle Kim, Attorney, Community and Consumer Law Division, 
(202) 874-5750; or Joseph A. Smith, Group Leader, Mortgage Banking & 
Securitization, Retail Credit Risk, (202) 874-5170.
    Board: Kathleen C. Ryan, Counsel, or Jamie Z. Goodson, Attorney, 
Division of Consumer and Community Affairs, (202) 452-3667. For users 
of Telecommunication Device for Deaf only, call (202) 263-4869.
    FDIC: Luke H. Brown, Associate Director, Compliance Policy Branch, 
(202) 898-3842, Samuel Frumkin, Senior Policy Analyst, Division of 
Supervision and Consumer Protection, (202) 898-6602; or Richard Foley, 
Counsel, Legal Division, (202) 898-3784.
    OTS: Glenn Gimble, Senior Project Manager, Compliance and Consumer 
Protection Division, (202) 906-7158, or Suzanne McQueen, Consumer 
Regulations Analyst, Compliance and Consumer Protection Division, (202) 
906-6459.
    NCUA: Matthew J. Biliouris, Program Officer, Examination and 
Insurance, (703) 518-6360.

SUPPLEMENTARY INFORMATION: 

I. Background

    On March 8, 2007, the Agencies published the Interagency Statement 
on Subprime Mortgage Lending (Subprime Statement) for comment. 72 FR 
10533 (March 8, 2007). After carefully reviewing and considering all 
comments received, the Agencies published the Subprime Statement 
(applicable to all banks and their subsidiaries, bank holding companies 
and their nonbank subsidiaries, savings institutions and their 
subsidiaries, savings and loan holding companies and their 
subsidiaries, and credit unions) in final form on July 10, 2007. 72 FR 
37569 (July 10, 2007).
    The Subprime Statement set forth recommended practices to ensure 
that consumers have clear and balanced information about certain hybrid 
adjustable rate mortgage products during the product selection process, 
not just upon submission of an application or at consummation of the 
loan. This information should address the relative benefits and risks 
of these products and describe their costs, terms, features, and risks 
to the borrower.
    Some industry group commenters on the proposed Subprime Statement 
asked the Agencies to provide uniform disclosures for these products, 
or to publish illustrations of the consumer information contemplated by 
the Subprime Statement similar to those previously proposed by the 
Agencies in connection with nontraditional mortgage products. (These 
illustrations were subsequently revised and published in final form.\1\ 
) The Agencies determined that illustrations of the consumer 
information contemplated by the Subprime Statement may be useful to 
institutions as they seek to ensure that consumers receive the 
information they need about the material features of these loans. On 
August 14, 2007, the Agencies published for comment two Proposed 
Illustrations of Consumer Information for Subprime Mortgage Lending 
(Proposed Illustrations). 72 FR 45495 (Aug. 14, 2007).
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    \1\ Illustrations of Consumer Information for Nontraditional 
Mortgage Products, 72 FR 31825 (June 8, 2007).
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    The two Proposed Illustrations consisted of (1) a narrative 
explanation of some of the key features of certain ARM loans that are 
identified in the Subprime Statement, including payment shock, 
responsibility for taxes and insurance, prepayment penalties,\2\ 
balloon payments, and increased costs associated with stated income or 
reduced documentation loans, and (2) a chart with numerical examples 
that is designed to show the potential consequences of payment shock in 
a concrete, readily understandable manner for a loan structured with a 
discounted interest rate for the first two years.
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    \2\ Federal credit unions are prohibited from charging 
prepayment penalties. 12 CFR 701.21.
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    The Agencies requested comment on all aspects of the Proposed 
Illustrations. Specifically, commenters were asked to address whether 
the illustrations, as proposed, would be useful to institutions, 
including community banks, seeking to implement the ``Consumer 
Protection Principles'' portion of the Subprime Statement, or whether 
changes should be made. The Agencies also encouraged specific comment 
on whether the illustrations, as proposed, would be useful in promoting 
consumer understanding of the risks and material terms of certain ARM 
products, as described in the Subprime Statement, or whether changes 
should be made. Additionally, the Agencies sought comment on whether 
the information in the Proposed Illustrations is set forth in a clear 
manner and format; whether these illustrations or a modified form 
should be adopted by the Agencies; and whether additional illustrations 
relating to certain ARM products would be useful to consumers and 
institutions. Finally, the Agencies requested information on any 
consumer testing that commenters may have conducted in connection with 
comparable disclosures.
    After considering the comments received, the Agencies are now 
issuing final illustrations of consumer information for certain hybrid 
ARMs. The Subprime Statement recommended that communications with 
consumers, including advertisements, oral statements, and promotional 
materials, provide clear and balanced information about the relative 
benefits, costs, terms, features, and risks of certain ARM

[[Page 30998]]

products to the borrower. This includes information about the risk of 
payment shock, the ramifications of prepayment penalties, balloon 
payments, and a lack of escrow for taxes and insurance, and any pricing 
premium associated with a stated income or reduced documentation loan 
program.
    Use of the illustrations is entirely voluntary. Accordingly, there 
is no Agency requirement or expectation that institutions must use the 
illustrations in their communications with consumers. Institutions 
seeking to follow the recommendations set forth in the Subprime 
Statement may, at their option, elect to:
     Use the illustrations;
     Provide information based on the illustrations, but 
expand, abbreviate, or otherwise tailor any information in the 
illustrations as appropriate to reflect, for example:
     [cir] The institution's product offerings, such as by deleting 
information about loan products and loan terms not offered by the 
institution and by revising the illustrations to reflect specific terms 
currently offered by the institution;
     [cir] The consumer's particular loan requirements or 
qualifications;
     [cir] Current market conditions, such as by changing the loan 
amounts, interest rates, and corresponding payment amounts to reflect 
current local market circumstances;
     [cir] Other material information relating to the loan consistent 
with the Subprime Statement; and
     [cir] The results of consumer testing of the illustrations or 
comparable disclosures; or
     Provide the information described in the Subprime 
Statement, as appropriate, in an alternate format.
    To assist institutions that wish to use the illustrations, the 
Agencies will be posting each of the illustrations on their respective 
Web sites in a form that can be downloaded and printed for easy 
reproduction. The Agencies also will develop and post Spanish-language 
versions of the illustrations on their respective Web sites. 
Additionally, in response to concerns that the interest rates used in 
Illustrations Nos. 2A, 2B, and 2C may become outdated with changes in 
market interest rates--and consistent with the Agencies' intention, 
expressed above, that the illustrations may be modified to reflect, 
among other things, current market conditions--the Agencies also will 
be posting on their respective Web sites a template that can be used by 
institutions that wish to modify the information presented in these 
illustrations to reflect more current interest rates (and corresponding 
payment amounts).

II. Overview of the Comments

    Collectively, the Agencies received approximately 25 comment 
letters on the proposal, including comments from one federal regulatory 
agency, a group of three associations of state banking and consumer 
protection agencies, six financial institutions, ten trade 
organizations, two community organizations, and five individuals.
    Most commenters encouraged the Agencies to adopt the illustrations. 
These commenters stated that the illustrations would be useful to 
financial institutions, including community banks, seeking to implement 
the consumer protection principles of the Subprime Statement. At least 
one commenter also noted that the illustrations would help reduce 
implementation costs and compliance burden.
    Several trade organizations supported making use of the 
illustrations voluntary. These commenters also urged the Agencies to 
notify their examiners that use of the illustrations is not required to 
show compliance with the Subprime Statement. One of these commenters 
stated that in developing the illustrations the Agencies have 
appropriately balanced the need for institutions to provide meaningful 
disclosures and the need to avoid unnecessary burdens. On the other 
hand, one community organization advocated that use of the 
illustrations should be made mandatory to prevent consumer confusion 
due to lack of uniform disclosures from lender to lender.
    Many commenters suggested that the Proposed Illustrations could 
confuse consumers about whether the illustrations are describing 
features of hybrid ARMs generally or, instead, describing the mortgage 
they are actually considering or being offered. These commenters 
suggested modifying the illustrations by revising statements that 
appear specific to a particular borrower and loan product. Other 
commenters, however, suggested modifying the illustrations so that they 
would be based on the actual loan product or product choices lenders 
will offer to the particular applicant, and include more loan-specific 
details.
    Commenters also suggested changes to make the illustrations more 
accurately reflect the actual terms of products prevalent in the 
market. For example, it was noted that the illustrations focused on 
hybrid ARM products structured with a discounted interest rate for the 
first two years. Due to recent market developments, such products have 
become uncommon, and have been replaced, to some extent, by products 
with somewhat longer discounted initial interest rate periods.
    Finally, commenters made a number of suggestions to change the 
wording, format, or content of the illustrations in order to improve 
the accuracy, clarity, or usefulness of the illustrations for 
consumers.

III. Final Illustrations

    After carefully considering all of the comments received, the 
Agencies have decided to publish the proposed illustrations in final 
form, with some modifications.\3\ Additionally, the Agencies believe 
that issuing these materials as nonmandatory illustrations will provide 
institutions with the flexibility needed to tailor the materials to 
their own circumstances and consumer needs.
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    \3\ The Agencies are using a different title for this final 
guidance than for the proposed guidance to reflect more closely the 
types of mortgage products covered by the Subprime Statement.
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    In response to commenter concerns, the Agencies have made three 
sets of changes to the proposed illustrations, as described more fully 
below. The first change relates to the language and format of 
Illustration No. 1. The Agencies have modified this illustration so it 
clearly will be a general description of the features of the products 
covered by the Subprime Statement, rather than a loan-specific 
disclosure. Second, the Agencies have included additional versions of 
Illustration No. 2 to provide institutions with illustrations 
reflecting products that may be more prevalent in the market, and to 
show how institutions might provide this information when they offer 
multiple products subject to the Subprime Statement. Finally, the 
Agencies have adopted a number of wording and format changes to improve 
the readability and usefulness of the illustrations for consumers, and 
to make it easier for consumers to understand the key risks of the 
products covered by the Subprime Statement.

A. Proposed Illustration No. 1

    As noted above, several commenters suggested that Illustration No. 
1 should generally describe features found in the subprime ARM products 
covered by the Subprime Statement. Given that the Subprime Statement 
called for early delivery--during the product selection process--of the 
consumer information contemplated in the Statement, the Agencies agree 
that it could be inappropriate and confusing for Illustration No. 1 to 
appear to set forth

[[Page 30999]]

specific loan terms. At this stage, consumers have not yet selected a 
specific loan, and institutions likely will not have performed the 
credit underwriting necessary to determine all of the terms that may be 
offered to the consumer. In view of these uncertainties, and in light 
of the fact that hybrid ARMs may include various combinations of the 
risks and features highlighted in the Subprime Statement, it would not 
be possible for this narrative description to convey loan-specific 
information in a way that would be accurate or relevant for all 
consumers. For these reasons, attempting to include loan-specific 
information would frustrate one of the Agencies' primary goals in 
issuing these illustrations: Namely, to create a set of documents that 
institutions can use to satisfy the expectations outlined in the 
Subprime Statement.\4\
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    \4\ In this regard, the Agencies note that institutions will 
continue to have obligations under the Truth in Lending Act, Real 
Estate Settlement Procedures Act, and other laws to provide 
consumers with timely, loan-specific information.
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    Accordingly, in order to make clear that this illustration is 
simply a generic description of key risks and features that may be 
found in the products covered by the Subprime Statement, and to improve 
readability and usefulness, the Agencies have made substantial changes 
to proposed Illustration No. 1, and have adopted, to a large extent, 
the format used in the Agencies' nontraditional mortgage product 
illustrations.\5\ Most significantly, the document has been revised and 
reformatted to emphasize the risk of payment shock present in all 
products covered by the Subprime Statement, as opposed to other 
features (such as prepayment penalties) that may (or may not) be found 
in any particular loan.\6\ These other features are now described under 
a general heading, ``Additional Information.'' The Agencies also 
believe that distinguishing between the inherent and potential risks of 
these products, and formatting the document accordingly, helps to make 
the document easier to use and understand. The Agencies also have 
revised the language in the subject matter headings of the ``Additional 
Information'' portion of the document. These changes are designed to 
conform to the approach used in the nontraditional mortgage product 
illustrations and to clarify that the features described therein are 
not necessarily included in the loan to be offered to the consumer.
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    \5\ Illustrations of Consumer Information for Nontraditional 
Mortgage Products, 72 FR 31825 (June 8, 2007).
    \6\ The title of this illustration also has been revised, in 
response to commenter suggestions, to stress that the document 
includes important facts about any adjustable rate mortgage with a 
reduced initial interest rate.
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    The Agencies also adopted several suggestions from commenters to 
place more emphasis on the nature of the risks associated with 
obtaining a hybrid ARM product of the type covered by the Subprime 
Statement, and to focus consumers' attention on those risks. For 
example, the Agencies have added language directing consumers not to 
assume that they will be able to refinance their ARM to a lower rate in 
the future. The final illustration also states that consumers ``need to 
know'' whether the monthly payment includes taxes and insurance, 
whether their loan would have a prepayment penalty or balloon payment, 
and whether obtaining a ``full documentation'' loan would be more cost-
effective.
    Other recommendations were adopted by the Agencies to improve the 
clarity or usefulness of the document for consumers. For example, 
Illustration No. 1 was modified to reflect interest rate indexes more 
likely to be used by lenders in the current market.
    The Agencies decided not to adopt a number of specific suggestions 
made by commenters. Some of these suggestions were largely duplicative 
of information already contained in the document, or otherwise would 
have made the document too lengthy and less consumer-friendly. Other 
comments would have provided substantive advice to consumers about 
particular features and terms, and were inconsistent with the purpose 
of the illustration to provide important information in an objective, 
balanced manner. One commenter representing the credit union industry 
suggested deleting the reference to prepayment penalties in 
Illustration No. 1 on the grounds that federal credit unions are not 
permitted to charge such penalties. The Agencies did not adopt this 
suggestion, however, because the illustrations are designed for the use 
of all institutions supervised by any of the Agencies. As noted above, 
institutions may tailor the information in the illustrations as 
appropriate to reflect, for example, their own product offerings. Other 
suggested changes that were not adopted would not, in the Agencies' 
view, have enhanced the clarity or usefulness of the illustration for 
consumers.

 B. Proposed Illustration No. 2

    After reviewing and considering the comments, the Agencies have 
retained Proposed Illustration No. 2--a chart comparing payment 
obligations on a fixed rate loan and an ARM with a discounted interest 
rate for the first two years--but have re-designated the illustration 
as Illustration No. 2A. In response to the comments and market changes, 
the Agencies also have included two additional versions of Proposed 
Illustration No. 2 for institutions to consider using. Comments on 
Illustration No. 2, as well as external data reviewed, indicate that 
hybrid ARM products structured with a discounted interest rate for the 
first five years may have become more prevalent in the current market 
than similar products structured with a discounted interest rate for 
the first two years. Accordingly, the Agencies have added a similar 
chart, designated as Illustration No. 2B, that compares payment 
obligations on a fixed rate loan and an ARM with a discounted interest 
rate for the first five years. Institutions may believe that 
Illustration No. 2B is more helpful than Illustration No. 2A to 
consumers considering loans whose initial rate remains in effect for a 
longer period of time. In addition, the Agencies have added a third 
chart, designated as Illustration No. 2C, that compares payment 
obligations on three products: A fixed rate loan; an ARM with a 
discounted interest rate for the first two years; and an ARM with a 
discounted rate for five years. Institutions that would like to present 
information about multiple products they offer on a single page, rather 
than providing a separate illustration for each product, may find this 
third chart to be useful.\7\ The Agencies also adopted a number of 
minor wording changes, including changes in the left column of the 
illustration to clarify that the interest rate conditions specified 
therein are specifically referring to movement in index interest rates, 
and not the interest rate increases required by the terms of the hybrid 
ARM loan. The Agencies also changed the assumed interest rate increase 
in the final row of the left column to be more consistent with the 
illustration's assumptions about product structure, and thereby less 
likely to produce consumer confusion. The Agencies did not adopt some 
suggestions made by commenters because they would require the provision 
of loan-specific information

[[Page 31000]]

that could not feasibly or accurately be presented in the early product 
selection process. However, as noted above, institutions that wish to 
modify the information presented in these illustrations will be able to 
access relevant templates on the respective Web sites of the Agencies 
and insert more loan-specific information. Some recommendations also 
were not adopted because, on balance, they would unreasonably increase 
or duplicate the information already included or would not otherwise 
appear to improve the clarity or usefulness of the information 
presented for consumers.
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    \7\ Illustrations Nos. 2A, 2B, and 2C reflect typical interest 
rates for these products at the time the Agencies issued the 
Subprime Statement, and embody other assumptions about typical 
features of these products. For example, they reflect assumptions 
that: the fully-indexed rate is 4.5 percentage points higher than 
the initial rate (based on an initial index rate of 5.5 percent and 
a margin of 6 percent); the first interest rate adjustment cannot 
exceed 3 percentage points; subsequent interest rate adjustments may 
not exceed 1.5 percentage points; and the applicable interest rate 
may never be more than 6 percentage points higher than the initial 
rate.
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    The final illustrations appear below.
BILLING CODE 4810-33-C, 6210-01-C, 6714-01-C, 6720-01-C, 7335-01-C

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    Dated: May 15, 2008.
John C. Dugan,
Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, May 20, 2008.
Robert deV. Frierson,
Deputy Secretary of the Board.

    Dated at Washington, DC, the 19th day of May, 2008.

    By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

    Dated: May 7, 2008.
    By the Office of Thrift Supervision.
John Reich,
Director.

    By the National Credit Union Administration on May 20, 2008.
JoAnn M. Johnson,
Chairman.
[FR Doc. E8-11850 Filed 5-28-08; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P, 7535-01-P