[Federal Register Volume 74, Number 164 (Wednesday, August 26, 2009)]
[Proposed Rules]
[Pages 43232-43425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-18119]
[[Page 43231]]
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Part II
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Proposed Rule
Federal Register / Vol. 74, No. 164 / Wednesday, August 26, 2009 /
Proposed Rules
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1366]
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board proposes to amend Regulation Z, which implements the
Truth in Lending Act (TILA), and the staff commentary to the
regulation, as part of a comprehensive review of TILA's rules for
closed-end credit. This proposal would revise the rules for disclosures
of closed-end credit secured by real property or a consumer's dwelling,
except for rules regarding rescission and reverse mortgages, which the
Board anticipates will be reviewed at a later date. Published elsewhere
in today's Federal Register is the Board's proposal regarding rules for
disclosures of open-end credit secured by a consumer's dwelling.
Disclosures provided at application would include a Board-published
one-page ``Key Questions to Ask About Your Mortgage'' document that
explains potentially risky loan features, and a Board-published one-
page ``Fixed vs. Adjustable Rate Mortgages'' document. Transaction-
specific disclosures required within three business days of application
would summarize key loan terms. The calculation of the annual
percentage rate and the finance charge would be revised to be more
comprehensive, and their disclosures improved. Consumers would receive
a ``final'' TILA disclosure at least three business days before
consummation. Certain new post-consummation disclosures would be
required. In addition, the proposed revisions would prohibit certain
payments to mortgage brokers and loan officers that are based on the
loan's terms or conditions, and prohibit steering consumers to
transactions that are not in their interest to increase compensation
received.
Rules regarding eligibility restrictions and disclosures for credit
insurance and debt cancellation or debt suspension coverage would apply
to all closed-end and open-end credit transactions.
DATES: Comments must be received on or before December 24, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1366, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jamie Z. Goodson, Jelena McWilliams,
Nikita M. Pastor, or Maureen C. Yap, Attorneys; Paul Mondor, Senior
Attorney; or Kathleen C. Ryan, Senior Counsel. Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System, at
(202) 452-3667 or 452-2412; for users of Telecommunications Device for
the Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background on TILA and Regulation Z
Congress enacted the Truth in Lending Act (TILA) based on findings
that economic stability would be enhanced and competition among
consumer credit providers would be strengthened by the informed use of
credit resulting from consumers' awareness of the cost of credit. One
of the purposes of TILA is to provide meaningful disclosure of credit
terms to enable consumers to compare credit terms available in the
marketplace more readily and avoid the uninformed use of credit.
TILA's disclosures differ depending on whether credit is an open-
end (revolving) plan or a closed-end (installment) loan. TILA also
contains procedural and substantive protections for consumers. TILA is
implemented by the Board's Regulation Z. An Official Staff Commentary
interprets the requirements of Regulation Z. By statute, creditors that
follow in good faith Board or official staff interpretations are
insulated from civil liability, criminal penalties, or administrative
sanction.
II. Summary of Major Proposed Changes
The goal of the proposed amendments to Regulation Z is to improve
the effectiveness of disclosures that creditors provide to consumers in
connection with an application and throughout the life of a mortgage.
The proposed changes are the result of the Board's review of the
provisions that apply to closed-end mortgage transactions. The proposal
would apply to all closed-end credit transactions secured by real
property or a dwelling, and would not be limited to credit secured by
the consumer's principal dwelling. The Board is proposing changes to
the format, timing, and content of disclosures for the four main types
of closed-end credit information governed by Regulation Z: (1)
disclosures at application; (2) disclosures within three days after
application; (3) disclosures three days before consummation; and (4)
disclosures after consummation. In addition, the Board is proposing
additional protections related to limits on loan originator
compensation.
Disclosures at Application. The proposal contains new requirements
and changes to the format and content of disclosures given at
application, to make them more meaningful and easier for consumers to
use. The proposed changes include:
Providing a new one-page Board publication, entitled ``Key
Questions to Ask About Your Mortgage,'' which would explain the
potentially risky features of a loan.
Providing a new one-page Board publication, entitled
``Fixed vs. Adjustable Rate Mortgages,'' which would explain the basic
differences between such loans and would replace the lengthy Consumer
Handbook on Adjustable-Rate Mortgages (CHARM booklet) currently
required under Regulation Z.
Revising the format and content of the current adjustable-
rate mortgage (ARM) loan program disclosure, including: a requirement
that the disclosure be in a tabular question and answer format, a
streamlined plain-language disclosure of interest rate and payment
information, and a new disclosure of potentially risky features, such
as prepayment penalties.
Disclosures within Three Days after Application. The proposal also
contains revisions to the TILA disclosures provided within three days
after
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application (the ``early TILA disclosure'') to make the information
clearer and more conspicuous. The proposed changes include:
Revising the calculation of the finance charge and annual
percentage rate (APR) so that they capture most fees and costs paid by
consumers in connection with the credit transaction.
Providing a graph that would show consumers how their APR
compares to the APRs for borrowers with excellent credit and for
borrowers with impaired credit.
Summarizing key loan features, such as the loan term,
amount, and type, and disclosing total settlement charges, as is
currently required for the good faith estimate of settlement costs
(GFE) under the Real Estate Settlement Procedures Act (RESPA) and
Regulation X.
Requiring disclosure of potential changes to the interest
rate and monthly payment.
Adopting new format requirements, including rules
regarding: type size and use of boldface for certain terms, placement
of information, and highlighting certain information in a tabular
format.
Disclosures Three Days before Consummation. The proposal would
require creditors to provide a ``final'' TILA disclosure that the
consumer must receive at least three business days before consummation.
In addition, two proposed alternatives regarding redisclosure of the
``final'' TILA disclosure include:
Alternative 1: If any terms change after the ``final''
TILA disclosures are provided, then another final TILA disclosure would
need to be provided so that the consumer receives it at least three
business days before consummation.
Alternative 2: If the APR exceeds a certain tolerance or
an adjustable-rate feature is added after the ``final'' TILA
disclosures are provided, then another final TILA disclosure would need
to be provided so that the consumer receives it at least three business
days before consummation. All other changes could be disclosed at
consummation.
Disclosures after Consummation. The proposal would change the
timing, content and types of notices provided after consummation. The
proposed changes include:
For ARMs, increasing advance notice of a payment change
from 25 to 60 days, and revising the format and content of the ARM
adjustment notice.
For payment option loans with negative amortization,
requiring a monthly statement to provide information about payment
options that include the costs and effects of negatively-amortizing
payments.
For creditor-placed property insurance, requiring notice
of the cost and coverage at least 45 days before imposing a charge for
such insurance.
Loan Originator Compensation. The proposal contains new limits on
originator compensation for all closed-end mortgages. The proposed
changes include:
Prohibiting certain payments to a mortgage broker or a
loan officer that are based on the loan's terms and conditions.
Prohibiting a mortgage broker or loan officer from
``steering'' consumers to transactions that are not in their interest
in order to increase the mortgage broker's or loan officer's
compensation.
III. The Board's Review of Closed-End Credit Rules
The Board has amended Regulation Z numerous times since TILA
simplification in 1980. In 1987, the Board revised Regulation Z to
require special disclosures for closed-end ARMs secured by the
borrower's principal dwelling. 52 FR 48665; Dec. 24, 1987. In 1995, the
Board revised Regulation Z to implement changes to TILA by the Home
Ownership and Equity Protection Act (HOEPA). 60 FR 15463; Mar. 24,
1995. HOEPA requires special disclosures and substantive protections
for home-equity loans and refinancings with APRs or points and fees
above certain statutory thresholds. Numerous other amendments have been
made over the years to address new mortgage products and other matters,
such as abusive lending practices in the mortgage and home-equity
markets.
The Board's current review of Regulation Z was initiated in
December 2004 with an advance notice of proposed rulemaking.\1\ 69 FR
70925; Dec. 8, 2004. At that time, the Board announced its intent to
conduct its review of Regulation Z in stages, focusing first on the
rules for open-end (revolving) credit accounts that are not home-
secured, chiefly general-purpose credit cards and retailer credit card
plans. In December 2008, the Board approved final rules for open-end
credit that is not home-secured. 74 FR 5244; Jan. 29, 2009.
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\1\ The review was initiated pursuant to requirements of section
303 of the Riegle Community Development and Regulatory Improvement
Act of 1994, section 610(c) of the Regulatory Flexibility Act of
1980, and section 2222 of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996. An advance notice of proposed
rulemaking is published to obtain preliminary information prior to
issuing a proposed rule or, in some cases, deciding whether to issue
a proposed rule.
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Beginning in 2007, the Board proposed revisions to the rules for
closed-end credit in several phases:
HOEPA. In 2007, the Board proposed rules under HOEPA for
higher-priced mortgage loans (2007 HOEPA Proposed Rule). The final
rules, approved in July 2008 (2008 HOEPA Final Rule), prohibited
certain unfair or deceptive lending and servicing practices in
connection with closed-end mortgages. The Board also approved revisions
to advertising rules for both closed-end and open-end home-secured
loans to ensure that advertisements contain accurate and balanced
information and do not contain misleading or deceptive representations.
The final rules also required creditors to provide consumers with
transaction-specific disclosures early enough to use while shopping for
a mortgage. 73 FR 44522; July 30, 2008.
Timing of Disclosures for Closed-End Mortgages. On May 7,
2009, the Board approved final rules implementing the Mortgage
Disclosure Improvement Act of 2008 (the MDIA).\2\ The MDIA adds to the
requirements of the 2008 HOEPA Final Rule regarding transaction-
specific disclosures. Among other things, the MDIA and the final rules
require early, transaction-specific disclosures for mortgage loans
secured by dwellings even when the dwelling is not the consumer's
principal dwelling, and requires waiting periods between the time when
disclosures are given and consummation of the transaction. 74 FR 23289;
May 19, 2009.
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\2\ The MDIA is contained in Sections 2501 through 2503 of the
Housing and Economic Recovery Act of 2008, Public Law 110-289,
enacted on July 30, 2008. The MDIA was later amended by the
Emergency Economic Stabilization Act of 2008, Public Law 110-343,
enacted on October 3, 2008.
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This proposal would revise the rules for disclosures for closed-end
credit secured by real property or a consumer's dwelling. The Board
anticipates reviewing the rules for rescission and reverse mortgages in
the next phase of the Regulation Z review.
A. Coordination With Disclosures Required Under the Real Estate
Settlement Procedures Act
The Board anticipates working with the Department of Housing and
Urban Development (HUD) to ensure that TILA and Real Estate Settlement
Procedures Act of 1974 (RESPA) disclosures are compatible and
complementary, including potentially developing a single disclosure
form that creditors could use to combine the initial disclosures
required under TILA and
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RESPA. The two statutes have different purposes but have considerable
overlap. Harmonizing the two disclosure schemes would ensure that
consumers receive consistent information under both laws. It may also
help reduce information overload by eliminating some duplicative
disclosures. Consumer testing would be used to ensure consumers could
understand and use the combined disclosures. In the meantime, the Board
is proposing a revised model TILA form so that commenters can see how
the Board's proposed revisions to Regulation Z might be applied in
practice.
RESPA, which is implemented by HUD's Regulation X, seeks to ensure
that consumers are provided with timely information about the nature
and costs of the settlement process and are protected from
unnecessarily high real estate settlement charges. To this end, RESPA
mandates that consumers receive information about the costs associated
with a mortgage loan transaction, and prohibits certain business
practices. Under RESPA, creditors must provide a GFE within three
business days after a consumer submits a written application for a
mortgage loan, which is the same time creditors must provide the early
TILA disclosure. RESPA also requires a statement of the actual costs
imposed at loan settlement (HUD-1 settlement statement). In November
2008, HUD published revised RESPA rules, including new GFE and HUD-1
settlement statement forms, which lenders, mortgage brokers, and
settlement agents must use beginning on January 1, 2010. 73 FR 68204;
Nov. 17, 2008. In addition to revised disclosures of settlement costs,
the revised GFE now includes loan terms, some of which would also
appear on the TILA disclosure, such as whether there is a prepayment
penalty and the borrower's interest rate and monthly payment. The
revised GFE form was developed through HUD's consumer testing.
TILA, which is implemented by the Board's Regulation Z, governs the
disclosure of the APR and certain loan terms. This proposal contains a
revised model TILA form that was developed through consumer testing. In
addition to a revised disclosure of the APR and loan terms, the revised
TILA disclosure would include the total settlement charges that appear
on the GFE required under RESPA. Total settlement charges would be
added to the TILA form because consumer testing conducted by the Board
found that consumers wanted to have settlement charges disclosed on the
TILA form.
The proposed revised TILA form and HUD's revised GFE would
represent significant improvements, but overlap between the two forms
could be eliminated to reduce information overload and consistency
issues. There have been previous efforts to develop a combined TILA and
RESPA disclosure form, which were fueled by the amount, complexity, and
overlap of information in the disclosures. Under a 1996 congressional
directive, the Board and HUD studied ways to simplify and improve the
disclosures. In July 1998, the Board and HUD submitted a joint report
to Congress that provided a broad outline intended to be a starting
point for consideration of legislative reform of the mortgage
disclosure requirements (the 1998 Joint Report).\3\ The 1998 Joint
Report included a recommendation for combining and simplifying the
RESPA and TILA disclosure forms to satisfy the requirements of both
laws. In addition, The 1998 Joint Report recommended that the timing of
the TILA and RESPA disclosures be coordinated. Recent regulatory
changes addressed the timing issues so that initial disclosures
required under TILA and RESPA would be delivered at the same time.
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\3\ Bd. of Governors of the Fed. Reserve Sys. and U.S. Dep't of
Hous. and Urban Dev., Joint Report to the Congress Concerning Reform
to the Truth in Lending Act and the Real Estate Settlement
Procedures Act (1998), available at http://www.federalreserve.gov/boarddocs/rptcongress/tila.pdf.
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B. The Bankruptcy Act's Amendment to TILA
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
(Bankruptcy Act) primarily amended the federal bankruptcy code, but
also contained several provisions amending TILA. With respect to open-
end and closed-end dwelling-secured credit, the Bankruptcy Act requires
that the credit application disclosure contain a statement warning
consumers that if the loan exceeds the fair market value of the
dwelling, then the interest on that portion of the loan is not tax
deductible, and the consumer should consult a tax advisor for further
information on tax deductibility. This proposal would implement this
Bankruptcy Act provision.
C. The MDIA's Amendments to TILA
On July 30, 2008, Congress enacted the MDIA.\4\ The MDIA codified
some of the requirements of the Board's 2008 HOEPA Final Rule, which
required transaction-specific disclosures to be provided within three
business days after an application is received and before the consumer
has paid a fee, other than a fee for obtaining the consumer's credit
history.\5\ The MDIA also expanded coverage of the early disclosure
requirement to include loans secured by a dwelling even when it is not
the consumer's principal dwelling. In addition, the MDIA required
creditors to mail or deliver early TILA disclosures at least seven
business days before consummation and provide corrected disclosures if
the disclosed APR changes in excess of a specified tolerance. The
consumer must receive the corrected disclosures no later than three
business days before consummation. The Board implemented these MDIA
requirements in final rules published May 19, 2009, and effective July
30, 2009. 74 FR 23289; May 19, 2009.
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\4\ As noted, Congress subsequently amended the MDIA with the
Emergency Economic Stabilization Act of 2008.
\5\ To ease discussion, the description of the closed-end
mortgage disclosure scheme includes MDIA's recent amendments to TILA
and the disclosure timing requirements of the 2008 HOEPA Final Rule
that will be effective July 30, 2009.
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The MDIA also requires payment examples if the interest rate or
payments can change. Such disclosures are to be formatted in accordance
with the results of consumer testing conducted by the Board. Those
provisions of the MDIA will not become effective until January 30,
2011, or any earlier compliance date established by the Board. This
proposal would implement those MDIA provisions.
D. Consumer Testing
A principal goal for the Regulation Z review is to produce revised
and improved mortgage disclosures that consumers will be more likely to
understand and use in their decisions, while at the same time not
creating undue burdens for creditors. Currently, Regulation Z requires
creditors to provide at application an ARM loan program disclosure and
the CHARM booklet. An early TILA disclosure is required within three
business days of application and at least seven business days before
consummation for closed-end mortgages.
In 2007, the Board retained a research and consulting firm (ICF
Macro) that specializes in designing and testing documents to conduct
consumer testing to help the Board's review of mortgage rules under
Regulation Z. Working closely with the Board, ICF Macro conducted
several tests in different cities throughout the United States. The
testing consisted of four focus groups and eleven rounds of one-on-one
cognitive interviews. The goals of these focus groups and interviews
were to learn how consumers shop for
[[Page 43235]]
mortgages and what information consumers read when they receive
mortgage disclosures, and to assess their understanding of such
disclosures.
The consumer testing groups contained participants with a range of
ethnicities, ages, educational levels, and mortgage behaviors,
including first-time mortgage shoppers, prime and subprime borrowers,
and consumers who had obtained one or more closed-end mortgages. For
each round of testing, ICF Macro developed a set of model disclosure
forms to be tested. Interview participants were asked to review model
forms and provide their reactions, and were then asked a series of
questions designed to test their understanding of the content. Data
were collected on which elements and features of each form were most
successful in providing information clearly and effectively. The
findings from each round of interviews were incorporated in revisions
to the model forms for the following round of testing.
Specifically, the Board worked with ICF Macro to develop and test
several types of closed-end disclosures, including:
Two Board publications to be provided at application,
entitled ``Key Questions To Ask About Your Mortgage'' and ``Fixed vs.
Adjustable Rate Mortgages'';
An ARM loan program disclosure to be provided at
application;
An early TILA disclosure to be provided within three
business days of application, and again so that the consumer receives
it at least three business days before consummation;
An ARM adjustment notice to be provided after
consummation; and
A payment option monthly statement to be provided after
consummation.
Exploratory focus groups. In February and March 2008 the Board
worked with ICF Macro to conduct four focus groups with consumers who
had obtained a mortgage in the previous two years. Two of the groups
consisted of subprime borrowers and two consisted of prime borrowers,
with creditworthiness determined by their answers to questions about
prior financial hardship, difficulties encountered in shopping for
credit, and the rate on their current mortgage. Each focus group
consisted of between seven and nine people that discussed issues
identified by the Board and raised by a moderator from ICF Macro.
Through these focus groups, the Board gathered information on how
consumers shop for mortgages, what information consumers currently use
in making decisions about mortgages, and what perceptions consumers had
of TILA disclosures currently provided in the shopping and application
process.
Cognitive interviews on existing disclosures. In 2008, the Board
worked with ICF Macro to conduct five rounds of cognitive interviews
with mortgage customers (seven to eleven participants per round). These
cognitive interviews consisted of one-on-one discussions with
consumers, during which consumers described their recent mortgage
shopping experience and reviewed existing sample mortgage disclosures.
In addition to learning about shopping behavior, the goals of these
interviews were: (1) To learn more about what information consumers
read when they receive current mortgage disclosures; (2) to research
how easily consumers can find various pieces of information in these
disclosures; and (3) to test consumers' understanding of certain
mortgage related words and phrases.
1. Initial design of disclosures for testing. In the fall of 2008,
the Board worked with ICF Macro to develop sample mortgage disclosures
to be used in later rounds of testing, taking into account information
learned through the focus groups and the cognitive interviews.
2. Additional cognitive interviews and revisions to disclosures. In
late 2008 and early 2009, the Board worked with ICF Macro to conduct
six additional rounds of cognitive interviews (nine or ten participants
per round), where consumers were asked to view new sample mortgage
disclosures developed by the Board and ICF Macro. The rounds of
interviews were conducted sequentially to allow for revisions to the
testing materials based on what was learned from the testing during
each previous round.
Results of testing. Several of the model forms were developed
through the testing. A report summarizing the results of the testing is
available on the Board's public Web site: http://www.federalreserve.gov.
Many consumer testing participants reported that they did not shop
for a lender or a mortgage. Several stated that they were referred to a
lender by a realtor, family member or friend, and that they relied on
that lender to get them a loan. Participants who reported shopping for
a mortgage relied on originators' oral quotes for interest rates,
monthly payments, and closing costs. Most participants stated that once
they had applied for a particular loan and received a TILA disclosure
they ceased shopping. Some cited the time involved, and the amount of
documentation required, as factors for limiting their shopping. These
findings suggest that consumers need information early in the process
and that information should not be limited to information about ARMs.
Therefore, the proposal would require creditors to provide key
information about evaluating loan terms at the time an application form
is provided, as discussed below.
1. Disclosures provided to consumers before application. Currently,
creditors must provide the CHARM booklet before a consumer applies or
pays a nonrefundable fee, whichever is earlier. The booklet explains
how ARMs generally work. Testing showed that participants found the
CHARM booklet too lengthy to be useful, although some liked specific
elements such as the glossary. In addition, creditors must provide an
ARM loan program disclosure for each ARM loan program in which the
consumer expresses an interest, before the consumer applies or has paid
a nonrefundable fee. The ARM loan program disclosure currently must
include either a 15-year historical example of rates and payments for a
$10,000 loan, or the maximum interest rate and payment for a $10,000
loan originated at the interest rate in effect for the disclosure's
identified month and year. Many testing participants found the
narrative form of the current ARM loan program disclosure difficult to
read and understand. Some participants mistook the historical examples
to be their actual loan rate and payments. Participants also found the
content of the disclosure too general to be useful to them when
comparing between lenders or products, and noted the absence of key
loan information, such as the interest rate.
Thus, the proposal would require creditors to provide, for all
closed-end mortgages, a one-page document that explains the basic
differences between fixed-rate mortgages and ARMs, and a one-page
document that would explain potentially risky features of a mortgage in
a plain-English question and answer format. In addition, the proposal
would streamline the content of the ARM loan program disclosure to
highlight in a table form information that participants found most
useful, such as interest rate and payment adjustments, and to provide
information about program-specific loan features that could pose
greater risk, such as prepayment penalties. Consumer testing suggested
that highlighting such information in a table form improved
participants' ability to identify and understand the information
provided about key loan features.
2. Disclosures provided to consumers after application. Currently,
creditors
[[Page 43236]]
must provide an early TILA disclosure within three business days after
application and at least seven business days before consummation, and
before the consumer has paid a fee other than a fee for obtaining the
consumer's credit history. If the APR on the early TILA disclosure
exceeds a certain tolerance before consummation, the creditor must
provide corrected disclosures that the consumer must receive at least
three days before consummation. If any term other than the APR becomes
inaccurate, the creditor must give the corrected disclosure no later
than at consummation.
The early TILA disclosure--and any corrected disclosure--must
provide certain information, such as the loan's annual percentage rate
(APR), finance charge, amount financed, and total of payments.
Participants in consumer testing indicated that much of the information
in the current TILA disclosure was of secondary importance to them when
considering a loan. Participants consistently looked for the contract
rate of interest, monthly payment, and in some cases, closing costs.
Most participants assumed that the APR was the contract rate of
interest, and that the finance charge was the total of all interest
they would pay if they kept the loan to maturity. Most identified the
amount financed as the loan amount. When asked to compare two loan
offers using redesigned model forms that contained these disclosures,
few participants used the APR and finance charge to compare the loans.
In addition, some participants had difficulty determining whether the
loan tested had a variable or fixed rate and understanding the payment
schedule's relationship to the changing interest rate. Many did not
understand what circumstances would trigger a prepayment penalty.
Thus, the proposal contains a number of revisions to the format and
content of TILA disclosures to make them clearer and more conspicuous.
To enhance the effectiveness of the finance charge as a disclosure of
the true cost of credit, the proposal would require a simpler, more
inclusive approach. The disclosure of the APR would be enhanced to
improve consumers' comprehension of the cost of credit. In addition, to
help consumers determine whether the loan offered is affordable for
them, creditors would be required to summarize key loan terms and
highlight interest rate and payment information in a table. Consumer
testing showed that using special formatting requirements, consistent
terminology and a minimum 10-point font, would ensure that consumers
are better able to identify and review key loan terms.
3. Disclosures required after consummation. Currently, creditors
must provide advance notice to a consumer before the interest rate and
monthly payment adjust on an ARM. The ARM adjustment notice must
provide certain information, including current and prior interest
rates, the index values upon which the current and prior interest rates
are based, and the payment that would be required to amortize the loan
fully at the new interest rate. The Board worked with ICF Macro to
develop a revised ARM adjustment notice that would enhance consumers'
ability to identify and understand changes being made to their loan
terms. Consumer testing of the revised ARM adjustment notice indicated
that consumers understood the content and were able correctly to
identify the amount and due date of the new payment. Thus, under the
proposal, creditors would be required to provide the ARM adjustment
notice in a revised format that would highlight changes being made to
the interest rate and the monthly payment, and provide other important
information, such as the due date of the new payment and the loan
balance.
Currently, creditors are not required to provide disclosures after
consummation for negatively-amortizing loans. The Board worked with ICF
Macro to develop a monthly statement that compares the amount and the
impact on the loan balance of a fully-amortizing payment, interest-only
payment, and minimum payment. Consumer testing of the proposed monthly
statement indicated that consumers understood the content, easily
recognized the payment options highlighted in the table, and understood
that by making only the minimum payment they would be borrowing more
money and increasing their loan balance. Thus, to improve consumer
understanding of the risks associated with payment option loans, the
Board proposes to require, not later than 15 days before a periodic
payment is due, a monthly statement of payment options that explains
the impact of payment choice on the loan balance.
Additional testing during and after the comment period. During the
comment period, the Board will work with ICF Macro to conduct
additional testing of model disclosures. After receiving comments from
the public on the proposal and the proposed disclosure forms, the Board
will work with ICF Macro to further revise model disclosures based on
comments received, and to conduct additional rounds of cognitive
interviews to test the revised disclosures. After the cognitive
interviews, quantitative testing will be conducted. The goal of the
quantitative testing is to measure consumers' comprehension of the
newly-developed disclosures with a larger and more statistically
representative group of consumers.
E. Other Outreach and Research
The Board also solicited input from members of the Board's Consumer
Advisory Council on various issues presented by the review of
Regulation Z. During 2009, for example, the Council discussed ways to
improve disclosures for home-secured credit. In addition, Board staff
met or conducted conference calls with various industry and consumer
group representatives throughout the review process leading to this
proposal. Board staff also reviewed disclosures currently provided by
creditors, the Federal Trade Commission's (FTC) report on consumer
testing of mortgage disclosures,\6\ HUD's report on consumer testing of
the GFE,\7\ and other information.
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\6\ James M. Lacko and Janis K. Pappalardo, Fed. Trade Comm'n,
Improving Consumer Mortgage Disclosures: An Empirical Assessment of
Current and Protoype Disclosure Forms (2007), (``Improving Consumer
Mortgage Disclosures'') available at http://www2.ftc.gov/os/2007/06/P025505MortgageDisclosureReport.pdf.
\7\ U.S. Dep't. of Hous. and Urban Dev., Summary Report:
Consumer Testing of the Good Faith Estimate Form (GFE) (2008),
available at http://www.huduser.org/publications/pdf/Summary_Report_GFE.pdf.
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F. Reviewing Regulation Z in Stages
The Board is proceeding with a review of Regulation Z in stages.
This proposal largely contains revisions to rules affecting closed-end
credit transactions secured by real property or a dwelling. Published
elsewhere in today's Federal Register is the Board's proposal regarding
disclosures for open-end credit secured by a consumer's dwelling.
Closed-end mortgages are distinct from other TILA-covered products, and
conducting a review in stages allows for a manageable process. To
minimize compliance burden for creditors offering other closed-end
credit, as well as home-secured credit, the proposed rules that would
apply only to closed-end home-secured credit are organized in sections
separate from the general disclosure requirements for closed-end rules.
Although this reorganization would increase the size of the regulation
and commentary, the Board believes a clear delineation of rules for
closed-end, home-secured loans pending the review of the remaining
closed-end rules provides a clear compliance benefit to creditors.
[[Page 43237]]
G. Implementation Period
The Board contemplates providing creditors sufficient time to
implement any revisions that may be adopted. The Board seeks comment on
an appropriate implementation period.
IV. The Board's Rulemaking Authority
TILA Section 105. TILA mandates that the Board prescribe
regulations to carry out the purposes of the act. TILA also
specifically authorizes the Board, among other things, to:
Issue regulations that contain such classifications,
differentiations, or other provisions, or that provide for such
adjustments and exceptions for any class of transactions, that in the
Board's judgment are necessary or proper to effectuate the purposes of
TILA, facilitate compliance with the act, or prevent circumvention or
evasion. 15 U.S.C. 1604(a).
Exempt from all or part of TILA any class of transactions
if the Board determines that TILA coverage does not provide a
meaningful benefit to consumers in the form of useful information or
protection. The Board must consider factors identified in the act and
publish its rationale at the time it proposes an exemption for comment.
15 U.S.C. 1604(f).
In the course of developing the proposal, the Board has considered
the views of interested parties, its experience in implementing and
enforcing Regulation Z, and the results obtained from testing various
disclosure options in controlled consumer tests. For the reasons
discussed in this notice, the Board believes this proposal is
appropriate pursuant to the authority under TILA Section 105(a).
Also, as explained in this notice, the Board believes that the
specific exemptions proposed are appropriate because the existing
requirements do not provide a meaningful benefit to consumers in the
form of useful information or protection. In reaching this conclusion
with each proposed exemption, the Board considered (1) the amount of
the loan and whether the disclosure provides a benefit to consumers who
are parties to the transaction involving a loan of such amount; (2) the
extent to which the requirement complicates, hinders, or makes more
expensive the credit process; (3) the status of the borrower, including
any related financial arrangements of the borrower, the financial
sophistication of the borrower relative to the type of transaction, and
the importance to the borrower of the credit, related supporting
property, and coverage under TILA; (4) whether the loan is secured by
the principal residence of the borrower; and (5) whether the exemption
would undermine the goal of consumer protection. The rationales for
these proposed exemptions are explained in part VI below.
TILA Section 129(l)(2). TILA also authorizes the Board to prohibit
acts or practices in connection with:
Mortgage loans that the board finds to be unfair,
deceptive, or designed to evade the provisions of HOEPA; and
Refinancing of mortgage loans that the Board finds to be
associated with abusive lending practices or that are otherwise not in
the interest of the borrower.
The authority granted to the Board under TILA Section 129(l)(2), 15
U.S.C. 1639(l)(2), is broad. It reaches mortgage loans with rates and
fees that do not meet HOEPA's rate or fee trigger in TILA Section
103(aa), 15 U.S.C. 1602(aa), as well as mortgage loans not covered
under that section, such as home purchase loans. Moreover, while
HOEPA's statutory restrictions apply only to creditors and only to loan
terms or lending practices, Section 129(l)(2) is not limited to acts or
practices by creditors, nor is it limited to loan terms or lending
practices. See 15 U.S.C. 1639(l)(2). It authorizes protections against
unfair or deceptive practices ``in connection with mortgage loans,''
and it authorizes protections against abusive practices ``in connection
with refinancing of mortgage loans.'' Thus, the Board's authority is
not limited to regulating specific contractual terms of mortgage loan
agreements; it extends to regulating loan-related practices generally,
within the standards set forth in the statute.
HOEPA does not set forth a standard for what is unfair or
deceptive, but the Conference Report for HOEPA indicates that, in
determining whether a practice in connection with mortgage loans is
unfair or deceptive, the Board should look to the standards employed
for interpreting State unfair and deceptive trade practices statutes
and the Federal Trade Commission Act (FTC Act), Section 5(a), 15 U.S.C.
45(a).\8\
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\8\ H.R. Rep. 103-652, at 162 (1994) (Conf. Rep.).
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Congress has codified standards developed by the Federal Trade
Commission (FTC) for determining whether acts or practices are unfair
under Section 5(a), 15 U.S.C. 45(a).\9\ Under the FTC Act, an act or
practice is unfair when it causes or is likely to cause substantial
injury to consumers which is not reasonably avoidable by consumers
themselves and not outweighed by countervailing benefits to consumers
or to competition. In addition, in determining whether an act or
practice is unfair, the FTC is permitted to consider established public
policies, but public policy considerations may not serve as the primary
basis for an unfairness determination.\10\
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\9\ See 15 U.S.C. 45(n); Letter from Commissioners of the FTC to
the Hon. Wendell H. Ford, Chairman, and the Hon. John C. Danforth,
Ranking Minority Member, Consumer Subcomm. of the H. Comm. on
Commerce, Science, and Transp. (Dec. 17, 1980).
\10\ 15 U.S.C. 45(n).
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The FTC has interpreted these standards to mean that consumer
injury is the central focus of any inquiry regarding unfairness.\11\
Consumer injury may be substantial if it imposes a small harm on a
large number of consumers, or if it raises a significant risk of
concrete harm.\12\ The FTC looks to whether an act or practice is
injurious in its net effects.\13\ The FTC has also observed that an
unfair act or practice will almost always reflect a market failure or
market imperfection that prevents the forces of supply and demand from
maximizing benefits and minimizing costs.\14\ In evaluating unfairness,
the FTC looks to whether consumers' free market decisions are
unjustifiably hindered.\15\
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\11\ Statement of Basis and Purpose and Regulatory Analysis,
Credit Practices Rule, 42 FR 7740, 7743; Mar. 1, 1984 (Credit
Practices Rule).
\12\ Letter from Commissioners of the FTC to the Hon. Wendell H.
Ford, Chairman, and the Hon. John C. Danforth, Ranking Minority
Member, Consumer Subcomm. of the H. Comm. on Commerce, Science, and
Transp., n.12 (Dec. 17, 1980).
\13\ Credit Practices Rule, 42 FR at 7744.
\14\ Id.
\15\ Id.
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The FTC has also adopted standards for determining whether an act
or practice is deceptive (though these standards, unlike unfairness
standards, have not been incorporated into the FTC Act).\16\ First,
there must be a representation, omission or practice that is likely to
mislead the consumer. Second, the act or practice is examined from the
perspective of a consumer acting reasonably in the circumstances.
Third, the representation, omission, or practice must be material. That
is, it must be likely to affect the consumer's conduct or decision with
regard to a product or service.\17\
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\16\ Letter from James C. Miller III, Chairman, FTC to the Hon.
John D. Dingell, Chairman, H. Comm. on Energy and Commerce (Oct. 14,
1983) (Dingell Letter).
\17\ Dingell Letter at 1-2.
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Many States also have adopted statutes prohibiting unfair or
deceptive acts or practices, and these statutes employ a variety of
standards, many of them different from the standards
[[Page 43238]]
currently applied to the FTC Act. A number of States follow an
unfairness standard formerly used by the FTC. Under this standard, an
act or practice is unfair where it offends public policy; or is
immoral, unethical, oppressive, or unscrupulous; and causes substantial
injury to consumers.\18\
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\18\ See, e.g., Kenai Chrysler Ctr., Inc. v. Denison, 167 P.3d
1240, 1255 (Alaska 2007) (quoting FTC v. Sperry & Hutchinson Co.,
405 U.S. 233, 244-45 n.5 (1972)); State v. Moran, 151 N.H. 450, 452,
861 A.2d 763, 755-56 (N.H. 2004) (concurrently applying the FTC's
former test and a test under which an act or practice is unfair or
deceptive if ``the objectionable conduct * * * attain[s] a level of
rascality that would raise an eyebrow of someone inured to the rough
and tumble of the world of commerce.'') (citation omitted); Robinson
v. Toyota Motor Credit Corp., 201 Ill. 2d 403, 417-418, 775 N.E.2d
951, 961-62 (2002) (quoting 405 U.S. at 244-45 n.5).
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In developing proposed rules under TILA Section 129(l)(2)(A), 15
U.S.C. 1639(l)(2)(A), the Board has considered the standards currently
applied to the FTC Act's prohibition against unfair or deceptive acts
or practices, as well as the standards applied to similar State
statutes.
V. Discussion of Major Proposed Revisions
The goal of the proposed revisions is to improve the effectiveness
of the Regulation Z disclosures that must be provided to consumers for
closed-end credit transactions secured by real property or a dwelling.
To shop for and understand the cost of home-secured credit, consumers
must be able to identify and comprehend the key terms of mortgages. But
the terms and conditions for mortgage transactions can be very complex.
The proposed revisions to Regulation Z are intended to provide the most
essential information to consumers when the information would be most
useful to them, with content and formats that are clear and
conspicuous. The proposed revisions are expected to improve consumers'
ability to make informed credit decisions and enhance competition among
creditors. Many of the changes are based on the consumer testing that
was conducted in connection with the review of Regulation Z.
In considering the proposed revisions, the Board sought to ensure
that the proposal would not reduce access to credit, and sought to
balance the potential benefits for consumers with the compliance
burdens imposed on creditors. For example, the proposed revisions seek
to provide greater certainty to creditors in identifying what costs
must be disclosed for mortgages, and how those costs must be disclosed.
More effective disclosures may also reduce confusion and
misunderstanding, which may also ease creditors' costs relating to
consumer complaints and inquiries.
A. Disclosures at Application
Currently, Regulation Z requires pre-application disclosures only
for variable-rate transactions. For these transactions, creditors are
required to provide the CHARM booklet and a loan program disclosure
that provides twelve items of information at the time an application
form is provided or before the consumer pays a nonrefundable fee,
whichever is earlier.
``Key Questions to Ask about Your Mortgage'' publication. Since
1987, the number of loan products and product features has grown,
providing consumers with more choices. However, the growth in loan
features and products has also made the decision-making process more
complex for consumers. The proposal would require creditors to provide
to consumers a one-page Board publication entitled, ``Key Questions to
Ask about Your Mortgage.'' Creditors would be required to provide this
document for all closed-end loans secured by real property or a
dwelling, not just variable-rate loans, before the consumer applies for
a loan or pays a nonrefundable fee, whichever is earlier. The
publication would inform consumers in a plain-English question and
answer format about potentially risky features, such as interest-only,
negative amortization, and prepayment penalties. To enable consumers to
track the presence or absence of potentially risky features throughout
the mortgage transaction process, the key questions and answers
provided in this one-page document would also be included in the ARM
loan program disclosure and the early and final TILA disclosures.
``Fixed vs. Adjustable Rate Mortgages'' publication. Instead of the
CHARM booklet, the proposal would require creditors to provide a one-
page Board publication entitled, ``Fixed vs. Adjustable Rate
Mortgages'' for all closed-end loans secured by real property or a
dwelling, not just variable-rate loans. The publication would contain
an explanation of the basic differences between fixed-rate mortgages
and ARMs. Although the requirement to provide a CHARM booklet would be
eliminated, the Board would continue to publish the CHARM booklet as a
consumer-education publication.
ARM loan program disclosure. Currently, for each variable-rate loan
program in which a consumer expresses an interest, creditors must
provide certain information, including the index and margin to be used
to calculate interest rates and payments, and either a 15-year
historical example of rates and payments for a $10,000 loan, or the
maximum interest rate and payment for a $10,000 loan originated at the
interest rate in effect for the disclosure's identified month and year.
Based on consumer testing, the proposal would simplify the ARM loan
program disclosure to focus on the interest rate and payment and the
potential risks associated with ARMs. Information on how to calculate
payments, and the effect of rising interest rates on monthly payments
would be moved to the early TILA disclosure provided after application.
Placing the information there will allow the creditor to customize the
information to the consumer's potential loan, making the information
more useful to consumers. The proposed ARM loan program disclosure
would be provided in a tabular question and answer format to enable
consumers to easily locate the most important information.
B. Disclosures Within Three Days After Application
TILA and Regulation Z currently require creditors to provide an
early TILA disclosure within three business days after application and
at least seven business days before consummation, and before the
consumer has paid a fee other than a fee for obtaining the consumer's
credit history. If the APR on the early TILA disclosure exceeds a
certain tolerance before consummation, the creditor must provide
corrected disclosures that the consumer must receive at least three
days before consummation. If any term other than the APR becomes
inaccurate, the creditor must give the corrected disclosure no later
than at consummation.
The early TILA disclosure, and any corrected disclosure, must
include certain loan information, including the amount financed, the
finance charge, the APR, the total of payments, and the amount and
timing of payments. The finance charge is the sum of all credit-related
charges, but excludes a variety of fees and charges. TILA requires that
the finance charge and the APR be disclosed more conspicuously than
other information. The APR is calculated based on the finance charge
and is meant to be a single, unified number to help consumers
understand the total cost of credit.
Calculation of the finance charge. The proposal contains a number
of revisions to the calculation of the finance charge and the
disclosure of the finance charge and the APR to improve consumers'
[[Page 43239]]
understanding of the cost of credit. Currently, TILA and Regulation Z
permit creditors to exclude several fees or charges from the finance
charge, including certain fees or charges imposed by third party
closing agents; certain premiums for credit or property insurance or
fees for debt cancellation or debt suspension coverage, if the creditor
meets certain conditions; security interest charges; and real-estate
related fees, such as title examination or document preparation fees.
Consumer groups, creditors, and government agencies have long been
dissatisfied with the ``some fees in, some fees out'' approach to the
finance charge. Consumer groups and others believe that the current
approach obscures the true cost of credit. They contend that this
approach creates incentives for creditors to shift the cost of credit
from the interest rate to ancillary fees excluded from the finance
charge. They further contend that this approach undermines the purpose
of the APR, which is to express in a single figure the total cost of
credit. Creditors maintain that consumers are confused by the APR and
that the current approach creates significant regulatory burdens. They
contend that determining which fees are or are not included in the
finance charge is overly complex and creates litigation risk.
The Board proposes to use its exception and exemption authority to
revise the finance charge calculation for closed-end mortgages,
including HOEPA loans. The proposal would maintain TILA's definition of
a ``finance charge'' as a fee or charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor as
an incident to the extension of credit. However, the proposal would
require the finance charge to include charges by third parties if the
creditor requires the use of a third party as a condition of or
incident to the extension of credit (even if the consumer chooses the
third party), or if the creditor retains a portion of the third-party
charge (to the extent of the portion retained). Charges that would be
incurred in a comparable cash transaction, such as transfer taxes,
would continue to be excluded from the finance charge. Under this
approach, consumers would benefit from having a finance charge and APR
disclosure that better represent the cost of credit, undiluted by
myriad exclusions for various fees and charges. This approach would
cause more loans to be subject to the special protections of the
Board's 2008 HOEPA Final Rule, special disclosures and restrictions for
HOEPA loans, and certain State anti-predatory lending laws. However,
the proposal could also reduce compliance burdens, regulatory
uncertainty, and litigation risks for creditors.
Disclosure of the finance charge and the APR. Currently, creditors
are required to disclose the loan's ``finance charge'' and ``annual
percentage rate,'' using those terms, more conspicuously than the other
required disclosures. Consumer testing indicated that consumers do not
understand the term ``finance charge.'' Most consumers believe the term
refers to the total of all interest they would pay if they keep the
loan to maturity, but do not realize that it includes the fees and
costs associated with the loan. For these reasons, the proposal
replaces the term ``finance charge'' with ``interest and settlement
charges'' to make clear it is more than interest, and the disclosure
would no longer be more conspicuous than the other required
disclosures.
In addition, the disclosure of the APR would be enhanced to improve
consumers' comprehension of the cost of credit. Under the proposal,
creditors would be required to disclose the APR in 16-point font in
close proximity to a graph that compares the consumer's APR to the
HOEPA average prime offer rate for borrowers with excellent credit and
the HOEPA threshold for higher-priced loans. This disclosure would put
the APR in context and help consumers understand whether they are being
offered a loan that comports with their creditworthiness.
Interest rate and payment summary. Currently, creditors are
required to disclose the number, amount, and timing of payments
scheduled to repay the loan. Under the MDIA's amendments to TILA,
creditors will be required to provide examples of adjustments to the
regularly required payment based on the change in interest rates
specified in the contract. Consumer testing consistently indicated that
consumers shop for and evaluate a mortgage based on the contract
interest rate and the monthly payment, but consumers have difficulty
understanding such terms using the current TILA disclosure. Under the
proposal, creditors would be required to disclose in a tabular format
the contract interest rate together with the corresponding monthly
payment, including escrows for taxes and property and/or mortgage
insurance. Special disclosure requirements would be imposed for
adjustable-rate or step-rate loans to show the interest rate and
payment at consummation, the maximum interest rate and payment at first
adjustment, and the highest possible maximum interest rate and payment.
Additional special disclosures would be required for loans with
negatively-amortizing payment options, introductory interest rates,
interest-only payments, and balloon payments.
Disclosure of other terms. In addition to the interest rate and
monthly payment, consumer testing indicated that consumers benefit from
the disclosure of other key terms in a clear format. Thus, the proposal
would require creditors to provide in a tabular format information
about the loan amount, the loan term, the loan type (such as fixed-
rate), the total settlement charges, and the maximum amount of any
prepayment penalty. In addition, creditors would be required to
disclose in a tabular question and answer format the ``Key Questions
about Risk,'' which would include information about potentially risky
loan features such as prepayment penalties, interest-only payments, and
negative amortization.
C. Disclosures Three Days Before Consummation
As noted above, the creditor is required to provide the early TILA
disclosure to the consumer within three business days after receiving
the consumer's written application and at least seven business days
before consummation, and before the consumer has paid a fee other than
a fee for obtaining the consumer's credit history. If the APR on the
early TILA disclosure exceeds a certain tolerance before consummation,
the creditor must provide corrected disclosures that the consumer must
receive at least three days before consummation. If any term other than
the APR becomes inaccurate, the creditor must give the corrected
disclosure no later than at consummation. The consumer may waive the
seven- and three-day waiting periods for a bona fide personal financial
emergency.
There are, however, long-standing concerns about consumers facing
different loan terms or increased settlement costs at closing. Members
of the Board's Consumer Advisory Council, participants in public
hearings, and commenters on prior Board rulemakings have expressed
concern about consumers not learning of changes to credit terms or
settlement charges until consummation. In addition, consumer testing
indicated that consumers are often surprised at closing by changes in
important loan terms, such as the addition of an adjustable-rate
feature. Despite these changes, consumers report that they have
proceeded with closing because they lacked alternatives (especially in
the case of a home purchase loan), or
[[Page 43240]]
were told that they could easily refinance with better terms in the
near future.
For these reasons, the proposal would require the creditor to
provide a final TILA disclosure that the consumer must receive at least
three business days before consummation, even if no terms have changed
since the early TILA disclosure was provided. In addition, the Board is
proposing two alternative approaches to address changes to loan terms
and settlement charges during the three-business-day waiting period.
Under the first approach, if any terms change during the three-
business-day waiting period, the creditor would be required to provide
another final TILA disclosure and wait an additional three business
days before consummation could occur. Under the second approach,
creditors would be required to provide another final TILA disclosure,
but would have to wait an additional three business days before
consummation only if the APR exceeds a designated tolerance or the
creditor adds an adjustable-rate feature. Otherwise, the creditor would
be permitted to provide the new final TILA disclosure at consummation.
D. Disclosures After Consummation
Regulation Z requires certain notices to be provided after
consummation. Currently, for variable-rate transactions, creditors are
required to provide advance notice of an interest rate adjustment.
There are no disclosure requirements for other post-consummation
events.
ARM adjustment notice. Currently, for variable-rate transactions,
creditors are required to provide a notice of interest rate adjustment
at least 25, but no more than 120, calendar days before a payment at a
new level is due. In addition, creditors must provide an adjustment
notice at least once each year during which an interest rate adjustment
is implemented without an accompanying payment change. These
disclosures must include certain information, including the current and
prior interest rates and the index values upon which the current and
prior interest rates are based.
Under the proposal, creditors would be required to provide the ARM
adjustment notice at least 60 days before payment at a new level is
due. This proposal seeks to address concerns that consumers need more
than 25 days to seek out a refinancing in the event of a payment
adjustment. This notice is particularly critical for subprime borrowers
who may be more vulnerable to payment shock and may have a more
difficult time refinancing a loan.
Payment option statement. Currently, creditors are not required to
provide disclosures after consummation for negatively amortizing loans,
such as payment option loans. To ensure consumers receive information
about the risks associated with payment option loans (e.g., payment
shock), the proposal would require creditors to provide a periodic
statement for payment option loans that have negative amortization. The
disclosure would contain a table with a comparison of the amount and
impact on the loan balance and property equity of a fully-amortizing
payment, interest-only payment, and minimum negatively-amortizing
payment. This disclosure would be provided not later than 15 days
before a periodic payment is due.
Creditor-placed property insurance notice. Creditors are not
currently required under Regulation Z to provide notice before charging
for creditor-placed property insurance. Industry reports indicate that
the volume of creditor-placed property insurance has increased
significantly. Consumers struggling financially may fail to pay
required property insurance premiums unaware that creditors have the
right to obtain such insurance on their behalf and add the premiums to
their outstanding loan balance. Such premiums are often considerably
more expensive than premiums for insurance obtained by the consumer.
Thus, under the proposal, creditors would be required to provide notice
to consumers of the cost and coverage of creditor-placed property
insurance at least 45 days before a charge is imposed for such
insurance. In addition, creditors would be required to provide
consumers with evidence of such insurance within 15 days of imposing a
charge for the insurance.
E. Prohibitions on Payments to Loan Originators and Steering
Currently, creditors pay commissions to loan originators in the
form of ``yield spread premiums.'' A yield spread premium is the
present dollar value of the difference between the lowest interest rate
a lender would have accepted on a particular transaction and the
interest rate a loan originator actually obtained for the lender. Some
or all of this dollar value is usually paid to the loan originator by
the creditor as a form of compensation, though it may also be applied
to other closing costs.
Yield spread premiums can create financial incentives to steer
consumers to riskier loans for which loan originators will receive
greater compensation. Consumers generally are not aware of loan
originators' conflict of interest and cannot reasonably protect
themselves against it. Yield spread premiums may provide some benefit
to consumers because consumers do not have to pay loan originators'
compensation in cash or through financing. However, the Board believes
that this benefit may be outweighed by costs to consumers, such as when
consumers pay a higher interest rate or obtain a loan with terms the
consumer may not otherwise have chosen, such as a prepayment penalty or
an adjustable rate.
In response to these concerns, the 2007 HOEPA Proposed Rule
attempted to address the potential unfairness through disclosure. The
proposal would have prohibited a creditor from paying a mortgage broker
more than the consumer had previously agreed in writing that the
mortgage broker would receive. A mortgage broker would have had to
enter into the written agreement with the consumer, before accepting
the consumer's loan application and before the consumer paid any fee in
connection with the transaction (other than a fee for obtaining a
credit report). The agreement also would have disclosed (1) that the
consumer ultimately would bear the cost of the entire compensation even
if the creditor paid part of it directly; and (2) that a creditor's
payment to a broker could influence the broker to offer the consumer
loan terms or products that would not be in the consumer's interest or
the most favorable the consumer could obtain.
Based on analysis of comments received on the 2007 HOEPA Proposed
Rule, the results of consumer testing, and other information, the Board
withdrew the proposed provisions relating to broker compensation in the
2008 HOEPA Final Rule. In particular, the Board's consumer testing
raised concerns that the proposed agreement and disclosures would
confuse consumers and undermine their decisionmaking rather than
improve it. Participants often concluded, not necessarily correctly,
that brokers are more expensive than creditors. Many also believed that
brokers would serve their best interests notwithstanding the conflict
resulting from the relationship between interest rates and brokers'
compensation.\19\ The proposed disclosures presented a significant risk
of misleading consumers regarding both the relative costs of brokers
and lenders and the role of brokers in their
[[Page 43241]]
transactions. In withdrawing the broker compensation provisions of the
HOEPA proposal, the Board stated it would continue to explore options
to address potential unfairness associated with loan originator
compensation arrangements.
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\19\ See Macro International, Inc., Consumer Testing of Mortgage
Broker Disclosures (July 10, 2008), available at http://www.federalreserve.gov/newsevents/press/bcreg/20080714regzconstest.pdf.
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To address the concerns related to loan originator compensation,
the Board proposes to prohibit payments to loan originators that are
based on the loan's terms and conditions. This prohibition would not
apply to payments that consumers make directly to loan originators. The
Board solicits comment on an alternative that would allow loan
originators to receive payments that are based on the principal loan
amount, which is a common practice today. If a consumer directly pays
the loan originator, the proposal would prohibit the loan originator
from also receiving compensation from any other party in connection
with that transaction. These rules would be proposed under the Board's
HOEPA authority to prohibit unfair or deceptive acts or practices in
connection with mortgage loans.
Under the proposal, a ``loan originator'' would include both
mortgage brokers and employees of creditors who perform loan
origination functions. The 2007 HOEPA Proposed Rule covered only
mortgage brokers. However, a creditor's loan officers frequently have
the same discretion as mortgage brokers to modify loans' terms to
increase their compensation, and there is evidence that creditors' loan
officers engage in such practices.
The Board also seeks comment on an optional proposal that would
prohibit loan originators from directing or ``steering'' consumers to a
particular creditor's loan products based on the fact that the loan
originator will receive additional compensation even when that loan may
not be in the consumer's best interest. The Board solicits comment on
whether the proposed rule would be effective in achieving the stated
purpose. In addition, the Board solicits comment on the feasibility and
practicality of such a rule, its enforceability, and any unintended
adverse effects the rule might have.
F. Additional Protections
Credit insurance or debt cancellation or debt suspension coverage
eligibility for all loan transactions. Currently, creditors may exclude
from the finance charge a premium or charge for credit insurance or
debt cancellation or debt suspension coverage if the creditor discloses
the voluntary nature and cost of the product, and the consumer signs or
initials an affirmative request for the product. Concerns have been
raised about creditors who sometimes offer products that contain
eligibility restrictions, specifically age or employment restrictions,
but do not evaluate whether applicants for the products actually meet
the eligibility restrictions at the time of enrollment. Subsequently,
consumers' claims for benefits may be denied because they did not meet
the eligibility restrictions at the time of enrollment. Consumers are
presumably unaware that they are paying for a product for which they
will derive no benefit. Under the proposal, creditors would be required
to determine whether the consumer meets the age and/or employment
eligibility criteria at the time of enrollment in the product and
provide a disclosure that such a determination has been made. The
proposal is not limited to mortgage transactions and would apply to all
closed-end and open-end transactions.
VI. Section-by-Section Analysis
Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement,
and Liability
1(b) Purpose
Section 226.1(b) would be revised to reflect the fact that Sec.
226.35 prohibits certain acts or practices for transactions secured by
the consumer's principal dwelling. In addition, Sec. 226.1(b) would be
revised to reflect the proposal to broaden the scope of Sec. 226.36
(from transactions secured by the consumer's principal dwelling to all
transactions secured by real property or a dwelling).
1(d) Organization
1(d)(5)
The Board proposes to revise Sec. 226.1(d)(5) to reflect the scope
of Sec. Sec. 226.32, 226.34, and 226.35. The Board would also revise
Sec. 226.1(d)(5) to reflect the proposed change in the scope of Sec.
226.36, and the addition of new Sec. Sec. 226.37 and 226.38.
Section 226.2 Definitions and Rules
2(a) Definitions
2(a)(24) Residential Mortgage Transaction
Regulation Z, Sec. 226.2(a)(24), defines a ``residential mortgage
transaction'' as ``a transaction in which a mortgage, deed of trust,
purchase money security interest arising under an installment sales
contract, or equivalent consensual security interest is created or
retained in the consumer's principal dwelling to finance the
acquisition or initial construction of that dwelling.'' Currently,
comment 2(a)(24)-1 states that the term is important in five provisions
in Regulation Z, including assumption under Sec. Sec. 226.18(q) and
226.20(b). However, the proposed rule would expand coverage of the
assumption rules to cover any closed-end credit transaction secured by
real property or a dwelling. Thus, the Board proposes to revise
comments 2(a)(24)-1, -2, and -5 to reflect this change.
Section 226.3 Exempt Transactions
3(b) Credit Over $25,000 Not Secured by Real Property or a Dwelling
TILA and Regulation Z cover all credit transactions that are
secured by real property or a principal dwelling in which the amount
financed exceeds $25,000. 15 U.S.C. 1603(3). Section 226.3(b), which
implements TILA Section 104(3), provides that credit transactions over
$25,000 not secured by real property, or by personal property used or
expected to be used as the principal dwelling of the consumer, are
exempt from Regulation Z. 15 U.S.C. 1603(3).
As noted in the discussion under Sec. Sec. 226.19 and 226.38, the
Board proposes to require creditors to provide certain disclosures for
all closed-end transactions secured by real property or a dwelling, not
just principal dwellings. However, the Board recognizes that, if
personal property that is a dwelling but not the borrower's principal
dwelling secures a loan of over $25,000, it is not covered by TILA in
the first instance. For example, Regulation Z does not apply to a
$26,000 loan that is secured by a manufactured home that is not the
consumer's second or vacation home. Notwithstanding this exemption, the
Board solicits comment on whether consumers in these transactions
receive adequate information regarding their loan terms and are
afforded sufficient protections. The Board also seeks comment on the
relative benefits and costs of applying Regulation Z to these
transactions.
Section 226.4 Finance Charge
Background
Section 106(a) of TILA provides that the finance charge in a
consumer credit transaction is ``the sum of all charges, payable
directly or indirectly by the person to whom the credit is extended,
and imposed directly or indirectly by the creditor as an incident to
the extension of credit.'' 15 U.S.C. 1605(a). The finance charge does
not include charges of a type payable in a comparable cash transaction.
Id. The finance charge does not include fees or charges imposed by
third party closing agents, such as settlement agents, attorneys, and
title companies, if the creditor does not require the imposition
[[Page 43242]]
of those charges or the services provided, and the creditor does not
retain the charges. Id. Examples of finance charges include, among
other things, interest, points, service or carrying charges, credit
report fees, and credit insurance premiums. Id.
The finance charge is significant for two reasons. First, it is
meant to represent, in dollar terms, the ``cost of credit'' in whatever
form imposed by the creditor or paid by the borrower. Second, the
finance charge is used in calculating the annual percentage rate (APR)
for the loan, 15 U.S.C. 1606, which represents the ``cost of credit,
expressed as a yearly rate.'' Sec. 226.22(a)(1). Together, these two
interrelated terms are among the most important terms disclosed to
consumers under TILA.
While the test for determining what is included in a finance charge
is very broad, TILA Section 106 excludes from the definition of the
finance charge various fees or charges. The statute excludes from the
finance charge: Premiums for credit insurance if coverage is not
required to obtain credit, certain disclosures are provided to the
consumer, and the consumer affirmatively requests the insurance in
writing; and premiums for property and liability insurance written in
connection with a consumer credit transaction if the insurance may be
obtained from a person of the consumer's choice and certain disclosures
are provided to the consumer. 15 U.S.C. 1605(b) and (c). Statutory
exclusions also apply to certain security interest charges, including:
(1) Fees or charges required by law and paid to public officials for
determining the existence of, or for perfecting, releasing, or
satisfying, any security related to the credit transaction; (2)
premiums for insurance purchased instead of perfecting any security
interest otherwise required by the creditor; and (3) taxes levied on
security instruments or the documents evidencing indebtedness if
payment of those taxes is required to record the instrument securing
the evidence of indebtedness. 15 U.S.C. 1605(d). Finally, the statute
excludes from the finance charge various fees in connection with loans
secured by real property, such as title examination fees, title
insurance premiums, fees for preparation of loan-related documents,
escrows for future payment of taxes and insurance, notary fees,
appraisal fees, pest and flood-hazard inspection fees, and credit
report fees. 15 U.S.C. 1605(e).
Through the exclusions described above, the Congress has adopted a
``some fees in, some fees out'' approach to the finance charge with
some fees automatically excluded from the finance charge and other fees
excluded from the finance charge provided certain conditions are met.
The regulation tracks this approach with a three-tiered approach to the
classification of fees or charges: (1) Some fees or charges are finance
charges; (2) some fees and charges are not finance charges; and (3)
some fees and charges are not finance charges, but only if certain
conditions are met. As a result, neither the finance charge nor the
corresponding APR disclosed to the consumer reflect the consumer's
total cost of credit.
Section 226.4(a) defines the finance charge as ``the cost of
consumer credit as a dollar amount.'' Consistent with TILA Section
106(a), the finance charge includes ``any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit''
and does not include ``any charge of a type payable in a comparable
cash transaction.'' Sec. 226.4(a). The finance charge also includes
fees and amounts charged by someone other than the creditor if the
creditor requires the use of a third party as a condition of or
incident to the extension of credit, even if the consumer can choose
the third party, or if the creditor retains a portion of the third
party charge (to the extent of the portion retained). Sec.
226.4(a)(1).
The Board has adopted provisions in the regulation to give effect
to each of the statutory exclusions and conditional exclusions from the
finance charge. Closing agent charges are not included in the finance
charge unless the creditor requires the particular services for which
the consumer is charged, requires imposition of the charge, or retains
a portion of the charge (to the extent of the portion retained). Sec.
226.4(a)(2). Premiums for credit insurance may be excluded from the
finance charge if insurance coverage is not required by the creditor,
certain disclosures are provided to the consumer, and the consumer
affirmatively requests the insurance coverage in a writing signed or
initialed by the consumer. Sec. 226.4(d)(1). Premiums for property and
liability insurance may also be excluded from the finance charge if the
insurance may be obtained from a person of the consumer's choice and
certain disclosures are provided to the consumer. Sec. 226.4(d)(2).
Certain security interest charges enumerated in the statute, such as
taxes and fees prescribed by law and paid to public officials for
determining the existence of, or for perfecting, releasing, or
satisfying, a security interest, are excluded from the finance charge.
Sec. 226.4(e). The regulation also excludes from the finance charge
the real estate related fees enumerated in Section 106(e) of TILA.
Sec. 226.4(c)(7).
Over time, the Board, by regulation, has contributed to the ``some
fees in, some fees out'' approach to the finance charge by determining
that certain other charges not specifically excluded by the statute are
not finance charges. These regulatory exclusions often sought to bring
logical consistency to the treatment of fees that are similar to fees
the statute excludes or conditionally excludes from the finance charge.
Charges excluded from the finance charge by regulation include: Charges
for debt cancellation or debt suspension coverage if the coverage is
not required by the creditor, certain disclosures are provided to the
consumer, and the consumer affirmatively requests the coverage in a
writing signed or initialed by the consumer; and fees for verifying the
information in a credit report. See Sec. 226.4(d)(3) and comment
4(c)(7)-1. The additional fees the Board has excluded from the finance
charge generally are closely analogous or related to fees that the
statute excludes or conditionally excludes from the finance charge. For
example, premiums for voluntary debt cancellation coverage are closely
analogous to premiums for voluntary credit insurance, which TILA
excludes from the finance charge. Likewise, charges for verifying a
credit report are related to the credit report itself.
Concerns With the Current Approach to Finance Charges
The ``some fees in, some fees out'' approach to the finance charge
has been problematic both for consumers and for creditors since TILA's
inception. Many of these problems were described in the 1998 Joint
Report.\20\
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\20\ The 1998 Joint Report at 8-16.
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One fundamental problem is that there are two views of what is
meant by the ``cost of credit.'' From the creditor's perspective, the
cost of credit means the interest and fee income that the creditor
receives or requires in exchange for providing credit to the consumer.
From the consumer's perspective, however, the cost of credit means what
the consumer pays for the credit, regardless of the persons to whom
such amounts are paid.\21\ The statute uses both of these approaches in
designating which fees are and are not included in the finance charge.
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\21\ See The 1998 Joint Report at 10.
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The influence of the creditor's perspective on the cost of credit
is evident in how the ``some fees in, some
[[Page 43243]]
fees out'' approach to the finance charge has evolved and been applied
to loans secured by real property. Many services provided in connection
with real estate loans are performed by third parties, such as
appraisers, closing agents, inspectors, public officials, attorneys,
and title companies. Some of these services are required by the
creditor, while others are not. In either case, the fees for these
services generally are remitted in whole or in part to the third party.
In some cases, the creditor may have little control over the fees
imposed by these third parties. From the creditor's perspective, the
creditor generally does not receive and retain these charges in
connection with providing credit to the consumer. From the consumer's
perspective, however, these third-party charges are part of what the
consumer pays to obtain credit.\22\
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\22\ See The 1998 Joint Report at 11.
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Another problem with the ``some fees in, some fees out'' approach
is that it undermines the effectiveness of the APR as an accurate
measure of the cost of credit expressed as a yearly rate. The APR is
designed to be a benchmark for consumer shopping. In consumer testing
conducted for the Board, however, the APR appeared not to be fulfilling
that objective in connection with mortgage loans.
A single figure such as the APR is simple to use, particularly if
consumers can use it to evaluate and compare competing products, rather
than having to evaluate multiple figures.\23\ This is especially true
for a figure such as the APR, which has a forty-year history in
consumer disclosures, and thus is familiar to consumers. Nevertheless,
if that single figure is not understood by consumers or does not fully
represent what it purports to represent, the usefulness of that figure
is undermined. Consumer testing shows that most consumers do not
understand the APR, and many believe that the APR is the interest rate.
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\23\ See The 1998 Joint Report at 9.
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Under the current ``some fees in, some fees out'' approach to the
finance charge, mortgage lenders also have an incentive to unbundle the
cost of credit and shift some of the costs from the interest rate into
ancillary fees that are excluded from the finance charge and not
considered when calculating the APR, resulting in a lower APR than
otherwise would have been disclosed. This further undermines the
usefulness of the APR and has resulted in the proliferation of ``junk
fees,'' such as fees for preparing loan-related documents. Such
unbundling of the cost of credit, and the resulting pricing complexity,
can have a detrimental impact on consumers. For example, research
undertaken by HUD suggests that borrowers experience great difficulty
when deciding whether the tradeoff between paying higher up-front costs
or paying a higher interest rate is in their best interest, and that
borrowers who do not pay up-front loan origination fees generally pay
less than borrowers who do pay such fees.\24\ To the extent that the
APR calculation includes most or all fees, the APR can reduce the
incentive for lenders to include junk fees in credit agreements.\25\
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\24\ U.S. Department of Housing and Urban Development, A Study
of Closing Costs for FHA Mortgages at x-xi and 2-4 (May 2008).
\25\ See The 1998 Joint Report at 9.
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Based on extensive outreach conducted by Board staff, there appears
to be a broad consensus that the ``some fees in, some fees out''
approach to the finance charge and corresponding APR calculation and
disclosure is seriously flawed. Many industry representatives consider
the finance charge definition overly complex. For creditors, this
complexity creates significant regulatory burden and litigation risk.
While some industry representatives generally favor a more inclusive
measure, they have not advocated a specific test for determining the
finance charge.
Consumer advocates believe that the exclusions from the finance
charge undermine the purpose of the finance charge and the APR, which
is to measure the cost of credit. Some consumer advocates have
recommended a ``but for'' test that would include in the finance charge
all fees except those that the consumer would pay if he or she were not
``obtaining, accessing, or repaying the extension of credit,'' such as
fees paid in comparable cash transactions.\26\
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\26\ Renuart, Elizabeth and Diane E. Thomson, The Truth, the
Whole Truth, and Nothing but the Truth: Fulfilling the Promise of
Truth in Lending, 25 Yale J. on Reg. 181, 230 (2008).
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In the 1998 Joint Report, the Board and HUD recommended that the
Congress adopt a more comprehensive definition of the finance
charge.\27\ The Board and HUD recommended adopting a ``required-cost of
credit'' test that would include in the finance charge ``the costs the
consumer is required to pay to get the credit.'' \28\ Under this
approach, the finance charge would include (and the APR would reflect)
costs required to be paid by the consumer to obtain the credit,
including many fees currently excluded from the finance charge, such as
application fees, appraisal fees, document preparation fees, fees for
title services, and fees paid to public officials to record security
interests.\29\ Under the ``required-cost of credit'' test, fees for
optional services, such as premiums for voluntary credit insurance,
would be excluded from the finance charge.\30\
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\27\ The 1998 Joint Report at 15-16.
\28\ The 1998 Joint Report at 13, 16.
\29\ The 1998 Joint Report at 13.
\30\ The 1998 Joint Report at 13.
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The Board's Proposal
A simpler, more inclusive test for determining the finance charge.
The Board believes consumers would benefit from having a disclosure
that includes fees or charges that better represent the full cost of
credit undiluted by myriad exclusions, the basis for which consumers
cannot be expected to understand. In addition, having a single
benchmark figure--the APR--that is simple to use should allow consumers
to evaluate competing mortgage products by reviewing one variable. The
Board also believes that such a disclosure would reduce compliance
burdens, regulatory uncertainty, and litigation risks for creditors who
must provide accurate TILA disclosures.
Thus, the Board would retain the APR as a benchmark for closed-end
transactions secured by real property or a dwelling but is proposing
certain revisions designed to make the APR more useful to consumers.
First, as discussed below, the Board is proposing to provide consumers
with more helpful explanation of the APR and what it represents.
Second, the Board is proposing to require disclosure of the APR
together with a new disclosure of the interest rate, as discussed
below. Third, the Board is proposing to replace the ``some fees in,
some fees out'' approach for determining the finance charge with a
simpler, more inclusive approach for determining the finance charge
that is based on TILA Section 106(a), 15 U.S.C. 1605(a). This approach
is designed to ensure that the finance charge and the corresponding APR
disclosed to consumers fulfills the basic purpose of TILA by providing
a more complete and useful measure of the cost of credit.
Pursuant to its authority under TILA Sections 105(a) and (f) of
TILA, 15 U.S.C. 1604(a) and (f), the Board is proposing to amend Sec.
226.4 to make most of the current exclusions from the finance charge
inapplicable to closed-end credit transactions secured by real property
or a dwelling. For such loans, the Board is proposing to replace the
``some fees in, some fees out'' approach with a simpler, more inclusive
test based on the definition of finance
[[Page 43244]]
charge in TILA Section 106(a), 15 U.S.C. 1605(a), for determining what
fees or charges are included in the finance charge. The Board believes
that the current patchwork of fee exclusions from the definition of the
finance charge is not consistent with TILA's purpose of disclosing the
cost of credit to the consumer. The Board believes that a more
inclusive approach to determining the finance charge would be more
consistent with TILA's purpose, enhance consumer understanding and use
of the finance charge and APR disclosures, and reduce compliance costs.
The Board also believes that the proposed revisions to the finance
charge may enhance competition for third-party services since creditors
would likely be more mindful of fees or charges that must be included
in the finance charge and APR.
The proposed test for determining the finance charge tracks the
language of current Sec. 226.4 but excluding Sec. 226.4(a)(2).
Specifically, under this test, a fee or charge is included in the
finance charge for closed-end credit transactions secured by real
property or a dwelling if it is (1) ``payable directly or indirectly by
the consumer'' to whom credit is extended, and (2) ``imposed directly
or indirectly by the creditor as an incident to or a condition of the
extension of credit.'' The finance charge would continue to exclude
fees or charges paid in comparable cash transactions. See Sec.
226.4(a). The finance charge also includes charges by third parties if
the creditor: (1) Requires use of a third party as a condition of or
incident to the extension of credit, even if the consumer can choose
the third party; or (2) retains a portion of the third-party charge, to
the extent of the portion retained. See Sec. 226.4(a)(1). Other
exclusions from the finance charge for closed-end credit transactions
secured by real property or a dwelling would be limited to late fees
and similar default or delinquency charges, seller's points, and
premiums for property and liability insurance.
As new services are added, and new fees are charged, in connection
with closed-end credit transactions secured by real property or a
dwelling, creditors would have to apply the basic test in making
judgments about whether or not new fees must be included in the finance
charge. The Board requests comment on whether further guidance is
needed to assist creditors in making these determinations, and, if so,
what specific guidance would be helpful.
Loans covered. Section 226.4 is part of Subpart A, General, as
opposed to Subpart C, Closed-End Credit. Nevertheless, the proposed
amendments to Sec. 226.4 would apply only to closed-end credit
transactions secured by real property or a dwelling, consistent with
the general scope of this proposed rule. The Board seeks comment on
whether the same amendments should be made applicable to other closed-
end credit and may consider such amendments under a future review of
Regulation Z. Contemporaneous with this proposal, the Board is
publishing separately proposed rules regarding home equity lines of
credit (HELOCs). Accordingly, the Board is not proposing to apply the
changes to the finance charge determination to HELOCs in this
rulemaking. As discussed in the HELOC proposal, the Board believes that
changing the definition of finance charge for HELOC accounts would not
have a material effect on the HELOC disclosures and accordingly is
unnecessary.
Impact on coverage of other rules. One potential consequence of
adopting a more inclusive test for determining the finance charge is
that more loans may qualify as ``HOEPA loans,'' as described in TILA
Section 103(aa), and therefore be subject to the additional disclosures
and prohibitions applicable to such loans under TILA Section 129.
Similarly, more loans may be subject to the Board's recently adopted
protections for higher-priced mortgage loans under Sec. 226.35, which
become effective on October 1, 2009. 73 FR 44522; Jul. 30, 2008.
Finally, more loans may qualify as covered loans under certain State
anti-predatory lending laws that use the APR as a coverage test. The
Board has conducted some analysis to quantify these impacts.
To estimate representative charges, the Board obtained information
from a 2008 survey conducted by Bankrate.com on closing costs for each
state, based on a $200,000 hypothetical mortgage loan.\31\ Using these
estimates, and scaling those that are calculated as a percentage of
loan amount as necessary, the Board estimated the effect on the APRs of
first-lien loans in two databases: HMDA records, which include most
closed-end home loans, and data obtained from Lender Processing
Services, Inc. (LPS), which include mostly prime and near-prime home
loans serviced by several large mortgage servicers.
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\31\ To supplement the Bankrate.com survey with estimated
recording fees and taxes, which the survey did not include, the
Board used the Martindale-Hubbell service's digest of State laws. As
discussed below, the Board is not proposing to revise comment 4(a)-
5, which provides principles for determining the treatment of taxes
based on the party on whom the law imposes the tax. For the sake of
simplicity, the Board did not attempt to distinguish such laws on
this basis and, instead, included all recording taxes in the finance
charge under the proposal. The analysis thus may have included some
recording taxes in the finance charge under the proposal that could
have been excluded under comment 4(a)-5.
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On the basis of this analysis, the Board estimates that proposed
Sec. 226.4 would increase the share of first-lien refinance and home
improvement loans covered by HOEPA, under Sec. 226.32, by about 0.6
percent. While this increase is small, the Board also notes that,
because very few HOEPA loans are originated overall, the absolute
number of loans covered would increase markedly--more than 350 percent.
Because the HMDA data do not include APRs for loans below the rate
spread reporting thresholds, see 12 CFR 203.4(a)(12), 2006 LPS data
were used to estimate the impact on coverage of Sec. 226.35. Based on
this analysis, the Board estimates that about 3 percent of the first-
lien loans in the loan amount range of the typical home purchase or
refinance loan ($175,000 to $225,000) that were below the Sec. 226.35
APR threshold would have been above the threshold if proposed Sec.
226.4 had been in effect at the time.
The Board also examined HMDA data for the impact of the proposed,
more inclusive finance charge definition on APRs in certain states.
Specifically, the Board considered the APR tests for coverage of first-
lien mortgages under the anti-predatory lending laws in the District of
Columbia (DC), Illinois, and Maryland. These laws are the only three
State anti-predatory lending laws with APR coverage thresholds that are
lower than the federal HOEPA APR threshold, for first-lien loans, of
800 basis points over the U.S. Treasury yield on securities with
comparable maturities. DC and Illinois use a threshold of 600 basis
points, and Maryland uses a threshold of 700 basis points, over the
comparable Treasury yield.\32\ Freddie Mac and Fannie Mae have policies
under which they will not purchase loans that exceed the Illinois
thresholds,\33\ but they have no such policies with regard to DC or
Maryland. The Board estimates that proposed Sec. 226.4 would convert
the following percentages of first-lien loans that are under the
applicable APR threshold into loans that exceed that threshold and thus
would become covered by the applicable State anti-predatory lending
law: DC, 2.5%; Illinois, 4.0%; Maryland, 0.0%.
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\32\ DC Code Ann. 26-1151.01(7)(A)(i); Ill. Comp. Stat. ch. 815,
137/10; Md. Code Ann. Com. Law 12-1029(a)(2).
\33\ http://www.freddiemac.com/learn/pdfs/uw/Pred_requirements.pdf; https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2003/03-12.pdf.
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[[Page 43245]]
The Board notes that the impact of the proposed finance charge
definition on APRs varies among loans based on two significant factors.
First, because many of the affected charges are fixed dollar amounts,
the impact is significantly greater for smaller loans. Second, the
impact likely would vary geographically because some charges, notably
title insurance premiums and recording fees and taxes, vary
considerably by state. The Board believes the proposal, on balance,
would be in consumers' interests but seeks comment on these
consequences of the proposal and the impact it may have on loans that
could become subject to these various laws.
Legal authority. The Board is proposing to adopt the simpler, more
inclusive test for determining the finance charge and corresponding APR
pursuant to its general rulemaking, exception, and exemption
authorities under TILA Section 105. Section 105(a) directs the Board to
prescribe regulations to carry out the purposes of this title, which
include facilitating consumers' ability to compare credit terms and
helping consumers avoid the uninformed use of credit. 15 U.S.C.
1601(a), 1604(a). Section 105(a) generally authorizes the Board to make
adjustments and exceptions to TILA to effectuate the statute's
purposes, to prevent circumvention or evasion of the statute, or to
facilitate compliance with the statute. 15 U.S.C. 1601(a), 1604(a).
The Board has considered the purposes for which it may exercise its
authority under TILA Section 105(a) carefully and, based on that
review, believes that the proposed adjustments and exceptions are
appropriate. The proposal has the potential to effectuate the statute's
purpose by better informing consumers of the total cost of credit and
to prevent circumvention or evasion of the statute through the
unbundling or shifting of the cost of credit from finance charges to
fees or charges that are currently excluded from the finance charge.
The Board believes that Congress did not anticipate how such unbundling
would undermine the purposes of TILA, when it enacted the exceptions.
For example, fees for preparation of loan-related documents are
excluded from the finance charge by TILA Section 106(e), 15 U.S.C.
1605(e); in practice, document preparation fees have become a common
vehicle used by creditors to enhance their revenue without having any
impact on the finance charge or APR. A simpler, more inclusive approach
to determining the finance charge also would facilitate compliance with
the statute.
TILA Section 105(f) generally authorizes the Board to exempt any
class of transactions from coverage under any part of TILA if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
15 U.S.C. 1604(f)(1). The Board is proposing to exempt closed-end
transactions secured by real property or a dwelling from the complex
exclusions in TILA Section 106(b) through (e), 15 U.S.C. 1605(b)
through (e). TILA Section 105(f) directs the Board to make the
determination of whether coverage of such transactions under those
exclusions provides a meaningful benefit to consumers in light of
specific factors. 15 U.S.C. 1604(f)(2). These factors are (1) the
amount of the loan and whether the disclosure provides a benefit to
consumers who are parties to the transaction involving a loan of such
amount; (2) the extent to which the requirement complicates, hinders,
or makes more expensive the credit process; (3) the status of the
borrower, including any related financial arrangements of the borrower,
the financial sophistication of the borrower relative to the type of
transaction, and the importance to the borrower of the credit, related
supporting property, and coverage under TILA; (4) whether the loan is
secured by the principal residence of the borrower; and (5) whether the
exemption would undermine the goal of consumer protection.
The Board has considered each of these factors carefully and, based
on that review, believes that the proposed exemptions are appropriate.
Mortgage loans generally are the largest credit obligation that most
consumers assume. Most of these loans are secured by the consumer's
principal residence. For many consumers, their mortgage loan is the
most important credit obligation that they have. Consumer testing
suggests that consumers find the finance charge and APR disclosures
confusing and unhelpful when shopping for a mortgage. Along with other
changes, replacing the patchwork ``some fees in, some fees out''
approach to determining the finance charge with a more inclusive
approach that reflects the consumer's total cost of credit has the
potential to further the goals of consumer protection and promote the
informed use of credit for mortgage loans. Adoption of a more inclusive
finance charge also would simplify compliance, reduce regulatory
burden, and reduce litigation risk for creditors.
The Board's exception and exemption authority under Sections 105(a)
and (f) does not apply in the case of a mortgage referred to in Section
103(aa), which are high-cost mortgages generally referred to as ``HOEPA
loans.'' The Board does not believe that this limitation restricts its
ability to apply the revised provisions regarding finance charges to
all mortgage loans, including HOEPA loans. This limitation on the
Board's general exception and exemption authority is a necessary
corollary to the decision of the Congress, as reflected in TILA Section
129(l)(1), to grant the Board more limited authority to exempt HOEPA
loans from the prohibitions applicable only to HOEPA loans in Section
129(c) through (i) of TILA. See 15 U.S.C. 1639(l)(1). Here, the Board
is not proposing any exemptions from the HOEPA prohibitions. This
limitation does raise a question as to whether the Board could use its
exception and exemption authority under Sections 105(a) and (f) to
except or exempt HOEPA loans, but not other types of mortgage loans,
from other, generally applicable TILA provisions. That question,
however, is not implicated by this proposal.
Here, the Board is proposing to apply its general exception and
exemption authority to enhance the finance charge disclosure for all
loans secured by real property or a dwelling, including both HOEPA and
non-HOEPA loans, in order to fulfill the statute's purpose of having
the finance charge and APR disclosures reflect the total cost of
credit. It would not be consistent with the statute or with
Congressional intent to interpret the Board's authority under Sections
105(a) and (f) in such a way that the proposed revisions could apply
only to mortgage loans that are not subject to HOEPA. Reading the
statute in a way that would deprive HOEPA borrowers of improved finance
charge and APR disclosures is not a reasonable construction of the
statute and contravenes the Congress's goal of ensuring ``that enhanced
protections are provided to consumers who are most vulnerable to
abuse.'' \34\
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\34\ H.R. Conf. Rept. 103-652 at 159 (Aug. 2, 1994).
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The Board solicits comment on all aspects of this proposal,
including the cost, burden, and benefits to consumers and to industry
regarding the proposed revisions to the determination of the finance
charge. The Board also requests comment on any alternatives to the
proposal that would further the purposes of TILA and provide consumers
with more useful disclosures.
4(a) Definition
Comment 4(a)-5 contains guidance for determining whether taxes
should be treated as finance charges. Generally, a tax imposed on the
creditor is a finance
[[Page 43246]]
charge if the creditor passes it through to the consumer. If applicable
law imposes a tax solely on the consumer, on the creditor and consumer
jointly, on the credit transaction itself without specifying a liable
party, or on the creditor with direction or authorization to pass it
through to the consumer, the tax is not a finance charge. Consequently,
an examination of the law imposing each tax that is paid by the
consumer is required to determine whether such taxes are finance
charges. This examination of laws creates burden for creditors and may
result in inconsistent treatment of similar taxes. The resulting
disclosures likely are not as useful to consumers as they might be if
all taxes were treated consistently. The Board seeks comment on whether
the rules for determining the finance charge treatment of taxes imposed
by State and local governments should be simplified and, if so, how.
The Board also seeks comment on whether any such simplification should
be for purposes of closed-end transactions secured by real property or
a dwelling only or should have more general applicability.
Proposed new comment 4(a)-6 would clarify that there is no
comparable cash transaction in a transaction where there is no seller,
such as a refinancing, and thus the comparable cash transaction
exclusion from the finance charge does not apply to such transactions.
4(a)(2) Special Rule; Closing Agent Charges
The Board is proposing to amend Sec. 226.4(a)(2), which set out
special rules for closing agent charges, in light of the proposed new
Sec. 226.4(g), discussed below. As a result, this provision would no
longer apply to closed-end credit transactions secured by real property
or a dwelling because the fees excluded by Sec. 226.4(a)(2) meet the
general definition of the finance charge in TILA Section 106(a). The
Board also proposes certain conforming amendments to the staff
commentary under this provision.
Under the general definition of ``finance charge'' in TILA Section
106(a), a charge is a finance charge if it is (1) ``payable directly or
indirectly by the person to whom the credit is extended,'' and (2)
``imposed directly or indirectly by the creditor as an incident to the
extension of credit.'' 15 U.S.C. 1605(a). Application of the basic
statutory definition as the test for determining which charges are
finance charges would result in many third-party charges being treated
as finance charges because such third-party charges often are payable
directly or indirectly by the consumer and imposed indirectly by the
creditor. For instance, because real estate settlements are complex
financial and legal transactions, creditors generally require a
licensed closing agent (often an attorney) to conduct closings to
ensure that the transaction is handled with professional skill and
care. These closing agents typically impose fees on the consumer in the
course of ensuring that the loan is consummated appropriately. In some
cases, the creditor clearly requires the particular third-party service
for which a fee is charged, such as where the creditor instructs the
closing agent to send documents by overnight courier. In other cases,
however, whether the creditor requires the particular service is not
clear.
A rule that requires case-by-case factual determinations as to
whether a particular third-party fee must be included in the finance
charge results in complexity and inconsistent treatment of such fees.
Such inconsistent treatment in turn undermines the utility of the
finance charge and APR as comparison shopping tools and introduces
uncertainty and litigation risk for creditors. For these reasons, the
Board believes that fees charged by closing agents, both their own and
those of other third parties they hire to perform particular services,
should be treated uniformly as finance charges. The Board seeks comment
on whether any such third-party charges do not fall within the basic
test for determining the finance charge and could be excluded from the
finance charge without requiring factual determination in each case.
Requiring third-party charges to be included in the finance charge
creates some risk that a creditor may understate the finance charge if
the creditor does not know that a particular charge was imposed by a
third party. This risk is mitigated to some extent by TILA Section
106(f), which provides that a disclosed finance charge is treated as
accurate if it does not vary from the actual finance charge by more
than $100 or is greater than the amount required to be disclosed. 15
U.S.C. 1605(f). This tolerance has been incorporated into Regulation Z.
See Sec. 226.18(d)(1). The Board requests comment on whether it should
increase the finance charge tolerance, for example to $200, in light of
its proposal to require more third-party charges to be included in the
finance charge. The Board also requests comment on whether the existing
or any increased tolerance should be linked to an inflation index, such
as the Consumer Price Index.
Excluding fees from the finance charge because they are voluntary
or optional also is not consistent with the statutory purpose of
disclosing the ``cost of credit,'' which includes charges imposed ``as
an incident to the extension of credit.'' \35\ 15 U.S.C. 1605(a). One
basis for the current exclusions for voluntary or optional charges is
an implicit assumption that they are not ``imposed directly or
indirectly by the creditor'' on the consumer. However, charges may be
imposed by a creditor even if the services for which the fee is imposed
are not specifically required by the creditor. Moreover, a test that
depends upon whether a service is ``voluntary'' inherently requires a
factual determination. In the current provisions addressing credit
insurance, the Board has identified certain objective criteria for
determining when the consumer's purchase of such insurance is deemed to
be voluntary. However, as discussed below, this approach has many
problems and has not proven satisfactory. The Board believes that
drawing a bright-line to include in the finance charge both voluntary
and required charges that are imposed by the creditor would eliminate
the difficulties posed by this type of fact-based analysis and provide
a more consistent measure of the cost of credit.
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\35\ The Board has consistently interpreted the definition of
finance charge as not dependent on whether a charge is voluntary or
required. As a practical matter, most voluntary fees are excluded
because they coincidentally are payable in a comparable cash
transaction, not specifically because they are voluntary. See, e.g.,
61 FR 49237, 49239; Sept. 19, 1996 (charges for voluntary debt
cancellation agreements).
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Another basis for the current exclusions for voluntary or optional
charges in connection with the credit transaction is an assumption that
creditors cannot know the amounts of such charges at the time the
disclosure must be provided to the consumer. The Board presumes that
creditors know the amounts of their own voluntary charges, if any. The
Board believes that creditors generally know or can readily determine
voluntary third-party charges when providing TILA disclosures three
business days before consummation, as proposed Sec. 226.19(a)(2)(ii)
would require. As a practical matter, the primary voluntary third-party
charge in connection with a mortgage transaction of which the Board is
aware (and that is not otherwise excluded from the finance charge) is
the premium for voluntary credit insurance, and creditors generally
solicit consumers for such insurance. In fact, under existing Sec.
226.4(d)(1)(ii), creditors historically
[[Page 43247]]
have had to disclose the premium for voluntary credit insurance to
exclude it from the finance charge. The Board nevertheless solicits
comment on whether there are voluntary third-party charges the amounts
of which cannot be determined three business days before consummation.
The Board recognizes that creditors may not know what voluntary or
optional charges the consumer will incur when providing early TILA
disclosures. When providing early TILA disclosures, creditors may rely
on reasonable assumptions regarding voluntary or optional charges and
label those amounts as estimates. The Board invites comment on whether
further guidance is required regarding reasonable assumptions that may
be made regarding voluntary or optional charges in early TILA
disclosures.
4(b) Examples of Finance Charges
The Board is proposing technical amendments to comment 4(b)-1 to
reflect the fact that the exclusions from the finance charge under
Sec. 226.4(c) through (e), other than Sec. Sec. 226.4(c)(2),
226.4(c)(5) and 226.4(d)(2), would not apply to closed-end credit
transactions secured by real property or a dwelling.
4(c) Charges Excluded From the Finance Charge
The Board proposes to amend Sec. 226.4(c), which lists
miscellaneous exclusions from the finance charge, to provide that Sec.
226.4(c) is limited by proposed new Sec. 226.4(g). Thus, except for
late fees and similar default or delinquency charges and seller's
points, the exclusions in Sec. 226.4(c) would not apply to closed-end
credit transactions secured by real property or a dwelling. The Board
also proposes certain conforming amendments to the staff commentary
under those provisions.
4(c)(2)
The exclusion of fees for actual unanticipated late payment,
exceeding a credit limit, or for delinquency, default, or a similar
occurrence in Sec. 226.4(c)(2) would be retained for closed-end credit
transactions secured by real property or a dwelling. The Board believes
these charges should be excluded because they necessarily occur only
after the finance charge is disclosed to consumers. At the time the
TILA disclosures must be provided to consumers, a creditor cannot know
whether it will impose such charges or their amounts.
4(c)(5)
The exclusion of seller's points from the finance charge in Sec.
226.4(c)(5) would be retained for closed-end credit transactions
secured by real property or a dwelling. Seller's points are not payable
by the consumer. Comment 226.4(c)(5)-1 notes that seller's points may
be passed on to the buyer in the form of a higher sales price for the
property or dwelling. Even then, seller's points are excluded from the
finance charge. A different rule would require a fact-specific
determination in every transaction involving seller's points regarding
whether and to what extent the seller shifted those costs to the
borrower. The Board does not believe that such a rule is feasible. The
Board seeks comment on the retention of the seller's points exclusion.
4(c)(7) Real-Estate Related Fees
The Board is proposing to amend Sec. 226.4(c)(7), which currently
excludes from the finance charge a number of fees charged in
transactions secured by real property or in residential mortgage
transactions if those fees are bona fide and reasonable. Under the
proposal, the following fees currently excluded would be included in
the finance charge for closed-end credit transactions secured by real
property or a dwelling: fees for title examination, abstract of title,
title insurance, property survey, and similar purposes; fees for
preparing loan-related documents, such as deeds, mortgages, and
reconveyance or settlement documents; notary and credit-report fees;
property appraisal fees or fees for inspections to assess the value or
condition of the property if the service is performed prior to closing,
including fees related to pest-infestation or flood-hazard
determinations; and amounts required to be paid into escrow or trustee
accounts if the amounts would not otherwise be included in the finance
charge. The commentary provisions under Sec. 226.4(c)(7) would also be
amended accordingly.
As amended, Sec. 226.4(c)(7) and the commentary provisions under
Sec. 226.4(c)(7) would apply only to open-end credit plans secured by
real property and open-end residential mortgage transactions. Thus, for
HELOCs, the fees specified in Sec. 226.4(c)(7) would continue to be
excluded from the finance charge. The Board requests comment on whether
it should retain Sec. 226.4(c)(7), as proposed to be amended, or
delete Sec. 226.4(c)(7) altogether, in light of the proposed changes
to the Regulation Z HELOC rules, published today in a separate Federal
Register notice. See the discussion under Sec. 226.4 in that notice.
4(d) Insurance and Debt Cancellation and Debt Suspension Coverage
The Board is proposing technical amendments to comment 4(d)-12 to
reflect the fact that the exclusions from the finance charge under
Sec. 226.4(e) would not apply to closed-end transactions secured by
real property or a dwelling.
4(d)(1) and (3) Voluntary Credit Insurance Premiums; Voluntary Debt
Cancellation and Debt Suspension Fees
The Board is proposing to amend Sec. Sec. 226.4(d)(1), exclusion
for voluntary credit insurance premiums, and 226.4(d)(3), exclusion for
voluntary debt cancellation and debt suspension fees, to limit their
application consistently with proposed Sec. 226.4(g). Thus, these
exclusions would not apply to closed-end transactions secured by real
property or a dwelling.
Age or employment eligibility criteria. Under TILA Section
106(a)(5), 15 U.S.C. 1605(a)(5), a premium or other charge for any
guarantee or insurance protecting the creditor against the obligor's
default or other credit loss is a finance charge. Under Sec. Sec.
226.4(b)(7) and 226.4(b)(10), a premium or charge for credit life,
accident, health, or loss-of-income insurance, or debt cancellation or
debt suspension coverage is a finance charge if the insurance or
coverage is written in connection with a credit transaction. TILA
Section 106(b), 15 U.S.C. 1605(b), allows the creditor to exclude from
the finance charge any charge or premium for credit life, accident, or
health insurance written in connection with any consumer credit
transaction if (1) the coverage is not a factor in the approval by the
creditor of the extension of credit, and this fact is clearly disclosed
in writing to the consumer; and (2) in order to obtain the insurance,
the consumer specifically requests the insurance after getting the
disclosures. Under Sec. Sec. 226.4(d)(1) and 226.4(d)(3), the creditor
may exclude from the finance charge any premium for credit life,
accident, health or loss-of-income insurance; any charge or premium
paid for debt cancellation coverage for amounts exceeding the value of
the collateral securing the obligation; or any charge or premium for
debt cancellation or debt suspension coverage in the event of loss of
life, health, or income or in case of accident, whether or not the
coverage is insurance, if (1) the insurance or coverage is not required
by the creditor and the creditor discloses this fact in writing; (2)
the creditor discloses the premium or charge for the initial term of
the insurance or coverage,
[[Page 43248]]
(3) the creditor discloses the term of insurance or coverage, if the
term is less than the term of the credit transaction, and (4) the
consumer signs or initials an affirmative written request for the
insurance or coverage after receiving the required disclosures. In
addition, under Sec. 226.4(d)(3)(iii), the creditor must disclose for
debt suspension coverage the fact that the obligation to pay loan
principal and interest is only suspended, and that interest will
continue to accrue during the period of suspension.\36\ Under proposed
Sec. 226.4(g), these provisions would not apply to closed-end credit
transactions secured by real property or a dwelling.
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\36\ The provisions regarding debt suspension coverage were in
the December 2008 Open-End Final Rule. See 74 FR 5244, 5400; Jan.
29, 2009. These provisions will take effect on July 1, 2010.
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Some creditors offer credit insurance or debt cancellation or debt
suspension products with eligibility restrictions, but may not evaluate
whether applicants for the products actually meet the eligibility
criteria at the time the applicants request the product.\37\ For
instance, a consumer who is 70 at the time of enrollment could never
receive the benefits of a product with a 65-year-old age limit.\38\
Similarly, a consumer who is self-employed at the time of enrollment
would not receive benefits if the product requires the consumer to be
employed as a W-2 wage employee.\39\
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\37\ See, e.g., Parker et al. v. Protective Life Ins. Co. of
Ohio et al., Nos. 2004-T-0127 and 2004-T-0128, 2006 Ohio App. LEXIS
3983, at *28 (Ohio Ct. App. Aug. 4, 2006) (reversing summary
judgment for defendants automobile dealership and insurer because
the automobile dealership employee did not evaluate whether the
plaintiffs were eligible for credit disability insurance and the
plaintiffs were later denied benefits based on eligibility
restrictions); Stewart v. Gulf Guaranty Life Ins. Co., No. 2000-CA-
01511-SCT, 2002 Miss. LEXIS 254, at *4 (Miss. Aug. 15, 2002)
(affirming the jury award where the insurer did not require the bank
employee to have the consumer fill out a credit life and disability
insurance application regarding pre-existing conditions and the
insurer later denied coverage based on a pre-existing condition).
\38\ See, e.g., Fed. Trade Comm'n v. Stewart Finance Holdings,
Inc. et al., Civ. Action No. 103CV-2648, Final Judgment and Order at
13 (N.D. Ga. Nov. 9, 2005) (alleging that the finance company sold
accidental death and dismemberment insurance to borrowers who were
not eligible for the product due to age restrictions).
\39\ See, e.g., In the Matter of Providian Nat'l Bank, OCC
Docket No. 2000-53, Consent Order (June 28, 2000) (alleging that the
bank marketed an involuntary unemployment credit protection program
but failed to adequately disclose that such protection was
unavailable to consumers who were self-employed).
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Although age and employment eligibility criteria may be set forth
in the product marketing materials and/or enrollment forms, the Board
believes few consumers notice this information when they obtain credit
and choose to purchase the voluntary credit insurance or debt
cancellation or debt suspension coverage. Because the product is sold
in connection with a credit transaction that is underwritten by the
creditor, the consumer may reasonably believe that the creditor has
determined that the consumer is eligible for the product. This may be
especially true for age restrictions because that information is
typically requested by the creditor on the credit application form. As
a result, many consumers may not discover until they file a claim that
they were paying for a product for which they were not eligible when
they initially purchased it. Consumers that do not submit claims may
never discover that they are paying for products that hold no value for
them.
To address this problem, the Board proposes to add Sec. Sec.
226.4(d)(1)(iv) and 226.4(d)(3)(v) to permit creditors to exclude a
premium or charge from the finance charge only if the creditor
determines at the time of enrollment that the consumer meets any
applicable age or employment eligibility criteria for the credit
insurance or the debt suspension or debt cancellation coverage. These
provisions would apply to open-end as well as closed-end (non-real
property) credit transactions. Proposed comment 4(d)-14 would state
that a premium or charge for credit life, accident, health, or loss-of-
income insurance, or debt cancellation or debt suspension coverage is
voluntary and can be excluded from the finance charge only if the
consumer meets the product's age or employment eligibility criteria at
the time of enrollment. The proposed comment would further clarify that
to exclude such a premium or charge from the finance charge, the
creditor would have to determine at the time of enrollment that the
consumer is eligible for the product under the product's age or
employment eligibility restrictions.
Proposed comment 4(d)-14 would provide that the creditor could use
reasonably reliable evidence of the consumer's age or employment status
to satisfy the condition. Reasonably reliable evidence of a consumer's
age would include using the date of birth on the consumer's credit
application, on the driver's license or other government-issued
identification, or on the credit report. Reasonably reliable evidence
of a consumer's employment status would include the consumer's
information on a credit application, Internal Revenue Service Form W-2,
tax returns, payroll receipts, or other evidence such as a letter or e-
mail from the consumer or the consumer's employer. A determination of
age or employment eligibility at the time of enrollment should not be
unduly burdensome because in most cases the creditor would already have
information about the consumer's age and employment status as part of
the credit underwriting process. The Board seeks comment on whether
other examples of reasonably reliable evidence of the consumer's age or
employment status should be included.
Proposed comment 4(d)-14 would clarify that, if the consumer does
not meet the product's age or employment eligibility criteria, then the
premium or charge is not voluntary and must be included in the finance
charge. If the creditor offers a bundled product (such as credit life
insurance combined with credit involuntary unemployment insurance) and
the consumer does not meet the age and/or employment eligibility
criteria for all of the bundled products, the proposed commentary would
clarify that the creditor must either: (1) treat the entire premium or
charge for the bundled product as a finance charge, or (2) offer the
consumer the option of selecting only the products for which the
consumer is eligible and exclude the premium or charge from the finance
charge if the consumer chooses an optional product for which the
consumer meets the age and/or employment eligibility criteria at the
time of enrollment.
The Board proposes this rule and commentary to address concerns
about the voluntary nature of this product. TILA Section 106(b), 15
U.S.C. 1605(b), states that ``[c]harges or premiums for credit life,
accident, or health insurance written in connection with any consumer
credit transaction shall be included in the finance charge unless (1)
the coverage of the debtor by the insurance is not a factor in the
approval by the creditor of the extension of credit, and this fact is
clearly disclosed in writing to the person applying for or obtaining
the extension of credit; and (2) in order to obtain the insurance in
connection with the extension of credit, the person to whom the credit
is extended must give specific affirmative written indication of his
desire to do so after written disclosure to him of the cost thereof.''
Historically, Sec. 226.4(d) has implemented this provision as a
``voluntariness'' standard. For example, in 1981, comment 4(d)-5 was
adopted as part of the TILA simplification process. The comment stated
that the credit insurance ``must be voluntary in order for the premium
to be excluded from the finance charge.'' 46 FR 50288, 50301; Oct. 9,
1981 (emphasis added). In 1996, the Board amended Regulation Z to apply
the rules for credit insurance to debt cancellation coverage. In
adopting this provision, the Board
[[Page 43249]]
stated: ``The new rule allows creditors to exclude fees for voluntary
debt cancellation coverage from the finance charge when specified
disclosures are made.'' 61 FR 49237, 49240; Sept. 19, 1996 (emphasis
added). In the December 2008 Open-End Final Rule, the Board applied the
rules for credit insurance and debt cancellation coverage to debt
suspension coverage. In adopting this provision, the Board referred to
the May 2007 Open-End Proposed Rule, which stated that the Board
``proposed to revise Sec. 226.4(d)(3) to expressly permit creditors to
exclude charges for voluntary debt suspension coverage from the finance
charge when, after receiving certain disclosures, the consumer
affirmatively requests such as product.'' 74 FR 5244, 5266; Jan. 29,
2009 (emphasis in original). Finally, the model forms currently contain
the following statement emphasizing the voluntary nature of the
product: ``Credit life insurance and credit disability insurance are
not required to obtain credit, and will not be provided unless you sign
and agree to pay the additional cost.'' See Appendix H-1 (Credit Sale
Model Form) and Appendix H-2 (Loan Model Form). The Board believes that
if the consumer was ineligible for the benefits of credit insurance or
debt cancellation or debt suspension coverage at the time of
enrollment, then the purchase cannot be voluntary because a reasonable
consumer would not knowingly purchase a policy for which he or she can
derive no benefit. For these reasons, the Board believes that the
requirements of proposed Sec. Sec. 226.4(d)(1)(iv) and 226.4(d)(3)(v)
would help ensure that the purchase of credit insurance or debt
cancellation or debt suspension coverage would, in fact, be voluntary.
The Board notes that although the proposed rule would require
creditors to determine the consumer's age and/or employment eligibility
for the product at the time of enrollment, the proposed rule would not
affect the creditor's ability to deny coverage if the consumer
misrepresented his or her age or employment status at the time of
enrollment. Finally, the proposed rule does not require a creditor to
determine if a consumer ceases to meet the age or employment
eligibility criteria after enrollment. For example, the creditor has
complied with the proposal if the consumer becomes ineligible for the
policy or coverage after enrollment. State or other law may address
these issues. However, the Board solicits comment on whether creditors
should be required to determine whether the consumer meets the
product's age or employment eligibility criteria after the product is
sold (e.g., before renewing an annual premium), or whether creditors
should be required to provide notice when the consumer exceeds the age
limit of the product after enrollment.
Revised disclosures. As discussed above, TILA Section 106(b), 15
U.S.C. 1605(b), and Sec. Sec. 226.4(d)(1) and 226.4(d)(3) allow a
creditor to exclude from the finance charge a credit insurance premium
or debt cancellation or debt suspension fee if the creditor provides
disclosures that inform the consumer of the voluntary nature and cost
of the product. Currently, Regulation Z does not specifically mandate
the format of these disclosures, but provides sample language in the
model forms. For example, Appendix H-2 (Loan Model Form) contains the
following language: ``Credit life insurance and credit disability
insurance are not required to obtain credit, and will not be provided
unless you sign and agree to pay the additional cost.'' The model form
also shows the type of product (e.g., credit life or credit
disability); the cost of the premium; and a signature line. The
signature area is accompanied by the following language: ``I want
credit life insurance.''
Concerns have been raised about whether the current disclosures
sufficiently inform consumers of the voluntary nature and costs of the
product. To address these concerns, a disclosure was tested that
included a charge for credit life insurance and listed the product
under the title ``Optional Features.'' Only about half of the
participants understood that accepting credit insurance was voluntary
and that they could decline the product. Subsequently, a disclosure was
tested that stated, ``STOP. You do not have to buy this insurance to
get this loan.'' After reading this disclosure, all participants
understood the voluntary nature of the product.
In addition, concerns have been raised about the product's cost.
The product may be more costly than, for example, traditional life
insurance, but may not provide additional benefits. To address this
concern, the Board tested the following language: ``If you have
insurance already, this policy may not provide you with any additional
benefits. Other types of insurance can give you similar benefits and
are often less expensive.'' Participant comprehension of the costs and
benefits of the product was significantly increased by these plain-
language disclosures.
Concerns have also been raised about eligibility restrictions.
Consumers might not be aware that they may incur a cost for a product
that provides no benefit to them if the eligibility criteria are not
met at the time of enrollment. Accordingly, the Board tested the
following language: ``Even if you pay for this insurance, you may not
qualify to receive any benefits in the future.'' Participants were
greatly surprised to learn that they might purchase the insurance only
to later discover that they were not eligible for benefits. A few
participants indicated that they did not understand how they could pay
for the coverage and then receive no benefits. To address this issue
and to conform to the requirements of proposed Sec. Sec.
226.4(d)(1)(iv) and 226.4(d)(3)(v), the following statement was added
to the disclosure: ``Based on our review of your age and/or employment
status at this time, you would be eligible to receive benefits.''
However, if there are other eligibility restrictions, such as pre-
existing health conditions, the creditor would be required to disclose
the following statements: ``Based on our review of your age and/or
employment status at this time, you may be eligible to receive
benefits. However, you may not qualify to receive any benefits because
of other eligibility restrictions.''
Finally, a sentence was added to the disclosure to refer consumers
to the Board's Web site to learn more about the product, and the cost
disclosure was streamlined to display more clearly the exact cost of
the product. Most consumer testing participants indicated they would
visit the Board's Web site to learn more about a credit insurance or
debt cancellation or debt suspension product.
Based on this consumer testing, the Board proposes to add model
clauses and samples that provide clearer information to consumers about
the voluntary nature and costs of credit insurance or debt cancellation
or debt suspension coverage. These model clauses and samples would
apply in open-end or closed-end (not secured by real property)
transactions, if the product is voluntary and the consumer qualifies
for benefits based on age or employment. For closed-end transactions
secured by real property or a dwelling, the model clause or sample
would be required whether or not the product is voluntary. Model
Clauses and Samples are proposed at Appendix G-16(C) and G-16(D) and H-
17(C) and H-17(D). These Model Clauses and Samples would be in addition
to the Debt Suspension Model Clauses and Samples found at Appendix G-
16(A) and G-16(B) and H-17(A) and H-17(B).
Timing of disclosures. Currently, comment 4(d)-2 states that ``[i]f
disclosures are given early, for example
[[Page 43250]]
under Sec. 226.17(f) or Sec. 226.19(a), the creditor need not
redisclose if the actual premium is different at the time of
consummation. If insurance disclosures are not given at the time of
early disclosure and insurance is in fact written in connection with
the transaction, the disclosures under Sec. 226.4(d) must be made in
order to exclude the premiums from the finance charge.'' The Board
proposes to delete the reference to Sec. 226.19(a) to conform to the
new timing and redisclosure requirements under proposed Sec.
226.19(a).
4(d)(2) Property Insurance Premiums
The proposal would retain the exclusion from the finance charge of
premiums for insurance against loss or damage to property or against
liability arising out of the ownership or use of property under TILA
Section 106(c) and Sec. 226.4(d)(2). Consumers typically purchase
property and liability insurance to protect against a variety of risks,
including loss of or damage to the property, such as damage caused by
fire, loss of or damage to personal property kept on the property, such
as furniture, and owner liability for injuries incurred by visitors to
the property. Although creditors generally require such insurance as a
condition of extending closed-end credit secured by real property or a
dwelling in order to protect the value of the collateral that is
securing the loan, consumers who do not have mortgages regularly
purchase this type of insurance to protect themselves from the risks
described above. This type of insurance is best viewed as a hybrid
product that protects not only the value of the creditor's collateral,
but also protects the consumer from loss or impairment of the
consumer's equity in the property, loss or impairment of the consumer's
personal property, and personal liability if anyone is injured on the
property. Consequently, it is impossible to segregate that portion of
the insurance (and that portion of the premium) which protects the
creditor from that portion which protects only the consumer.
In addition, the Board has not identified significant abuses in
connection with the sale or marketing of insurance against loss or
damage to property or against liability arising out of the ownership or
use of property. The market for these products appears to be
competitive. Consumers can purchase this type of insurance from many
insurance companies, including companies not associated with mortgage
lenders. In addition, policies generally are tailored to the particular
risks faced by the consumer. Thus, consumers have choices with regard
to how much insurance to purchase to cover various risks and, as a
result, have some control over the premiums they pay.
The Board requests comment on the appropriateness of retaining the
current exclusion from the finance charge of premiums for insurance
against loss or damage to property or against liability arising out of
the ownership or use of property. The Board notes that, under current
Sec. 226.4(d)(2), the category of property and liability insurance has
been interpreted to include coverage against flood risks; the Board
seeks comment on whether the reasons for retaining the exclusion
discussed above are applicable to flood insurance specifically and, if
not, whether it should be subject to separate treatment under
Regulation Z. In addition, the Board requests comment on whether
including such premiums in the finance charge could have adverse or
unintended consequences for consumers and for creditors.
TILA Section 106(c) states that charges or premiums for property
insurance must be included in the finance charge unless ``a clear and
specific statement in writing is furnished by the creditor to the
person to whom the credit is extended, setting forth the cost of the
insurance if obtained from or through the creditor, and stating that
the person to whom the credit is extended may choose the person through
which the insurance is to be obtained.'' 15 U.S.C. 1605(c) (emphasis
added). Section 226.4(d)(2) permits property insurance premiums to be
excluded from the finance charge under the following conditions, among
others: ``If the coverage is obtained from or through the creditor, the
premium for the initial term of insurance coverage shall be disclosed.
If the term of insurance is less than the term of the transaction, the
term of insurance shall also be disclosed.'' (Emphasis added). Comment
4(d)-8 states, in relevant part, that ``[t]he premium or charge must be
disclosed only if the consumer elects to purchase the insurance from
the creditor; in such a case, the creditor must also disclose the term
of the property insurance coverage if it is less than the term of the
obligation.'' (Emphasis added.) Currently, the comment does not use the
statutory language ``from or through the creditor'' and does not define
the phrase. To conform to the statutory and regulatory language, the
Board proposes to amend comment 4(d)-8 to clarify that the premium or
charge and term (if less than the term of the obligation) must be
disclosed if the consumer elects to purchase the insurance ``from or
through the creditor.'' In addition, the proposed comment would clarify
that insurance is available ``from or through a creditor'' if it is
available from the creditor's ``affiliate,'' as that term is defined
under the Bank Holding Company Act, 12 U.S.C. 1841(k). The Bank Holding
Company Act defines an ``affiliate'' as ``any company that controls, is
controlled by, or is under common control with another company.'' Thus,
if the consumer elects to purchase property insurance from a company
that controls, is controlled by, or is under common control with the
creditor, then the creditor would be required to disclose the cost of
the insurance, and the term, if it is less than the term of the
obligation. The Board believes that this proposed rule would clarify
for creditors the meaning of ``through the creditor'' and provide
consumers with a clearer disclosure of the cost of property insurance.
4(d)(4) Telephone Purchases
Under Sec. Sec. 226.4(d)(1) and 226.4(d)(3), creditors may exclude
from the finance charge premiums for credit insurance or fees for debt
cancellation or debt suspension coverage, if the creditor provides
certain disclosures in writing and the consumer signs or initials an
affirmative written request for the insurance or coverage. Over the
years, the Board has received industry requests to permit creditors to
provide the disclosures and obtain the affirmative consumer request
orally in order to facilitate telephone purchases of these products. In
addition, the OCC has issued telephone sales guidelines for national
banks that sell debt cancellation and debt suspension coverage. 12 CFR
37.6(c)(3), 37.7(b).
In the December 2008 Open-End Final Rule, the Board created an
exception to the requirement to provide prior written disclosures and
obtain written signatures or initials for telephone purchases of credit
insurance and debt cancellation or debt suspension coverage in
connection with open-end (not home-secured) plans. 74 FR 5244, 5267;
Jan. 29, 2009. This rule will take effect on July 1, 2010. Under new
Sec. 226.4(d)(4), for telephone purchases a creditor may make the
disclosures orally and the consumer may affirmatively request the
insurance or coverage orally, provided that the creditor (1) maintains
evidence that the consumer, after being provided the disclosures
orally, affirmatively elected to purchase the insurance or coverage,
and (2) mails the required disclosures within three business days after
the telephone purchase. New comment 226.4(d)(4)-1 provides that a
creditor does not satisfy
[[Page 43251]]
the requirement to obtain a consumer's affirmative request if the
``request'' was a response to a leading question or negative consent.
The comment also provides an example of an acceptable enrollment
question (``Do you want to enroll in this optional debt cancellation
plan?'').
The Board promulgated this rule pursuant to its exception and
exemption authorities under TILA Section 105. Section 105(a) authorizes
the Board to make exceptions to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
15 U.S.C. 1601(a), 1604(a). In addition, the Board considered the
exemption factors set forth in TILA Section 105(f)(2), 15 U.S.C.
1604(f)(2), and determined that an exemption for telephone purchases
for open-end (not home-secured) plans was appropriate because the rule
contained adequate safeguards to ensure that oral purchases are
voluntary. 74 FR 5268. The Board emphasized that consumers in open-end
(not home-secured) plans receive monthly statements that clearly
disclose fees, including credit insurance and debt cancellation or debt
suspension coverage charges. Id. Consumers who are billed for insurance
or coverage they did not request can dispute the charge as a billing
error. Id. The Board stated that as part of the closed-end review, it
would consider whether to expand the telephone purchase rule to this
type of credit. 74 FR 5267.
The Board believes that a telephone purchase rule for closed-end
credit is not appropriate. Monthly statements are not required for
closed-end credit, and it would be difficult for consumers who do not
receive monthly statements to detect charges for unwanted coverage.
Moreover, there is no billing error resolution process for closed-end
loans.
Finally, the Board noted in the December 2008 Open-End Final Rule
that an exception or exemption for the telephone purchase of credit
insurance or debt cancellation or debt suspension coverage in
connection with closed-end loans may be ``less necessary.'' 74 FR 5267.
For open-end (not home-secured) credit, new comments 4(b)(7) and (8)-2
and 4(b)(10)-2 in the December 2008 Open-End Final Rule clarify that
credit insurance and debt cancellation or debt suspension coverage is
``written in connection with a credit transaction'' if the consumer
purchases it after the opening of an open-end (not home-secured) plan
because the consumer retains the ability to obtain advances of funds.
74 FR 5265. Therefore, in such a transaction, the creditor must comply
with the disclosure and consumer request requirements even if the
credit insurance and debt cancellation or debt suspension coverage is
sold after the opening of the plan. A creditor in an open-end (not
home-secured) transaction may be more likely to market the product by
telephone after the opening of the plan, and new Sec. 226.4(d)(4)
facilitates the telephone purchase. By contrast, a creditor in a
closed-end transaction is more likely to have the opportunity to meet
the consumer face-to-face at or before consummation to market the
product, provide the disclosure, and obtain the consumer request. For
these reasons, this proposal does not contain a telephone purchase rule
for credit insurance or debt cancellation or debt suspension coverage
sold in connection with a closed-end credit transaction. The Board
seeks comment on this issue. For a discussion of the application of the
telephone purchase rule to HELOCs, see the Board's proposal for such
transactions published simultaneously with this proposal.
4(e) Certain Security Interest Charges
The Board proposes to amend Sec. 226.4(e), which provides
exclusions from the finance charge for certain government recording and
related charges and insurance premiums incurred in lieu of such
charges, as limited by proposed Sec. 226.4(g). Thus, the exclusions
listed in Sec. 226.4(e) would not apply to closed-end credit
transactions secured by real property or a dwelling. The Board also
proposes certain conforming amendments to the staff commentary under
this provision.
4(g) Special Rule; Closed-End Mortgage Transactions
The Board is proposing to add a new Sec. 226.4(g) as a special
rule for closed-end credit transactions secured by real property or a
dwelling. Proposed Sec. 226.4(g) would provide that the exclusions
from the finance charge enumerated in Sec. Sec. 226.4(a)(2) (closing
agent charges), (c) (miscellaneous charges), (d) (premiums for certain
insurance and debt cancellation coverage), and (e) (certain security-
interest charges) do not apply to closed-end credit transactions
secured by real property or a dwelling, except that the exclusions in
Sec. 226.4(c)(2) for late, over-limit, delinquency, default, and
similar fees, Sec. 226.4(c)(5) for seller's points, and Sec.
226.4(d)(2) for property and liability insurance would continue to
apply to such transactions. As noted above, a cross-reference to the
special rule in Sec. 226.4(g) would be added to each of the enumerated
sections. With these changes, the following fees that currently are
excluded from the finance charge would be included in the finance
charge for closed-end mortgage transactions (unless otherwise
excluded): Closing agent charges, application fees charged to all
applicants for credit (whether or not credit is extended), voluntary
credit insurance premiums, voluntary debt-cancellation charges or
premiums, taxes or fees required by law and paid to public officials
relating to security interests, premiums for insurance obtained in lieu
of perfecting a security interest, taxes imposed as a condition of
recording the instruments securing the evidence of indebtedness, and
various real-estate related fees.
Proposed commentary to Sec. 226.4(g) is included to clarify the
rule for mortgage transactions. Proposed comment 4(g)-1 clarifies that
the commentary for the exclusions identified above no longer applies to
closed-end credit transactions secured by real property or a dwelling.
Proposed comment 4(g)-2 clarifies that third-party charges that meet
the definition under Sec. 226.4(a) and are not otherwise excluded
generally are finance charges, whether or not the creditor requires the
services for which they are imposed. Proposed comment 4(g)-3 clarifies
that charges payable in a comparable cash transaction, such as property
taxes and fees or taxes imposed to record the deed evidencing transfer
of title to the property from the seller to the buyer, are not finance
charges because they would have to be paid even if no credit were
extended to finance the purchase.
Request for Comment
The Board solicits comment on the benefits and costs of the
proposed changes for determining the finance charge for closed-end
credit transactions secured by real property or a dwelling. The Board
requests comment specifically on whether this approach adequately or
appropriately addresses the concerns raised by the ``some fees in, some
fees out'' approach in light of the statute's purposes, the need for
consumer protection and meaningful disclosures, and industry concerns
regarding complexity and burden. The Board also seeks comment on the
benefits and costs of the rules for insurance and related products
under the proposed amendments to Sec. 226.4(d).
Section 226.17 General Disclosure Requirements
The Board is proposing new rules governing format and content of
disclosures for transactions secured by real property or a dwelling
under new
[[Page 43252]]
Sec. Sec. 226.37 and 226.38. Accordingly, the Board proposes
conforming and technical amendments to current Sec. Sec. 226.17 and
226.18, as discussed more fully below. In addition, in reviewing the
rules for closed-end credit, regulatory text and associated commentary
have been redesignated, and footnotes moved to the text of the
regulation or commentary, as appropriate, to facilitate compliance with
the regulation.
17(a) Form of Disclosures
17(a)(1)
The Board proposes special rules in new Sec. 226.37 and associated
commentary to govern the format of disclosures required under proposed
Sec. Sec. 226.38 and 226.20(d), and existing Sec. Sec. 226.19(b) and
226.20(c). These new format rules would be in addition to the rules
contained in current Sec. 226.17(a)(1). Current Sec. 226.17(a)(1)
requires that closed-end credit disclosures be grouped together,
segregated from everything else, and not contain any information not
directly related to the disclosures. The Board proposes to revise Sec.
226.17(a)(1) to clarify that the general disclosure standards continue
to apply to transactions secured by real property or a dwelling, but
under the proposal, creditors would also be required to meet the higher
standards under proposed Sec. 226.37. In addition, Sec. 226.17(a)(1)
would be revised to reflect the requirement of electronic disclosures
in certain circumstances, as discussed under Sec. 226.19(d). Under the
proposal, the substance of footnotes 37 and 38 would be moved to the
regulatory text of Sec. 226.17(a)(1).
Footnotes 37 and 38 currently provide exceptions to the grouped and
segregated requirement under Sec. 226.17(a)(1). Footnote 37 allows
creditors to include certain information not directly related to the
required disclosures, such as the consumer's name, address, and account
number. Footnote 38, which implements TILA Section 128(b)(1) in part,
allows creditors to exclude certain required disclosures from the
grouped and segregated requirement, such as the creditor's identity
under Sec. 226.18(a). 15 U.S.C. 1638(b)(1). The Board proposes to
revise the substance of footnote 38 to require that the creditor's
identity under Sec. 226.18(a) be subject to the grouped together and
segregated requirement for all closed-end credit disclosures. (See
proposed Sec. 226.37(a)(2), which parallels this approach for
transactions secured by real property or a dwelling). The Board
proposes to make this adjustment pursuant to its authority under TILA
Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the Board
to make exceptions and adjustments to TILA to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms, and avoiding the uninformed use of credit. 15 U.S.C.
1601(a).
The Board believes requiring the creditor's identity to be grouped
together with required disclosures could assist consumers. The Board
believes it is important for the disclosures to bear the creditor's
identity so that consumers can more easily identify the appropriate
entity. As a result, the Board believes the proposal would help serve
TILA's purpose to provide meaningful disclosure of terms.
Commentary to Sec. 226.17(a)(1) provides guidance to creditors
regarding the general disclosures standards contained in Sec.
226.17(a)(1). The Board proposes to clarify the applicability of
comments 17(a)(1)-2, -5, -6, and -7 to transactions secured by real
property or a dwelling.
Current comment 17(a)(1)-2 provides an exception to the grouped and
segregated requirement for disclosures on variable rate transactions
required under existing Sec. Sec. 226.19(b) and 226.20(c). For the
reasons discussed under proposed Sec. 226.37(a)(2), the Board proposes
to require that ARM loan program disclosures under proposed Sec.
226.19(b), and ARMs adjustment notices under proposed Sec. 226.20(c),
be subject to the grouped and segregated requirement. As a result, the
reference made to Sec. Sec. 226.19(b) and 226.20(c) would be removed
from comment 17(a)(1)-2.
Current comment 17(a)(1)-5, which addresses information considered
directly related to the segregated disclosures, would be revised to
clarify that it does not apply to transactions secured by real property
or a dwelling, and to cross-reference proposed Sec. 226.37(a)(2).
Under the proposal, cross-references in comments 17(a)(1)-5(viii),
(xi), (xii), and (xvi) would be updated; no substantive change is
intended. In addition, as noted below, proposed revisions to Sec.
226.18(f) regarding variable rate transactions, and proposed Sec.
226.38(j)(6) regarding assumption disclosure for transactions secured
by real property or a dwelling, render comments 17(a)(1)-5(xiii) and
(xiv) unnecessary and therefore those comments would be deleted.
Finally, comment 17(a)(1)-5(xvi) would be revised to update cross-
references.
As discussed under proposed Sec. Sec. 226.37(a)(2) and 226.38, the
Board proposes to require that creditors make disclosures for
transactions secured by real property or a dwelling only as applicable.
Current comment 17(a)(1)-6, which permits creditors to design multi-
purpose forms for closed-end credit disclosures as long as they are
clear and conspicuous, would be revised to clarify that it does not
apply to transactions secured by real property or a dwelling, as
discussed more fully below under proposed Sec. 226.37(a)(2).
Finally, the Board proposes to clarify in current comment 17(a)(1)-
7 that transactions secured by real property or a dwelling and that
have balloon payment financing with leasing characteristics are treated
as closed-end credit under TILA and subject to its disclosure
requirements.
17(a)(2)
Section 226.17(a)(2), which implements TILA Section 122(a),
requires the terms finance charge and annual percentage rate, together
with a corresponding amount or percentage rate, to be more conspicuous
than any other disclosure, except the creditor's identity under Sec.
226.18(a). The Board proposes new disclosure requirements under
proposed Sec. 226.38(e)(5)(ii) for the finance charge (renamed
``interest and settlement charges''), and under proposed Sec. Sec.
226.37(a)(2) and 226.38(b) for the APR. As a result, the Board would
revise Sec. 226.17(a)(2) to be inapplicable to transactions secured by
real property or a dwelling.
17(b) Time of Disclosures
Section 227.17(b) and comment 17(b)-1 require creditors to make
closed-end credit disclosures before consummation of the transaction;
special timing requirements apply to dwelling-secured transactions and
variable-rate transactions. As discussed more fully under Sec. 226.19,
the Board is proposing to require creditors to make pre-consummation
disclosures for transactions secured by real property or a dwelling in
accordance with special timing requirements. As a result, the Board
proposes to revise Sec. 226.17(b) and comment 17(b)-1 to clarify that
more specific timing rules would apply to transactions secured by real
property or a dwelling. Current comment 17(b)-2, which addresses
disclosure requirements for transactions converted from open-end to
closed-end, would be revised to clarify that the special timing
requirements under Sec. 226.19(b) would apply for adjustable rate
transactions secured by real property or a dwelling.
[[Page 43253]]
17(c) Basis of Disclosures and Use of Estimates
17(c)(1) Legal Obligation
Section 226.17(c)(1) requires that disclosures under subpart C
reflect the terms of the legal obligation between the parties.
Commentary to Sec. 226.17(c)(1) provides guidance regarding disclosure
of specific transaction types and loan features. The Board proposes to
add new provisions in Sec. 226.17(c)(1)(i) through (vi) to move
certain content from commentary to the regulation, as discussed below.
In addition, the Board would revise certain commentary to Sec.
226.17(c)(1) to reflect the new disclosure regime for mortgages, and
redesignate comments as appropriate. Each of these proposed
subsections, and accompanying commentary, is discussed below.
Comments 17(c)(1)-1 and 17(c)(1)-2 generally address disclosure of
the legal obligation and modification of such obligation. Comment
17(c)(1)-1 would be revised to include the general principle that the
consumer is presumed to abide by the terms of the legal obligation. For
example, proposed comment 17(c)(1)-1 states that creditors should
assume that a consumer will make payments on time and in full. This
proposed revision is consistent with existing comment 17(c)(2)(i)-3,
which states that creditors may base all disclosures on the assumption
that payments will be made on time, disregarding any possible
inaccuracies resulting from consumers' payment patterns. Comment
17(c)(2)(i)-3 specifically addresses disclosures for simple-interest
transactions that potentially may be affected by late payments. The
proposed revisions to comment 17(c)(1)-1 would clarify that disclosures
for all transactions subject to Sec. 226.17 should be based on the
assumption that the consumer will adhere to the terms of the legal
obligation.
Comment 17(c)(1)-2 would be revised to clarify that transactions
secured by real property or a dwelling are subject to the special
disclosure rules under proposed Sec. 226.38(a)(3) and (c). Under the
proposal, preferred-rate loans with a fixed interest rate would not be
considered ARMs, and therefore, comment 17(c)(1)-2 also would be
revised to remove the cross-reference to Sec. 226.19(b). Comment
17(c)(1)-2 would be redesignated as 17(c)(1)-2(i) through (iii).
Comment 17(c)(1)-16, which addresses disclosure for credit extensions
that may be treated as multiple transactions, would be moved and
redesignated as comment 17(c)(1)-3; no substantive change is intended.
Comment 17(c)(1)-15 states that where a deposit account is created
for the sole purpose of accumulating payments that are applied to
satisfy the consumer's credit obligation--a practice used in Morris
Plan transactions--payments to that account are treated the same as
loan payments. Under the proposal, comment 17(c)(1)-15 would be
removed. As discussed below, Morris Plan transactions are rare. In
addition, the Board believes that such deposits clearly constitute loan
payments and therefore comment 17(c)(1)-15 is unnecessary.
The remaining commentary to Sec. 226.17(c)(1) would be revised and
redesignated as discussed below under proposed subsections 17(c)(1)(i)
through (vi).
17(c)(1)(i) Buydowns
Comments 17(c)(1)-3 through 17(c)(1)-5 address third-party
buydowns, consumer buydowns, and split buydowns, respectively. The
proposed rule would add a new provision in Sec. 226.17(c)(1)(i) that
reflects that existing commentary about buydowns. Proposed Sec.
226.17(c)(1)(i) requires creditors to disclose an APR that is a
composite rate, based on the rate in effect during the initial period
and the rate in effect for the remainder of the loan's term, if the
consumer's interest rate or payments are reduced for all or part of the
loan term. Proposed Sec. 226.17(c)(1)(i) applies to seller or third-
party buydowns if they are reflected in the legal obligation, and to
all consumer buydowns.
Comments 17(c)(1)-3 through 17(c)(1)-5 would be redesignated as
comments 17(c)(1)(i)-1 through -4 and revised to reflect changes in the
terminology used under the proposed rule to describe the finance
charge, for transactions secured by real property or a dwelling.
17(c)(1)(ii) Wrap-Around Financing
Comment 17(c)(1)-6 provides guidance on disclosures for
transactions that involve wrap-around financing; comment 17(c)(1)-7
provides guidance on disclosures for wrap-around transactions that
include a balloon payment. Both comments state that, in transactions
that involve wrap-around financing, the amount financed equals the sum
of the new funds advanced by the wrap creditor and the remaining
principal owed to the original creditor on the pre-existing loan. The
proposed rule would incorporate this guidance into proposed Sec.
226.17(c)(1)(ii). Comments 17(c)(1)-6 and 17(c)(1)-7 would be
redesignated as comments 17(c)(1)(ii)-1 and 17(c)(1)(ii)-2,
respectively; no substantive change is intended.
17(c)(1)(iii) Variable- or Adjustable-Rate Transactions
Comment 17(c)(1)-8 currently provides that creditors should base
disclosures for variable- or adjustable-rate transactions on the full
term of the transaction and the terms in effect at the time of
consummation and should not assume that the rate will increase. The
proposed rule would incorporate that guidance into proposed Sec.
226.17(c)(1)(iii). Proposed Sec. 226.17(c)(1)(iii) would require
creditors to base disclosures for variable- or adjustable-rate
transactions on the full loan term, and on the terms in effect at the
time of consummation, except as otherwise provided under proposed
Sec. Sec. 226.17(c)(1)(iii) or 226.38(a)(3) and (c) for transactions
secured by real property or a dwelling.
As discussed below under proposed Sec. 226.38(c), creditors would
be required to disclose specified rate and payment adjustments for
adjustable-rate loans secured by real property or a dwelling. As a
result, comment 17(c)(1)-8 would be revised to clarify that creditors
must disclose specified rate and payment adjustments for adjustable-
rate loans secured by real property or a dwelling in accordance with
the requirements under proposed Sec. 226.38(c). Current comment
17(c)(1)-8 would be redesignated as comment 17(c)(1)(iii)-1.
Current comment 17(c)(1)-9, which states that a variable-rate
feature does not, by itself, make the disclosures estimates, would be
redesignated as comment 17(c)(1)(iii)-2. No substantive change is
intended.
17(c)(1)(iii)(A) and (B) Discounted and Premium Rates
Comment 17(c)(1)-10 provides that if the initial interest for a
variable-rate transaction is not determined by the index or formula
used to make later interest-rate adjustments, disclosures should
reflect a composite APR based on the initial interest rate for as long
as it is charged and, for the remainder of the term, the rate that
would have been applied using the index or formula at the time of
consummation. The proposed rule would incorporate that commentary into
proposed Sec. 226.17(c)(1)(iii)(B).
Proposed Sec. 226.17(c)(1)(iii) contains two separate disclosure
rules; which disclosure rule applies depends on whether or not the
initial rate is determined using the same index or formula used to make
subsequent rate adjustments. If the initial rate is determined using
the same index or
[[Page 43254]]
formula used for subsequent rate adjustments, then the general rule
that disclosures must reflect the terms in effect at the time of
consummation applies under proposed Sec. 226.17(c)(1)(iii)(A). If the
initial rate is set using a different index or formula, however,
disclosures must reflect a composite APR under proposed Sec.
226.17(c)(1)(iii)(B). The composite APR would be based on the initial
rate for as long as it is charged and, for the remainder of the loan
term, the rate that would have applied if such index or formula had
been used at the time of consummation. Comments 17(c)(1)-10(i) through
(vi) would be revised to reflect that, under the proposed rule, for
transactions secured by real property or a dwelling, new terminology
would be used for specified disclosures (for example, the term
``interest and settlement charges'' would be used in place of ``finance
charge''), as discussed below. Comments 17(c)(1)-10(i) through (vi)
also would be redesignated as comments 17(c)(1)(iii)-3(i) through (vi);
no substantive change is intended. Finally, a cross-reference in
comment 24(c)-4 would be updated to reflect the redesignation of
comment 17(c)(1)-10.
Comment 17(c)(1)-11 provides that variable rate transactions
include the following transaction types, even if initially they feature
a fixed interest rate: balloon-payment loans where the creditor is
unconditionally obligated to renew, but can increase the interest rate
at the time of renewal; preferred-rate loans where the interest rate
may increase upon some future event; and price-level adjusted mortgages
that provide for periodic payment and loan balance adjustments. (But
see the discussion under proposed Sec. 226.19(b) on comment 19(b)-5,
which clarifies that creditors need not provide the disclosures
required by Sec. 226.19(b) for specified balloon-payment, preferred-
rate, and price-level adjusted mortgages.) As discussed below, proposed
Sec. 226.38(a)(3), which address disclosure of loan type for
transactions secured by real property or a dwelling, would treat each
of these transaction types as fixed-rate loans. As a result, comment
17(c)(1)-11 would be revised to clarify that balloon-payment,
preferred-rate, and price-level adjusted mortgages secured by real
property or a dwelling are considered fixed-rate transactions for the
purposes of the loan type disclosure required under proposed Sec.
226.38(a)(3). (See also the discussion under proposed Sec. 226.38(c),
which clarifies that the loan type attributed to transactions under
proposed Sec. 226.38(a)(3) applies for purposes of interest rate and
payment summary disclosures under proposed Sec. 226.38(c).)
Further, certain shared-equity or shared-appreciation mortgages are
considered variable-rate transactions under comment 17(c)(1)-11.
However, under the proposal, if a mortgage is secured by real property
or a dwelling, the mortgage would not be considered an adjustable-rate
loan solely because of a shared-equity or shared-appreciation feature.
As discussed under proposed Sec. Sec. 226.19(b)(2)(ii)(F) and
226.38(d)(2)(vi), the Board would require creditors to disclose shared-
equity or shared-appreciation as a loan feature for transactions
secured by real property or a dwelling. As a result, guidance in
comment 17(c)(1)-11 relating to shared-equity and shared-appreciation
mortgages would be deleted.
Comment 17(c)(1)-11 would be redesignated as comment 17(c)(1)(iii)-
4(i) through (iii), except that guidance under current comment
17(c)(1)-11 regarding graduated payment mortgages and step-rate
transactions without a variable-rate feature would be redesignated as
comment 17(c)(1)(iii)-5. A cross-reference to comment 17(c)(1)-11 in
comment 30-1 would be updated accordingly. Comment 17(c)(1)-12, which
addresses graduated-payment ARMs, would be redesignated as comment
17(c)(1)(iii)-6(i) through (iii); no substantive change is intended.
Current comment 17(c)(1)-13 states that creditors may base
disclosures for growth-equity mortgages (also referred to as ``payment-
escalated mortgages'') on estimated payment increases, using the best
information reasonably available, or may disclose by analogy to the
variable-rate disclosures in Sec. 226.18(f)(1). As discussed below,
current Sec. 226.18(f) contains disclosure requirements for variable-
rate transactions that differ based on a loan's security interest and
term. Under the proposed rule, Sec. 226.18(f) would be revised so that
a loan's security interest, not its term, would determine whether the
creditor would provide variable- or adjustable-rate disclosures.
Accordingly, under the proposal, the reference made in comment
17(c)(1)-13 to providing disclosures analogous to those under current
Sec. 226.18(f)(1) would be deleted, and comment 17(c)(1)-13 would be
revised to require creditors to base disclosures for growth-equity
mortgages using estimated payment increases. The reference to
graduated-payment mortgages would be removed for clarity. Comment
17(c)(1)-13 would be redesignated as comment 17(c)(1)(iii)-7.
17(c)(1)(iv) Reverse Mortgages
Comment 17(c)(1)-14 provides that if a reverse mortgage has a
specified period for disbursements but repayment is due only upon the
occurrence of a future event such as the death of the consumer, the
creditor must assume that repayment will occur when disbursements end.
The proposed rule would incorporate this commentary into the regulation
as proposed Sec. 226.17(c)(1)(vi). Comment 17(c)(1)-14 would be
revised to clarify that the disclosure requirements for reverse
mortgage under Sec. 226.33 apply only if the consumer's death is one
of the conditions of repayment, as provided under Sec. 226.33(a).
Comment 17(c)(1)-14 also would be revised by removing the discussion of
shared-equity and shared-appreciation features because under the
proposed rule transactions with such features would not be deemed
adjustable-rate loans solely because of such features, as discussed
above. Further, comment 17(c)(1)-14 would be revised to state that, if
a reverse mortgage has an adjustable interest rate and is secured by
real property or a dwelling, the creditor must disclose the shared-
equity or shared-appreciation feature as required under Sec. Sec.
226.19(b)(2)(ii)(F) and 226.38(d)(2)(vi). Finally, under the proposed
rule comment 17(c)(1)-14 would be redesignated as comment 17(c)(1)(iv)-
1(i) through (iii).
17(c)(1)(v) Tax Refund-Anticipation Loans
Comment 17(c)(1)-17 clarifies that if a consumer is required to
repay a tax refund-anticipation loan when the consumer receives a tax
refund, disclosures are to be based on the creditor's estimate of the
time the refund will be delivered. Comment 17(c)(1)-17 further
clarifies that the finance charge includes any repayment amount that
exceeds the loan amount that is not excluded from the finance charge
under Sec. 226.4. The proposed rule would incorporate this guidance
into the regulation as proposed Sec. 226.17(c)(1)(v). Comment
17(c)(1)-17 which would be redesignated as comments 17(c)(1)(v)-1(i)
and -1(ii) under the proposed rule. No substantive change is intended.
17(c)(1)(vi) Pawn Transactions
For pawn transactions, proposed Sec. 226.17(c)(1)(vi) would
require creditors to: (1) Disclose the initial sum provided to the
consumer as the amount financed; (2) include the difference between the
initial sum provided to the consumer and the price at which the
[[Page 43255]]
item is pledged or sold in the finance charge; and (3) determine the
APR using the redemption date as the end of the loan term. Proposed
Sec. 226.17(c)(1)(vi) is consistent with comment 17(c)(1)-18, which
would be redesignated as comment 17(c)(1)(vi)-1. No substantive change
is intended.
17(c)(2) Estimates
Under the proposal, Sec. 226.17(c)(2) would be revised to clarify
that proposed Sec. 226.19(a) would limit creditors' ability to provide
estimated disclosures for transactions secured by real property or a
dwelling. As discussed below, proposed Sec. 226.19(a) requires
creditors to provide disclosures that consumers must receive no later
than three business days before consummation and which may not be
estimated disclosures. Comments 17(c)(2)(i)-1 and 17(c)(2)(i)-2, which
address the basis and labeling of estimates, respectively, also would
be revised to reflect this limitation. In addition, comment
17(c)(2)(i)-3, which states that creditors may base all disclosures on
the assumption that consumers will make timely payments, would be
revised to clarify that creditors may also assume that consumers would
make payments in the amounts required by the terms of the legal
obligation. In technical revisions, a heading would be added to Sec.
226.17(c)(2) for clarity; no substantive change is intended.
17(c)(3) Disregarded Effects
In technical revisions, a heading would be added to Sec.
226.17(c)(3) for clarity, and guidance under current comment 17(c)(3)-1
would be redesignated as 17(c)(3)-1(i) and (ii). No substantive change
is intended.
17(c)(4) Disregarded Irregularities
Under the proposal, Sec. 226.17(c)(4) would be revised to clarify
that creditors may disregard period irregularities when disclosing the
payment summary table, as required under proposed Sec. 226.38(c), for
transactions secured by real property or a dwelling. No substantive
change to the treatment of period irregularities is intended.
In technical revisions, a heading would be added to Sec.
226.17(c)(4) for clarity. Also, comment 17(c)(4)-1 would be
redesignated as comment 17(c)(4)-1(i) and (ii), and comment 17(c)(4)-2
would be redesignated as comment 17(c)(4)-2(i) through (iii). No
substantive change is intended.
17(c)(5) Demand Obligations
Under the proposal, comment 17(c)(5)-1, which addresses demand
obligation disclosures, would be revised to reflect that proposed
Sec. Sec. 226.19(b)(2)(ii)(D) and 226.38(d)(2)(iv) contain
requirements for disclosing a demand feature in transactions secured by
real property or a dwelling. Comment 17(c)(5)-2, which addresses future
events such as the maturity date, would be revised to clarify that
certain disclosures for transactions not secured by real property or a
dwelling may not contain estimated disclosures, as discussed below
under proposed Sec. 226.19(a)(2). Comment 17(c)(5)-3, which addresses
demand after a stated period, would be revised to delete obsolete
references to specific loan programs and update cross-references.
Comment 17(c)(5)-4, which addresses balloon payment mortgages, would be
revised to reflect that creditors must disclose a payment summary table
for transactions secured by real property or a dwelling under proposed
Sec. 226.38(c) (rather than a payment schedule, as required for
transactions not secured by real property or a dwelling under Sec.
226.18(g)) and to update a cross-reference. In technical revisions, a
heading would be added to Sec. 226.17(c)(5) for clarity; no
substantive change is intended.
17(c)(6) Multiple Advance Loans
In technical revisions, a heading would be added to Sec.
226.17(c)(6) for clarity; no substantive change is intended.
17(d) Multiple Creditors; Multiple Consumers
Section 226.17(d) addresses transactions that involve multiple
creditors and consumers. The Board does not propose any changes to
these provisions, except that the guidance contained in current comment
17(d)-1 would be redesignated as comment 17(d)-1(i) through (iii); no
substantive change is intended.
17(e) Effect of Subsequent Events
Section 226.17(e) addresses whether a subsequent event makes a
disclosure inaccurate or requires a new disclosure. Under proposed
Sec. 226.20(e), if a creditor obtains insurance on behalf of the
consumer subsequent to consummation, the creditor would be required to
provide notice before charging for such insurance. The Board proposes
to revise comment 17(e)-1 to reflect this new requirement.
17(f) Early Disclosures
Under the proposal, in addition to providing early disclosures,
creditors would be required to provide additional disclosures that a
consumer must receive no later than three business days before
consummation for transactions secured by real property or a dwelling.
Accordingly, comments 17(f)-1 through -4 would be revised to clarify
that the special disclosure timing requirements under Sec.
226.19(a)(2) would apply to transactions secured by real property or a
dwelling. In technical revisions, guidance in current comment 17(f)-1
would be renumbered and headings revised to clarify that some of the
current guidance would not apply to transactions secured by real
property or a dwelling under the proposed rule.
17(g) Mail or Telephone Orders--Delay in Disclosures
Section 226.17(g) and comment 17(g)-1 permit creditors to delay
disclosures for transactions involving mail or telephone orders until
the first payment is due if certain information, such as the APR or
finance charge, is provided to the consumer in advance of any request.
As discussed under Sec. 226.19(a) and 226.20(c), the Board proposes
special timing requirements for disclosures for transactions secured by
real property or a dwelling and for adjustable rate transactions. As a
result, the Board proposes to revise Sec. 226.17(g) and comment 17(g)-
1 to clarify that they do not apply to transactions secured by real
property or a dwelling.
17(h) and 17(i) Series of Sales--Delay in Disclosures; Interim Student
Credit Extensions
Sections 226.17(h) and (i) address delay in disclosures in
transactions involving a series of sales and interim student credit
extensions. The Board does not propose any substantive changes to these
provisions. In technical revisions, a cross-reference is corrected.
Section 226.18 Content of Disclosures
As noted, the Board proposes to require creditors to provide new
disclosures for transactions secured by real property or a dwelling
under proposed Sec. 226.38. Accordingly, the Board would clarify under
Sec. 226.18 that creditors must provide the new disclosures under
Sec. 226.38 for transactions secured by real property or a dwelling.
In addition, the Board proposes conforming amendments to Sec. 226.18
and associated commentary to reflect the new disclosure regime for
mortgages, and would redesignate comments as appropriate.
18(a) Creditor
Currently, Sec. 226.18(a), which implements TILA Section
128(a)(1), requires disclosure of the identity of the creditor making
the disclosures. 15
[[Page 43256]]
U.S.C. 1638(a)(1). Comment 18(a)-1 states, in part, that this
disclosure may, at the creditor's option, appear apart from the other
required disclosures. As discussed above, currently, Sec. 226.17(a)(1)
footnote 38, which implements TILA Section 128(b)(1), allows creditors
to exclude from the grouped and segregated requirement certain required
disclosures, such as the creditor's identity. 15 U.S.C. 1638(b)(1).
However, the Board proposes to revise the substance of footnote 38 to
require the creditor's identity under Sec. 226.18(a) to be subject to
the grouped together and segregated requirement for all closed-end
credit disclosures. Thus, the Board proposes to revise comment 18(a)-1
to reflect this change.
18(b) Amount Financed
Section 226.18(b) addresses the disclosure and calculation of the
amount financed. The Board proposes to revise comment 18(b)-2, which
provides guidance regarding treatment of rebates and loan premiums for
the amount financed calculation required under Sec. 226.18(b). Comment
18(b)-2 primarily addresses credit sales, such as automobile financing,
and provides that creditors may choose whether to reflect creditor-paid
premiums and seller- or manufacturer-paid rebates in the disclosures
required under Sec. 226.18. The Board believes that creditor-paid
premiums and seller- or manufacturer-paid rebates are analogous to
buydowns. Like buydowns, such premiums and rebates may or may not be
funded by the creditor and reduce costs that otherwise would be borne
by the consumer. Accordingly, their impact on the amount financed, like
that of buydowns, properly depends on whether they are part of the
legal obligation. See comments 17(c)(1)-1 through -5. The Board is
proposing to revise comment 18(b)-2 to clarify that the disclosures,
including the amount financed, must reflect loan premiums and rebates
regardless of their source, but only if they are part of the terms of
the legal obligation between the creditor and the consumer. As
discussed below, proposed comment 38(e)(5)(iii)-2 would parallel this
approach for transactions secured by real property or a dwelling.
In addition, the Board proposes to revise comment 18(b)(2)-1, which
addresses amounts included in the amount financed calculation that are
not otherwise included in the finance charge, to remove reference to
real estate settlement charges for the reasons discussed more fully
under Sec. 226.4.
18(c) Itemization of Amount Financed
Section 226.18(c) requires a separate disclosure of the itemization
of amount financed and provides guidance on the amounts that must be
included in such itemization. As discussed below, the Board proposes
new Sec. 226.38(e)(5)(iii) to address the calculation and disclosure
requirements of the amount financed for transactions secured by real
property or a dwelling. Under the proposal, the substance of footnote
40, which permits creditors to substitute good faith estimates required
under RESPA for the itemization of the amount financed for dwelling-
secured transactions, would be moved to new Sec. 226.38(j)(1)(iii).
Comment 18(c)-2 affords creditors flexibility in the information
that may be included in the itemization of amount financed. Under the
proposal, the Board would revise comment 18(c)-2(i) to remove
references made to escrow items and to the commentary under Sec.
226.18(g) because the proposal renders them unnecessary, and 18(c)-
2(vi) to reflect a technical revision with no intended change in
substance or meaning. The Board also proposes to move comment 18(c)-4
regarding the exemption afforded to RESPA transactions, and
18(c)(1)(iv)-2 regarding prepaid mortgage insurance premiums to
proposed comments 38(j)(1)(iii)-1 and 38(j)(1)(i)(D)-2, respectively,
because they apply only to dwelling-secured transactions.
18(d) Finance Charge
Section 226.18(d) requires disclosure of the finance charge for
closed-end credit. As discussed below, the Board proposes new Sec.
226.38(e)(5)(ii) to address disclosure of the finance charge (renamed
``interest and settlement charges'') for transactions secured by real
property or a dwelling. As a result, reference to the finance charge
tolerances for mortgage loans would be moved from Sec. 226.18(d) to
proposed Sec. 226.38(e)(5)(ii); no substantive change is intended.
Technical amendments to comment 18(d)(2) would reflect this revision.
18(e) Annual Percentage Rate
Section 226.18(e) requires disclosure of the annual percentage
rate, using that term. The substance of footnote 42 would be moved to
the regulatory text of Sec. 226.18(e). Technical amendments to comment
18(e)-2 would reflect this revision; no substantive change is intended.
18(f) Variable Rate
Section 226.18(f)(1) contains disclosure requirements for variable-
rate transactions not secured by a consumer's principal dwelling and
variable-rate transactions secured by a consumer's principal dwelling
if the loan term is one year or less. Section 226.18(f)(1) requires
creditors to make the following disclosures within three business days
after receiving the consumer's application: (1) Circumstances under
which the APR may increase; (2) any limitations on the increase; (3)
the effect of an increase; and (4) an example of the payment terms that
would result from an increase. Section 226.18(f)(2) applies to
variable-rate transactions secured by a consumer's principal dwelling
with a loan term greater than one year, and requires creditors to
disclose that the loan has a variable-rate feature together with a
statement that variable-rate program disclosures (required by current
Sec. 226.19(b)) have been provided earlier.
The Board adopted Sec. 226.18(f)(2) in 1987, at the same time that
it adopted Sec. 226.19(b) (disclosures for variable-rate mortgages
with terms greater than one year). The Board adopted those provisions
based on recommendations by the Federal Financial Institutions
Examination Council (FFIEC). 52 FR 48665; Dec. 24, 1987. However, the
Board applied the requirements of those provisions only to loans
secured by a principal dwelling with a term greater than one year.
Loans secured by a principal dwelling with a term of one year or less,
and loans not secured by a principal dwelling remained subject to rules
in Sec. 226.18(f)(1). The Board did not apply the new variable-rate
loan disclosure requirements to such loans because public comments
expressed concern about potential compliance problems for creditors
making short-term loans. 52 FR at 48666.
Proposed Sec. Sec. 226.19(b) and 226.38(c) contain disclosure
requirements for closed-end adjustable-rate loans secured by real
property or a dwelling, and would apply the same rules to loans with a
term of one year or less as for loans with a term greater than one
year. Disclosures required by those provisions are discussed below. As
a result, Sec. 226.18(f)(2) and comment 18(f)(2)-1, which address
requirements and guidance for closed-end adjustable-rate loans secured
by real property or a dwelling, are unnecessary and would be deleted.
The substance of footnote 43, which permits creditors to substitute
information required under Sec. 226.18(f)(2) and 226.19(b) for the
disclosures required by Sec. 226.18(f)(1), would also be deleted.
Section 226.18(f)(1)(i) through (iv) would be redesignated as Sec.
226.18(f)(1) through
[[Page 43257]]
(4), and references in comment 18(f)-1 would be updated.
As discussed below, proposed Sec. Sec. 226.19(b)(3)(iii) and
226.38(d)(2)(iii) regarding disclosure of shared-equity or shared-
appreciation loan features would render guidance about shared-equity or
shared-appreciation mortgages in comment 18(f)-1 unnecessary, and
therefore that comment would be deleted. Comment 18(f)(1)-1 regarding
terms used in disclosures, and comment 18(f)(1)(i)-2 regarding
conversion features would be redesignated as comments 18(f)-2 and -3,
respectively. Finally, comments 18(f)(1)(i)-1, 18(f)(1)(ii)-1,
18(f)(1)(iii)-1, and 18(f)(1)(iv)-1 would be redesignated as comments
18(f)(1)-1, 18(f)(2)-1, 18(f)(3)-1, and 18(f)(4)-1, respectively.
18(g) Payment Schedule
Section 226.18(g) and associated commentary address the disclosure
of the payment schedule for all closed-end credit. As discussed under
proposed Sec. 226.38(c), the Board would require creditors to provide
disclosures regarding interest rates and monthly payments in a tabular
format for transactions secured by real property or a dwelling. As a
result, creditors would not need to comply with the disclosure
requirements of Sec. 226.18(g) for such transactions. However, as
discussed under proposed Sec. 226.38(e)(5)(i), creditors would be
required to disclose the number and total amount of payments that the
consumer would make over the full term of the loan for transactions
secured by real property or a dwelling. Proposed comment 18(e)(5)(i)-1
would require creditors to calculate the total payments following the
rules under Sec. 226.18(g) and associated commentary. As a result, the
Board proposes to revise comment 18(g)-3 to require creditors to
disclose the total number of payments for all payment levels as a
single figure for transactions secured by real property or a dwelling,
and to cross-reference proposed Sec. 226.38(e)(5)(i).
18(h) Total of Payments
In a technical revision, the substance of footnote 44 would be
moved to the regulation text of Sec. 226.18(e); technical amendments
to comment 18(h)-3 would reflect this revision.
18(i) Demand Feature
Section 226.18(i) and associated commentary address the following
for all closed-end credit: disclosure of a demand feature; the type of
demand features covered; and the relationship to payment schedule
disclosures. The Board does not propose any change to this provision,
except that comments 18(i)-2 and -3 would be updated to cross-reference
proposed Sec. Sec. 226.38(d)(2)(iv) and 226.38(c), which address the
disclosure requirements for a demand feature and payment schedule,
respectively, for transactions secured by real property or a dwelling.
No substantive change is intended.
18(k) Prepayment
Section 226.18(k)(1) provides that, when an obligation includes a
finance charge computed from time to time by application of a rate to
the unpaid principal balance, the creditor must disclose a statement
that indicates whether or not a penalty may be imposed if the
obligation is prepaid in full. Comment 18(k)(1)-1 provides examples of
charges considered penalties under Sec. 226.18(k)(1). One such example
is ``interest charges for any period after prepayment in full is
made.'' When the loan is prepaid in full, there is no balance to which
the creditor may apply the interest rate. Accordingly, the proposed
rule would revise this example for clarity; no substantive change is
intended. Proposed Sec. 226.38(a)(5) contains requirements for
disclosing prepayment penalties for transactions secured by real
property or a dwelling. As discussed below, commentary on proposed
Sec. 226.38(a)(5) is consistent with the commentary on Sec.
226.18(k), as proposed to be revised.
18(j) Through 18(m) Total Sale Price; Prepayment; Late Payment;
Security Interest
Sections 226.18(j), (k), (l), and (m) address, respectively,
disclosures regarding: total sale price; prepayment; late payment; and
security interest. The Board does not propose any changes to these
provisions, except for a minor technical amendment to comment 18(k)(1)-
1, as discussed above. However, as noted below, the Board proposes new
disclosure requirements under Sec. Sec. 226.38(a)(5) and
226.38(d)(1)(iii) regarding prepayment penalties, Sec. 226.38(j)(3)
regarding late payment, and Sec. 226.38(f)(2) regarding security
interest, for transactions secured by real property or a dwelling.
18(n) Insurance and Debt Cancellation
Section 226.18(n) requires disclosure of insurance and debt
cancellation in accordance with the requirements under Sec. 226.4(d)
to exclude such fees from the finance charge. For the reasons discussed
under Sec. 226.4(d), the Board proposes to revise Sec. 226.18(n) and
comment 18(n)-2 to clarify that this disclosure requirement also
applies to debt suspension policies.
18(o) and 18(p) Certain Security-Interest Charges; Contract Reference
Sections 226.18(o) and (p) address, respectively, disclosures
regarding certain security-interest charges and contract reference. The
Board does not propose any changes to these provisions. However, as
noted below, the Board would require creditors to provide parallel
contract references for transactions secured by real property or a
dwelling under proposed Sec. 226.38(j)(5). No parallel disclosure for
security-interest charges is proposed for transactions secured by real
property or a dwelling because such disclosures would not apply to
those transactions under the Board's proposed revisions to Sec. 226.4,
discussed above.
18(q) Assumption Policy
Section 226.18(q) and associated commentary require disclosure of
assumption policies for residential mortgage transactions. Under the
proposal, the Board proposes to move Sec. 226.18(q) and comments
18(q)-1 and -2 to proposed Sec. 226.38(j)(6) and comments 38(j)(6)-1
and -2, respectively, because assumption policies apply only to
transactions secured by real property or a dwelling. No substantive
change is intended.
18(r) Required Deposit
Section 226.18(r) addresses disclosure requirements when creditors
require consumers to maintain deposits as a condition to the specific
transaction. Footnote 45 provides additional guidance on such required
deposits and includes a reference to payments made under Morris Plans.
Although at least one Morris Plan bank remains active, Morris Plans
essentially are obsolete today. Accordingly, the Board proposes to move
the substance of footnote 45 to the regulation text but delete the
reference to Morris Plans. Comments 18(r)-1, -3, and -5 would also be
similarly revised. In addition, under the proposal, comment 18(r)-2 on
pledged-account mortgages would be moved to comment 38(i)-2 because it
applies only to transactions secured by real property. (See also
comment 17(c)(1)-15 on Morris Plans, which the Board proposes to delete
as unnecessary.) Comment 18(r)-6 would be redesignated as comment
18(r)-6(i) through (vii).
[[Page 43258]]
Section 226.19 Early Disclosures and Adjustable-Rate Disclosures for
Transactions Secured by Real Property or a Dwelling
Section 226.19(a) currently contains timing requirements for
providing disclosures for closed-end transactions secured by a dwelling
and subject to RESPA. Section 226.19(b) contains disclosure timing and
content requirements for variable-rate loans secured by a consumer's
principal dwelling. The Board proposes to revise Sec. 226.19(a) and
(b) to apply the disclosures to any closed-end transaction secured by
real property or a dwelling, for reasons discussed below. Section
226.19(a) also would be revised to require creditors to provide new
disclosures that a consumer must receive at least three business days
before consummation, in addition to the existing requirement to provide
early disclosures within three business days of application. The Board
also proposes to revise the content of disclosures for ARMs required
under Sec. 226.19(b), require new disclosures about risky loan
features in proposed Sec. 226.19(c), and to include existing rules
about disclosures provided through an intermediary agent or broker, or
by telephone or electronic communication, in proposed Sec. 226.19(d).
19(a) Good Faith Estimates of Mortgage Transaction Terms and New
Disclosures
TILA Section 128(b)(2), 15 U.S.C. 1638(b)(2), requires creditors to
mail or deliver to consumers good faith estimates of disclosures
required by TILA Section 128(a), 15 U.S.C. 1638(a) (early disclosures),
for a transaction secured by a dwelling and subject to RESPA. As
amended by the MDIA, TILA Section 128(b)(2) requires creditors to
deliver or mail the early disclosures at least seven business days
before consummation. Further, TILA Section 128(b)(2), as amended by the
MDIA, requires that the creditor provide corrected disclosures if the
disclosed APR changes in excess of a specified tolerance. The consumer
must receive the corrected disclosures no later than three business
days before consummation. The Board implemented these MDIA requirements
in Sec. 226.19(a) through a final rule effective July 30, 2009 (MDIA
Final Rule). 74 FR 23289; May 19, 2009.
The Board proposes to expand the coverage of Sec. 226.19(a) so
that the timing provisions would apply to closed-end mortgage
transactions secured by real property or a dwelling, and would not be
limited to RESPA-covered transactions. Thus, proposed Sec. 226.19(a)
would apply to transactions secured by real property that does not
include a dwelling, such as vacant land, and transactions that are not
subject to RESPA, such as construction loans.
The Board also proposes to revise Sec. 226.19(a) so that, in
addition to the early disclosures, the creditor must provide final
disclosures that the consumer must receive no later than three business
days before consummation. Under existing Sec. 226.19(a), by contrast,
a consumer must receive new disclosures at least three business days
before consummation only if changes to the previously disclosed APR
exceed a specified tolerance. The Board is proposing two alternative
provisions to address circumstances where terms change after the
consumer has received the final disclosures.
19(a)(1)(i) Time of Good Faith Estimates of Disclosures
TILA Section 128(b)(2), 15 U.S.C. 1638(b)(2), as amended by the
MDIA, requires creditors to provide early disclosures if a transaction
is secured by a dwelling and subject to RESPA. However, TILA's early
disclosure requirements do not apply to mortgage transactions for
personal, family, or household purposes if they are secured by real
property that is not a dwelling, for example a consumer's business
property. Creditors need not provide early disclosures for transactions
secured by property of 25 acres or more, temporary financing (such as a
construction loan), or transactions secured by vacant land because
RESPA does not apply to such transactions. 24 CFR 3500.5(b)(1), (3),
and (4).
The Board proposes to expand Sec. 226.19(a) to cover transactions
secured by real property, even if the property is not a dwelling and
even if the transaction is not subject to RESPA. (Transactions secured
by a consumer's interest in a timeshare plan would be treated
differently, as discussed under Sec. 226.19(a)(5) below.) Under TILA
Section 128(b)(2), 15 U.S.C. 1638(b)(2), if the transaction is not
secured by a dwelling, or is not covered by RESPA, the creditor is only
required to provide disclosures before consummation. The Board proposes
to require creditors to provide early disclosures under TILA for all
closed-end transactions secured by real property or a dwelling to
facilitate compliance.
Section 226.18 currently contains requirements for the content of
transaction-specific disclosures secured by real property or a
dwelling, whether or not creditors are required to provide that content
in early disclosures. Although under the proposed rule Sec. 226.38
rather than Sec. 226.18 would contain requirements for disclosure
content for transactions secured by real property or a dwelling, the
content required in early disclosures is the same as the content of
disclosures provided in cases where early disclosures are not required.
Applying the requirement to provide early disclosures to all
transactions secured by real property or a dwelling would simplify
creditors' determination of the time by which creditors must make the
disclosures required by Sec. 226.38. The Board requests comment about
operational or other issues involved in providing early disclosures for
temporary loans, however. The Board also solicits comment on whether
there are other types of loans exempt from RESPA to which it is not
appropriate to apply proposed Sec. 226.19(a).
Proposed new comment 19-1 states that proposed Sec. 226.19 applies
to transactions secured by real property or a dwelling even if such
transactions are not subject to RESPA. The proposed comment clarifies
that TILA does not apply to transactions that are primarily for
business, commercial, or agricultural purposes, however. (Proposed
comment 19-1 addresses the introductory text to proposed Sec. 226.19,
which provides that all of Sec. 226.19, not only Sec. 226.19(a),
applies to closed-end transactions secured by real property or a
dwelling.)
Comment 19(a)(1)(i)-1, which discusses the coverage of Sec.
226.19(a), would be removed because proposed comment 19-1 would discuss
the coverage of all of proposed Sec. 226.19. Comment 19(a)(1)(i)-2
would be revised to clarify that under the proposed rule disclosures
required by proposed Sec. 226.19(a)(2) may not contain estimated
disclosures, with limited exceptions. The comment also would be revised
to reflect that proposed Sec. 226.37 contains requirements for
disclosure of estimates and contingencies, as discussed below. Comment
19(a)(1)(i)-3 would be revised to reflect that creditors may rely on
RESPA and Regulation X to determine when an application is received,
even for transactions not subject to RESPA. Comment 19(a)(1)(i)-5 would
be revised to refer to the itemization of the amount financed
disclosures in proposed Sec. 226.38(j) rather than in Sec. 226.18(c),
as currently referenced. Finally, comments 19(a)(1)(i)-2 through -5
would be redesignated as comments 19(a)(1)(i)-1 through -4.
19(a)(1)(ii) Imposition of Fees
On July 30, 2008, the Board published the 2008 HOEPA Final Rule
amending Regulation Z, which implements TILA
[[Page 43259]]
and HOEPA. The July 2008 final rule requires creditors to give
transaction-specific cost disclosures no later than three business days
after receiving a consumer's application, for closed-end mortgage
transactions secured by a consumer's principal dwelling, under Sec.
226.19(a)(1)(i). Further, the 2008 HOEPA Final Rule prohibits creditors
and other persons from imposing a fee on the consumer, other than a fee
for obtaining the consumer's credit history, before the consumer
receives the early disclosures, under Sec. 226.19(a)(1)(ii) and (iii).
Section 226.19(a)(1)(ii) provides that if the early disclosures are
mailed to the consumer, the consumer is considered to have received
them three business days after they are mailed. 73 FR 44522, 44600-
44601.
The proposed rule would revise Sec. 226.19(a)(1)(ii) to conform to
the presumption of receipt provision the Board subsequently adopted in
the MDIA Final Rule in Sec. 226.19(a)(2)(ii).\40\ Under the proposed
rule Sec. 226.19(a)(1)(ii) would be revised to provide that if the
early disclosures are mailed to the consumer or delivered to the
consumer by means other than delivery in person, the consumer is deemed
to have received the corrected disclosures three business days after
they are mailed or delivered. This is consistent with comment
19(a)(1)(ii)-1, which provides that creditors may impose a fee any time
after midnight following the third business day after the creditor
delivers or mails the early disclosures in all cases, regardless of the
method the creditor uses to provide the early disclosures. The Board
does not intend to make substantive changes by conforming the
presumption of receipt provisions under Sec. Sec. 226.19(a)(1)(ii) and
226.19(a)(2)(ii).
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\40\ On the same day the July 2008 final rule was published, the
Congress passed the MDIA. Under the MDIA, if the APR stated in the
early disclosures changes in excess of a specified tolerance, the
creditor must provide corrected disclosures that the consumer must
receive no later than three business days before consummation. The
MDIA provides that if the creditor mails the corrected disclosures,
the consumer is considered to have received them three business days
after they are mailed. These early disclosure rules are contained in
TILA Section 128(b)(2)(E) (to be codified at 15 U.S.C.
1638(b)(2)(E)). Section 226.19(a)(2)(ii) implements these rules.
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The Board also proposes to revise comment 19(a)(1)(ii)-1 to clarify
that the three-business-day presumption of receipt applies in all
cases, including where a creditor uses electronic mail or a courier to
provide the early disclosures. Proposed comment 19(a)(1)(ii)-1 provides
that creditors that use electronic mail or a courier other than the
postal service may use the three-business-day presumption of receipt.
This comment is consistent with existing comment 19(a)(2)(ii)-3 adopted
through the MDIA Final Rule. (Comment 19(a)(2)(ii)-3 would be
redesignated as comment 19(a)(2)(v)-1 and conforming edits would be
made in connection with the proposed requirement that creditors provide
final disclosures that the consumer must receive no later than three
business days before consummation, as discussed below.)
An additional change would be made to comment 19(a)(1)(ii)-1 under
the proposed rule. Currently, comment 19(a)(1)(ii)-1 provides that if
the creditor places the early disclosures in the mail, the creditor may
impose a fee in all cases ``after midnight on the third business day
following mailing of the disclosures.'' The Board recognizes that the
phrase ``after midnight on the third business day'' may be construed to
mean either that the creditor may impose a fee at the beginning of the
third business day after the creditor receives the consumer's
application, or at the beginning of the fourth business day after the
creditor receives the consumer's application. Thus, the Board proposes
to revise comment 19(a)(1)(ii)-1 to provide that the creditor may
impose a fee after the consumer receives the early disclosures or, in
all cases, after midnight following the third business day after
mailing the early disclosures. For example, proposed comment
19(a)(1)(ii)-1 provides that (assuming that there are no intervening
legal public holidays) a creditor that receives the consumer's written
application on Monday and mails the early mortgage loan disclosure on
Tuesday may impose a fee on the consumer on Saturday.
19(a)(2)(ii) Three-Business-Day Waiting Period
Under Sec. 226.19(a), as revised by the MDIA Final Rule, if
changes to the APR disclosed for a closed-end transaction secured by a
dwelling and subject to RESPA exceed a specified tolerance, creditors
must provide corrected disclosures. The consumer must receive the
corrected disclosures no later than three business days before
consummation. The tolerance specified for closed-end ``regular
transactions'' (those that do not involve multiple advances, irregular
payment periods, or irregular payment amounts) is \1/8\ of 1 percentage
point and for closed-end ``irregular transactions'' (those that involve
multiple advances, irregular payment periods, or irregular payment
amounts, such as an ARM with a discounted initial interest rate) is \1/
4\ of 1 percentage point. See Sec. 226.22(a) and footnote 46; comment
17(c)(1)-10(iv).
Currently, if an APR stated in early disclosures for a closed-end
transaction not subject to Sec. 226.19(a) remains accurate but other
terms that were not labeled as estimates change, the creditor must
disclose those changed terms before consummation under Sec. 226.17(f).
Creditors also must provide corrected disclosures if a variable-rate
feature is added to a closed-end transaction under Sec. 226.17(f),
whether or not the transaction is subject to Sec. 226.19(a). See
comment 17(f)-2. In practice, most creditors provide ``final''
disclosures to a consumer on the day of consummation, whether or not
the loan terms stated in the early disclosures have changed.
Under the proposed rule, after providing early disclosures for a
closed-end transaction secured by real property or a dwelling,
creditors would provide a second set of disclosures in all cases, under
Sec. 226.19(a)(2)(ii). The consumer would have to receive these final
disclosures no later than three business days before consummation.
Proposed Sec. 226.19(a)(2)(ii) is designed to address long-standing
concerns that consumers may find out about different loan terms or
increased settlement costs only at consummation. Members of the Board's
Consumer Advisory Council and commenters on prior Board rulemakings
have expressed concern about consumers not learning of changes to
credit terms until consummation. Further, several participants in the
Board's consumer testing stated that they had been surprised at closing
by important changes in loan terms. For example, some participants said
that they had been told at closing that a loan would have an adjustable
rate even though previously they had been told they would receive a
fixed-rate loan. Participants said that they closed despite unfavorable
changes in loan terms because they lacked alternatives, especially in
the case of a loan financing a home purchase. Some participants stated
that they accepted changed terms because the loan originator advised
them that they could easily obtain a refinance loan with better terms
in the near future.
Terms or costs may change after early disclosures are given for a
variety of reasons, including that the consumer did not lock the
interest rate at application or an appraisal report developed after
early disclosures are provided shows a different property value than
the creditor assumed when providing the early disclosure. Regardless of
the reason for the changed terms, a consumer who receives notice
[[Page 43260]]
of changed loan terms at consummation that differ from those originally
disclosed does not have a meaningful opportunity to make an informed
credit decision.
To address concerns about changes to loan terms, proposed Sec.
226.19(a)(2)(ii) requires creditors to provide final disclosures that a
consumer would have to receive no later than the third business day
before consummation. Under proposed Sec. 226.38(a)(4), the early
disclosures and final disclosures would contain total estimated
settlement costs disclosed under RESPA and HUD's Regulation X, which
implements RESPA. Regulation X permits final settlement charges to be
disclosed at consummation; the consumer may request that final
settlement charges be disclosed twenty-four hours in advance, however.
24 CFR 3500.10(a) and (b). Thus, under RESPA, creditors, settlement
agents, and settlement service providers have until the day of
consummation to determine the amounts of the various settlement costs.
Effective January 1, 2010, Regulation X provides that the sum of most
lender-required third party settlement costs may vary no more than 10
percent from the same costs disclosed on the good faith estimate (GFE)
delivered earlier. Certain other changes, such as the lender's
origination fee, cannot vary, unless the consumer did not lock the
interest rate.
The Board believes that proposed Sec. 226.19(a)(2) would not
conflict with tolerance and timing rules under Regulation X--that is,
creditors could comply with both Regulation Z and Regulation X.
However, the Board's proposal would require creditors to finalize
settlement costs earlier than RESPA does: At least three business days
before consummation, and as much as a week before consummation if the
creditor mails the disclosures to the consumer.\41\ The Board
recognizes that requiring that loan terms and costs be finalized
several days before consummation would require significant changes to
current settlement practices. These changes would generate costs that
creditors and third-party service providers would pass on to consumers.
The Board solicits comment on the operational and other practical
effects of requiring that consumers receive final TILA disclosures for
closed-end loans secured by real property or a dwelling no later than
three business days before consummation.
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\41\ Under existing and proposed Sec. 226.19(a)(2), a consumer
is deemed to receive corrected disclosures three business days after
a creditor mails them. Under existing and proposed Sec.
226.19(a)(2), creditors may but need not rely on the presumption of
receipt to determine when the three-business-day waiting period
begins, whether creditors mail TILA disclosures using the postal
service, use a courier other than the postal service, or provide
disclosures electronically. Alternatively, creditors may rely on
evidence of receipt. 74 FR at 23293; 73 FR 44522, 44593; July 30,
2008.
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Proposed comment 19(a)(2)(ii)-1 provides that creditors must
provide final disclosures even if the terms disclosed have not changed
since the creditor provided the early disclosures. Proposed comment
19(a)(2)(ii)-2 provides that disclosures made under Sec.
226.19(a)(2)(ii) must contain each of the applicable disclosures
required by Sec. 226.38.
If escrows for taxes and insurance will be required, creditors may
disclose periodic payments of taxes and insurance as estimates under
Sec. 226.38(c). If the creditor includes escrowed amounts when
calculating the total of payments under Sec. 226.38(e)(5)(i), then the
total of payments also would be disclosed as estimated disclosures, as
discussed in comment 38(e)(5)-1. Periodic payment disclosures that
include escrowed amounts must be estimated disclosures because the
creditor cannot know with certainty the amounts for property taxes and
insurance after the first year of the loan. Proposed comment
19(a)(2)(ii)-3 clarifies that other disclosures may not be estimated
under proposed Sec. 226.19(a)(2)(ii). Finally, comment 19(a)(2)(ii)-4
provides an example that illustrates when consummation may occur after
the consumer receives the final disclosures.
19(a)(2)(iii) Additional Three-Business-Day Waiting Period
The Board is proposing two alternative requirements for creditors
to provide corrected disclosures after making the final disclosures
required by Sec. 226.19(a)(2)(ii), to be designated as Sec.
226.19(a)(2)(iii). Consumers would have to receive the corrected
disclosures required by proposed Sec. 226.19(a)(2)(iii) no later than
the third business day before consummation. Under both Alternative 1
and Alternative 2, comment 19(a)(2)-2 would be revised to reflect that
there is more than one three-business-day waiting period under Sec.
226.19(a).
Alternative 1. The first alternative would require that a creditor
provide corrected disclosures if any terms stated in the final
disclosures required by proposed Sec. 226.19(a)(2)(ii) change. This
would ensure that consumers are aware of the final loan terms and costs
at least three business days before consummation. The consumer would
have to receive the corrected disclosures no later than the third
business day before consummation.
Under Alternative 1, proposed comment 19(a)(2)(iii)-1 clarifies
that a disclosed APR is accurate for purposes of Sec.
226.19(a)(2)(iii) if the disclosure is accurate under proposed Sec.
226.19(a)(2)(iv). (Under proposed Sec. 226.19(a)(2)(iv), an APR
disclosed under proposed Sec. 226.19(a)(2)(ii) or (iii) is considered
accurate as provided by Sec. 226.22, except that in certain
circumstances the APR is considered accurate if the APR decreases from
the APR disclosed previously, as discussed below.) Proposed comment
19(a)(2)(iii)-2 states that disclosures made under Sec.
226.19(a)(2)(ii) must contain each of the disclosures required by Sec.
226.38. Proposed comment 19(a)(2)(iii)-3 clarifies that creditors may
rely on proposed comment 19(a)(2)(ii)-3 in determining which of the
disclosures required by Sec. 226.19(a)(2)(iii) may be estimated
disclosures. Proposed comment 19(a)(2)(iii)-4 provides an example that
shows when consummation may occur after the consumer receives corrected
disclosures. Existing comments 19(a)(2)(ii)-1 through -4 would be
removed under Alternative 1.
Alternative 2. It is not clear that it is always in a consumer's
interest to delay consummation until three business days after the
consumer receives corrected disclosures if any terms or costs change.
Thus, the Board proposes an alternative Sec. 226.19(a)(2)(iii) that
incorporates the existing tolerance for APR changes under Sec. 226.22
and incorporates an additional tolerance discussed under Sec.
226.19(a)(iv). If the APR changes beyond the specified tolerances,
creditors would be required to provide corrected disclosures that the
consumer must receive no later than three business days before
consummation.
Under the second alternative, after the creditor provides the final
disclosures, only APR changes beyond the specified tolerances or the
addition of a variable-rate feature to the loan would trigger a
requirement that consumers receive corrected disclosures no later than
three business days before consummation. In other cases, the creditor
would have to disclose changed terms no later than the day of
consummation, under existing Sec. 226.17(f). Under this alternative, a
consumer would be alerted to significant increases in loan costs and
would have three business days to investigate the reason for the change
or to consider other options. Smaller APR increases or other changes to
loan terms would not trigger a three-day delay in consummation,
however. This alternative is designed to prevent
[[Page 43261]]
relatively minor changes in loan terms from repeatedly delaying
consummation.
Under Alternative 2, comment 19(a)(2)(ii)-1 would be redesignated
as comment 19(a)(2)(iii)-1 and revised to clarify that creditors must
provide corrected disclosures if the APR disclosed pursuant to Sec.
226.19(a)(ii) becomes inaccurate under proposed Sec. 226.19(a)(2)(iv),
which incorporates existing tolerances under Sec. 226.22, or an
adjustable-rate feature is added. Comment 19(a)(2)(ii)-2 would be
redesignated as comment 19(a)(2)(iii)-2 and revised to: (1) Reflect
that corrected disclosures must comply with the format requirements of
proposed Sec. 226.37 as well as those of Sec. 226.17(a); (2) reflect
that a different APR will almost always result in changes in ``interest
and settlement charges'' and the ``payment summary'' (currently
designated as the finance charge and payment schedule, respectively);
(3) clarify that the addition of an adjustable-rate feature triggers
the requirement to provide corrected disclosures, by moving a cross-
reference to comment 17(f)-2; and (4) remove guidance on the timing and
conditions of new disclosures from guidance on disclosure content, for
clarity. Proposed comment 19(a)(2)(iii)-3 clarifies that creditors may
rely on proposed comment 19(a)(2)(ii)-3 in determining which of the
disclosures required by Sec. 226.19(a)(2)(iii) creditors may estimate.
Under the proposed rule, comment 19(a)(2)(iii)-4 would be revised to
update a cross-reference consistent with the proposed rule and reflect
that consumers must receive disclosures under Sec. 226.19(a)(2)(ii)
whether or not the disclosures correct the early disclosures.
The Board solicits comment on whether, under Alternative 2, changes
other than APR changes in excess of the specified tolerance or the
addition of an adjustable-rate feature after the creditor makes the new
disclosures should trigger an additional three-business-day waiting
period. For example, should the addition of a prepayment penalty,
negative amortization, interest-only, or balloon payment feature
trigger a waiting period requirement?
Proposed Sec. 226.19(a)(2)(iii) (under Alternative 2) would
require corrected disclosures and a new three-business-day waiting
period if the previously disclosed APR has become inaccurate. Under
current rules, a disclosed APR is considered accurate and does not
trigger corrected disclosures if it results from a disclosed finance
charge that is greater than the finance charge required to be disclosed
(i.e., the finance charge is ``overstated''). See Sec. Sec.
226.22(a)(4) and 226.18(d)(1)(ii). In some transactions, the finance
charge at consummation might be lower than the amount previously
disclosed, for example, if the parties agree to a smaller principal
loan amount after early disclosures were made. In the same transaction,
the APR might increase because of an increase in the interest rate
after the early disclosures were made. In this transaction, at
consummation the previously disclosed finance charge would be
overstated and the previously disclosed APR understated. In such a
case, the question has been raised as to whether the previously
disclosed APR, which was derived from the overstated finance charge,
should be deemed accurate even though it is understated at
consummation. The Board believes the APR in this case is not accurate.
The Board believes an APR ``results from'' an overstated finance charge
only if the APR also is overstated. The Board solicits comment on
whether, should Alternative 2 be adopted, the Board also should adopt
commentary under Sec. 226.22(a)(4) to clarify this interpretation.
Proposed Sec. 226.19(a)(2)(iv) contains APR tolerances, and
proposed Sec. 226.38(e)(5)(ii) contains tolerances for interest and
settlement charges (as the finance charge would be referred to under
the proposed rule), for transactions secured by real property or a
dwelling. The Board solicits comment on whether, under Sec.
226.38(e)(5)(ii), tolerances would be appropriate for numerical
disclosures other than the APR and interest and settlement charges. For
example, would dollar tolerances for overstatements of periodic payment
disclosures required by Sec. 226.38(c) be appropriate? What standards
should be used to prevent overstated disclosures from undermining the
integrity of the early disclosures and their usefulness as a shopping
tool?
19(a)(2)(iv) Annual Percentage Rate Accuracy
Under proposed Sec. 226.19(a)(2)(iv), an APR disclosed under
proposed Sec. 226.19(a)(2)(ii) or (iii) is considered accurate as
provided by Sec. 226.22, except that the APR also is considered
accurate if the APR decreases due to a discount (1) the creditor gives
the consumer to induce periodic payments by automated debit from a
consumer's deposit account or (2) the title insurer gives the consumer
on owner's title insurance. Thus, such APR changes would not trigger a
new three-business-day waiting period. Comment 19(a)(2)(iv)-1 clarifies
that if a change occurs that does not render the APR inaccurate under
Sec. 226.19(a)(iv), the creditor must disclose the changed terms
before consummation, consistent with Sec. 226.17(f). The Board
solicits comment on whether a disclosed APR that is higher than the
actual APR at consummation should be considered accurate in other
circumstances.
19(a)(2)(v) Timing of Receipt
As adopted by the MDIA Final Rule, Sec. 226.19(a)(2)(ii) provides
that consumers must receive corrected disclosures, if required, no
later than three business days before consummation. Further, Sec.
226.19(a)(2)(ii) provides that if the corrected disclosures are mailed
to the consumer or delivered to the consumer by means other than
delivery in person, the consumer is deemed to have received the
disclosures three business days after they are mailed or delivered. The
proposed rule applies this presumption for purposes of both the waiting
period under proposed Sec. 226.19(a)(2)(ii) and the waiting period
under proposed Sec. 226.19(a)(2)(iii). The presumption would be moved
to Sec. 226.19(a)(2)(v) under the proposed rule.
Proposed comment 19(a)(2)(v)-1 states that whether the creditor
provides disclosures by delivery, postal service, electronic mail, or
courier other than the postal service, consumers are deemed to receive
the disclosures three business days after the creditor so provides
them, for purposes of determining when a three-business-day waiting
period required by Sec. 226.19(a)(2)(ii) or (iii) begins. Further,
proposed comment 19(a)(2)(v)-1 clarifies that creditors may rely on
evidence of earlier receipt, regardless of how the creditor provides
disclosures to the consumer. This commentary is consistent with the
Board's discussion of delivery and mailing under the MDIA Final Rule
and the 2008 HOEPA Final Rule. See 74 FR at 23292-23293; 73 FR at
44593.
19(a)(3) Consumer's Waiver of Waiting Period
Section 226.19(a)(3) and comment 19(a)(3)-1 would be revised to
reflect that under the proposed rule the disclosures required for
transactions secured by real property or a dwelling are contained in
Sec. 226.38 rather than in Sec. 226.18. Section 226.19(a)(3) also
would be revised to reflect that there is more than one three-business-
day waiting period under proposed Sec. 226.19(a)(2); comment 19(a)(3)-
1 would be revised to clarify that a separate waiver is required for
each waiting period to be waived.
[[Page 43262]]
Section 226.19(a)(2)(ii) currently requires creditors to provide
corrected disclosures to a consumer if changes to the disclosed APR
exceed the specified tolerance (APR correction disclosures). The
consumer must receive APR correction disclosures no later than three
business days before consummation. Comment 19(a)(3)-2 provides examples
that show whether or not the three-business-day waiting period would
need to be waived to allow consummation to occur during the seven-
business-day waiting period required by Sec. 226.19(a)(2)(i), in the
event of a bona fide personal financial emergency. This example would
be removed because proposed Sec. 226.19(a)(2)(ii) provides that, after
the creditor provides the early disclosures, consumers must receive
final disclosures no later than three business days before consummation
in all cases. Comment 19(a)(3)-3 provides examples illustrating whether
or not, after the seven-business-day waiting period required by Sec.
226.19(a)(2)(i), the three-business-day waiting period triggered by APR
correction disclosures would need to be waived to allow consummation to
occur, in the event of a bona fide personal financial emergency.
Comment 19(a)(3)-3 would be revised to reflect that in all cases
consumers would have to receive final disclosures after the creditor
provides the early disclosures under the proposed rule and that under
proposed Sec. 226.19(a)(2)(iv) a disclosed APR that is overstated is
considered accurate in specified circumstances. Comment 19(a)(3)-3
would be redesignated as comment 19(a)(3)-2 under the proposed rule.
19(a)(4) Notice
Section 226.19(a)(4) currently requires creditors to disclose that
a consumer need not enter into a loan agreement because the consumer
has received disclosures or signed a loan application. This requirement
would be moved to Sec. 226.38(f)(1) under the proposed rule. Proposed
Sec. 226.38 contains all content requirements for disclosures for
transactions secured by real property or a dwelling.
19(a)(5) Timeshare Transactions
Section 226.19(a)(5) excludes transactions secured by a consumer's
interest in a timeshare plan described in 11 U.S.C. 101(53(D))
(timeshare transactions) from Sec. 226.19(a)(1) through (a)(4), which
address the following: (1) The period within which the creditor must
provide the early disclosures and the fact that creditors and other
persons cannot collect fees from the consumer before the consumer
receives the early disclosures; (2) waiting periods after the creditor
provides the early disclosures and after the consumer receives
corrected disclosures (if any) and before consummation; (3) waiver of
waiting periods; and (4) the requirement to disclose a statement that
the consumer is not required to consummate a transaction merely because
the consumer has received disclosures or signed a loan application.
Section 226.19(a)(5)(ii) contains timing requirements for early
disclosures, and Sec. 226.19(a)(5)(iii) contains timing requirements
for corrected disclosures, for timeshare transactions. Waiting periods
are not required for timeshare transactions, so Sec. 226.19(a)(5) does
not contain requirements similar to the requirements in Sec.
226.19(a)(3) for waiving waiting periods for non-timeshare
transactions. Section 226.19(a)(5) also does not contain a requirement
similar to that in Sec. 226.19(a)(4) that disclosures contain a
statement that a consumer need not consummate a transaction simply
because the consumer receives disclosures or signs a loan application.
Section 226.19(a)(4) would be removed under the proposed rule, and a
substantially similar requirement would apply under proposed Sec.
226.38(f)(1). Proposed Sec. 226.38(f)(1) requires creditors to
disclose a statement that a consumer is not obligated to consummate a
loan and that the consumer's signature only confirms receipt of a
disclosure statement.
Proposed Sec. 226.38(f)(1) applies to timeshare transactions. The
MDIA exempts timeshare transactions from the requirements of TILA
Section 128(b)(2)(C), which existing Sec. 226.19(a)(4) implements.
However, the Board does not believe that the Congress intended to
exempt timeshare transactions from any requirement to disclose to a
consumer that the consumer is not obligated to consummate a loan. Thus,
the proposed rule does not exempt timeshare transactions from Sec.
226.38(f)(1).
Section 226.19(a)(5) would be redesignated as Sec. 226.19(a)(4)
and cross-references adjusted accordingly under the proposed rule
because Sec. 226.19(a)(4) would be removed, as discussed above.
Comment 19(a)(5)(ii)-1 would be revised to reflect that the coverage of
Sec. 226.19 has been expanded to include transactions not subject to
RESPA, as discussed above. Comment 19(a)(5)(iii)-1 would be revised to
clarify that timeshare transactions are subject to the general
requirement to disclose changed terms under Sec. 226.17(f). Further,
comment 19(a)(5)(iii)-1 would be revised to reflect that cross-
referenced commentary on variable- or adjustable- rate transactions
would be incorporated into proposed Sec. 226.17(c)(1)(iii). Finally,
commentary on Sec. 226.19(a)(5)(ii) and (iii) would be redesignated as
commentary on Sec. 226.19(a)(4)(ii) and (iii), respectively.
19(b) Adjustable-Rate Loan Program Disclosures
Section 226.19(b) currently requires creditors to provide detailed
disclosures about adjustable-rate loan programs and a CHARM booklet if
a consumer expresses an interest in ARMs. Section 226.19(b) applies to
closed-end transactions secured by a consumer's principal dwelling with
a term greater than one year. Creditors must provide these disclosures
at the time an application form is provided or before the consumer pays
a non-refundable fee, whichever is earlier. Creditors need not provide
these disclosures, however, if a loan is secured by a dwelling other
than a principal dwelling (such as a second home) or real property that
is not a dwelling (such as vacant land) or with a term of one year or
less. For such transactions, creditors instead must provide the less
detailed variable-rate disclosures required by Sec. 226.18(f)(1)
within three business days after receiving the consumer's application,
as discussed above.
The Board proposes to require creditors to provide ARM loan program
disclosures, and additional disclosures discussed below, at the time an
application form is provided, for all closed-end transactions secured
by real property or a dwelling, regardless of the length of the loan's
term. The ARM disclosures and the new disclosures are intended to alert
consumers to certain risks before they apply for a loan. The Board
believes that consumers should receive this information, even where the
loan would be secured by a second home or unimproved real property, and
where the loan term is one year or less. In these circumstances, the
transaction likely involves a significant asset and consumers should
receive information about risks, so that they can decide whether the
program or loan feature is appropriate. The Board solicits comment on
whether loan program disclosures should be given at the time an
application form is provided to a consumer or before the consumer pays
a non-refundable fee, whichever is earlier, for transactions other than
ARMs.
The Board proposes to require creditors to provide the following
disclosures at the time an application is provided:
[[Page 43263]]
The ARM loan program disclosure, for each program in which
the consumer expresses an interest (proposed Sec. 226.19(b));
The ``Key Questions about Risk'' document published by the
Board (proposed Sec. 226.19(c)); and
The ``Fixed vs. Adjustable-Rate Mortgages'' document
published by the Board (proposed Sec. 226.19(c)).
Creditors no longer would be required to provide the CHARM booklet,
as discussed under Sec. 226.19(c).
Current content of ARM loan program disclosures. For adjustable-
rate mortgage transactions secured by a consumer's principal dwelling
with a term greater than one year, Sec. 226.19(b)(2) requires the
creditor to provide disclosures to consumers at the time an application
form is provided or before the consumer pays a nonrefundable fee,
whichever is earlier. Section 226.19(b)(2) requires creditors to
provide the following disclosures, as applicable, for each adjustable-
rate loan program in which the consumer expresses an interest: (1) The
fact that interest rate, payment, or term of the loan can change, (2)
the index or formula used in making adjustments, and a source of
information about the index or formula, (3) an explanation of how the
interest rate and payment will be determined, including an explanation
of how the index is adjusted, such as by the addition of a margin, (4)
a statement that the consumer should ask about the current margin value
and current interest rate, (5) the fact that the interest rate will be
discounted, and a statement that the consumer should ask about the
amount of the interest rate discount, (6) the frequency of interest
rate and payment changes, (7) any rules relating to changes in the
index, interest rate, payment amount, and outstanding loan balance, (8)
pursuant to TILA Section 128(a)(14), 15 U.S.C. 1638(a)(14), either (a)
an historical example based on a $10,000 loan amount that illustrates
how interest rate changes implemented according to the terms of the
loan program would have affected payments and the loan balance over the
past fifteen years or (b) the maximum interest rate and payment for a
$10,000 loan originated at an initial interest rate in effect as of an
identified month and year and a statement that the periodic payments
may increase or decrease substantially, (9) an explanation of how the
consumer may calculate the payments for the loan, (10) the fact that
the loan program contains a demand feature, (11) the type of
information that will be provided in notices of adjustments and the
timing of such notices, and (12) a statement that the disclosure forms
are available for the creditor's other variable-rate loan programs.
Amendments to maximum rate and historical example disclosures. TILA
Section 128(a)(14), 15 U.S.C. 1638(a)(14), requires creditors to
disclose at application (a) a statement that the periodic payments may
increase or decrease substantially and the maximum interest rate and
payment for a $10,000 loan originated at a recent interest rate,
assuming the maximum periodic increases in rates and payments under the
program or (b) an historical example illustrating the effects of
interest rate changes implemented according to the loan program.
Section 226.19(b)(2)(viii) implements TILA Section 128(a)(14). For the
reasons discussed below, the Board proposes not to require creditors to
provide either the historical example or the maximum interest rate and
payment based on a $10,000 loan.
The Board proposes to eliminate the disclosure of the historical
example or the maximum interest rate and payment based on a $10,000
loan pursuant to the Board's exception and exemption authorities in
TILA Section 105. Section 105(a) authorizes the Board to make
exceptions to TILA to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uniformed use of credit. See 15 U.S.C. 1601(a),
1604(a). Section 105(f) authorizes the Board to exempt any class of
transactions from coverage under any part of TILA if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
See 15 U.S.C. 1604(f)(1). The Board must make this determination in
light of specific factors. See 15 U.S.C. 1604(f)(2). These factors are
(1) the amount of the loan and whether the disclosure provides a
benefit to consumers who are parties to the transaction involving a
loan of such amount; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process; (3)
the status of the borrower, including any related financial
arrangements of the borrower, the financial sophistication of the
borrower relative to the type of transaction, and the importance to the
borrower of the credit, related supporting property, and coverage under
TILA; (4) whether the loan is secured by the principal residence of the
borrower; and (5) whether the exemption would undermine the goal of
consumer protection.
The Board has considered each of these factors carefully and based
on that review believes that the proposed exemption is appropriate.
Consumer testing conducted by the Board showed that examples based on
hypothetical loan amounts and interest rates may be confusing to
consumers and may not provide meaningful benefit. Several participants
thought the historical example showed payments and rates that actually
would apply if the participant chose the loan program described in the
disclosure. Some participants mistakenly thought that the disclosures
described an ARM with a fifteen-year term because the disclosure showed
fifteen years' worth of index changes under an ARM program. Some
consumer testing participants said that disclosures based on a
hypothetical $10,000 loan amount are not useful to them; these
consumers said they wanted to see information about rates and terms
that would actually apply in the context of their own loan amount.
The Board's exception and exemption authority under Sections 105(a)
and (f) does not apply in the case of a mortgage referred to in Section
103(aa), which are high-cost mortgages generally referred to as ``HOEPA
loans.'' The Board does not believe that this limitation restricts its
ability to apply the proposed changes to all mortgage loans, including
HOEPA loans. This limitation on the Board's general exception and
exemption authority is a necessary corollary to the decision of the
Congress, as reflected in TILA Section 129(l)(1), to grant the Board
more limited authority to exempt HOEPA loans from the prohibitions
applicable only to HOEPA loans in Section 129(c) through (i) of TILA.
See 15 U.S.C. 1639(l)(1). Here, the Board is not proposing any
exemptions from the HOEPA prohibitions. This limitation does raise a
question as to whether the Board could use its exception and exemption
authority under Sections 105(a) and (f) to except or exempt HOEPA
loans, but not other types of mortgage loans, from other, generally
applicable TILA provisions. That question, however, is not implicated
by this proposal.
Here, the Board is proposing to apply its general exception and
exemption authority to eliminate information from the ARM loan program
disclosure that consumers find confusing or not useful, for all loans
secured by real property or a dwelling, including both HOEPA and non-
HOEPA loans, in order to fulfill the statute's purpose of facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uninformed use of credit. It would not be consistent with the
statute or with
[[Page 43264]]
Congressional intent to interpret the Board's authority under Sections
105(a) and (f) in such a way that the proposed revisions could apply
only to mortgage loans that are not subject to HOEPA. Reading the
statute in a way that would deprive HOEPA borrowers of improved ARM
loan program disclosures is not a reasonable construction of the
statute and contravenes the Congress's goal of ensuring ``that enhanced
protections are provided to consumers who are most vulnerable to
abuse.'' \42\
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\42\ H.R. Conf. Rept. 103-652 at 159 (Aug. 2, 1994).
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The Board notes that proposed Sec. 226.38(c) would require
creditors to provide consumers with the maximum possible interest rate
and payment within three business days after the consumer applies for
an ARM or a loan in which payments may vary. See discussion of Sec.
226.38(c). Consumer testing indicated that consumers find this
information very useful when provided in the context of an actual loan
offer, in contrast to the information for a hypothetical loan amount in
relation to an historical interest rate or the interest rate or for a
recently originated loan, as required by TILA Section 128(a)(14).
In addition to removing Sec. 226.19(b)(2)(viii), the proposed rule
would remove the related requirement under Sec. 226.19(b)(2)(ix) that
creditors explain how a consumer may calculate payments for the
consumer's loan amount based on either the initial interest rate used
to calculate the maximum interest rate and payment disclosure or the
most recent payment shown in the historical example. The proposed rule
also would eliminate commentary on Sec. 226.19(b)(2)(viii) and (ix).
Further, the proposed rule would eliminate comment 19(b)(2)-2(i)(I),
which provides that if a loan feature must be taken into account in
preparing the historical example of payment and loan balance movements
required by Sec. 226.19(b)(2)(viii), variable-rate loans that differ
as to that feature constitute separate loan programs under Sec.
226.19(b)(2).
Amendments to other regulations and comments. Comment 19(b)-1
currently provides that in an assumption of an adjustable-rate mortgage
transaction secured by the consumer's principal dwelling with a term
greater than one year, disclosures need not be provided under
Sec. Sec. 226.18(f)(2)(ii) or 226.19(b). Comment 19(b)-2(iv) currently
provides that in cases where an open-end credit account will convert to
a closed-end transaction subject to Sec. 226.19(b), the creditor must
provide the disclosures required by Sec. 226.19(b). The proposed rule
would integrate the foregoing commentary into Sec. 226.19(b). Proposed
Sec. 226.19(b) would apply to all closed-end mortgage transactions
secured by real property or a dwelling regardless of loan security or
term, however, as discussed above.
The proposed rule would not require program disclosures to contain
an explanation of how payments will be determined, a disclosure that
creditors must make under existing Sec. 226.19(b)(2)(iii). In general,
consumer testing participants preferred to receive specific information
about the amount of the payments they would have to make, which
generally is not available at the time the consumer submits a loan
application. Most participants found model loan program disclosures
based on current requirements to be confusing because they contained
complex terminology. Participants responded much more positively to
revised model disclosures, which did not discuss technical issues about
how payments are determined. If a creditor chooses to include an
explanation of how payments will be determined, the explanation must be
disclosed apart from the segregated disclosures that proposed Sec.
226.19(b) requires, as a general rule under proposed Sec.
226.37(a)(2), discussed below.
Footnote 45a to Sec. 226.19(b) currently states that creditors may
substitute information provided in accordance with variable-rate
regulations of other federal agencies for the disclosures required by
Sec. 226.19(b). The proposed rule would remove and reserve that
footnote and comment 19(b)-4. The footnote was designed to account for
the fact that disclosure rules for variable-rate loans issued by HUD,
the Federal Home Loan Bank Board, and the Office of the Comptroller of
the Currency (OCC) were in effect when the Board adopted Sec.
226.19(b). No comprehensive disclosure requirements for variable-rate
loans currently are in effect under the rules of HUD, the OCC, or the
Office of Thrift Supervision (OTS), the successor agency to the FHLBB.
No such requirements are in effect under the rules of the Federal
Deposit Insurance Corporation (FDIC) or the National Credit Union
Administration (NCUA) either. Moreover, HUD and the OTS have
incorporated the disclosure requirements for variable-rate loans under
TILA and Regulation Z into their own regulations by cross-
reference.\43\ Accordingly, footnote 45a no longer appears to be
necessary. The Board requests comment, however, on whether there are
potential inconsistencies between any ARM loan disclosures required by
other federal financial institution supervisory agencies that
Regulation Z should specifically address.
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\43\ See 24 CFR 203.49(g) (HUD); 12 CFR 560.210 (OTS). Some of
those agencies have issued regulations that apply to adjustable rate
mortgages. See, e.g., 12 CFR 34.22 (OCC) (requiring that an index
specified in a national bank's loan documents for an ARM subject to
Sec. 226.19(b) be readily available to and verifiable by a borrower
and beyond the bank's control). Those requirements do not establish
comprehensive disclosure requirements, however.
---------------------------------------------------------------------------
Comment 19(b)-5 currently states that creditors must provide
disclosures under Sec. 226.19(b) for certain renewable balloon-
payment, preferred-rate, and price-level adjusted mortgages with a
fixed interest rate, if they are secured by a dwelling and have a term
greater than one year. However, such mortgages lack most of the
adjustable interest rate and payment features required to be disclosed
under proposed Sec. 226.19(b)(1). For example, the frequency of rate
and payment changes for a preferred-rate loan with a fixed interest
rate likely cannot be known because the loss of the preferred rate is
based on factors other than a formula or a change in the value of an
index. Accordingly, under the proposed rule creditors would not be
required to provide ARM loan program disclosures under Sec. 226.19(b)
for such mortgages. Creditors would be required to provide ARM loan
program disclosures for such mortgages if their interest rate is
adjustable, however. Cross-references in comment 19(b)-5 would be
updated and the comment would be redesignated as comment 19(b)-3 under
the proposed rule.
Existing comment 19(b)(2)-2(i) provides examples of particular loan
features that distinguish separate loan programs. That commentary would
be redesignated as comment 19(b)-5(i) but generally would be unchanged
under the proposal, with one exception. Differences among rules
relating to loan balance changes would be removed as an example of a
particular loan feature that distinguishes separate loan programs.
However, differences in the possibility of negative amortization would
continue to distinguish separate loan programs, as discussed above.
Also, existing comment 19(b)(2)(vii)-2(i) on disclosing a negative
amortization feature would be redesignated as comment 19(b)-5 under the
proposal.
The requirement to provide loan program disclosures for each loan
program in which a consumer expresses an interest generally would
remain unchanged. However, comment 19(b)(2)-4 would be revised to state
that a creditor ``must describe''--rather than
[[Page 43265]]
``must fully describe''--an ARM loan program. The proposal would reduce
some of the material that creditors must disclose about ARM loan
programs to highlight information that is most important to consumers,
as discussed above.
Use of term ``Adjustable-Rate Mortgage'' or ``ARM.'' Proposed Sec.
226.19(b) requires the creditor to disclose the heading ``Adjustable-
Rate Mortgage'' or ``ARM.'' Participants in the Board's consumer
testing showed greater familiarity with the term ``adjustable-rate
mortgage'' than with ``variable-rate mortgage.'' Format requirements in
proposed Sec. 226.19(b)(4)(iii) state that the statement must be more
conspicuous than, and must precede, the other disclosures required by
Sec. 226.19(b) and must be located outside of the tables required by
proposed Sec. 226.19(b)(4)(iv). Finally, proposed Sec.
226.19(b)(4)(iii) states that creditors may make the ``Adjustable-Rate
Mortgage'' or ``ARM'' disclosure in a heading that states the name of
the creditor and the name of the loan program, such as ``ABC Bank 3/1
Adjustable Rate Mortgage.''
19(b)(1) Interest Rate and Payment Disclosures
Proposed Sec. 226.19(b)(1) requires the creditor to disclose the
following information, as applicable, grouped together under the
heading ``Interest Rate and Payment,'' using that term: (1) The
introductory period, (2) the frequency of the rate and payment change,
(3) the index, (4) the limit on rate changes, (5) the conversion
feature, and (6) the preferred rate.
Introductory period. Proposed Sec. 226.19(b)(1)(i) requires the
creditor to disclose the period during which the interest rate or
payment remains fixed and a statement that the interest rate may vary
or the payment may increase after that period. This disclosure is
similar to that required under existing Sec. 226.19(b)(2)(i). Proposed
Sec. 226.19(b)(1)(i) also requires the creditor to provide an
explanation of the effect on the interest rate of having an initial
interest rate that is not determined using the index or formula that
applies for interest rate adjustments, that is, of having a discounted
or premium interest rate. This disclosure requirement is similar to
that required under existing Sec. 226.19(b)(2)(v). However, the
proposed rule would eliminate the requirement that ARM loan program
disclosures state that the consumer should ask about the amount of the
interest rate discount.
Frequency of rate and payment change. Proposed Sec.
226.19(b)(1)(ii) requires the creditor to disclose the frequency of
interest rate and payment changes, as currently is required under Sec.
226.19(b)(2)(vi).
Index. Proposed Sec. 226.19(b)(1)(iii) requires the creditor to
disclose the index or formula used in making adjustments and a source
of information about the index or formula. Proposed Sec.
226.19(b)(1)(iii) also requires the creditor to provide an explanation
of how the interest rate will be determined, including an explanation
of how the index is adjusted, such as by the addition of a margin.
Those requirements are contained in existing Sec. 226.19(b)(2)(ii) and
(iii). However, the proposed rule eliminates Sec. 226.19(b)(2)(iv),
which requires the creditor to disclose that the consumer should ask
about the current margin value and current interest rate.
Limit on rate changes. Currently, requirements for disclosing
interest rate or payment limitations and carryover are contained in
existing Sec. 226.19(b)(2)(vii). The proposed rule would retain these
requirements, under proposed Sec. 226.19(b)(1)(iv). (Existing Sec.
226.19(b)(2)(vii) also contains a requirement to disclose negative
amortization. The proposed rule would retain that requirement as
proposed Sec. 226.19(b)(2)(ii)(B), as discussed below.)
Conversion feature. Existing comment 19(b)(2)(vii)-3 provides that
if a loan program permits consumers to convert a variable-rate loan to
a fixed-rate loan, the creditor must disclose that the fixed interest
rate after conversion may be higher than the adjustable interest rate
before conversion. Comment 19(b)(2)(vii)-3 further provides that the
creditor must disclose any limitations on the period during which the
loan may be converted, a statement that conversion fees may be charged,
and any interest rate and payment limitations that apply if the
consumer exercises the conversion option. The proposed rule would
integrate this commentary into proposed Sec. 226.19(b)(1)(v).
Preferred rate. Currently, if the variable-rate mortgage
transaction is a preferred-rate loan, the creditor must disclose any
event that would allow the creditor to increase the interest rate, for
example, upon the termination of the consumer's employment with the
creditor, whether voluntary or involuntary. See comment 19(b)(2)(vii)-
4. The creditor also must disclose that fees may be charged when the
preferred rate no longer is in effect, if applicable. The Board
proposes to retain these requirements in proposed Sec.
226.19(b)(1)(vi).
19(b)(2) Key Questions About Risk
Currently, TILA Section 128(a)(14), 15 U.S.C. 1638(a)(14), and
Sec. 226.19(b)(2), require the creditor to disclose only certain
information about certain adjustable-rate mortgage features early in
the mortgage application process. The Board believes, however, that the
consumer should be aware early in the process of other risky features,
in addition to adjustable-rate features. For this reason, the Board
proposes to require ``Key Question'' disclosures several times during
the process to allow consumers to become aware of and track potentially
risky features of their loan. Consumer testing and document design
principles suggest that keeping language and design elements consistent
between forms improves consumers' ability to identify and track any
changes in the information being disclosed. As discussed more fully
below, proposed Sec. 226.19(c)(1) would require the creditor to
provide a Board publication entitled ``Key Questions to Ask about Your
Mortgage'' at the time an application form is provided to the consumer
or before the consumer pays a non-refundable fee, whichever is earlier.
The content of this disclosure would be published by the Board and
would address important terms related to any type of mortgage, whether
fixed-rate or adjustable-rate. At the same time, if the consumer
expresses an interest in an ARM loan program, proposed Sec.
226.19(b)(2) would require the creditor to disclose the ``Key Questions
about Risk'' as part of the ARM loan program disclosure. These ``Key
Questions'' would be tailored to the specific ARM loan program in which
the consumer has expressed an interest. Subsequently, within three days
of the creditor receiving the consumer's application for a specific
loan program, proposed Sec. 226.38(d) would require the creditor to
make a similar disclosure of ``Key Questions about Risk'' in the
transaction-specific TILA disclosure. The list of the ``Key Questions
about Risk'' for the transaction-specific TILA disclosure required
under proposed Sec. 226.38(d) would be the same as that required for
the ARM loan program disclosure under proposed Sec. 226.19(b)(2), but
the information in the TILA disclosure would be specific to the loan
program for which the consumer applied and would apply to fixed-rate or
adjustable-rate loan programs. The Board believes that consistently
using the ``Key Questions'' terminology would enhance consumers'
ability to identify, review, and understand the disclosed terms across
all disclosures, and,
[[Page 43266]]
therefore, avoid the uninformed use of credit.
Key questions about risk. As discussed above, current Sec.
226.19(b)(2) requires the creditor to disclose over 12 loan features.
Consumer testing showed that the current format for these disclosures
was very difficult for participants to understand. In addition, because
the content was so general, participants felt the current disclosure
would not help them shop for a mortgage. Therefore, the Board proposes
to replace existing Sec. 226.19(b)(2) with a new streamlined ARM loan
program disclosure that would contain key information specific to that
loan program. The proposed rule would require creditors to disclose
certain information grouped together under the heading ``Key Questions
about Risk,'' using that term, to draw the consumer's attention to
information about the potential adverse impact that certain loan
features could have on the consumer's ability to repay the loan.
Proposed Sec. 226.19(b)(2)(i) requires the creditor to always disclose
information about the following three terms: (1) Rate increases, (2)
payment increases, and (3) prepayment penalties. Proposed Sec.
226.19(b)(2)(ii) would require the creditor to disclose information
about the following six terms, but only if they are applicable to the
loan program: (1) Interest-only payments, (2) negative amortization,
(3) balloon payment, (4) demand feature, (5) no-documentation or low-
documentation loans, and (6) shared-equity or shared-appreciation. The
``Key Questions about Risk'' disclosure would be subject to special
format requirements, including a tabular format and a question and
answer format, as described under proposed Sec. 226.19(b)(4). The
Board believes it is critical that consumers be alerted to certain risk
factors before they have applied for an ARM, so that they can decide
whether they want a loan with those terms. The Board solicits comment
on whether there are other risk factors that loan program disclosures
or publications should identify.
Required disclosures. As noted above, proposed Sec.
226.19(b)(2)(i) requires the creditor to disclose information about the
following three terms: (1) Rate increases, (2) payment increases, and
(3) prepayment penalties. The Board believes that these three factors
should always be disclosed. Rate and payment increases pose the most
direct risk of payment shock. In addition, consumer testing showed that
interest rate and monthly payment were by far the two most common terms
that participants used to shop for a mortgage. The Board also believes
that the prepayment penalty is a key risk factor because it is critical
to the consumer's ability sell the home or to refinance the loan to
obtain a lower rate and payments. While the other risk factors are
important, those factors are only required to be disclosed as
applicable to avoid information overload.
Rate and payment increases. With respect to rate increases,
proposed Sec. 226.19(b)(2)(i)(A) would require the creditor to
disclose a statement that the interest rate on the loan may increase,
along with a statement indicating when the first rate increase may
occur and the frequency with which the interest rate may increase. With
respect to payment increases, proposed Sec. 226.19(b)(2)(i)(B) would
require the creditor to disclose a statement indicating whether or not
the periodic payment on the loan may increase. If the periodic payment
on the loan may increase, then the creditor would disclose a statement
indicating when the first payment may increase. For payment option
loans, if the periodic payment may increase, the creditor would
disclose a statement indicating when the first minimum payment would
increase. Proposed comment 19(b)(2)(i)-1 would clarify that the
requirement to disclose when the first rate or payment increase may
occur refers to the time period in which the increase may occur, not
the exact calendar date. For example, the disclosure may state, ``Your
interest rate may increase at the end of the 3-year introductory
period.''
Prepayment penalties. If the obligation includes a finance charge
computed from time to time by application of a rate to the unpaid
principal balance, proposed Sec. 226.19(b)(2)(i)(C) would require the
creditor to disclose a statement indicating whether or not a penalty
could be imposed if the obligation is prepaid in full. If the creditor
could impose a prepayment penalty, the creditor would disclose the
circumstances under which and the period in which the creditor could
impose the penalty. Because of the importance of prepayment penalties,
the proposed rule would also require disclosure of this feature under
proposed Sec. 226.38(a)(5). To avoid duplication, proposed comments
19(b)(2)(i)(C)-1 to -3 cross-reference proposed comments 38(a)(5)-1 to
-3 for information about whether there is a prepayment penalty and
examples of charges that are or are not prepayment penalties.
Some consumers take out ARM loans planning to refinance or sell the
home securing the loan before the rate or payment increases. Consumer
testing showed that while most participants understood the general
meaning of the phrase ``prepayment penalty,'' they did not realize that
the penalty would apply if they refinanced their loan or sold their
home. The Board believes it is important for consumers to understand
that a prepayment penalty may be imposed in various circumstances,
including paying off the loan, refinancing, or selling the home early.
Additional disclosures. As noted above, proposed Sec.
226.19(b)(2)(ii) requires the creditor to disclose information about
the following six terms, as applicable: (1) Interest-only payments, (2)
negative amortization, (3) balloon payment, (4) demand feature, (5) no-
documentation or low-documentation loans, and (6) shared-equity or
shared-appreciation. The Board proposes to require these disclosures
only when the feature is present, in contrast to the required
disclosures of proposed Sec. 226.19(b)(2)(i). Proposed comment
19(b)(2)(ii)-1 would clarify that ``as applicable'' means that any
disclosure not relevant to a particular ARM loan program may be
omitted. Although consumer testing showed that some participants felt
reassured by seeing all of the risk factors whether they were a feature
of the loan or not, the Board is concerned about the potential for
information overload if the entire list is included on every ARM loan
program disclosure.
Interest-only payments. Proposed Sec. 226.19(b)(2)(ii)(A) requires
the creditor to disclose a statement that periodic payments will be
applied only toward interest on the loan. The creditor would also
disclose a statement of any limitation on the number of periodic
payments that will be applied only toward interest on the loan and not
towards the principal, that such payments will cover the interest owed
each month, but none of the principal, and that making these periodic
payments means the loan amount will stay the same and the consumer will
not have paid any of the loan amount. For payment option loans, the
creditor would disclose a statement that the loan gives the consumer
the choice to make periodic payments that cover the interest owed each
month, but none of the principal, and that making these periodic
payments means the loan amount will stay the same and the consumer will
not have paid any of the loan amount. Consumer testing showed that many
participants did not understand that there are loans where the periodic
payments do not pay down the mortgage principal. The Board believes it
is important to alert
[[Page 43267]]
consumers to this feature in order to avoid payment shock when the
principal becomes due or the periodic payment increases.
Negative amortization. Proposed Sec. 226.19(b)(2)(ii)(B) would
require the creditor to disclose a statement that the loan balance may
increase even if the consumer makes the required periodic payments. In
addition, the creditor would disclose a statement that the minimum
payment covers only a part of the interest the consumer owes each
period and none of the principal, that the unpaid interest will be
added to the consumer's loan amount, and that over time this will
increase the total amount the consumer is borrowing and cause the
consumer to lose equity in the home. The proposed requirement would
replace existing Sec. 226.19(b)(2)(vii), which requires the creditor
to disclose any rules relating to changes in the outstanding loan
balance, including an explanation of negative amortization. The Board
believes that information regarding negative amortization should be
disclosed because it is a complicated feature that significantly
impacts a consumer's ability to repay the loan. Consumer testing showed
that participants were generally unfamiliar with the term or concept.
However, participants generally understood the revised transaction-
specific plain-language explanation of negative amortization's causes
and effects when disclosed in the ``Key Questions'' format.
Balloon payment. Proposed Sec. 226.19(b)(2)(ii)(C) requires the
creditor to disclose a statement that the consumer will owe a balloon
payment, along with a statement of when it will be due. Proposed
comment 19(b)(2)(ii)(C)-1 would clarify that the creditor must make
this disclosure if the loan program includes a payment schedule with
regular periodic payments that when aggregated do not fully amortize
the outstanding principal balance. Proposed comment 19(b)(2)(ii)(C)-2
would clarify that the requirement to disclose when the balloon payment
is due refers to the time period when it is due, not the exact calendar
date. For example, the disclosure may state, ``You would owe a balloon
payment due in seven years.'' The Board believes it is important for
the consumer to be aware early in the process of any potential payment
shock.
Demand feature. Proposed Sec. 226.19(b)(2)(ii)(D) would require
the creditor to disclose a statement that the creditor may demand full
repayment of the loan, along with a statement of the timing of any
advance notice the creditor will give the consumer before the creditor
exercises such right. Proposed comment Sec. 226.19(b)(2)(ii)(D)-1
would clarify that this requirement would apply not only to
transactions payable on demand from the outset, but also to
transactions that convert to a demand status after a stated period.
Proposed comments Sec. 226.19(b)(2)(ii)(D)-2 and -3 cross-reference
comment 18(i)-2 regarding covered demand features and comment 18(i)-3
regarding the relationship to the payment schedule disclosures. The
proposed rule replaces existing Sec. 226.19(b)(2)(x). The Board
believes that demand features are rare in consumer mortgage
transactions, but pose a considerable risk when present and, therefore,
should be brought to the consumer's attention. Consumer testing showed
that participants understood the revised language regarding a demand
feature and thought it was important information.
No-documentation or low-documentation loans. Proposed Sec.
226.19(b)(2)(ii)(E) would require the creditor to disclose a statement
that the consumer's loan could have a higher rate or fees if the
consumer does not document employment, income, or other assets. In
addition, the creditor would disclose a statement that if the consumer
provides more documentation, the consumer could decrease the interest
rate or fees. The Board is concerned that consumers who obtain loans
with such features may not understand that they may pay a higher price
for this feature.
Shared-equity or shared-appreciation. Proposed Sec.
226.19(b)(2)(ii)(F) requires the creditor to disclose a statement that
any future equity or appreciation in the real property or dwelling that
secures the loan must be shared, along with a statement of the
percentage of future equity or appreciation to which the creditor is
entitled, and the events that may trigger such an obligation. The Board
is aware that a number of shared-equity and shared-appreciation
programs are being offered to consumers, including low- and moderate-
income borrowers, on various terms. Consumer testing showed that
participants were generally unfamiliar with the concept of shared-
equity or shared-appreciation. However, to the extent that a shared-
equity or a shared-appreciation feature is being offered as one of the
loan terms, participants stated that they would want it disclosed
clearly and prominently.
19(b)(3) Additional Information and Web Site
Currently, Sec. 226.19(b)(2)(iv) and (v) require the creditor to
disclose a statement that consumers should ask the creditor about the
current margin value and current interest rate or the amount of any
interest rate discount. Existing Sec. 226.19(b)(2)(xii) requires a
notice that disclosure forms are available for the creditor's other
variable-rate programs. Consumer testing indicated that many consumers
skim disclosures quickly and become frustrated if they cannot quickly
locate the key information they seek. Reducing the number of non-
specific notices in the loan program disclosures would increase the
likelihood that consumers will read and understand specific
disclosures. Under proposed Sec. 226.19(b)(3), the creditor would be
required to disclose that the consumer may visit the Web site of the
Federal Reserve Board for more information about adjustable-rate
mortgages and for a list of licensed housing counselors in the
consumer's area that can help the consumer understand the risks and
benefits of the loan. The Board believes that streamlining the notice
will reduce information overload.
19(b)(4) Format Requirements
Proposed Sec. 226.19(b)(4) contains format requirements for ARM
loan program disclosures. As discussed more fully in proposed Sec.
226.37, consumer testing showed that the location and order in which
information was presented affected consumers' ability to locate and
comprehend the information disclosed. Based on these findings, the
Board proposes, under Sec. 226.19(b)(4)(i), to require that creditors
disclose the ``Key Questions about Risk'' using the format requirements
for similar disclosures required by Sec. 226.38, except as otherwise
provided in proposed Sec. 226.19(b)(4). Proposed Sec.
226.19(b)(4)(ii) would require that the disclosures required by
paragraphs (b)(1) through (b)(3) be grouped together and placed in a
prominent location. Proposed Sec. 226.19(b)(4)(iii) would require that
the heading ``Adjustable Rate Mortgage'' or ``ARM'' required under
Sec. 226.19(b) be more conspicuous than and precede the other
disclosures. The heading would be required to be outside the tables
required under this paragraph. The creditor would be permitted to use a
heading with the name of the loan program and the name of the creditor,
such as ``XXX Bank 3/1 ARM.'' Proposed Sec. 226.19(b)(4)(viii) would
require the disclosure of the Board's Web site and list of licensed
housing counselors to be disclosed outside of the required tables
described below.
Proposed Sec. 226.19(b)(4)(iv) to (vii) would require the
following special formats for the ARM loan program
[[Page 43268]]
disclosure: tabular format, question and answer format, highlighted
answers, and special order of disclosures. Proposed Sec.
226.19(b)(4)(iv) would require the creditor to provide the interest
rate disclosure required under Sec. 226.19(b)(1) and the ``Key
Questions about Risk'' disclosure required under Sec. 226.19(b)(2) in
the form of two tables with headings, content and format substantially
similar to Model Form H-4(B) in Appendix H. Consumer testing showed
that using a tabular format improved participants' ability to readily
identify and understand key information. Only the information required
or permitted by paragraphs (b)(1) and (b)(2) would be in this table. In
addition, under Sec. 226.19(b)(4)(v), the ``Key Questions about Risk''
disclosures would be required to be grouped together and presented in
the format of a question and answer in a manner substantially similar
to Model Form H-4(B) in Appendix H. The table with interest rate
information would precede the table with the ``Key Questions about
Risk.'' Consumer testing showed that using a question and answer format
improved participants' ability to recognize and understand potentially
risky or costly features of a loan. Proposed Sec. 226.19(b)(4)(vi)
would require the creditor to disclose each affirmative answer in bold
text and in all capitalized letters to highlight the fact that a risky
feature is present in the loan. Negative answers (required under
proposed Sec. 226.19(b)(2)(i) but not under proposed Sec.
226.(b)(2)(ii)) would be disclosed in non-bold text. Finally, proposed
Sec. 226.19(b)(4)(vii) would require the creditor to make the
disclosures, as applicable, in the following order: Rate increases
under Sec. 226.19(b)(2)(i)(A), payment increases under Sec.
226.19(b)(2)(i)(B), interest-only payments under Sec.
226.19(b)(2)(ii)(A), negative amortization under Sec.
226.19(b)(2)(ii)(B), balloon payments under Sec. 226.19(b)(2)(ii)(C),
prepayment penalties under Sec. 226.19(b)(2)(i)(C), demand feature
under Sec. 226.19(b)(2)(ii)(D), no-documentation or low-documentation
loans under Sec. 226.19(b)(2)(ii)(E), and shared-equity or shared-
appreciation under Sec. 226.19(b)(2)(ii)(F). This order would ensure
that consumers receive critical information about their payments first.
Model Clauses and Samples are proposed at Appendix H-4(C) through H-
4(F).
19(c) Publications for Transactions Secured by Real Property or a
Dwelling
Based on the results of consumer testing, under the proposal
creditors would be required to provide to consumers two Board
publications for closed-end transactions secured by real property or a
dwelling. The first publication, entitled ``Key Questions to Ask about
Your Mortgage,'' discusses loan terms and conditions that are important
for consumers to consider when selecting a closed-end mortgage loan.
The second publication, entitled ``Fixed vs. Adjustable Rate
Mortgages,'' discusses the respective costs and benefits of fixed-rate
mortgages and ARMs.
Under existing Sec. 226.19(b)(1), the creditor must provide to the
consumer a copy of the CHARM booklet published by the Board, or a
suitable substitute. The Board consumer tested the CHARM booklet and a
sample current loan program disclosure. Few of the consumer testing
participants who had obtained an ARM recalled having seen the CHARM
booklet. Although many participants thought that the information in the
CHARM booklet is useful, particularly the descriptions of ``payment
shock,'' prepayment penalties, and negative amortization, most
participants thought that the CHARM booklet is too long and that they
likely would not read it.
The proposed rule would eliminate the requirement under Sec.
226.19(b)(1) for creditors to provide the CHARM booklet to consumers
who express interest in an ARM transaction, and instead, under proposed
Sec. 226.38(c)(2) require a brief Board publication showing the
principal differences between a fixed-rate loan and an ARM. Comment
19(b)(1)- and -2 on the CHARM booklet would be removed accordingly.
Also, proposed Sec. 226.38(c)(1) would require creditors to provide to
all consumers--regardless of whether they express interest in an ARM--
two new single-page Board publications. These new disclosure forms
would contain a notice stating where consumers may obtain additional
information about ARMs. The Board believes that requiring that
creditors provide the ``Key Questions to Ask about Your Mortgage''
publication and the ``Fixed versus Adjustable Rate Mortgages''
publication without modifications would promote consistency in the
information consumers receive about ARMs. Accordingly, proposed Sec.
226.19(c) would require creditors to provide this information ``as
published.''
The Board proposes to require creditors to provide these
publications at the time a consumer is given an application form or
pays a non-refundable fee, whichever is earlier, for fixed-rate
mortgage loans as well as variable-rate mortgage loans. Special rules
for when a consumer accesses an application form electronically and
when the creditor receives a consumer's application from an
intermediary agent or broker are discussed below. The Board solicits
comment on whether there are other loan types for which loan program
publications should be given at the time an application form is
provided to a consumer or before the consumer pays a non-refundable
fee, whichever is earlier.
19(d) Timing of Disclosures
Proposed comment 19(c)-1 states that creditors are not required to
provide disclosures under proposed Sec. 226.19(c) in cases where an
open-end credit account will convert to a closed-end transaction. The
``Key Questions to Ask About Your Mortgage'' disclosure and the ``Fixed
vs. Adjustable Rate Mortgages'' disclosure would not be helpful at that
time, because the creditor and consumer already will have entered into
a written agreement. By contrast, transaction-specific disclosures are
required in such cases under Sec. 226.19(b), both as in effect (see
comment 19(b)-2(iv)) and as proposed (see proposed Sec. 226.19(b) and
comment 19(b)-2).
Existing Sec. 226.19(b) requires that creditors provide variable-
rate loan program disclosures at the time an application form is
provided to a consumer or before the consumer pays a non-refundable
fee, whichever is earlier. Comment 19(b)-2 currently discusses when a
creditor should provide such disclosures in cases where the creditor
receives a consumer's application through an intermediary agent or
broker or a consumer requests an application by telephone. The comment
also clarifies that if the creditor solicits applications by mailing
application forms, the creditor must send the ARM loan program
disclosures with the application form. Existing Sec. 226.19(c)
contains requirements for providing variable-rate loan program
disclosures when a consumer accesses an application form
electronically. (Section 226.17(a)(1) currently permits creditors to
provide the ARM loan program disclosures electronically, without regard
to the consumer-consent or other provisions of the Electronic
Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq.
(E-Sign Act)).
Under the Board's proposal, timing requirements for ARM loan
program disclosures would be consolidated in proposed Sec. 226.19(d).
These timing requirements also would apply to the provision of the
proposed new ``Key Questions to Ask About Your Mortgage'' and ``Fixed
vs. Adjustable Rate
[[Page 43269]]
Mortgages'' disclosures. Proposed Sec. 226.19(d)(1) contains the
general requirement to provide ARM loan program disclosures (if a
consumer expresses interest in ARMs) at the time an application form is
provided or before the consumer pays a non-refundable fee, whichever is
earlier. Proposed Sec. 226.19(d)(1) also specifies that creditors must
provide ARM loan program disclosures before charging a fee for
obtaining a consumer's credit report.
Proposed Sec. 226.19(d)(2) states that if a consumer accesses an
ARM loan application electronically, a creditor must provide the
disclosures in electronic form, except as provided in Sec.
226.19(d)(2). Proposed Sec. 226.19(d)(2), in turn, states that if a
consumer who is physically present in a creditor's office accesses an
ARM loan application electronically, the creditor may provide
disclosures in either electronic or paper form. These provisions are
consistent with existing comment 19(c)-1(i) and (ii). Comment 19(c)-1
on the form of electronic disclosures would be redesignated as comment
19(d)(2)(i)-1. Commentary on the timing of electronic disclosures,
currently contained in comment 19(b)-2(v), would be redesignated as
comments 19(d)(2)(i)-2 and 19(d)(2)(ii)-1. Further, under the proposed
rule existing Sec. 226.17(a) would be revised to include the proposed
new Key Questions to Ask About Your Mortgage'' and ``Fixed vs.
Adjustable Rate Mortgages'' disclosures among the disclosures creditors
may provide without regard to the consumer-consent or other provisions
of the E-Sign Act.
Proposed Sec. 226.19(d)(3) contains rules for applications made by
telephone or through an intermediary. These rules are consistent with
existing comment 19(b)-2. Existing comments 19(b)-2(i) through -2(iii)
are redesignated as comments 19(d)(3)-1 through 19(d)(3)-3. Existing
comment 19(b)-2(iii) states that the creditor must include the
disclosures required by Sec. 226.19(b) with any application form the
creditor sends by mail to solicit consumers. This comment is
redesignated as proposed comment 19(d)(3)-3 and revised to cover the
Key Questions and Fixed versus Adjustable Rate Mortgages disclosures
required by proposed Sec. 226.19(c).
Proposed Sec. 226.19(d)(4) provides that, where a consumer does
not express interest in an ARM until after receiving or accessing an
application form or paying a non-refundable fee, the creditor must
provide an ARM loan program disclosure(s) within three business days
after the consumer expresses such interest to the creditor or the
creditor receives notice from an intermediary broker or agent that the
consumer has expressed interest in an ARM. This is consistent with
existing footnote 45b. Existing comment 19(b)-3 is redesignated as
comments 19(d)(3)-1 through 19(d)(3)-3 under the proposed rule.
Proposed Sec. 226.19(d)(5) provides that if the consumer expresses
an interest in negotiating loan terms that are not generally offered,
the creditor need not provide the disclosures required by Sec.
226.19(b) before an application form is provided. Proposed Sec.
226.19(d)(5) requires that the creditor provide such disclosures as
soon as reasonably possible after the terms to be disclosed have been
determined and not later than the time the consumer pays a non-
refundable fee. Further, proposed Sec. 226.19(d)(5) provides that in
all cases the creditor must provide the disclosures required by Sec.
226.19(c) of this section at the time an application form is provided
or before the consumer pays a non-refundable fee, including a fee for
obtaining a consumer's credit history, whichever is earlier.
Comment 19(b)(2)-1 currently provides that, if ARM loan program
disclosures cannot be provided because a consumer expresses an interest
in individually negotiating loan terms that the creditor generally does
not offer, the creditor may provide disclosures reflecting those terms
as soon as reasonably possible after the terms have been decided upon,
but not later than the time the consumer pays a non-refundable fee.
Proposed Sec. 226.19(d)(5) incorporates that guidance into the
regulation. Further, comment 19(b)(2)-1 provides that if, after an
application form is provided or the consumer pays a non-refundable fee,
a consumer expresses an interest in an adjustable-mortgage loan program
for which the creditor has not provided the ARM loan program
disclosures, the creditor must provide such disclosures as soon as
reasonably possible. Proposed Sec. 226.19(d)(6) incorporates that
guidance into the regulation. The foregoing guidance is removed from
comment 19(b)(2)-1 (which the proposed rule would redesignate as
comment 19(b)-4) because under the proposed rule timing rules for ARM
loan program disclosures are contained in Sec. 226.19(d) rather than
Sec. 226.19(b).
Section 226.20 Subsequent Disclosure Requirements
20(b) Assumptions
Section 226.20(b) currently requires post-consummation disclosures
if the creditor expressly agrees in writing with a subsequent consumer
to accept that consumer as a primary obligator on an existing
residential mortgage transaction. The Board proposes technical changes
to Sec. 226.20(b) and associated commentary to reflect the new format
and content disclosure requirements for transactions secured by real
property or a dwelling under Sec. Sec. 226.37 and 226.38.
20(c) Rate Adjustments
For ARM transactions subject to Sec. 226.19(b), Sec. 226.20(c)
currently requires creditors to mail or deliver to consumers a notice
of interest rate adjustment at least 25, but no more than 120, calendar
days before a payment at a new level is due. Section 226.20(c) also
requires creditors to mail or deliver to consumers an adjustment notice
at least once each year during which an interest rate adjustment is
implemented without an accompanying payment change.
Those adjustment notices must state: (1) The current and prior
interest rates for the loan; (2) the index values upon which the
current and prior interest rates are based; (3) the extent to which the
creditor has foregone any increase in the interest rate; (4) the
contractual effects of the adjustment, including the payment due after
the adjustment is made, and a statement of the loan balance; and (5)
the payment, if different from the payment due after adjustment, that
would be required to fully amortize the loan at the new interest rate
over the remainder of the loan term. Model clauses in Appendix H-4(H)
illustrate how creditors may comply with the requirements of Sec.
226.20(c).
Discussion
The Board adopted the requirements for post-consummation
disclosures (subsequent disclosures) in 1987. The minimum advance
notice of a rate adjustment was set at 25 days to track the rules of
the Office of the Comptroller of the Currency (OCC) and to provide
creditors with flexibility in giving adjustment notices for a variety
of ARMs. See 52 FR 48665, 48668; Dec. 24, 1987. Since 1987, ARMs have
grown in popularity, especially from 2003 to 2007. Beginning in 2007,
ARM growth began to slow as consumers experienced difficulty repaying
such loans and concerns grew about the risk of payment shock ARMs pose.
Because ARMs pose the risk of payment shock, it is critical that
consumers receive notice of ARM payment changes so they can prepare to
make higher payments if necessary. If
[[Page 43270]]
the new payments are unaffordable, borrowers need time to seek a
refinance loan with lower payments or make other arrangements. Even if
a consumer can afford a higher payment, the consumer may want to
refinance into a fixed-rate loan for payment certainty or into another
ARM loan with lower payments. It is particularly important that
consumers with subprime loans receive adequate notice before a payment
increase, as these borrowers tend to be more vulnerable to payment
shock.
The Board believes the current 25-day notice is insufficient to
allow many consumers to refinance into a loan with affordable payments
or to make other arrangements. In the ``Subprime Mortgage Guidance''
issued in 2007, the Board, the OCC, FDIC, OTS, and NCUA stated that
consumers should be given at least 60 days before an ARM adjustment in
which to refinance without paying a prepayment penalty. Several
consumer advocates who commented on the Board's 2008 HOEPA Final Rule
stated that consumers with subprime ARMs may need significant time in
which to seek out a refinancing, in some cases as much as 6 months.
The Board's Proposal
The Board proposes to require creditors to mail or deliver a notice
of an interest rate adjustment at least 60 days before payment at a new
level is due, instead of the current 25-day provision. Creditors would
provide notice annually where interest rate changes are made without
accompanying payment changes under the proposed. Proposed Sec.
226.20(c)(1)(i) contains timing requirements for circumstances where a
payment change accompanies an interest rate adjustment, and proposed
Sec. 226.20(c)(ii) contains timing requirements for circumstances
where no payment change accompanies interest rate changes made during a
year.
Proposed Sec. 226.20(c)(2) contains content requirements for
disclosures required where a payment change accompanies an interest
rate adjustment. Proposed Sec. 226.20(c)(3) contains content
requirements for disclosures required once each year where no payment
change accompanies an interest rate change. Whether or not a payment
change is made, under proposed Sec. 226.20(c)(4) creditors would
disclose the following information: (1) The date until which the
creditor may impose a prepayment penalty if the consumer prepays the
obligation in full, if applicable; (2) a phone number the consumer may
call to obtain additional information about the loan; and (3) a
telephone number and Internet Web site for HUD-licensed housing
counselors. Proposed Sec. 226.20(c)(5) contains formatting
requirements for discloses required by proposed Sec. 226.20(c).
Section 226.20(c) currently provides that an adjustment to the
interest rate with or without a corresponding adjustment to the payment
in an adjustable-rate mortgage subject to Sec. 226.19(b) is an event
requiring new disclosures to the consumer. The proposed rule would
retain this provision. Comment 20(c)-1 provides that the requirements
of Sec. 226.20(c) apply where the interest rate and payment change due
to the conversion of an adjustable-rate mortgage subject to Sec.
226.19(b) to a fixed-rate mortgage. The proposed rule would incorporate
this guidance into proposed Sec. 226.20(c). Further, the proposed rule
would revise comment 20(c)-1 for clarity and to remove commentary on
timing requirements, because timing requirements are contained in
proposed Sec. 226.20(c)(1).
The proposed rule would revise comment 20(c)-2 to clarify that
price-level adjusted mortgages and similar mortgages are not subject to
the disclosure requirements of Sec. 226.20(c) because they are not
subject to the disclosure timing requirements of Sec. 226.19(b), as
discussed above. The proposed rule would remove the commentary stating
that ``shared-equity'' and ``shared-appreciation'' mortgages are not
subject to the disclosure requirements of Sec. 226.20(c) to conform
with the removal of reference to such mortgages as examples of
variable-rate transactions from comment 17(c)(1)-11 (redesignated as
proposed comment 17(c)(1)(iii)-4), as discussed above. Under the
proposed rule, whether or not creditors must provide ARM adjustment
notices for a shared-equity or shared-appreciation mortgage depends on
whether such mortgage has an adjustable rate or a fixed rate. Shared-
equity and shared-appreciation mortgages with a fixed rate would not be
considered adjustable-rate mortgages under the proposed rule.
20(c)(1) Timing of Disclosures
The Board proposes to require creditors to mail or deliver a notice
of an interest rate adjustment for a closed-end ARM at least 60, but no
more than 120, days before payment at a new level is due. This proposal
is designed to provide borrowers with enough advance notice about an
impending rate and payment change to enable them to refinance the loan
if they cannot afford the adjusted payment. Even if consumers do not
need or want to refinance a loan, they may need time to adjust other
spending in order to afford higher mortgage loan payments.
The Board issued the current rule requiring 25 days' notice before
a payment at a new level is due in 1987. Home Mortgage Disclosure Act
(HMDA) data for the years 2004 through 2007 suggest that a requirement
to provide ARM adjustment 60, rather than 25, days before payment at a
new level is due more closely reflects the time needed for consumers to
refinance a loan.\44\ In each of those years, for first-lien refinance
loans, the period between loan application and origination was 25 days
or less for 50 percent of the loans originated, 45 days or less for 75
percent of the loans originated, and 65 days or less for 90 percent of
the loans originated. (These data do not include time needed to compare
available refinance loans.) Requiring creditors to provide an ARM
adjustment notice at least 60 days before payment at a new level is due
would better enable consumers to arrange to make a higher payment (if
applicable) without missing a payment or paying less than the amount
due.
---------------------------------------------------------------------------
\44\ HMDA data consist of information reported by about 8,600
home lenders, including all of the nation's largest mortgage
originators. Reported loans are estimated to represent about 80
percent of all home lending nationwide. Accordingly, HMDA data
likely provide a broadly representative view of U.S. home lending.
Robert B. Avery, Kenneth P. Brevoort, and Glenn B. Canner, The 2007
HMDA Data, 94 Fed. Reserve Bulletin A107 (Dec. 23, 2008).
---------------------------------------------------------------------------
The Board believes that a 60-day minimum notice requirement is
consistent with many existing ARM agreements. For most ARMs, creditors
base the calculation of interest rate changes on the value of an index
30 or 45 days prior to the effective date of a rate change (calculation
date). Creditors generally refer to the period from the calculation
date to the effective date of the interest rate change as the ``look-
back period.'' (Interest rate change dates tend to be the first of a
month to correspond with payment due dates.) In turn, payment in the
new amount is due on the first day of the month following the month in
which interest accrued at the new rate.
Thus, for most ARM loans creditors know what the new interest rate
and payment will be well before payment at a new level is due, even
assuming a week-long lag between publication of an index's level and
the creditor's verification of that level. In fact, many creditors mail
or deliver notice of an interest rate and payment change 60 or more
days before payment at a new level is due.
[[Page 43271]]
However, some ARM agreements may provide for shorter look-back
periods. For example, the calculation date for some ARM products is the
first business day of the month that precedes the effective date of the
interest rate change. The first day of that month may not be a business
day, in which case the look-back period would be fewer than 30 days. In
addition, it takes time for index levels to be reported and for
creditors to confirm the index level and prepare disclosures for
delivery or mailing.
Proposed Sec. 226.20(c)(1) requires creditors to provide advance
notice of an adjustment at least 60, but no more than 120, days before
payment at a new level is due, not before the interest rate changes.
Comment 20(c)-1 would be revised to reflect the increase in the
required advance notice of a payment adjustment. Proposed comment
20(c)(1)-1 provides that if an adjustable-rate feature is added when an
open-end credit account is converted to an adjustable-rate transaction,
creditors must provide disclosures under Sec. 226.20(c)(1) where
payments change due to conversion of a transaction subject to Sec.
226.19(b) to a fixed-rate transaction. Because relevant payment changes
under existing and proposed Sec. 226.20(c) are those due to interest
changes, proposed comment 20(c)(1)-2 clarifies that payment changes due
to adjustments in property tax obligations or premiums for mortgage-
related insurance do not trigger requirements to disclose interest rate
and payment adjustments.
The Board solicits comment on the operational changes creditors and
servicers would need to make to provide disclosures at least 60 days
before payment at a new level is due. Are there indices that are
published at times that would make compliance with such a rule
difficult? Are reported levels for particular indices difficult to
confirm within a few days? The Board requests comment on whether
requiring creditors to provide 45, rather than 60, days' advance notice
of a payment change better balance concerns about providing sufficient
notice to consumers and sufficient time for creditors to verify
reported indices and prepare disclosures.
A look-back period of 45 days likely provides ample time for a
creditor to determine a loan's new interest rate and provide
disclosures at least 60 days before payment at a new level is due, as
discussed above. Are there reasons why a look-back period of forty-five
days is not feasible for certain loan types for which a shorter look-
back period is common, for example, subordinate-lien loans? Also, where
an interest rate and payment adjustment is due to the conversion of an
adjustable-rate mortgage to a fixed-rate mortgage under a written
agreement, should creditors continue to be required to provide an
adjustment notice at least 25, rather than at least 60, days before
payment at a new level is due?
Coverage. Section 226.20(c) currently applies to transactions
subject to Sec. 226.19(b), which applies to closed-end ARMs secured by
a consumer's principal dwelling with a term greater than one year. The
Board is proposing to apply Sec. 226.19(b) to all closed-end ARMs
secured by real property or a dwelling, as discussed above. Proposed
Sec. 226.20(c) would apply to the same category of transactions.
The Board recognizes that currently creditors need not provide ARM
adjustment notices under existing Sec. 226.20(c) for a short-term
transaction, such as a construction loan, with an adjustable rate. The
Board solicits comment on whether a 60-day notice period is appropriate
for such loans and if not, what period would be appropriate and still
provide consumers sufficient notice of a payment change.
Existing ARM loan agreements. The Board is aware that some ARM loan
agreements may provide for a look-back period that is too short for the
creditor to be able to provide an adjustment notice at least 60 days
before payment at a new level is due. The Board seeks comment on the
number or proportion of existing ARM loan agreements under which
creditors or servicers could not comply with a minimum 60-day advance
notice requirement.
20(c)(2)(i)
Where a payment change accompanies an interest rate change,
proposed Sec. 226.20(c)(2)(i) requires creditors to disclose a
statement that changes are being made to the interest rate and the date
such change is effective. Proposed Sec. 226.20(c)(2)(i) also requires
creditors to state that more detailed information is available in the
loan agreements. Proposed Sec. 226.20(c)(5)(ii) requires that these
disclosures appear before the other required disclosures, as discussed
below.
20(c)(2)(ii)
Proposed Sec. 226.20(c)(2)(ii) requires creditors to provide the
following disclosures for covered loans in the form of a table: (1) The
current and new interest rates; (2) if payments are interest-only or
negatively amortizing, the amount of the current and new payment
allocated to pay interest, principal, and property taxes and mortgage-
related insurance, as applicable; and (3) the current and new periodic
payment amounts and the due date for the first new payment. This
content is substantially similar to the content of the ``Payment
Summary'' table in the TILA disclosures provided before consummation
for most types of ARMs. (Under proposed Sec. 226.38, the ``Payment
Summary'' table for negatively amortizing ARMs differs from the
``Payment Summary'' table for other ARMs, as discussed below.) Under
proposed Sec. 226.20(c)(5)(iii), this table would have to contain
headings, content, and format substantially similar to those in
Appendix H-4(G), as discussed below.
Currently, ARM adjustment notices need not state how payments are
allocated among principal, interest, and escrow accounts. The Board
believes that a table showing payment allocations would benefit
consumers with interest-only or negatively amortizing loans.
Participants in the Board's consumer testing generally understood a
sample form with a table showing the transition from interest-only
payments to payments of both principal and interest. Further, all
participants correctly identified the new payment and the due date of
the first payment at the new level shown in the table. Almost all
participants recognized the increase in the interest rate and amounts
escrowed for taxes and property-related insurance and that part of the
new payment would be allocated to pay principal.
Comment 20(c)(1)-1 on disclosing ``current'' and ``prior'' interest
rates would be revised for clarity to refer instead to ``current'' and
``new'' interest rates. Under the proposed rule, Sec. 226.20(c)(3)
contains content requirements for annual notice disclosures and Sec.
226.20(c)(2) contains content requirements for payment change notices.
Accordingly, commentary on disclosure where no payment change has
occurred during a year would be removed from comment 20(c)(1)-1.
20(c)(2)(iii)
Creditors currently must disclose the index values upon which the
prior and new interest rates are based, under existing Sec.
226.19(c)(2). Some consumer testing participants had difficulty
understanding the relationship among an index, a margin, and an
interest rate. Accordingly, proposed Sec. 226.20(c)(2)(iii)
substitutes a requirement that disclosures contain a description of the
change in the index or formula for the disclosure required under
existing Sec. 226.20(c)(2). For example, rather than
[[Page 43272]]
disclose that payments previously were based on a 1-year LIBOR rate of
3.75 and now would be based on a new rate of 5.75, a creditor might
disclose the following: ``Your interest rate will change due to an
increase in the 1-year LIBOR index.'' Further, proposed Sec.
226.20(c)(2)(iii) requires creditors to disclose any application of
previously foregone increases together with the description of the
change in the index or formula.
A simple statement of the occurrence that caused the interest rate
and payment to change likely conveys a level of information suitable
for most consumers' needs. In consumer testing conducted for the Board,
participants indicated that they found explanations of interest rates
difficult to follow. Thus, providing more information would likely
result in information overload. Consumers who prefer more information
can review the loan agreement to determine the interaction between the
interest rate and the index and margin or to learn more about the
formula used to determine the interest rate. The loan agreement also
will contain information about how the creditor may apply previously
foregone interest. For these reasons, proposed Sec. 226.20(c)(2)(ii)
does not require creditors to disclose the current and prior index
values. Comment 20(c)(2)-1 would be removed accordingly.
Comment 20(c)(4)-1, which discusses the types of contractual
effects Sec. 226.20(c) requires creditors to disclose--for example,
effects on the loan term and balance--also would be removed under the
proposed rule. Proposed comments 20(c)(2)(vi)-2, 20(c)(2)(vii)-1, and
20(c)(3)(v)-1 reflect the removed commentary, however.
20(c)(2)(iv)
Existing Sec. 226.20(c)(3) requires that a creditor disclose the
extent to which the creditor has foregone any increase in the interest
rate. This requirement would be redesignated as proposed Sec.
226.20(c)(2)(iv). Further, proposed Sec. 226.20(c)(iv) would require
creditors to disclose the earliest date a creditor may apply foregone
interest to future adjustments, subject to any rate caps. Proposed
comment 20(c)(3)(iv)-1 states that creditors may rely on proposed
comment 20(c)(2)(iv)-1 in determining to which transactions the
requirement to disclose foregone interest applies and how to disclose
such increases. Proposed comment 20(c)(3)(iv)-1 clarifies that
creditors need not disclose the earliest date the creditor may apply
foregone interest in notices provided annually when no payment change
occurs during a year.
20(c)(2)(v)
Proposed Sec. 226.20(c)(2)(v) would require creditors to disclose
limits on interest rate or payment increases at each adjustment, if
any, and the maximum interest rate or payment over the life of the
loan. This is consistent with the disclosure of rate change limits in
the ``More Information about Your Payments'' section of the disclosures
provided within three business days of application. See proposed Sec.
226.38(e).
20(c)(2)(vi)
Currently, where the required loan payment is different from the
payment disclosed under Sec. 226.20(c)(4), Sec. 226.20(c)(5) requires
a creditor to disclose the payment required to fully amortize the loan
over the remainder of the loan term. This requirement would be
redesignated as proposed Sec. 226.20(c)(2)(vi). Further, in all cases
creditors would disclose a statement regarding whether or not part of
the new payment will be allocated to pay the loan principal. This is
consistent with the focus on the impact of loan payments on loan
principal in the proposed new ``Key Questions'' disclosure in Sec.
226.19(c) and the ``Key Questions about Risk'' section of the
disclosure creditors provide within three business days of application
in proposed Sec. 226.38(d).
Existing comment 20(c)(5)-1, on fully amortizing payments, would be
redesignated as comment 20(c)(2)(vi)-1. The comment also would be
revised for clarity and to update cross-references. Consistent with
existing comment 20(c)(4)-1, proposed comment 20(c)(2)(vi)-2 clarifies
that the creditor must disclose any change in the term or maturity of
the loan if the change resulted from the rate adjustment.
20(c)(2)(vii)
Existing Sec. 226.20(c)(4) requires creditors to disclose the loan
balance. This requirement would be redesignated as proposed Sec.
226.20(c)(2)(vii) and would require creditors to disclose the loan
balance as of the effective date of the interest rate adjustment.
Proposed comment 20(c)(2)(vii)-1 clarifies that the balance required to
be disclosed is the balance on which the new adjusted payment is based.
This is consistent with existing comment 20(c)(4)-1.
20(c)(3) Content of Annual Interest Rate Notice
Existing Sec. 226.20(c) requires creditors to provide ARM
adjustment notices at least once each year during which an interest
rate adjustment is implemented without an accompanying payment change.
This requirement would be redesignated as proposed Sec. 226.20(c)(3).
Currently, Sec. 226.20(c) contains a single list of required
disclosures creditors must provide as applicable, in a payment change
notice and an annual notice of interest rate changes without payment
changes. Proposed Sec. 226.20(c)(3) specifies the disclosures that are
applicable for purposes of annual notices.
20(c)(3)(i)
Under proposed Sec. 226.20(c)(3)(i), where no payment adjustment
has been made during a year, the creditor must disclose that the
interest rate on the loan has changed without changing the payments the
consumer must make. Further, proposed Sec. 226.20(c)(3)(i) requires
creditors to disclose the specific time period for which the annual
notice discloses interest rates that were not accompanied by payment
changes. Proposed Sec. 226.20(c)(5)(ii) requires that this disclosure
appear before the other required disclosures, as discussed below.
20(c)(3)(ii)
Under proposed Sec. 226.20(c)(3)(ii), a creditor must disclose the
highest and lowest interest rates applied during the year in which no
payment change has accompanied interest rate changes. Creditors would
not disclose all interest rates applied to a transaction if the payment
has not changed. By contrast, existing comment 20(c)-1 provides that
creditors either may disclose all interest rates that applied or the
highest and lowest rates. The Board believes that a simple and clear
disclosure of the highest and lowest interest rates applied better
conveys to consumers the impact of interest rate changes than does a
list of all of the interest rates applied. This is especially true
where interest rates change more frequently than monthly.
20(c)(3)(iii)
Creditors disclose the extent to which the creditor has foregone
any increase in the interest rate under existing Sec. 226.20(c)(3).
This requirement would be contained in proposed Sec. 226.20(c)(3)(iii)
for notices where payment changes do not accompany interest rate
changes made during a year.
20(c)(3)(iv)
Proposed Sec. 226.20(c)(3)(iv) requires creditors to disclose the
maximum interest rate that may apply over the life of the loan. This is
consistent with the disclosure of rate change limits in the ``More
Information about Your Payments'' section of the disclosures
[[Page 43273]]
provided within three business days of application in proposed Sec.
226.38(e).
20(c)(3)(v)
Existing Sec. 226.20(c)(4) requires creditors to disclose the loan
balance. Under the proposal, this requirement would be contained in
proposed Sec. 226.20(c)(3)(v) for purposes of annual notices where
payment changes do not accompany interest rate changes. Creditors would
disclose the loan balance as of the last date of the year covered by
the disclosure. Proposed comment 20(c)(3)(v)-1 clarifies that the
balance required to be disclosed is the balance on which the new
adjusted payment is based. This is consistent with existing comment
20(c)(4)-1.
20(c)(4) Additional Information
Proposed Sec. 226.20(c)(4) requires that ARM adjustment notices
creditors provide information about prepayment penalties, contacting
the creditor, and locating housing counseling resources. Proposed Sec.
226.20(c)(5)(ii) requires that these additional disclosures be located
directly below the required interest rate disclosures, as discussed
below.
20(c)(4)(i)
Proposed Sec. 226.20(c)(4)(i) requires creditors to disclose the
last date the creditor may impose a penalty if the consumer prepays the
obligation in full and the amount of the maximum penalty possible
before that date, if applicable. Under proposed Sec. 226.20(c)(4)(i),
if an ARM has a prepayment penalty, the creditor must disclose the
required information whether or not a payment change accompanies the
interest rate change. The Board believes that disclosures regarding a
prepayment penalty would assist consumers in determining when to seek a
refinance loan. When presented with a sample ARM adjustment notice for
a loan with a prepayment penalty, almost all consumer testing
participants recognized that a prepayment penalty would apply if they
obtained a refinance loan before a specified date.
Proposed Sec. 226.20(c)(4)(i) provides that the creditor shall
disclose the maximum prepayment penalty possible if the consumer
prepays in full between the date the creditor delivers or mails the ARM
adjustment notice and the last day the creditor may impose the penalty.
The Board requests comment on whether creditors should determine the
maximum prepayment penalty during some other period, for example
between the date the creditor prepares the ARM adjustment notice and
the last day the creditor may impose the penalty.
20(c)(4)(ii)
Proposed Sec. 226.20(c)(4)(ii) requires creditors to disclose a
phone number to call for additional information about the consumer's
loan. Creditors must provide this information whether or not a payment
change accompanies an interest rate change, under the proposed rule.
Most consumer testing participants responded positively to tested
disclosures stating how to contact their lender with questions and
stated that they would call their lender if they realized they were
unable to afford higher payments on an ARM.
20(c)(4)(iii)
Proposed Sec. 226.20(c)(4)(iii) requires creditors to disclose a
phone number and an Internet Web site consumers may use to obtain a
list of HUD-licensed housing counselors. The proposed rule requires
creditors to provide this disclosure whether or not a payment change
accompanies an interest rate change. Most consumer testing participants
thought that information about how to locate a HUD-licensed housing
counselor would be useful to consumers. Some said that they would use
the information themselves if they had difficulty affording payments.
20(c)(5) Format of Disclosures
20(c)(5)(i)
Proposed Sec. 226.20(c)(5)(i) requires that the heading, content,
and format of the disclosures required by Sec. 226.20(c) be
substantially similar to the heading, content, and format of the model
form in Appendix H-4(G), where an interest rate adjustment is
accompanied by a payment change, or the model form in Appendix H-4(K),
where a creditor provides an annual notice of interest rate adjustments
without an accompanying payment change. Proposed Sec. 226.20(c)(5)(i)
also requires that the disclosures required by Sec. 226.20(c) be
placed in a prominent location. (Comment 37(d)-1 states that
disclosures meet the prominent location standard if they are located on
the first page and on the front side of the disclosure statement.)
Further, under proposed Sec. 226.20(c)(5)(i) the interest rate
disclosures required by Sec. 226.20(c)(2) (where a payment change
accompanies an interest rate change) or Sec. 226.20(c)(3) (where no
payment change occurs during a year) must be grouped together with the
additional disclosures on prepayment penalties, contacting the creditor
or servicer for loan information, and locating housing counseling
resources required by proposed Sec. 226.20(c)(4). These grouped
disclosures must be segregated from everything else.
20(c)(5)(ii)
Under proposed Sec. 226.20(c)(5)(ii), the statement that changes
are being made to the interest rate and payments (under proposed Sec.
226.20(c)(2)(i)) or that the interest rate has changed without
accompanying payments changes (under proposed Sec. 226.20(c)(3)(i))
must precede the other required disclosures. The additional disclosures
on information on prepayment penalties, contacting the creditor, and
housing counseling resources required by proposed Sec. 226.20(c)(4)
must follow the interest rate disclosures, under proposed Sec.
226.20(c)(5)(ii).
20(c)(5)(iii)
Under proposed Sec. 226.20(c)(5)(iii), where a payment change
accompanies an interest rate adjustment, the interest rate and payment
change disclosures required by proposed Sec. 226.20(c)(2)(ii) must
contain headings, content, and format substantially similar to those in
the table contained in Appendix H-4(G). The textual disclosures
required by proposed Sec. 226.20(c)(2)(iii) through (vii) must be
located directly below the table. Further, the format requirements in
Sec. 226.37 apply to ARM adjustment notices, as discussed below.
Regulations of other agencies. Footnote 45c to Sec. 226.20(c)
currently states that creditors may substitute information provided in
accordance with variable-rate subsequent disclosure regulations of
other federal agencies for the disclosure required by Sec. 226.20(c).
The Board adopted footnote 45c in 1987, a time when OCC, FHLBB, and HUD
regulations contained subsequent disclosure requirements for ARMs. See
52 FR 48665, 48671; Dec. 24, 1987. The proposed rule would remove
footnote 45c. No comprehensive disclosure requirements for variable-
rate mortgage transactions presently are in effect under the
regulations of the other Federal financial institution supervisory
agencies, as discussed above.
20(d) Periodic Statement for Negative Amortization Loans
The Board proposes to require creditors to provide periodic
statements for payment option ARMs with a negative amortization feature
that are secured by real property or a dwelling. Such ARMs permit
consumers to choose the amount paid (above a specified minimum) each
period. In 2006, the Board, the OCC, the OTS, the FDIC, and the NCUA
expressed concerns about
[[Page 43274]]
consumer understanding of how such loans function and of the effect of
negative amortization on a loan's balance in the Interagency Guidance
on Nontraditional Mortgage Product Risks issued in 2006. 71 FR 58609;
October 4, 2006. The agencies issued related sample illustrations that
include a payment summary table showing the impact of various payment
options on the loan balance that creditors may include with periodic
statements for payment option ARMs. 72 FR 31825, 31831; Jun. 8, 2007.
The illustrations were not consumer-tested. The Board's proposed model
table showing payment options is similar to the summary table the
agencies issued but has been revised based on consumer testing.
Payment option ARMs are complex products. Most participants in the
Board's consumer testing were unfamiliar with such loans and with
negative amortization generally. These loans present consumers with
choices each month, and how the consumer exercises his or her choice
may result in negative amortization and much higher payments when the
consumer must begin to make fully amortizing payments or a balloon
payment. The Board believes that consumers should be informed of the
consequences of making minimum payments on such a loan. Thus, the Board
proposes to require creditors to provide a periodic statement that
describes a consumer's payment options and the effects of making
payments in those amounts.\45\
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\45\ The Federal financial institution supervisory agencies (the
Board, the OCC, the OTS, the FDIC, and the NCUA (collectively, the
agencies)) expressed concerns about consumer understanding of how
such loans function and of the effect of negative amortization on a
loan's balance in the Interagency Guidance on Nontraditional
Mortgage Product Risks issued in 2006. 71 FR 58609; October 4, 2006.
The agencies issued related sample illustrations that include a
payment summary table showing the impact of various payment options
on the loan balance that creditors may include with periodic
statements for payment option ARMs. 72 FR 31825, 31831; Jun. 8,
2007. Proposed Sec. 226.20(d) requires creditors to provide
periodic statements that disclose payment options in the form of a
table. The proposed model table is similar to the summary table the
agencies issued but has been revised based on consumer testing.
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20(d)(1) Timing and Content of Disclosures
For closed-end transactions secured by real property or a dwelling
that permit the consumer to select among multiple payment options that
include an option that results in negative amortization, proposed Sec.
226.20(d) requires creditors to provide a periodic statement that
discloses payment options not later than fifteen business days before a
payment is due. Where payment at a new level is due, however, proposed
Sec. 226.20(c) requires creditors to provide an ARM adjustment notice
no later than 60 days beforehand, as discussed above.
20(d)(1)(i) Payment
Proposed Sec. 226.20(d)(1)(i) would require creditors to disclose,
based on the interest rate in effect at the time the disclosure is
made, the payment amount required to: (1) Pay off the loan balance in
full by the end of the term through regular periodic payments, without
a balloon payment; (2) prevent negative amortization, if the legal
obligation explicitly permits the consumer to elect to pay interest
only without paying principal; and (3) pay the minimum payment required
under the legal obligation. Under the proposed rule, creditors would
provide each disclosure as applicable. For example, if the terms of the
loan obligation did not provide the option for consumers to make
interest-only payments, creditors would disclose only the required
minimum payment and the fully amortizing payment.
In consumer testing conducted for the Board, participants generally
understood the options presented in the table. Most were able to
understand that making the minimum required payment would cause their
loan balance to grow. They also understood that making a fully
amortizing payment would be a safe choice and would pay their loan
balance off over time.
Proposed comment 20(d)(1)-1 clarifies that creditors must provide a
summary table under Sec. 226.20(d) for covered loans that allow a
consumer to choose to make a payment that results in negative
amortization even if the initial payments required do not negatively
amortize the loan. Proposed comment 20(d)(1)-1 states that a payment
summary table need only contain those disclosures that apply to payment
options available to a consumer, however. For example, the proposed
comment states that if a negatively amortizing loan recasts and a
consumer must begin to make fully amortizing payments, the payment
summary table need not disclose payments other than the fully
amortizing payment.
Proposed comment 20(d)(1)-2 states that creditors may base all
disclosures on the assumption that payments will be made on time and in
the amounts required by the terms of the legal obligation, disregarding
any possible inaccuracies resulting from consumers' payment patterns.
This is consistent with existing comment 17(c)(2)(i)-3 and proposed
revisions to comment 17(c)(1)-1, discussed above. Proposed comment
20(d)(1)-2 clarifies, however, that creditors may not base disclosures
for loans with a negatively amortizing feature on the fully amortizing,
interest-only, or other payment unless that payment is the amount the
consumer is required to pay under the legal obligation. Finally,
proposed comment 20(d)(1)(i)-1 states that creditors may rely on
comment 38(c)(5)-1 to determine whether a payment is a regular periodic
payment or a balloon payment.
20(d)(1)(ii) Effects
Proposed Sec. 226.20(d)(1)(ii) requires creditors to disclose the
effects of making payments in the amounts required to be disclosed
under proposed Sec. 226.20(d). Appendix H-4(L) contains a proposed
model form with accessible language on fully amortizing payments,
interest-only payments, and negatively amortizing minimum payments.
First, the model form states that a fully amortizing payment will cover
all the interest owed in a particular payment plus some principal and
decrease the loan balance and that if the consumer regularly makes the
fully amortizing payment the consumer will pay off the loan on
schedule. Second, the model form states that an interest-only payment
will cover all the interest owed in a particular payment but none of
the principal, that the consumer's balance will remain the same, and
that if the consumer regularly makes interest-only payments the
consumer will have to make larger payments as early as a specified
date. Third, the model form states that a minimum payment will cover
only part of the interest owed in a particular payment and result in a
specified amount of unpaid interest being added to the loan balance and
that if the consumer makes a minimum payment the consumer in effect
will be borrowing more money and will lose home equity. Further, the
model form states that if a consumer regularly makes minimum payments
the consumer will have to make significantly larger payments as early
as a specified date.
Proposed comment 20(d)(1)(ii)-1 states that the disclosures
required by Sec. 226.20(d) must be consistent with the terms of the
legal obligation. For example, the proposed comment clarifies that
disclosures may not state that making fully amortizing payments on an
interest-only loan will reduce a consumer's loan balance if the
creditor will not apply payments that exceed the interest-only payment
to principal.
[[Page 43275]]
20(d)(1)(iii) Unpaid Interest
Proposed Sec. 226.20(d)(1)(iii) requires creditors to disclose the
amount that will be added to the loan balance due to unpaid interest,
if the consumer elects to make a payment that results in negative
amortization.
20(d)(2) Format of Disclosures
Proposed Sec. 226.20(d)(2)(i) requires that periodic statements
for loans with a negative amortization feature contain payment
disclosures with content substantially similar to the content of Form
H-4(L) in Appendix H. Further, the proposed provision requires
creditors to make payment disclosures in a payment summary table with
headings, content, and format substantially similar to Form H-4(L).
Proposed Sec. 226.20(d)(2)(ii) requires that disclosures be placed in
a prominent location (that is, located on the first page and on the
front side of the disclosure statement, as clarified by proposed
comment 37(d)(1)-1), with one exception. Under proposed Sec.
226.20(d)(2)(ii), if the payment disclosures required by Sec.
226.20(d) are made together with the ARM adjustment disclosures
required by Sec. 226.20(c), the payment disclosures must be located
directly below the ARM adjustment disclosures.
Proposed Sec. 226.20(d)(2)(iii) requires that the table required
by Sec. 226.20(d)(2)(i) contain only the information required by Sec.
226.20(d)(1). Other information may be presented with the table under
the proposed rule, provided that such information appears outside of
the required table.
Alternatives not proposed. The Board is proposing to apply the
requirement to provide periodic statements that contain a payment
summary table, for payment option ARMs with a negative amortization
feature that are secured by real property or a dwelling. The Board
considered requiring periodic statements for all loans secured by real
property or a dwelling. The Board is not proposing such a requirement,
however. It is not clear that a monthly statement on a fixed-rate
mortgage or an ARM without payment options would provide sufficient
benefits to consumers to offset the costs of providing statements. For
these loans, the consumer cannot exercise any choice in payments.
Moreover, creditors must give borrowers advance notice each time the
required payment for a variable-rate transaction adjusts, under Sec.
226.20(c), as discussed above. Servicers send borrowers with escrow
accounts annual statements under RESPA. Some servicers send additional
escrow notices more frequently, for example quarterly. Those statements
assist consumers in monitoring account changes related to changes in
taxes or property insurance costs.
20(e) Creditor-Placed Property Insurance
Creditor-placed property insurance requirements. The security
instrument or promissory note typically contains a requirement that the
consumer maintain insurance on the property securing the loan, such as
the consumer's dwelling or automobile. If the consumer fails to
maintain the insurance or the insurance is cancelled, the credit
agreement typically authorizes the creditor to obtain such insurance at
the consumer's expense. The premium becomes additional debt of the
consumer. This practice is known as ``creditor-placed property
insurance.''
Industry reports indicate that the volume of creditor-placed
property insurance premiums has increased significantly in the past few
years.\46\ Consumers struggling financially may fail to pay required
property insurance premiums unaware that the creditor has the right to
obtain such insurance on their behalf and add the premiums to the
outstanding loan balance.\47\ In some instances, creditors have
improperly obtained property insurance when they arguably knew or
should have known that the consumer already had insurance.\48\
Generally, creditor-placed insurance is more costly and provides less
coverage than insurance that a consumer purchases through an insurance
agent.\49\
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\46\ See, e.g., Consumer Credit Industry Association, Fact Book
of Credit-Related Insurance at 1 (2007) (finding that the 2007
volume of creditor-placed property insurance premiums was over twice
the 2002 amount).
\47\ See State of Wisconsin, Office of the Commissioner of
Insurance, ``Force-Placed'' Insurance Surprises Those Who Let
Policies Lapse (May 30, 2002) available at http://oci.wi.gov/pressrel/0502home.htm (``Many people don't realize that if they let
that [homeowner's] insurance lapse, banks and other lenders can
legally re-insure their home loan by buying insurance to replace it
and making the homebuyer pay for it.'').
\48\ See, e.g., United States of America v. Fairbanks Capital
Corp., Civ. Action No. 03-12219-DPW, Complaint at ] 17 (D. Mass.
Nov. 12, 2003) (finding that Fairbanks improperly obtained property
insurance when it knew or should have known that borrowers already
had insurance); Ocwen Federal Bank FSB, OTS Docket No. 04592,
Supervisory Agreement, OTS Docket No. 04592 (Apr. 19, 2004)
(requiring the bank to take reasonable actions to determine whether
appropriate hazard insurance is already in place before it obtained
creditor-placed property insurance).
\49\ See, e.g., Webb, et al. v. Chase Manhattan Mortgage Corp.,
No. 2:05-CV-0548, 2008 U.S. Dist. LEXIS 42559, at *15 (S.D. Ohio May
28, 2008) (finding that the creditor-placed property insurance
premium was four times higher than the plaintiff's original premium
and did not cover personal property or provide coverage for personal
liability or medical payments to others).
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Currently, there is no provision in Regulation Z or federal law
that requires the creditor to provide notice of the cost to the
consumer before charging the consumer for creditor-placed property
insurance. It appears that only a few states require creditors to
provide notice, and these requirements differ. Under Michigan law, for
example, a creditor may not impose charges on a debtor for creditor-
placed property insurance unless the creditor provides two notices and
allows the borrower a total of 30 days to provide evidence of
insurance.\50\ New Mexico law, on the other hand, simply requires the
insurer to provide notice to the debtor within 15 days after the
placement or renewal of creditor-placed property insurance.\51\ The
majority of states have no notice requirement. The servicing guidelines
of Fannie Mae and Freddie Mac also vary greatly. Fannie Mae's
guidelines state that the servicer ``should'' provide the borrower with
at least one written notice and a total of at least 60 days to provide
evidence of insurance before charging for creditor-placed property
insurance.\52\ Freddie Mac's guidelines do not require the servicer to
provide notice to the borrower.\53\
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\50\ Mich. Comp. Laws Sec. 500.1625 (2009).
\51\ N.M. Admin. Code Sec. 13.18.3.17 (2009).
\52\ Fannie Mae Single-Family Servicing Guide, Part II, Ch. 6
Lender-Placed Property Insurance (2005).
\53\ Freddie Mac Single-Family Seller/Servicer Guide, Vol. 2,
Sec. 58.9 Special Insurance Requirements and Changes in Insurance
Requirements (2007).
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In order to ensure that consumers are informed of the cost of
creditor-placed property insurance, the Board proposes to use its
authority under TILA Section 105(a), 15 U.S.C. 1604(a), to add Sec.
226.20(e) to require the creditor to provide notice of the cost and
coverage of creditor-placed property insurance before charging the
consumer for such insurance. In addition, proposed Sec. 226.20(e)(4)
would require the creditor to provide the consumer with evidence of
creditor-placed property insurance within 15 days of imposing a charge
for such insurance. Proposed Sec. 226.20(e)(1) would define
``creditor-placed property insurance'' as ``property insurance coverage
obtained by the creditor when the property insurance required by the
credit agreement has lapsed.'' Section 226.20(e) would apply to secured
closed-end loans, including mortgage and automobile loans. The Board
solicits comment as to whether this rule should also apply to HELOCs.
Proposed Sec. 226.20(e)(2) contains three conditions for charging
for creditor-
[[Page 43276]]
placed property insurance. First, proposed Sec. 226.20(e)(2)(i) would
require the creditor to make a reasonable determination that the
required property insurance had lapsed. Second, proposed Sec.
226.20(e)(2)(ii) would require the creditor to mail or deliver to the
consumer a written notice containing the information required by the
proposed rule at least 45 days before a charge is imposed on the
consumer for the creditor-placed property insurance. Finally, proposed
Sec. 226.20(e)(2)(iii) would permit the creditor to charge the
consumer if, during the 45-day notice period, the consumer did not
provide the creditor with evidence of adequate property insurance.
Notice period timing and charges. Under the proposed rule, the
creditor would have to mail or deliver to the consumer the required
written notice at least 45 days before charging the consumer for the
cost of creditor-placed property insurance. This 45-day notice period
is consistent with the 45-day notice period required by the Flood
Disaster Protection Act of 1973 Section 102(e), 42 U.S.C. 4012a(e), and
represents the midpoint between State law 30-day notice periods \54\
and the 60-day Fannie Mae Servicing Guide recommendation.\55\ The Board
notes that the provision in the Fannie Mae Servicing Guide is stated as
a recommendation, but not a requirement. The Board believes that a 45-
day notice period would allow the consumer reasonable time to shop for
and provide evidence of insurance. The Board recognizes that it may
take several days for the consumer to receive a notice sent by mail,
but the consumer would still have at least one calendar month in which
to shop for and purchase property insurance. Comment is solicited,
however, on whether a different time period would better serve the
needs of consumers and creditors.
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\54\ See Ark. Code Ann. Sec. 23-101-113 (2008); Mich. Comp.
Laws Sec. 500.1625 (2009); Miss. Code Ann. Sec. 83-54-25 (2008);
Tenn. Code Ann. Sec. 56-49-113 (2009).
\55\ Fannie Mae Single-Family Servicing Guide, Part II, Ch. 6
Lender-Placed Property Insurance (2005).
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Proposed comment 20(e)-1 would make clear that if the creditor
complies with Sec. 226.20(e), the creditor could charge the consumer
for creditor-placed insurance as of the 46th day after sending the
notice to the consumer. For example, a creditor that mails the required
notice on January 2, 2011, may begin to charge the consumer for the
cost of the creditor-placed property insurance on February 18, 2011.
Proposed comment 20(e)-1 would also clarify that the creditor may
charge the consumer for the cost of any required property insurance
obtained during the 45-day notice period if such charge is not
prohibited by applicable State or other law.
Content and format of notice. Proposed Sec. 226.20(e)(3) would
require the creditor to provide the written notice clearly and
conspicuously. Proposed Sec. 226.20(e)(3)(i) would require that the
notice contain the creditor's name and contact information, the loan
number, and the address or description of the property securing the
credit transaction. The Board solicits comment as to whether the
creditor should be required to establish a local or toll-free telephone
number for the consumer to contact the creditor.
Under proposed Sec. 226.20(e)(ii)-(viii), the notice would also
need to contain the following statements: (1) That the consumer is
obligated to maintain insurance on the property securing the credit
transaction; (2) that the required property insurance has lapsed; (3)
that the creditor is authorized to obtain the property insurance on the
consumer's behalf; (4) the date the creditor can charge the consumer
for the cost of the creditor-placed property insurance; (5) how the
consumer may provide evidence of property insurance; (6) the cost of
the creditor-placed property insurance stated as an annual premium, and
that this premium is likely significantly higher than a premium for
property insurance purchased by the consumer; and (7) that the
creditor-placed insurance may not provide as much coverage as
homeowner's insurance. The Board solicits comment on whether the notice
should also contain statements, if applicable, that the creditor will
receive compensation for obtaining creditor-placed property insurance
and that the creditor will establish an escrow account to pay for the
creditor-placed insurance premium. Although such statements would be
informative, the Board is concerned that providing these additional
disclosures could result in information overload for the consumer. A
Model Clause is proposed at Appendix H-18.
The Board proposes to use its authority under TILA Section 105(a),
15 U.S.C. 1604(a), to add Sec. 226.20(e) to require the creditor to
provide notice before charging the consumer for the cost of creditor-
placed property insurance. TILA Section 105(a), 15 U.S.C. 1604(a),
authorizes the Board to prescribe regulations to carry out the purposes
of the act. TILA's purpose includes promoting ``the informed use of
credit,'' which ``results from an awareness of the cost thereof by
consumers.'' TILA Section 102(a), 15 U.S.C. 1601(a). Currently, few
consumers are aware of the cost or coverage of creditor-placed property
insurance, or that the premiums become additional debt of the consumer.
The Board believes that this proposed rule would inform consumers of
the cost and coverage of the creditor-placed property insurance and
avoid the uninformed use of credit. In addition, this proposed rule
would not prohibit the creditor from charging for creditor-placed
property insurance, but would simply delay the charge until the
consumer has been provided sufficient notice of the cost and sufficient
time to shop for his or her own homeowner's insurance.
Section 226.25 Record Retention
25(a) General Rule
Section 226.25(a) provides that creditors must retain records to
evidence compliance with Regulation Z for two years. As discussed in
detail below, the Board is proposing to add a new comment to Sec.
226.25(a) to provide guidance on record retention requirements relating
to proposed Sec. 226.36(d)(1), which would prohibit any person from
paying compensation to a loan originator based on any of the terms or
conditions of the transaction. Proposed comment 25(a)-5 would provide
that, to evidence compliance with proposed Sec. 226.36(d)(1), a
creditor must retain for each covered transaction a record of the
agreement between it and the loan originator that governs the
originator's compensation and a record of the amount of compensation
actually paid to the originator in connection with the transaction.
Section 226.27 Language of Disclosures
Currently, Sec. 226.27, permits TILA disclosures in a language
other than English as long as the disclosures are provided in English
upon the consumer's request. Many consumers do not speak English or
speak English as a second language. According to the 2000 Census, at
least 18% of the population (47 million people) speak a language other
than English at home.\56\ To protect non-native English speakers from
fraud and discrimination in credit transactions, recent enforcement
actions have required that creditors or mortgage brokers provide
translations of presentations, disclosures, or documents.\57\ Moreover,
several states
[[Page 43277]]
have enacted laws to require credit disclosures or documents in Spanish
or other foreign languages.\58\ In 2006, Fannie Mae and Freddie Mac
announced the availability of non-executable Spanish translations of
the Fannie Mae/Freddie Mac Uniform Instrument to help the residential
mortgage industry better serve Spanish-speaking consumers.\59\ Finally,
Congress recently asked the General Accounting Office to conduct a
study examining the relationship between fluency in English and
financial literacy, and the extent, if any, to which individuals whose
native language is not English are impeded in the conduct of their
financial affairs.\60\
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\56\ U.S. Census Bureau, Language Use and English-Speaking
Ability: 2000 at 2 (Oct. 2003), available at http://www.census.gov/prod/2003pubs/c2kbr-29.pdf.
\57\ See, e.g., In the Matter of First Mariner Bank, Baltimore,
Maryland, FDIC-07-285b, FDIC-08-358k, Consent Agreement at 5 (April
22, 2009) (alleging that the bank discriminated against Hispanics,
African-Americans, and women by charging them higher prices for
residential mortgage loans and requiring the bank to provide
financial literacy courses in English and Spanish); Fed. Trade
Comm'n v. MortgagesParaHispanos.com and Daniel Moises Goldberg, Civ.
Action No. 4:06cv19, Final Judgment and Order at 5 (E.D. Tex. Sept.
27, 2006) (alleging that the mortgage broker misrepresented the
mortgage terms to Spanish-speaking consumers and requiring the
broker to provide a disclosure and consumer education brochure in
Spanish to any consumer if they have reason to believe that the
consumer's primary language is Spanish); In re Ameriquest Mortgage
Co., et al., Settlement Agreement at 17-18 (Jan. 23, 2006)
(requiring documents and disclosures to be translated to Spanish or
to any language in which Ameriquest advertises).
\58\ Ariz. Rev. Stat. Sec. 6-631 (requiring a consumer loan
lender to provide a notice in English and Spanish that the consumer
may request the TILA disclosure in Spanish); Cal. Civ. Code Sec.
1632 (requiring any person engaged in a trade or business who
negotiates certain transactions primarily in Spanish, Chinese,
Tagalog, Vietnamese, or Korean to deliver a translation of the
contract in the language in which the contract was negotiated); DC
Code Ann. Sec. 26-1113 (requiring a post-application mortgage
disclosure to be provided in the language of the mortgage lender's
presentation to the borrower); 815 Ill. Comp. Stat. Ann. 122/2-20
(requiring payday lenders to provide consumers with a written
disclosure in English and in the language in which the loan was
negotiated); Tex. Fin. Code Ann. Sec. 341.502 (requiring that the
TILA disclosure be provided in Spanish if the terms for the consumer
loan, retail installment transaction, or home equity loan were
negotiated in Spanish).
\59\ News Release, Fannie Mae and Freddie Mac Offer Mortgage
Documents in Spanish to Aid Lenders and Industry Partners with
Helping More Hispanics Become Homeowners; Collaborative Effort Aimed
at Helping Close the Hispanic and Overall Minority Homeownership
Gaps (Sept. 25, 2006), available at http://www.fanniemae.com/newsreleases/2006/3803.jhtml?p=Media&s=News+Releases.
\60\ Credit CARD Act of 2009, Public Law 111-24, Sec. 513, 123
Stat. 1734, 1765 (2009).
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Consumer advocates are concerned that consumers who do not speak
English or speak English as a second language may be more susceptible
to abusive credit practices or offered less favorable credit terms or
products because they are not provided with disclosures they can
understand. Industry representatives, on the other hand, raise concerns
about the cost and burden of translating documents into multiple
foreign languages and the potential liability for inaccurate
translations. Both consumer advocates and industry representatives
question whether consumers who speak minority languages will still have
access to credit if creditors have to bear the cost and liability for
translating documents into little-known languages. Creditors may be
reluctant to engage in outreach to consumers who speak those languages.
The Board solicits comment on whether it should use its rulemaking
authority to require creditors to provide translations of credit
disclosures. Comment is requested on whether the failure to provide
credit disclosure translations is unfair or deceptive, or impedes the
informed use of credit. Comment is also requested on potential
litigation issues, such as whether a translation would be admissible
into evidence or whether an inaccurate translation would toll TILA's
statute of limitations or extend the right of rescission. Finally,
comment is requested on the effectiveness of State laws that require
translations of disclosures or documents and whether the Board should
adopt similar regulations.
The Board requests comment on the following translation issues:
What is the scope of the problem? That is, approximately
how many consumers do not understand TILA disclosures because of
language barriers?
Should creditors be required to provide consumers with
translations of required TILA disclosures? If such translations were
required, what should be the trigger for such disclosures (e.g., the
language of the negotiation, the language of the creditor's
presentation, the language of the creditor's advertisement, a consumer
request)?
Should there be an exception for consumers who are
accompanied by an interpreter?
Would a translation requirement negatively affect
consumers and the type and terms of credit offered because creditors
would be reluctant to risk liability for engaging in transactions in a
language other than English?
Finally, the Board solicits comment on the following coverage
issues:
Should a translation requirement apply only to mortgages
loans, or also to other types of credit products, such as auto loans or
credit cards?
Should a translation requirement apply only to the TILA
disclosures provided before or at consummation, or to any credit
disclosures or documents provided before, at, or subsequent to
consummation?
Should a translation requirement apply to Web sites that
provide early TILA disclosures?
Should a translation requirement apply only to one or a
few languages, or should it apply to any foreign language?
Section 226.32 Requirements for Certain Closed-End Mortgages
32(b) Definitions
32(b)(1)
Section 226.32(b)(1) defines the ``point and fees'' used to
determine whether a loan is a HOEPA loan. That definition consists of
four elements: (i) All items required to be disclosed under Sec.
226.4(a) and 226.4(b), except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers; (iii) All items listed
in Sec. 226.4(c)(7) (other than amounts held for future payment of
taxes) unless the charge is reasonable, the creditor receives no direct
or indirect compensation in connection with the charge, and the charge
is not paid to an affiliate of the creditor; and (iv) Premiums or other
charges for credit life, accident, health, or loss-of-income insurance,
or debt-cancellation coverage (whether or not the debt-cancellation
coverage is insurance under applicable law) that provides for
cancellation of all or part of the consumer's liability in the event of
the loss of life, health, or income or in the case of accident, written
in connection with the credit transaction. In light of the changes to
the finance charge under proposed Sec. 226.4, discussed above, the
Board is proposing technical amendments to this provision.
The reference to ``items required to be disclosed under Sec.
226.4(a) and 226.4(b), except interest or the time-price differential''
in Sec. 226.32(b)(1)(i) implements TILA Section 103(aa)(4)(A). That
provision includes in points and fees ``all items included in the
finance charge, except interest or the time-price differential.'' 15
U.S.C. 1602(aa)(4)(A). Thus, ``items required to be disclosed under
Sec. 226.4(a) and 226.4(b)'' is intended to capture the finance
charge. Section 226.32(b)(1)(ii) and (iii) parallel the additional
elements in TILA Section 103(aa)(4)(B) and (C). See 15 U.S.C.
1602(aa)(4)(B) and (C). Finally, TILA Section 103(aa)(4)(D) provides
for the inclusion of such other charges as the Board determines to be
appropriate. 15 U.S.C. 1602(aa)(4)(D). Pursuant to that authority, in
Sec. 226.32(b)(1)(iv), the Board included credit insurance premiums
and debt cancellation coverage fees. Thus, the statutory definition
reflects Congress's intent to
[[Page 43278]]
include in points and fees mortgage broker compensation, certain real-
estate related fees, and the insurance charges added by the Board, even
if those items would be excluded from the finance charge under other
applicable rules.
Under TILA Section 103(aa)(1), HOEPA applies to certain
transactions that are secured by a consumer's principal dwelling. 15
U.S.C. 1602(aa)(1). Proposed Sec. 226.4(g), and therefore the more
inclusive definition of finance charge it would create, would apply to
any transaction secured by real property or a dwelling. Consequently,
all loans that are potentially subject to HOEPA would be subject to the
proposed ``but for'' finance charge definition. Under that definition,
the items included under the points and fees definition in addition to
the finance charge (other than interest or the time-price differential)
would never be excluded from the finance charge for transactions
secured by real property or a dwelling.
The Board believes that proposed Sec. 226.4 would render Sec.
226.32(b)(1)(ii) through (iv) unnecessary because all items included in
points and fees under those provisions already would be included as
part of the finance charge. To eliminate unnecessary complexity, the
Board proposes to streamline Sec. 226.32(b)(1) by deleting those
additional elements. The Board also proposes to revise Sec.
226.32(b)(1) to provide that points and fees means all items included
in the finance charge pursuant to Sec. 226.4, except interest or the
time-price differential, instead of Sec. 226.32(b)(1)(i)'s reference
to ``items required to be disclosed under Sec. 226.4(a) and
226.4(b).'' This change would reflect the language of TILA more closely
and is not meant to effect any substantive change to HOEPA's coverage.
32(c) Disclosures
32(c)(1) Notices
For HOEPA loans, TILA Sections 129(a)(1)(A) and (B), 15 U.S.C.
1639(a)(1)(A) and (B), and Sec. 226.32(c)(1), require the creditor to
provide the following disclosures in conspicuous type size: ``You are
not required to complete this agreement merely because you have
received these disclosures or have signed a loan application. If you
obtain this loan, the lender will have a mortgage on your home. You
could lose your home, and any money you have put into it, if you do not
meet your obligations under the loan.'' The first sentence is a ``no
obligation'' statement to inform the consumer that the space for the
consumer's signature that may be on the credit application does not
obligate the consumer to accept the terms of the loan. The next two
sentences are ``security interest'' disclosures to inform the consumer
of the potential consequences when the creditor takes a security
interest in the consumer's home. Comment 32(c)(1)-1 states that these
disclosures need not be in a particular format or part of the note or
mortgage document. A Model Clause is currently provided at Appendix H-
16.
As discussed more fully in Sec. 226.38(f)(1), the MDIA amended
TILA Section 128(b)(2), 15 U.S.C. 1638(b)(2), to require the creditor
to provide the following ``no obligation'' statement on the TILA
disclosure: ``You are not required to complete this agreement merely
because you have received these disclosures or signed a loan
application.'' Based on consumer testing, the Board proposes to use its
adjustments and exception authority under TILA Section 105(a), 15
U.S.C. 1604(a), to modify the specific wording on the disclosure.
Proposed Sec. 226.38(f)(1) would require the creditor to provide a
statement that the consumer has no obligation to accept the loan, and,
if the creditor provides space for a consumer's signature, a statement
that a signature by the consumer only confirms receipt of the
disclosure statement. During consumer testing, participants'
comprehension improved when they reviewed the plain-language version of
the clause.
Similarly, based on consumer testing, the Board proposes to use its
adjustments and exception authority under TILA Section 105(a), 15
U.S.C. 1604(a), to require the creditor under proposed Sec.
226.32(c)(1) to provide the following ``no obligation'' statement in
connection with a HOEPA loan: ``You have no obligation to accept this
loan. Your signature below only confirms that you have received this
form.'' TILA Section 105(a), 15 U.S.C. 1604(a), states that the Board
``may provide for such adjustments * * * as in the judgment of the
Board are necessary or proper to effectuate the purposes of [TILA]''.
One of the purposes of TILA is to promote the informed use of credit.
TILA Section 102(a), 15 U.S.C. 1601(a). Consumer testing showed that
the ``no obligation'' language improved participants' understanding of
the key point that signing or accepting a disclosure did not obligate
the consumer to accept the terms of the loan.
In addition, the Board proposes to use its adjustments and
exception authority under TILA Section 105(a), 15 U.S.C. 1604(a), to
require the creditor under proposed Sec. 226.32(c)(1) to provide the
following ``security interest'' statement in connection with a HOEPA
loan: ``If you are unable to make the payments on this loan, you could
lose your home.'' As discussed more fully in Sec. 226.38(f)(2),
consumer testing showed that participant comprehension of this
disclosure improved when the plain-language version of the ``security
interest'' disclosure was used. The Board believes that the plain-
language versions of the ``no obligation'' and ``security interest''
disclosures will better inform consumers who are considering obtaining
HOEPA loans.
The proposal would delete comment 32(c)(1)-1 and require these
statements to be in bold text and a minimum 10-point font, consistent
with proposed Sec. Sec. 226.37 and 226.38. A revised Model Clause is
proposed at Appendix H-16.
32(c)(5) Amount Borrowed
For HOEPA mortgage refinancing loans, Sec. 226.32(c)(5) requires
the creditor to disclose the amount borrowed, and states that ``where
the amount borrowed includes premiums or other charges for optional
credit insurance or debt-cancellation coverage, that fact shall be
stated, grouped together with the disclosure of the amount borrowed.''
In the December 2008 Open-End Final Rule, the existing rules for credit
insurance and debt cancellation coverage were applied to debt
suspension coverage for purposes of excluding a charge for debt
suspension coverage from the finance charge. See 74 FR 5244, 5255; Jan.
29, 2009. In the final rule, the Board stated that ``[d]ebt
cancellation coverage and debt suspension coverage are fundamentally
similar to the extent they offer a consumer the ability to pay in
advance for the right to reduce the consumer's obligations under the
plan on the occurrence of specified events that could impair the
consumer's ability to satisfy those obligations.'' 74 FR 5266. The
Board also noted that the two products are different because debt
cancellation coverage cancels the debt while debt suspension merely
suspends payment of the debt. Id. Despite this difference, the Board
adopted a final rule treating the two products the same for purposes of
the finance charge, but adding a special disclosure warning consumers
of the risks of debt suspension coverage. Id. Consistent with this
approach, the Board proposes to treat debt suspension coverage in the
same manner as debt cancellation coverage for purposes of the
disclosing the amount borrowed for a HOEPA mortgage refinancing loan.
The Board proposes to revise Sec. 226.32(c)(5) to clarify that where
the amount borrowed
[[Page 43279]]
includes charges for debt suspension coverage, that fact should be
stated, grouped together with the disclosure of the amount borrowed.
Proposed comment 32(c)(5)-1 would also be revised to include a
reference to debt suspension coverage. Comment is solicited on this
approach.
Section 226.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans
35(a) Higher-Priced Mortgage Loans
35(a)(2)
In its final rule implementing new requirements for higher-priced
mortgage loans, 73 FR 44522; July 30, 2008, the Board adopted the
``average prime offer rate'' as the benchmark for coverage of new Sec.
226.35. In so doing, the Board adopted commentary under new Sec.
226.35(a)(2) regarding the calculation of the average prime offer rate
and related guidance. Comment 35(a)(2)-4 indicated that the Board
publishes average prime offer rates and the methodology for their
calculation on the Internet. The Board is proposing to amend comment
35(a)(2)-4 to specify where on the Internet the table and methodology
may be found (http://www.ffiec.gov/hmda).
The Board also is proposing new comment 35(a)(2)-5 to provide
additional guidance on determination of applicable average prime offer
rates for purposes of Sec. 226.35. The comment would clarify that the
average prime offer rate is defined identically under Sec. 226.35 and
under Regulation C (HMDA), 12 CFR 203.4(a)(12)(ii). Thus, for purposes
of both coverage of Sec. 226.35 and coverage of the rate spread
reporting requirement under Regulation C, 12 CFR 203.4(a)(12)(i), the
applicable average prime offer rate is identical. The comment would
clarify further that guidance on the applicable average prime offer
rate is provided in the staff commentary under Regulation C, the
Board's A Guide to HMDA Reporting: Getting it Right!, and the relevant
``Frequently Asked Questions'' on HMDA compliance posted on the FFIEC's
Web site referenced above.
Section 226.36 Prohibited Acts or Practices in Connection With Credit
Secured by Real Property or a Consumer's Dwelling
The Board proposes to amend Sec. 226.36 to extend the scope of the
section's coverage to all closed-end transactions secured by real
property or a dwelling. Currently, this section applies to closed-end
credit transactions secured by a consumer's principal dwelling. As
revised, Sec. 226.36 would apply to closed-end transactions secured by
any dwelling, not just a consumer's principal dwelling. This approach
would be consistent with recent amendments to the TILA effected by the
MDIA.
36(a) Loan Originator and Mortgage Broker Defined
As discussed below in more detail, the Board proposes to prohibit
certain payments to loan originators that are based on a transaction's
terms and conditions, and also proposes to prohibit loan originators
from ``steering'' consumers to transactions that are not in their
interest in order to increase the originator's compensation.
Accordingly, the Board proposes to amend the regulation to provide a
definition of ``loan originator'' in Sec. 226.36(a)(1), which would
include persons who are covered by the current definition of mortgage
broker but also would include employees of the creditor, who are not
considered ``mortgage brokers.'' Existing Sec. 226.36(a) defines the
term ``mortgage broker'' because mortgage brokers are subject to the
prohibition on coercion of appraisers in Sec. 226.36(b). A revised
definition of mortgage broker would be designated as Sec.
226.36(a)(2). The provision of existing Sec. 226.36(a) stating that a
creditor making a ``table funded'' transaction is considered a mortgage
broker would be revised for clarity; no substantive change is intended
other than the expansion of the definition from mortgage broker to loan
originator. Thus, under proposed Sec. 226.36(a)(1), a creditor that
does not provide the funds for the transaction at consummation out of
its own resources, out of deposits held by it, or by drawing on a bona
fide warehouse line of credit would be considered a loan originator for
purposes of Sec. 226.36.
36(b) and (c) Misrepresentation of Value of Consumer's Dwelling;
Servicing Practices
The Board proposes to amend Sec. 226.36(b) and (c) to reflect the
expanded scope of coverage of Sec. 226.36, as noted above. Existing
Sec. 226.36(b) prohibits creditors and mortgage brokers and their
affiliates from coercing, influencing, or otherwise encouraging
appraisers to misstate or misrepresent the value of the consumer's
principal dwelling in connection with a closed-end mortgage
transaction. Section 226.36(c) currently prohibits certain practices of
servicers of closed-end consumer credit transactions secured by a
consumer's principal dwelling. Under this proposal, the rules relating
to appraiser coercion and loan servicing would apply to all closed-end
transactions secured by real property or a dwelling, for the reasons
discussed above.
36(d) Prohibited Payments to Loan Originators
The Board is proposing to use its authority in HOEPA to prohibit
unfair or deceptive acts or practices in mortgage lending to restrict
certain practices related to the payment of loan originators. See TILA
Section 129(l)(2)(A), 15 U.S.C. 1639(l)(2)(A). For this purpose, a
``loan originator'' includes both mortgage brokers and employees of
creditors who perform loan origination functions.
Specifically, to address the potential unfairness that can arise
with certain loan originator compensation practices, the proposed rule
would prohibit a creditor or other party from paying compensation to a
loan originator based on the credit transaction's terms or conditions.
This prohibition would not apply to payments that consumers make
directly to a loan originator. However, if a consumer directly pays the
loan originator, the proposed rule would prohibit the originator from
also receiving compensation from any other party in connection with
that transaction.
The Board is soliciting comment on an alternative that would allow
loan originators to receive payments that are based on the principal
loan amount, which is a common practice today. The Board is also
soliciting comment on whether it should adopt a rule that seeks to
prohibit loan originators from directing or ``steering'' consumers to
loans based on the fact that the originator will receive additional
compensation, unless that loan is in the consumer's interest. The Board
is expressly soliciting comment on whether the rule would be effective
in achieving the stated purpose. Comment is also solicited on the
feasibility and practicality of such a rule, its enforceability, and
any unintended adverse effects the rule might have. These proposals and
alternatives are discussed more fully below.
Background
In the summer of 2006, the Board held public hearings on home
equity lending in four cities. During the hearings, consumer advocates
urged the Board to ban ``yield spread premiums,'' payments that
mortgage brokers receive from the creditor at closing for delivering a
loan with an interest rate that is higher than the creditor's ``buy
rate.'' The consumer advocates asserted that yield spread premiums
provide brokers an incentive to increase consumers' interest rates
[[Page 43280]]
unnecessarily. They argued that a prohibition would align reality with
consumers' perception that brokers serve consumers' best interests.
In light of the information received at the 2006 hearings and the
rise in defaults that began soon after, the Board held an additional
hearing in June of 2007 to explore how it could use its authority under
HOEPA to prevent abusive lending practices in the subprime mortgage
market while still preserving responsible lending. Although the Board
did not expressly solicit comment on mortgage broker compensation in
its notice of the June 2007 hearing, a number of commenters and some
hearing panelists raised the topic. Consumer and creditor
representatives alike raised concerns about the fairness and
transparency of creditors' payment of yield spread premiums to brokers.
Several commenters and panelists stated that consumers are not aware of
the payments creditors make to brokers, or that such payments increase
consumers' interest rates. They also stated that consumers may
mistakenly believe that a broker seeks to obtain the best interest rate
available. Consumer groups have expressed particular concern about
increased payments to brokers for delivering loans both with higher
interest rates and prepayment penalties. Consumer groups suggested a
variety of solutions, such as prohibiting creditors paying brokers
yield spread premiums, imposing on brokers that accept yield spread
premiums a fiduciary duty to consumers, imposing on creditors that pay
yield spread premiums liability for broker misconduct, or including
yield spread premiums in the points and fees test for loans subject to
HOEPA. Several creditors and creditor trade associations advocated
requiring brokers to disclose whether the broker represents the
consumer's interests, and how and by whom the broker is to be
compensated. Some of these commenters recommended that brokers be
required to disclose their total compensation to the consumer and that
creditors be prohibited from paying brokers more than the disclosed
amount.
To address these concerns, the Board's January 2008 proposed rule
would have prohibited a creditor from paying a mortgage broker any
compensation greater than the amount the consumer had previously agreed
in writing that the broker would receive. 73 FR 1672, 1698-1700; Jan.
9, 2008 (HOEPA proposal). In support of the rule, the Board explained
its concerns about yield spread premiums, which are summarized below.
A yield spread premium is the present dollar value of the
difference between the lowest interest rate the wholesale lender would
have accepted on a particular transaction and the interest rate the
broker actually obtained for the lender. This dollar amount is usually
paid to the mortgage broker, though it may also be applied to reduce
the consumer's upfront closing costs. The creditor's payment to the
broker based on the interest rate is an alternative to the consumer
paying the broker directly from the consumer's preexisting resources or
from loan proceeds. Preexisting resources or loan proceeds may not be
sufficient to cover the broker's total fee, or may appear to the
consumer to be a more costly way to finance those costs if the consumer
expects to prepay the loan in a relatively short period. Thus,
consumers potentially benefit from having an option to pay brokers for
their services indirectly by accepting a higher interest rate.
The Board shares concerns, however, that creditors' payments to
mortgage brokers are not transparent to consumers and are potentially
unfair to them. Creditor payments to brokers based on the interest rate
give brokers an incentive to provide consumers loans with higher
interest rates. Some brokers may refrain from acting on this incentive
out of legal, business, or ethical considerations. Moreover,
competition in the mortgage loan market may often limit brokers'
ability to act on the incentive. The market often leaves brokers room
to act on the incentive should they choose, however, especially as to
consumers who are less sophisticated and less likely to shop among
either loans or brokers.
Large numbers of consumers are simply not aware the incentive
exists. Many consumers do not know that creditors pay brokers based on
the interest rate, and the current legally required disclosures seem to
have only limited effect. Some consumers may not even know that
creditors pay brokers: A common broker practice of charging a small
part of its compensation directly to the consumer, to be paid from the
consumer's existing resources or loan proceeds, may lead consumers to
believe, incorrectly, that this amount is all the consumer will pay or
that the broker will receive. Consumers who do understand that the
creditor pays the broker based on the interest rate may not fully
understand the implications of the practice. They may not appreciate
the full extent of the incentive the practice gives the broker to
increase the rate because they do not know the dollar amount of the
creditor's payment.
Moreover, consumers often wrongly believe that brokers have agreed,
or are required, to obtain the best interest rate available. Several
commenters in connection with the 2006 hearings suggested that mortgage
broker marketing cultivates an image of the broker as a ``trusted
advisor'' to the consumer. Consumers who have this perception may rely
heavily on a broker's advice, and there is some evidence that such
reliance is common. In a 2003 survey of older borrowers who had
obtained prime or subprime refinancings, majorities of respondents with
refinance loans obtained through both brokers and creditors' employees
reported that they had relied ``a lot'' on their loan originators to
find the best mortgage for them.\61\ The Board's recent consumer
testing also suggests that many consumers shop little for mortgages and
often rely on one broker or lender because of their trust in the
relationship.
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\61\ See Kellie K. Kim-Sung & Sharon Hermanson, Experiences of
Older Refinance Mortgage Loan Borrowers: Broker- and Lender-
Originated Loans, Data Digest No. 83 (AARP Public Policy Inst.,
Washington, DC, Jan. 2003, at 3, available at http://assets.aarp.org/rgcenter/post-import/dd83_loans.pdf.
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If consumers believe that brokers protect consumers' interests by
shopping for the lowest rates available, then consumers will be less
likely to take steps to protect their interests when dealing with
brokers. For example, they may be less likely to shop rates across
retail and wholesale channels simultaneously to assure themselves the
broker is providing a competitive rate. They may also be less likely to
shop and negotiate brokers' services, obligations, or compensation
upfront, or at all. For example, they may be less likely to seek out
brokers who will promise in writing to obtain the lowest rate
available.
In response to these concerns, the 2008 HOEPA proposal would have
prohibited a creditor from paying a broker more than the consumer
agreed in writing to pay. Under the proposal, the consumer and mortgage
broker would have had to enter into a written agreement before the
broker accepted the consumer's loan application and before the consumer
paid any fee in connection with the transaction (other than a fee for
obtaining a credit report). The agreement also would have disclosed (i)
that the consumer ultimately would bear the cost of the entire
compensation even if the creditor paid part of it directly; and (ii)
that a creditor's payment to a broker could influence the broker to
offer the consumer loan terms or products that would not be in the
consumer's interest
[[Page 43281]]
or the most favorable the consumer could obtain.
Based on the Board's analysis of comments received on the HOEPA
proposal, the results of consumer testing, and other information, the
Board withdrew the proposed provisions relating to broker compensation.
73 FR 44522, 44563-65; July 30, 2008. The Board's withdrawal of those
provisions was based on its concern that the proposed agreement and
disclosures could confuse consumers and undermine their decision-making
rather than improve it. The risks of consumer confusion arose from two
sources. First, an institution can act as either creditor or broker
depending on the transaction. At the time the agreement and disclosures
would have been required, such an institution could be uncertain as to
which role it ultimately would play. This could render the proposed
disclosures inaccurate and misleading in some, and possibly many,
cases. Second, the Board was concerned by the reactions of consumers
who participated in one-on-one interviews about the proposed agreement
and disclosures as part of the Board's consumer testing. These
consumers often concluded, not necessarily correctly, that brokers are
more expensive than creditors. Many also believed that brokers would
serve their best interests notwithstanding the conflict resulting from
the relationship between interest rates and brokers' compensation.\62\
The proposed disclosures presented a significant risk of misleading
consumers regarding both the relative costs of brokers and lenders and
the role of brokers in their transactions.
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\62\ For more details on the consumer testing, see the report of
the Board's contractor, Macro International, Inc., Consumer Testing
of Mortgage Broker Disclosures (July 10, 2008), available at http://www.federalreserve.gov/newsevents/press/bcreg/20080714regzconstest.pdf.
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In withdrawing the broker compensation provisions of the HOEPA
proposal, the Board stated it would continue to explore options to
address potential unfairness associated with loan originator
compensation arrangements, such as yield spread premiums. The Board
indicated it would consider whether disclosures or other approaches
could effectively remedy this potential unfairness without imposing
unintended consequences.
Potential for Unfairness in Loan Originator Compensation Practices
As noted above, the Board is now proposing rules to prohibit
certain practices relating to payments made to compensate mortgage
brokers and other loan originators. These rules would be adopted
pursuant to the Board's authority under HOEPA, as contained in TILA
Section 129(l), which authorizes the Board to prohibit acts or practice
in connection with mortgage loans that the Board finds to be unfair or
deceptive. As discussed in part IV above, in considering whether a
practice is unfair or deceptive under TILA Section 129(l), the Board
has generally relied on the standards that have been adopted for
purposes of Section 5(a) of the FTC Act, 15 U.S.C. 45(a), which also
prohibits unfair and deceptive acts and practices.
For purposes of the FTC Act, an act or practice is considered
unfair when it causes or is likely to cause substantial injury to
consumers that is not reasonably avoidable by consumers themselves and
not outweighed by countervailing benefits to consumers or to
competition. As explained below, the practice of basing a loan
originator's compensation on the credit transaction's terms or
conditions appears to meet these standards and constitute an unfair
practice. Furthermore, based on its experience with consumer testing,
particularly in connection with the HOEPA proposal, the Board believes
that disclosure alone would be insufficient for most consumers to avoid
the harm caused by this practice. Thus, the Board is proposing a rule
that would remedy the practice through substantive regulations that
prohibit particular practices.
Specifically, under proposed Sec. 226.36(d)(1), compensation
payments made to a mortgage broker or any other loan originator based
on a mortgage transaction's terms or conditions would be prohibited.
Unlike the 2008 HOEPA proposal, the rule would also apply to creditors'
employees who originate loans. As noted above, such payments when made
to a mortgage broker are commonly referred to as yield spread premiums.
There are analogous payments made by creditors to their employees who
originate loans at a higher interest rate than the minimum rate
required by the creditor. This arrangement is frequently referred to as
an ``overage.'' For convenience, the discussion below uses the term
``yield spread premium'' also to refer to these types of payments,
which would be covered by the proposed rule as well.
Substantial injury. When loan originators receive compensation
based on a transaction's terms and conditions, they have an incentive
to provide consumers loans with higher interest rates or other less
favorable terms. Yield spread premiums, therefore, present a
significant risk of economic injury to consumers. Currently, such
injury is common because consumers typically are not aware of the
practice or do not understand its implications and cannot effectively
negotiate its use.
Creditors' payments to mortgage brokers or their own employees that
originate loans (``loan officers'') generally are not transparent to
consumers. Brokers may impose a direct fee on the consumer which may
lead consumers to believe that this is the sole source of the broker's
compensation. While consumers expect the creditor to compensate its own
loan officers, they do not necessarily understand that the loan
originator may have the ability to increase the creditor's interest
rate or include certain loan terms for the originator's own gain.
To guard effectively against this practice, a consumer would have
to know the lowest interest rate the creditor would have accepted to
ascertain that the offered interest rate represents a rate increase by
the loan originator. Most consumers will not know the lowest rate the
creditor would be willing to accept. The consumer also would need to
understand the dollar amount of the yield spread premium that is
generated by the rate increase to determine what portion, if any, is
being applied to reduce the consumer's upfront loan charges. Although
HUD recently adopted disclosures in Regulation X, implementing RESPA,
that could enhance some consumers' understanding of mortgage broker
compensation, the details of the compensation arrangements are complex
and the disclosures are limited. A creditor may show the yield spread
premium as a credit to the borrower that is applied to cover upfront
costs, but is also permitted to add the amount of the yield spread to
the total origination charges being disclosed. This would not
necessarily inform the consumer that the rate has been increased by the
originator and that a lower rate with a smaller origination charge was
also available. In addition, the Regulation X disclosure concerning
yield spread premiums would not apply to overages occurring when the
loan originator is employed by the creditor. Thus, the Regulation X
disclosure, while perhaps an improvement over previous rules, is not
likely by itself to prevent consumers from incurring substantial injury
from the practice.
Because consumers generally do not understand the yield spread
premium mechanism, they are unable to engage in effective negotiation.
Instead they are more likely to rely on the loan originator's advice
and frequently obtain a higher rate or other unfavorable terms
[[Page 43282]]
solely because of greater originator compensation. These consumers
suffer substantial injury by incurring greater costs for mortgage
credit than they would otherwise be required to pay.
Injury not reasonably avoidable. Yield spread premiums create a
conflict of interest between the loan originator and consumer. As noted
above, many consumers are not aware of creditor payments to loan
originators, especially in the case of mortgage brokers, because these
arrangements lack transparency. Although consumers may reasonably
expect creditors to compensate their own employees, consumers do not
know how the loan officer's compensation is structured or that the loan
officer can increase the creditor's interest rate or offer certain loan
terms to increase their own compensation. Without this understanding,
consumers cannot reasonably be expected to appreciate or avoid the risk
of financial harm these arrangements represent.
Yield spread premiums are complex and may be counter-intuitive even
to well-informed consumers. Based on the Board's experience with
consumer testing, the Board believes that disclosures are insufficient
to overcome the gap in consumer comprehension regarding this critical
aspect of the transaction. Currently, the required disclosures of
originator compensation under federal and State laws seem to have
little, if any, effect on originators' incentive to provide consumers
with increased interest rates or other unfavorable loan terms, such as
a prepayment penalty, that can increase the originator's
compensation.\63\ The Board's consumer testing, discussed above,
supported the finding that disclosures about yield spread premiums are
ineffective; consumers in these tests did not understand yield spread
premiums and did not grasp how they create an incentive for loan
originators to increase consumers' costs.
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\63\ Creditors may be willing to offer a loan with a lower
interest rate in return for including a prepayment penalty. A loan
originator that offers a loan with a prepayment penalty might not
offer the lower rate, resulting in a premium interest rate and the
payment of a yield spread premium.
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Consumers' lack of comprehension of yield spread premiums is
compounded where the originator also imposes a direct charge on the
consumer. A mortgage broker might charge the consumer a direct fee, for
example $500, for arranging the consumer's mortgage loan. This charge
encourages consumers to infer that the broker accepts the consumer-paid
fee to represent the consumer's financial interests. Consumers may
believe that the fee they pay is the originator's sole compensation.
This may lead reasonable consumers to believe, erroneously, that loan
originators are working on their behalf and are under a legal or
ethical obligation to help consumers obtain the most favorable loan
terms and conditions. There is evidence that consumers often regard
loan originators as ``trusted advisors'' or ``hired experts'' and
consequently rely on originators' advice. Consumers who regard loan
originators in this manner are far less likely to shop or negotiate to
assure themselves that they are being offered competitive mortgage
terms. Even for consumers who shop, the lack of transparency in
originator compensation arrangements makes it unlikely consumers will
avoid yield spread premiums that unnecessarily increase the cost of
their loan.
Consumers generally lack expertise in complex mortgage transactions
because they engage in such mortgage transactions infrequently. Their
reliance on the loan originator is reasonable in light of the
originator's greater experience and professional training in the area,
the belief that originators are working on their behalf, and the
apparent ineffectiveness of disclosures to dispel that belief.
Injury not outweighed by benefits to consumers or to competition.
Yield spread premiums can represent a potential consumer benefit in
cases where the amount is applied to reduce consumers' upfront closing
costs, including originator compensation. A creditor's increase in the
interest rate (or the addition of other loan terms) may be used to
generate additional income that the creditor uses to compensate the
originator, in lieu of adding origination points or fees that the
consumer would be required to pay directly from the consumer's
preexisting funds or the loan proceeds. This can benefit a consumer who
lacks the resources to pay closing costs in cash, or who might have
insufficient equity in the property to increase the loan amount to
cover these costs. Further, some consumers prefer to fund closing
costs, including origination fees, through a higher rate if the
consumer expects to own the property or have the loan for a relatively
short period, for example, less than five years. For those consumers
who understand this trade-off there could be potential benefits. In
such cases, however, the yield spread premium does not increase the
amount of compensation paid by the creditor to the originator, who
would receive the same amount whether the loan has a higher rate or a
lower rate accompanied by higher upfront fees.
Nevertheless, without a clear understanding of yield spread
premiums or effective disclosure, the majority of consumers are not
equipped to police the market to ensure that yield spread premiums are
in fact applied to reduce their closing costs, especially in the case
of loan originator compensation. This would be particularly difficult
because consumers are not likely to have any basis for determining a
``typical'' or ``reasonable'' amount for originator compensation.
Accordingly, the Board is proposing a rule that prohibits any person
from basing a loan originator's compensation on the loan's rate or
terms but still affords creditors the flexibility to structure loan
pricing to preserve the potential consumer benefit of compensating an
originator through the interest rate.
The Board's Proposal
Under Sec. 226.36(d)(1), the Board proposes to prohibit any person
from compensating a loan originator, directly or indirectly, based on
the terms or conditions of a loan transaction secured by real property
or a dwelling. This prohibition would apply to any person, rather than
only a creditor, to prevent evasion by structuring loan originator
payments through non-creditors. For example, secondary market investors
that purchase closed loans from creditors would not be permitted to pay
compensation to loan originators that is based on the terms or
conditions of their transactions.
Under the proposal, compensation that is based on the loan amount
would be considered a payment that is based on a term or condition of
the loan. The prohibition would not apply to consumers' direct payments
to loan originators. Under Sec. 226.36(d)(2), however, if the consumer
compensates the loan originator directly, the originator would be
prohibited from receiving compensation from the creditor or any other
person.
Because the loan originator could not receive compensation based on
the interest rate or other terms, the originator would have no
incentive to alter the terms made available by the creditor to deliver
a more expensive loan. For example, a company acting as a mortgage
broker could not provide greater compensation to its employee acting as
the loan originator for a transaction with a 7 percent interest rate
than for a transaction with a 6 percent interest rate. A creditor would
be under the same restriction in compensating its loan officer. For
this purpose, the term ``compensation'' would not be limited to
commissions, but would include
[[Page 43283]]
salaries or any financial incentive that is tied to the transaction's
terms or conditions, including annual or periodic bonuses or awards of
merchandise or other prizes. See proposed comment 36(d)(1)-1.
Proposed comment 36(d)(1)-2 provides examples of compensation that
is based on the transaction's terms or conditions, such as payments
that are based on the interest rate, annual percentage rate, or the
existence of a prepayment penalty. Examples of loan originator
compensation that is not based on the transaction's terms or conditions
are listed in proposed comment 36(d)(1)-3. These include compensation
based on the originator's loan volume, the performance of loans
delivered by the originator, or hourly wages.
The Board recognizes that loans originators may need to expend more
time and resources in originating loans for consumers with limited or
blemished credit histories. Because such loans are likely to carry
higher rates, originators currently rely on higher yield spread
premiums to compensate them for the additional time and efforts. Paying
an originator based on the time expended would be permissible under the
proposed rule.
Although the proposed rule would not prohibit a creditor from
basing compensation on the originator's loan volume, such arrangements
may raise concerns about whether it creates incentives for originators
to deliver loans without proper regard for the credit risks involved.
The Board expects creditors to exercise due diligence to monitor and
manage such risks. Financial institution regulators generally will
examine creditors they supervise to ensure they have systems in place
to exercise such due diligence.
The proposed rule also would not prohibit compensation that differs
by geographical area, but any such arrangements must comply with other
applicable laws such as the Equal Credit Opportunity Act (15 U.S.C.
1691-1691f) and Fair Housing Act (42 U.S.C. 3601-3619). See proposed
comment 36(d)(1)-4. Creditors that use geography as a criterion for
setting originator compensation would need to be able to demonstrate
that this reflects legitimate differences in the costs of origination
and in the levels of competition for originators' services.
Under the proposed rule, creditors also may compensate their own
loan officers differently than mortgage brokers. For instance, in light
of the fact that mortgage brokers relieve creditors of certain overhead
costs of loan originations, a creditor might pay brokers more than its
own loan officers. Likewise, a creditor might pay one loan originator
of either type more than it pays another, as long as each originator
receives compensation that is not based on the terms of the
transactions they deliver to the creditor.
Scope of coverage. The Board believes that the proposed rule should
apply to creditors' employees who originate loans in addition to
mortgage brokers. A creditor's loan officers frequently have the same
discretion over loan pricing that mortgage brokers have to modify a
loan's terms to increase their compensation, and there is evidence
suggesting that loan officers engage in such practices.\64\
Accordingly, the coverage of Sec. 226.36(d)(1) is broader than the
2008 HOEPA proposal, which covered only mortgage brokers. Some
commenters on the HOEPA proposal expressed concern that it would create
an ``unlevel playing field'' by creating an unfair advantage for
creditors that would not have to comply with the same requirements as
brokers.
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\64\ For example, the Federal Trade Commission's settlement with
Gateway Funding, Inc. in December 2008 illustrates a case where a
creditor's loan officers created ``overages,'' although the primary
legal theory concerned disparate treatment by race in the imposition
of overages. The FTC's complaint and the court's final judgment and
order can be found on the FTC's web-site at http://www.ftc.gov/os/caselist/0623063/index.shtm. The FTC has since filed a complaint
alleging similar patterns of overages in violation of fair lending
laws, against Golden Empire Mortgage, Inc. The May 2009 complaint
can be found at http://www.ftc.gov/os/caselist/0623061/090511gemcmpt.pdf. A similar pattern of overages was alleged in
legal actions brought by the Department of Justice (DOJ), which
resulted in settlement agreements with Huntington Mortgage Company
(1995) and Fleet Mortgage Corp. (1996).
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The proposed rule would apply to covered transactions whether or
not they are higher-priced mortgage loans. A loan originator's
financial incentive to deliver less favorable loan terms to a consumer
could result in consumer injury whether or not the loan has a rate
above the coverage threshold in Sec. 226.35. The risks of harm could
be reduced in the lower-priced segment of the market, however, where
consumers historically have more choices. Comment is solicited on the
relative costs and benefits of applying the rule to all segments of the
market, and whether the costs would outweigh the benefits for loans
below the higher-priced mortgage loan threshold.
Creditors' pricing flexibility. The proposed rule would not affect
creditors' flexibility in setting rates or other loan terms. The rule
does not limit the creditor's ability to adjust the loan terms it
offers to consumers as a means of financing costs the consumer would
otherwise be obligated to pay directly (in cash or out of the loan
proceeds), including the originator's compensation, provided this does
not affect the amount the originator receives for the transaction.
Thus, a creditor could recoup costs by adding to the loan pricing terms
an origination point (calculated as one percentage point of the loan
amount) even though the creditor could not pay the originator's
compensation on that basis. Similarly, a creditor could add a constant
premium of, for instance, \1/4\ of one percent to the interest rates on
all transactions for which the creditor will pay compensation to the
loan originator, as a means of recouping the cost of the originator's
compensation. The creditor would not recoup the same dollar amount in
each transaction, however, because the present value of the premium in
dollars would vary with the loan amount. Consequently, even though loan
pricing could be set in this manner, this method could not be used to
set the loan originator's compensation. See proposed comment 36(d)(1)-
5.
Effect of modification of loan terms. The proposed rule is designed
to prevent consumers from being harmed by loan originators making
unfavorable modifications to loan terms, such as increasing the
interest rate, to increase the originator's compensation. Currently,
loan originators might also exercise discretion to make modifications
in the consumer's favor. For example, to retain the consumer's
business, today a loan originator might agree with the consumer to
reduce the amount the consumer must pay in origination points on the
loan, which would be funded by a reduction in the amount the originator
receives from the creditor as compensation for delivering the loan.
Under the proposed rule, however, a creditor would not be permitted to
reduce the amount it pays to the loan originator based on such a change
in loan terms. As a result, the reduction in origination points would
be a cost borne by the creditor.
Thus, when the creditor offers to extend a loan with specified
terms and conditions (such as the rate and points), the amount of the
originator's compensation for that transaction is not subject to
change, through either an increase or a decrease, even if different
loan terms are negotiated. If this were not the case, a creditor
generally could agree to compensate originators at a high level and
then subsequently lower the compensation only in selective cases, such
as when the consumer obtains a competing offer with a lower interest
rate. This would have the same
[[Page 43284]]
effect as increasing the originator's compensation for higher rate
loans. Proposed comment 36(d)(1)-6 would address this issue.
Periodic changes in loan originator compensation. Under proposed
Sec. 226.36(d)(1) a creditor would not be prevented from periodically
revising the compensation it agrees to pay a loan originator. However,
a creditor may not revise a loan originator's compensation arrangement
in connection with each transaction. This guidance is reflected in
proposed comment 36(d)(1)-7. The revised compensation arrangement must
result in payments to the loan originator that are not based on the
terms or conditions of a credit transaction. A creditor might
periodically review factors such as loan performance, transaction
volume, as well as current market conditions for originator
compensation, and prospectively revise the compensation it agrees to
pay to a loan originator. For example, assume that during the first six
months of the year, a creditor pays $3,000 to a particular loan
originator for each loan delivered, regardless of the loan terms. After
considering the volume of business produced by that originator, the
creditor could decide that as of July 1, it will pay $3,250 for each
loan delivered by that originator, regardless of the loan terms. The
change in compensation would not be a violation even if the loans made
by the creditor after July 1 generally carry higher interest rates than
loans made before that date.
Alternative to permit compensation based on loan amount. The Board
is also publishing for comment a proposed alternative that would allow
loan originator compensation to be based on the loan amount, which
would not be considered a transaction term or condition for purposes of
the prohibition in Sec. 226.36(d)(1). Currently, the compensation
received by many mortgage originators is structured as a percentage of
the loan amount. Other participants in the mortgage market, such as
creditors, mortgage insurers, and other service providers, also receive
compensation based on the loan amount. The Board is therefore seeking
comment on whether prohibiting originator compensation on this basis
might be unduly restrictive and unnecessary to achieve the purposes of
the proposed rule.
On the other hand, prohibiting compensation based on the loan
amount would eliminate an incentive for the originator to steer
consumers to a larger loan amount. Such steering maximizes the
originator's compensation but also increases the transaction's loan-to-
value ratio and decreases the consumer's equity in the property. If the
loan-to-value ratio increases sufficiently, the consumer may incur
additional costs in the form of a higher interest rate or additional
points and fees, including the cost of mortgage insurance premiums.
Because the consumer's monthly payment would also be larger, the
originator might direct the consumer to riskier loan products that have
discounted initial rates but are subject to significant payment
increases after the introductory period expires.
Because of the foregoing concerns, the Board is publishing two
alternative versions of proposed Sec. 226.36(d)(1). The first
alternative would consider the loan amount as a term or condition of
the loan, thereby prohibiting the payment of originator compensation as
a percentage of the loan amount. The second alternative provides that
the loan amount is not a term or condition of the loan, and would
permit such payments. The second alternative would be accompanied by
proposed comment 36(d)(1)-10 to provide further guidance. Under
proposed comment 36(d)(1)-10, a loan originator could be paid a fixed
percentage of the loan amount even though the dollar amount paid by a
particular creditor would vary from transaction to transaction and
would increase as the loan amount increases. Comment 36(d)(1)-10 also
permits compensation paid as a fixed percentage of the loan amount to
be subject to a specified minimum or maximum dollar amount. For
example, a loan originator's compensation could be set at one percent
of the principal loan amount but not less than $1,000 or greater than
$5,000.
The Board seeks comment on the two alternatives. Further, if the
final rule permits compensation based on the loan amount, should
creditors be permitted to apply different percentages to loans of
different amounts? Should creditors be allowed to pay a larger
percentage for smaller loan amounts, which could be an incentive to
originate loans in lower- priced neighborhoods that ensures that the
originator receives an amount that is comparable to loans originated in
high-priced neighborhoods? If so, should creditors also be permitted to
pay originators a higher percentage for larger loan amounts?
Prohibition of compensation from both the consumer and another
source. Proposed Sec. 226.36(d)(2) would provide that, if a loan
originator is compensated directly by the consumer for a transaction
secured by real property or a dwelling, no other person may pay any
compensation to the originator for that transaction. Direct
compensation paid by a consumer to a loan originator would not be
limited to ``origination fees,'' ``broker fees,'' or similarly labeled
charges. Rather, compensation for this purpose includes any payment by
the consumer that is retained by the loan originator. Thus, a creditor
that is a loan originator by virtue of making a table funded
transaction, as discussed above, would be subject to this prohibition
if it imposes and retains any direct charge on the consumer for the
transaction.
Consumers reasonably may believe that when they pay a loan
originator directly, that amount is the only compensation the
originator will receive. As discussed above, consumers generally are
not aware of creditor payments to originators. If the consumer were
aware of such payments, the consumer might reasonably expect that
making a direct payment to an originator would reduce or eliminate the
need for the creditor to fund the originator's compensation through the
consumer's interest rate. Because the consumer is unaware of yield
spread premiums, however, the consumer cannot effectively negotiate the
originator's compensation. In fact, if consumers pay loan originators
directly and creditors also pay originators through higher rates,
consumers may be injured by unwittingly paying originators more in
total compensation (directly and through the rate) than consumers
believe they agreed to pay.
The Board believes that simply disclosing the yield spread premium
would not address this injury to consumers. Consumer testing in
connection with the Board's 2008 HOEPA Final Rule shows that, even with
a disclosure, consumers do not understand how a creditor payment to a
loan originator can result in a higher interest rate for the consumer.
A disclosure therefore cannot inform consumers that they effectively
are paying the loan originator more than they believe they agreed to
pay. Without that knowledge, consumers cannot take steps to protect
their own interests, such as by negotiating for a smaller direct
payment, a lower rate, or both.
The Board also believes that this prohibition would increase
transparency for consumers by requiring that all originator
compensation come from the creditor or from the consumer, but not both.
This additional consequence of proposed Sec. 226.36(d)(2) would reduce
the total number of loan pricing variables with which the consumer must
contend. There is evidence that such simplification is consistent with
TILA's purpose of promoting the informed use of
[[Page 43285]]
consumer credit.\65\ See TILA Section 102(a), 15 U.S.C. 1601(a).
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\65\ See, e.g., Woodward, Susan E., A Study of Closing Costs for
FHA Mortgages at 70-73 (Urban Institute and U.S. Department of
Housing and Urban Development 2008), available at http://www.urban.org/UploadedPDF/411682_fha_mortgages.pdf.
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Proposed Sec. 226.36(d)(2) would prohibit only payments to an
originator that are made in connection with the particular credit
transaction, such as a commission for delivering the loan. The rule is
not intended to prohibit payment of a salary to a loan originator who
also receives direct compensation from a consumer in connection with
that consumer's transaction. This guidance is contained in proposed
comment 36(d)(2)-1.
Record retention requirements. Creditors are required by Sec.
226.25(a) to retain evidence of compliance with Regulation Z for two
years. Proposed staff comment 25(a)-5 would be added to clarify that,
to demonstrate compliance with Sec. 226.36(d)(1), a creditor must
retain at least two types of records.
First, a creditor must have a record of the compensation agreement
with the loan originator that was in effect on the date the
transaction's rate was set. The Board believes this date is most likely
when a loan originator's compensation was determined for a given
transaction. The Board seeks comment, however, on whether some other
time would be more appropriate, in light of the purposes of the
proposed rule. Proposed comment 25(a)-5 would clarify that the rules in
Sec. 226.35(a) would govern in determining when a transaction's rate
is set.
Second, proposed comment 25(a)-5 would state that a creditor must
retain a record of the actual amount of compensation it paid to a loan
originator in connection with each covered transaction. The proposed
comment would clarify that, in the case of mortgage brokers, the HUD-1
settlement statement required under RESPA would be an example of such a
record because it itemizes the compensation received by a mortgage
broker. The Board solicits comment on whether any comparable record
exists for loan officer compensation that should be referenced in
proposed comment 25(a)-5. To facilitate compliance, a cross reference
to the record retention requirement would be included in proposed
comment 36(d)(1)-9.
The Board solicits comment on whether there are other records that
should be subject to the retention requirements. The Board also seeks
comment on whether the existing two-year record retention period is
adequate for purposes of the rules governing loan originator
compensation.
The current record retention requirements in Sec. 226.25 apply
only to creditors. Although loan originator compensation has
historically been paid by creditors, the prohibitions in Sec.
226.36(d) apply more broadly to any person to prevent evasion by
restructuring of payments through non-creditors. Accordingly, the Board
expects that payments to loan originators will continue to be made
largely by creditors. The Board seeks comment on whether there is a
need to adopt requirements for retaining records concerning originator
compensation that would apply to persons other than creditors,
including the relative costs and benefits of that approach.
36(e) Prohibition on Steering
Optional Proposal on Steering by Loan Originators
The Board is also soliciting comment on whether it should adopt a
rule that seeks to prohibit loan originators from directing or
``steering'' consumers to loans based on the fact that the originator
will receive additional compensation, when that loan may not be in the
consumer's best interest. Under proposed Sec. 226.36(d)(1), a loan
originator would receive the same compensation from a particular
creditor regardless of the transaction's rate or terms. That provision,
however, would not prohibit a loan originator from directing a consumer
to transactions from a single creditor that offers greater compensation
to the originator, while ignoring possible transactions having lower
interest rates that are available from other creditors.
Attempting to address this issue presents difficulties. Determining
whether a loan originator was warranted in directing a consumer to a
loan that resulted in greater compensation for the originator also
involves a determination of whether that loan was in the consumer's
best interest compared to other available loan products. There is,
however, no uniform method for making that evaluation. Consumers and
loan originators may choose from among possible loan offers for a
variety of reasons. The annual percentage rate (APR) is a tool that
facilitates comparison shopping among different loans, but it is
imperfect for reasons that are well documented, including the fact that
the APR is calculated by amortizing origination fees over the full loan
term rather than the expected life of the loan. See the 1998 Joint
Report to the Congress by the Board and HUD, cited above. In
considering interest rates, consumers may view the economic trade-off
between rates and points differently depending on their individual
financial circumstances or the amount of time they expect to hold the
loan. Moreover, consumers evaluate other factors in deciding whether a
loan is in their best interest even if it is not represented as the
lowest cost option among the possible loan offers available through the
originator. Thus, some consumers may reasonably determine that the
financial risk created by a loan's prepayment penalty is acceptable in
light of the loan's lower interest rate, while other consumers may
prefer to accept a higher rate to avoid the risk. Consumers and loan
originators also may consider factors other than loan cost, such as the
creditor's rate lock-in policies, or the creditor's reputation for
delivering loans within the promised time-frame, especially for home-
purchase loans.
The Board believes, however, that there is benefit in attempting to
craft a rule that prohibits and deters the most egregious practices,
even if such a rule cannot ensure that consumers always obtain the
lowest cost loan. Under the proposal, a loan originator would have a
duty not to steer a consumer to higher cost loans that pay more to the
originator when the loan is not in the consumer's interest. Originators
would violate the rule, for example, if they directed the consumer to a
fixed-rate loan option from a creditor that maximizes the originator's
compensation without providing the consumer with an opportunity to
choose from other available loans that have lower fixed interest rates
with the equivalent amount in origination and discount points.
The Board is publishing a proposal, designated as proposed Sec.
226.36(e)(1), to reflect this optional approach. Specifically, the rule
would prohibit loan originators from directing or ``steering'' a
consumer to consummate a transaction secured by real property or a
dwelling that is not in the consumer's interest, based on the fact that
the originator will receive greater compensation from the creditor in
that transaction than in other transactions the originator offered or
could have offered to the consumer. The proposed rule seeks to preserve
consumer choice by ensuring that consumers have appropriate loan
options that reflect considerations other than the maximum amount of
compensation that will be paid to the originator. Proposed comments
36(e)(1)-1 through -3 would provide additional guidance on the rule.
[[Page 43286]]
Proposed Sec. 226.36(e) would not require a loan originator to
direct a consumer to the transaction that will result in the least
amount of compensation being paid to the originator by the creditor.
However, if the loan originator reviews possible loan offers available
from a significant number of the creditors with which the originator
regularly does business and the originator directs the consumer to the
transaction that will result in the least amount of creditor-paid
compensation, the requirements of Sec. 226.36(e) would be deemed to be
satisfied. See proposed comment 36(e)(1)-2(ii).
Loan originators employed by the creditor in a transaction would be
prohibited under Sec. 226.36(d)(1) from receiving compensation based
on the terms or conditions of the loan. Thus, when originating loans
for the employer, the originator could not steer the consumer to a
particular loan to increase compensation. Accordingly, in those cases,
their compliance with Sec. 226.36(d)(1) would be deemed to satisfy the
requirements of proposed Sec. 226.36(e). See proposed comment
36(e)(1)-2(ii). A creditor's employee, however, occasionally might act
as a broker in forwarding a consumer's application to a creditor other
than the originator's employer, such as when the employer does not
offer any loan products for which the consumer would qualify. If the
originator is compensated for arranging the loan with the other
creditor, the originator would not be an employee of the creditor in
that transaction and would be subject to proposed Sec. 226.36(e).
The Board is also publishing provisions that would facilitate
compliance with the prohibition in proposed Sec. 226.36(e)(1). Under
proposed Sec. 226.36(e)(2) and (3), a safe harbor would be created,
and there would be no violation if the loan was chosen by the consumer
from at least three loan options for each type of transaction (fixed-
rate or adjustable-rate loan) in which the consumer expressed an
interest, provided the following conditions are met. The loan
originator must obtain loan options from a significant number of
creditors with which the originator regularly does business. For each
type of transaction in which the consumer expressed an interest, the
originator must present and permit the consumer to choose from at least
three loans that include: the loan with the lowest interest rate, the
loan with the second lowest interest rate, and the loan with the lowest
total dollar amount for origination points or fees and discount points.
The loan originator must have a good faith belief that these are loans
for which the consumer likely qualifies. If the originator presents
more than three loans to the consumer, the originator must highlight
the three loans that satisfy the lowest rate and points criteria in the
rule. Proposed comments 36(e)(2)-1 and 36(e)(3)-1 though -4 would
provide guidance on the application of the rule.
Comment is expressly solicited on whether the proposed rule in
Sec. 226.36(e) and the accompanying commentary would be effective in
achieving the stated purpose. Comment is also solicited on the
feasibility and practicality of such a rule, its enforceability, and
any unintended adverse effects the rule might have.
36(f)
The Board proposes to redesignate existing Sec. 226.36(d) as Sec.
226.36(f). Existing Sec. 226.36(d) provides that Sec. 226.36 does not
apply to home-equity lines of credit (HELOCs). The redesignation would
accommodate proposed new Sec. 226.36(d) and (e), discussed above.
The Board proposed as part of the 2008 HOEPA proposal to exclude
HELOCs from the coverage of Sec. 226.36 because of two considerations,
which suggested that the protections may be unnecessary for such
transactions. First, the Board understood that most originators of
HELOCs hold them in portfolio rather than sell them, which aligns these
originators' interests in loan performance more closely with their
borrowers' interests. Second, the Board understood that HELOCs are
concentrated in the banking and thrift industries, where the federal
banking agencies can use their supervisory authority to protect
consumers. The Board sought comment on whether these considerations
were valid or whether any or all of the protections in Sec. 226.36
should apply to HELOCs. Although mortgage lenders and other industry
representatives commented in support of the proposed exclusion and
consumer advocates commented in opposition, neither group provided the
Board with substantial evidence as to whether the kinds of problems
Sec. 226.36 addresses exist in the HELOC market.
In the July 2008 HOEPA Final Rule, the Board limited the scope of
Sec. 226.36 to closed-end mortgages. In the absence of clear evidence
of abuse, the Board continued to believe the protections may be
unnecessary for the reasons discussed above. Nevertheless, the Board
remains aware of concerns that creditors may structure transactions as
HELOCs solely to evade the protections of Sec. 226.36. The Board also
is aware that many of the same opportunities and incentives that
underlie the abuses addressed by Sec. 226.36 for closed-end mortgages
may well exist for HELOCs. Reasons therefore exist for positing that
such unfair practices either may or may not occur with HELOCs, but the
Board lacks concrete evidence as to which is the case.
The Board requests comment on whether any or all of the protections
in Sec. 226.36 should apply to HELOCs. Specifically, what evidence
exists that shows whether loan originators unfairly manipulate HELOC
terms and conditions to receive greater compensation, injuring
consumers as a result? What evidence is there as to whether appraisals
obtained for HELOCs have been influenced toward misstating property
values? To what extent do creditors contract out HELOC servicing to
third parties, thus undermining the Board's premise regarding aligned
interests between servicers and consumers? Whether third parties or the
original creditors primarily service HELOCs, what evidence shows
whether they engage in the abusive servicing practices addressed by
Sec. 226.36(c)?
Section 226.37 Special Disclosure Requirements for Closed-End Mortgages
Section 226.17(a), which implements Sections 122(a) and 128(b)(1)
of TILA, addresses format and other disclosure standards for all
closed-end credit. 15 U.S.C. 1632(a), 1638(b)(1). For closed-end
credit, creditors must provide disclosures in writing in a form that
the consumer may keep, grouped together and segregated from other
information. In addition, the loan's ``finance charge'' and ``annual
percentage rate,'' using those terms, must be more conspicuous than
other required disclosures.
The Board proposes special rules in new Sec. 226.37 to govern the
format of required disclosures under TILA for transactions secured by
real property or a dwelling. These new rules would be in addition to
the rules in Sec. 226.17. The proposed format rules are intended to
(1) improve consumers' ability to identify disclosed loan terms more
readily; (2) emphasize information that is most important to the
consumer in the decision-making process; and (3) simplify the
organization and structure of required disclosures to reduce complexity
and ``information overload.'' Proposed Sec. 226.37 would establish
special format rules for disclosures required by proposed Sec. Sec.
226.38 and 226.20(d), and existing Sec. Sec. 226.19(b) and 226.20(c).
The Board is proposing Sec. 226.37 and associated commentary to
address the
[[Page 43287]]
duty to provide ``clear and conspicuous'' disclosures that are grouped
together and segregated from other information, and to require that
certain information be highlighted in table form or in a graph.
Proposed Sec. 226.37 would also require creditors to use consistent
terminology for all disclosures. The Board is proposing to revise the
requirement that certain terms be used or disclosed more conspicuously,
for transactions secured by real property or a dwelling. The general
disclosure standards under Sec. 226.17(a)(1) and associated commentary
continue to apply transactions secured by real property or a dwelling
but, under the proposal creditors would also be required to meet the
higher standards under proposed Sec. 226.37.
37(a) Form of Disclosures
37(a)(1) Clear and Conspicuous
Section 122(a) of TILA and Sec. 226.17(a)(1) require that all
closed-end credit disclosures be made clearly and conspicuously. 15
U.S.C. 1632(a). Currently, under comment 17(a)(1)-1, the Board
interprets the clear and conspicuous standard to mean that disclosures
must be in a ``reasonably understandable'' form. This standard does not
require any mathematical progression or format, or that disclosures be
provided in a particular type size, although disclosures must be
legible whether typewritten, handwritten, or printed by computer.
Comment 17(a)(1)-3 provides that the standard does not require
disclosures to be located in a particular place.
Consumer testing conducted by the Board showed that information
presented without any highlighting or other emphasis, and the use of
small print led many participants to miss or disregard key information
about the loan transaction. As discussed more fully under the following
sections, consumer testing indicates that when certain information is
presented and highlighted in a specific way consumers are able to
identify and use key terms more easily: proposed Sec. 226.38 for
disclosures required on transactions secured by real property or a
dwelling, Sec. 226.19(b) for ARM loan program disclosures, Sec.
226.20(c) for ARM adjustment notices, and Sec. 226.20(d) for periodic
statements on loans that are negatively amortizing.\66\ For example,
consumer testing of the current TILA model form indicated that
participants viewed both the interest rate and monthly payment as
important. Although participants generally understood that the interest
rate on their loan could change, several arrived at this conclusion
because of the payment schedule disclosure, which showed different
monthly payment amounts, not because they understood the loan had a
variable rate feature that would affect their monthly payments. In
addition to testing the current TILA model form, the Board also tested
variations of that form, including a form it developed in 1998 with HUD
(``Joint Form'') that was submitted to Congress in the 1998 Joint
Report.\67\ Participants who reviewed the Joint Form also generally
understood the loan had an adjustable rate, but less than half
understood the rate was fixed only for the first three years and could
vary only after that time period. However, when the Board consumer
tested information about interest rates and monthly payments in a
tabular form, participants could identify more readily that the loan
had an adjustable rate feature, and comprehension of when interest
rates would adjust and the impact that rate adjustments had on their
monthly payments improved.
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\66\ See also Improving Consumer Mortgage Disclosures (finding
that incorporating white space, using clear headings, and using
certain formatting and organization create a ``less intimidating
appearance than many consumer financial disclosures, making it more
likely that consumers will both want to read the form and be able to
use it productively in their decisions.'').
\67\ See the 1998 Joint Report, App.A-6.
---------------------------------------------------------------------------
For these reasons, the Board proposes to require that creditors
make disclosures for transactions secured by real property or a
dwelling clearly and conspicuously, by highlighting certain information
in accordance with the requirements in proposed Sec. Sec. 226.38,
226.19(b), Sec. 226.20(c), and Sec. 226.20(d). Proposed comment
37(a)(1)-1 would clarify that to meet the clear and conspicuous
standard, disclosures must be in a reasonably understandable form and
readily noticeable to the consumer. Proposed comment 37(a)(1)-2
provides that to meet the readily noticeable standard, the disclosures
under proposed Sec. Sec. 226.38, 226.19(b), 226.20(c), and 226.20(d)
generally must be provided in a minimum 10-point font. The approach of
requiring a minimum of 10-point font for certain disclosures is
consistent with the approach taken by the Board in revising disclosures
required under TILA for certain open-end credit. 74 FR 5244; Jan. 29,
2009.
New comment 37(a)(1)-3 would clarify that disclosures under
proposed Sec. Sec. 226.38 and 226.19(b) must be provided on a document
separate from other information, although these disclosures, as well as
disclosures under proposed Sec. Sec. 226.20(c) and 226.20(d), may be
made on more than one page, on the front or back side of a page, and
continued from one page to the next. Consumer testing suggests that
consumers may not read information carefully if it is excessive in
length, and if unable to identify relevant information quickly are
likely to become frustrated and not read the disclosures. The Board
believes that allowing creditors to combine disclosures with other
information may increase the likelihood that consumers will not read
the disclosures.
37(a)(2) Grouped Together and Segregated
Section 128(b)(1) of TILA and Sec. 226.17(a)(1) currently require
that, except for certain information, the disclosures required for
closed-end credit must be grouped together, segregated from everything
else, and not contain any information not directly related to the
required disclosures. 15 U.S.C. 1638(b)(1). Comment 17(a)(1)-2 states
that creditors can satisfy the grouped together and segregation
requirement in a variety of ways, including combining segregated
disclosures with other information as long as they are set off by a
certain format type. Comment 17(a)(1)-2 further provides that the
segregation requirement does not apply to disclosures for variable rate
transactions required under current Sec. Sec. 226.19(b) and 226.20(c).
Comment 17(a)(1)-7 clarifies that balloon-payment financing with
leasing characteristics is subject to the grouped together and
segregation requirement.
Consumer testing conducted by the Board indicated that participants
generally are overwhelmed by the amount of information presented for
loan transactions, and as a result, do not read their mortgage
disclosures carefully. Consumer testing showed that emphasizing terms
and costs consumers find important, and separating out less useful
information, is critical to improving consumers' ability to identify
and use key information in their decision-making process.\68\ Consumer
testing also demonstrated that grouping related concepts and figures
together, and presenting them in a particular format or structure can
improve
[[Page 43288]]
consumers' ability to identify, comprehend, or use disclosed terms.
---------------------------------------------------------------------------
\68\ See also Improving Consumer Mortgage Disclosure at 69
(consumer testing results showed that current mortgage disclosure
forms failed to convey key cost disclosures, but that prototype
disclosures, which removed less useful information, significantly
improved consumers' recognition of key mortgage costs).
---------------------------------------------------------------------------
For these reasons, the Board proposes to require that certain
disclosures be grouped together and segregated in the manner discussed
below, pursuant to its authority under TILA Section 105(a). 15 U.S.C.
1604(a). Section 105(a) authorizes the Board to make exceptions and
adjustments to TILA to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a),
1604(a). Grouping and segregating information which is most useful and
relevant to the loan transaction would facilitate consumers' ability to
evaluate a loan offer.
Segregation of disclosures. Proposed Sec. 226.37(a)(2) would
implement TILA Section 128(b)(1) of TILA, in part, for transactions
secured by real property or a dwelling. 15 U.S.C. 1604(a), 1638(b)(1).
Proposed Sec. 226.37(a)(2) would require that disclosures for such
transactions be grouped together in accordance with the requirements
under proposed Sec. 226.38(a) through (j), segregated from other
information, and not contain any information not directly related to
the segregated disclosures. Based on consumer testing, the Board also
is proposing to require that ARM loan program disclosures under
proposed Sec. 226.19(b), ARM adjustment notices under proposed Sec.
226.20(c), and periodic notices for payment option loans that are
negatively amortizing under proposed Sec. 226.20(d), be subject to a
grouped-together and segregation requirement. Thus, the reference to
Sec. Sec. 226.19(b) and 226.20(c) would be deleted from comment
17(a)(1)-2.
Proposed comment 37(a)(2)-1 would clarify that to be segregated,
disclosures must be set off from other information. Based on consumer
testing, the Board is concerned that allowing creditors to combine
disclosures with other information, in any format, will diminish the
clarity of key disclosures, potentially cause ``information overload,''
and increase the likelihood that consumers may not read the
disclosures. Proposed comment 37(a)(2)-1 also would provide guidance on
how creditors can group together and segregate the disclosures in
accordance with proposed Sec. 226.38(a)-(j), such as by using bold
print dividing lines.
Content of segregated disclosures; directly related information.
Footnotes 37 and 38 currently provide exceptions to the grouped-
together and segregation requirement under Sec. 226.17(a)(1). Footnote
37 allows creditors to include information not directly related to the
required disclosures, such as the consumer's name, address, and account
number. Footnote 38, which implements TILA Section 128(b)(1), 15 U.S.C.
1638(b)(1), allows creditors to exclude certain required disclosures
from the grouped-together and segregation requirement, such as the
creditor's identity under Sec. 226.18(a), the variable-rate example
under Sec. 226.18(f)(1)(iv), insurance or debt cancellation
disclosures under Sec. 226.18(n), or certain security-interest charges
under Sec. 226.18(o). Comment 17(a)(1)-4 clarifies that creditors have
flexibility in grouping the disclosures listed in footnotes 37 and 38
either together with or separately from segregated disclosures, and
comment 17(a)(1)-5 addresses what is considered directly related to the
segregated disclosures.
Proposed Sec. 226.37(a)(2)(i) and (ii) would provide exceptions to
the grouped-together and segregation requirement, and implement TILA
Section 128(b)(1) for transactions secured by real property or a
dwelling. 15 U.S.C. 1638(b)(1). Proposed Sec. 226.37(a)(2)(i)
replicates the content in current footnote 37 and would allow the
following disclosures to be made together with the segregated
disclosures: the date of the transaction, and the consumer's name,
address and account number. Proposed Sec. 226.37(a)(2)(ii) generally
replicates the substance in current footnote 38, except that the Board
proposes to remove the reference to the variable-rate example under
Sec. 226.18(f)(iv), which would be eliminated for mortgage loans as
discussed under proposed Sec. 226.19(b). Under proposed Sec.
226.37(a)(2)(ii), creditors also would have flexibility to make the tax
deductibility disclosure, as discussed under proposed Sec.
226.38(f)(4), together with or separately from other required
disclosures.
Proposed comment 37(a)(2)-2 clarifies that creditors may add or
delete the disclosures listed in proposed Sec. 226.37(a)(2)(i) and
(ii) in any combination together with or separate from the segregated
disclosures. Proposed comment 37(a)(2)-3 provides guidance on the type
of information that would be considered directly related and that may
be included with the segregated disclosures for transactions secured by
real property or a dwelling. Information described in comments
17(a)(1)-5(i) through (xv) are not included in proposed comment
37(a)(2)-3 because they are not applicable to transactions secured by
real property or a dwelling, or are unnecessary as a result of other
proposed disclosures: grace periods for late fees; unsecured interest;
demand features; instructions on multi-purpose forms; minimum finance
charge statement; negative amortization; due-on-sale clauses;
prepayment of interest statement; the hypothetical example disclosure
required by current Sec. 226.18(f)(1)(iv); the variable rate
transaction disclosure required by current Sec. 226.18(f)(1);
assumption; and the late-payment fee disclosure for single-payment
loans.
The Board also proposes to require that the disclosure of the
creditor's identity be grouped together and segregated from other
information, for all closed-end credit. The Board proposes to make this
change pursuant to its authority under TILA Section 105(a). 15 U.S.C.
1604(a). Section 105(a) authorizes the Board to make exceptions and
adjustments to TILA to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms, and avoiding
the uninformed use of credit. 15 U.S.C. 1601(a). The Board believes
that the creditor's identity should be included with the grouped-
together and segregated disclosures so that consumers can more easily
identify the appropriate entity. Thus, current footnote 38 would be
revised, and proposed Sec. 226.37(a)(2) would implement this aspect of
the proposal for transactions secured by real property or a dwelling.
In technical revisions, the Board proposes to move the substance of
footnotes 37 and 38 to the regulatory text of Sec. 226.17(a)(1).
Current comment 17(a)(1)-7 would be revised to address disclosures for
transactions secured by real property or a dwelling that have balloon
payment financing with leasing characteristics; a cross-reference to
comment 17(a)(1)-7 is proposed in new comment 37(a)(2)-4.
The Board seeks comment on whether it should continue to permit
creditors to make the insurance or debt cancellation disclosures under
proposed Sec. 226.4(d) together with or separately from other required
disclosures. Consumer testing showed that many participants found these
disclosures too long and complex, and as a result they do not read or
only skim the disclosures. The Board is concerned that adding the
insurance information to the information about loan terms required by
proposed Sec. 226.38 will result in ``information overload.''
Multi-purpose forms. Comment 17(a)(1)-6 currently permits creditors
to design multi-purpose forms for TILA-required closed-end credit
disclosures as long as the clear and conspicuous requirement is met.
The Board proposes
[[Page 43289]]
to require that disclosures for transactions secured by real property
or a dwelling be made only as applicable, as discussed more fully under
proposed Sec. 226.38. As noted, consumer testing indicates that
consumers may not read information if it is excessive in length, and if
unable to identify relevant information quickly are likely to become
frustrated and not read the disclosures. The Board believes that
allowing creditors to combine disclosures with other information that
is not applicable to the transaction may contribute to ``information
overload,'' and increase the likelihood that consumers will not read
the disclosures.
For these reasons, under the proposal creditors would not be
permitted to use forms for more than one type of mortgage transaction
(i.e., multi-purpose forms). The Board believes technology and form
design software will allow creditors to prepare transaction-specific,
customized disclosure forms at minimal cost. The Board seeks comment,
however, on whether creditors already provide consumers with customized
disclosures forms for mortgage loans in the regular course of business,
or the extent to which creditors rely on multi-purpose forms. The Board
seeks comment on potential operational changes, difficulties, or costs
that would be incurred to implement the requirement to have
transaction-specific disclosures for transactions secured by real
property or a dwelling.
37(b) Separate Disclosures
Existing Sec. 226.17(a)(1) requires certain disclosures to be
provided separately from the segregated information, such as the
itemization of amount financed required by Sec. 226.18(c)(1) and TILA
Section 128(a)(2)(A). 15 U.S.C. 1638(a)(2)(A). The Board is proposing
to expand the list of disclosures that must be provided separately from
the segregated information, based on consumer testing.
Consumer testing showed that certain disclosures, such as
disclosures about assumption or property insurance, were confusing to
participants, or were generally not as useful in the participants'
decision-making process as other information. For example, with respect
to assumption, few participants understood the current assumption
policy model clause in Model Clause H-6 in Appendix H to Regulation Z;
almost no one stated that the assumption was important information when
applying for and obtaining a loan. With respect to property insurance,
most participants understood that the borrower can obtain property
insurance from anyone that is acceptable to the lender, but
participants stated they were already aware of this fact and therefore
this information was not useful. Regarding rebates, consumers
understood that early payoff of the loan could result in a refund of
interest and fees, and generally expressed interest in knowing this
information. However, most also indicated that information about
rebates would not have an impact on whether they accepted a loan and
therefore, it was not as important or useful to the decision-making
process as other information, such as interest rate or closing costs.
With respect to the contract reference, almost all participants
understood already that they could read their contract to learn what
could happen if they stopped making payments, defaulted, paid off or
refinanced their loan early. In addition, other proposed disclosures,
such as the prepayment penalty under proposed Sec. 226.38(a)(5) or
demand feature under proposed Sec. 226.38(d)(2)(iv), would make the
contract reference disclosure less important because such information
would already be disclosed directly on the disclosure statement itself.
Moreover, because creditors must provide disclosures within three
business days after application for transactions secured by real
property or a consumer's dwelling, consumers will not have a contract
to reference at this point in time.
For these reasons, the Board proposes to require that certain
information be disclosed separately from the grouped together and
segregation information, to improve consumers' ability to focus on the
terms that are most important for shopping and decision-making.\69\ New
Sec. 226.37(b) would require that creditors provide the following
disclosures separately from other information for transactions secured
by real-property or a dwelling: Itemization of amount financed under
proposed Sec. 226.38(j)(1); rebates under proposed Sec. 226.38(j)(2);
late payment under proposed Sec. 226.38(j)(3); property insurance
under proposed Sec. 226.38(j)(4); contract reference under proposed
Sec. 226.38(j)(5); and assumption under proposed Sec. 226.38(j)(6).
---------------------------------------------------------------------------
\69\ See also Improving Consumer Mortgage Disclosures at 37-38,
59-60 (finding that streamlining disclosures improved consumer
ability to identify and understand key terms of the loan transaction
disclosed).
---------------------------------------------------------------------------
The Board proposes this approach pursuant to its authority under
TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the
Board to make exceptions and adjustments to TILA for any class of
transactions to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a),
1604(a). In this case, the Board believes an exception from TILA's
grouped together and segregation requirement is necessary to effectuate
the Act's purposes for transactions secured by real property or a
dwelling. As noted above, many consumers may not read information if it
is excessive in length, and if unable to identify relevant information
quickly are likely to become frustrated and not read the disclosures.
The Board is concerned that allowing creditors to combine the
information in proposed Sec. 226.38(j) with other required information
could contribute to ``information overload,'' distract from other
important disclosures, such as the APR or monthly payments, and may
increase the likelihood that consumers will not read the disclosures.
Thus, the Board believes that requiring these disclosures to be
separate from the other required disclosures will serve TILA's purpose
to avoid the uninformed use of credit. 15 U.S.C. 1601(a).
37(c) Terminology
37(c)(1) Consistent Terminology
Currently, there is no requirement that TILA disclosures for
closed-end credit use consistent terminology. Consumer testing showed
that some participants were confused when different terms are used for
the same information. For example, when the terms loan amount,
principal, and loan balance were used, some participants attributed
different meaning to each term used. Based on these findings, the Board
proposes Sec. 226.37(c)(1) to require the use of consistent
terminology for the disclosures under proposed Sec. Sec. 226.38,
226.19(b), 226.20(c) and 226.20(d). The Board believes that using
consistent terminology will enhance a consumers' ability to identify,
review, and comprehend disclosed terms across all disclosures and
therefore, avoid the uninformed use of credit. Proposed comment
37(c)(1)-1 clarifies that terms do not need to be identical, unless
otherwise specified, but must be close enough in meaning to enable the
consumer to relate the disclosures to one another. Proposed comment
37(c)(1)-2 provides guidance on combining terms for transactions
secured by real property or a dwelling when more than one numerical
disclosure would be the same, and provides an example relating to the
total payments and amount financed disclosures required under proposed
[[Page 43290]]
Sec. Sec. 226.38(e)(5)(i) and 226.38(e)(5)(iii), respectively.
37(c)(2) Terms Required To Be More Conspicuous
Currently TILA Section 122(a) and Sec. 226.17(a)(2) require
creditors to disclose the terms ``finance charge'' and ``annual
percentage rate,'' together with a corresponding dollar amount and
percentage rate, more conspicuously than any other disclosure, except
the creditor's identity under Sec. 226.18(a). 15 U.S.C. 1632(a). Under
TILA Section 103(u), the finance charge and the annual percentage rate
are material disclosures; failure to disclose either term extends the
right of rescission under TILA Section 125, and can result in actual
and statutory damages under TILA Section 130(a). 15 U.S.C. 1602(u); 15
U.S.C. 1635, 1640(a).
Finance charge: interest and settlement charges. Section 226.18(d),
which implements TILA Sections 128(a)(3) and (a)(8), requires creditors
to disclose the ``finance charge,'' using that term, and a brief
description such as ``the dollar amount the credit will cost you'' for
closed-end credit. 15 U.S.C. 1638(a)(3), (a)(8). Consumer testing
showed that participants could not correctly explain what the finance
charge represented. Many consumers recognized that the finance charge
included all of the interest they would pay over the loan's term, but
did not know that it also included fees. Most participants did not find
the finance charge to be useful in evaluating a loan offer. However,
some participants expressed a general interest in knowing the
information.
Based on these results, the Board tested a form with the finance
charge disclosed as ``interest and settlement charges,'' to more
closely represent the components of the finance charge. Participants
generally understood the term, but still stated that they did not find
the term very useful, particularly when compared to other information
such as the interest rate or monthly payments. Consumer testing
suggests that highlighting terms that are not useful in the decision-
making process may generally diminish consumers' ability to understand
other key terms.
For these reasons, and as discussed more fully in the discussion of
proposed Sec. 226.38(e)(5)(ii), the Board proposes to exercise its
authority under TILA Section 105(a) to make certain exceptions to the
disclosure of the finance charge under TILA Section 128(a)(3) and TILA
Section 122(a). 15 U.S.C. 1604(a); 1632(a); 1638(a)(3). First,
creditors would be required to disclose the finance charge as
``interest and settlement charges,'' not as the ``finance charge'' as
required by TILA Section 128(a)(3). 15 U.S.C. 1638(a)(3). Second, the
disclosure of interest and settlement charges would not have to be more
conspicuous than other terms, as required by TILA Section 122(a). 15
U.S.C. 1632(a).
The exception to TILA's requirements that the finance charge be
disclosed as the ``finance charge'' and that it be more conspicuous
than other information is proposed pursuant to TILA Section 105(a). 15
U.S.C. 1604(a). The Board has authority under TILA Section 105(a) to
adopt ``such adjustments and exceptions for any class of transactions
as in the judgment of the Board are necessary or proper to effectuate
the purposes of this title, to prevent circumvention or evasion
thereof, or to facilitate compliance therewith.'' 15 U.S.C. 1601(a),
1604(a). The class of transactions that would be affected is closed-end
transactions secured by real property or a dwelling. The Board believes
an exception from TILA's requirements is necessary and proper to
effectuate TILA's purposes to assure meaningful disclosure and informed
credit use. Consumer testing showed that disclosing the finance charge
as ``interest and settlement charges'' improved participants'
understanding of the information, even though the figure may not
include all interest and settlement charges applicable to the
transaction. (See discussion under proposed Sec. 226.4 regarding
content and calculation of the interest and settlement charges.)
Moreover, consumer testing showed that participants did not find the
interest and settlement charges as useful, when choosing or evaluating
a loan product, as other information, such as whether the loan has an
adjustable rate or the monthly payment amount.
In addition, and for the reasons discussed more fully under
proposed Sec. 226.38(e)(5)(ii) regarding interest and settlement
charges, the proposal would group the interest and settlement charges
disclosure with other disclosures relating to the total cost of the
loan offered, such as the total of payments and the amount financed.
Consumer testing conducted by the Board, as well as basic document
design principles, shows that grouping related concepts and figures
makes it easier for consumers to identify, comprehend, or use disclosed
terms.
Annual percentage rate. TILA Section 122(a) and Sec. 226.17(a)(1)
require that the term ``annual percentage rate,'' when disclosed with
the corresponding percentage rate, be disclosed more conspicuously than
any other required disclosure. 15 U.S.C. 1632(a). The Board is
proposing to revise the description of the APR and require that
creditors provide context for the APR by disclosing it on a scaled
graph with explanatory text, as discussed more fully under proposed
Sec. Sec. 226.38(b). In addition, the Board is proposing Sec.
226.37(c)(2) to implement TILA Section 122(a) for transactions secured
by real property or a dwelling. 15 U.S.C. 1632(a). Section 226.37(c)(2)
would require that creditors disclose the APR in a 16-point font, in a
prominent location, and in close proximity to the scaled graph and
explanations proposed under Sec. 226.38(b)(2) through (4).
As discussed under proposed Sec. 226.38(b), the APR is one of the
most important terms disclosed about the loan; it is the only single,
unified number available to help consumers understand the overall cost
of a loan. To this end, the Board believes it is essential that
consumers be able to identify the APR easily. Consumer testing and
basic document design principles show that participants generally pay
greater attention to figures, such as numbers, percentages and dollar
signs, than to terminology that may accompany, describe or label any
disclosed figure. However, the TILA disclosure contains many numerical
figures that consumers must identify and review. Given that the Board
is proposing to require a minimum 10-point font for disclosure of other
terms on the TILA (see discussion under proposed comment 37(a)(1)-2),
and based on document design principles, the Board consumer tested
disclosing the APR figure in a larger font and in bold text to make it
more readily noticeable as compared to other disclosed terms. When
tested in this manner, participants were able to easily identify the
APR. Based on consumer testing, the Board believes that a 16-point font
requirement for the APR is sufficient to highlight the APR. The Board
also notes that the approach of requiring at least a 16-point font for
the APR disclosure is consistent with the approach taken by the Board
in revising the purchase APR disclosure required under TILA for open-
end credit. 74 FR 5244; Jan. 29, 2009.
Proposed comment 37(c)-3(i) through (iii) would provide further
guidance on the more conspicuous requirement and would clarify that the
APR must be more conspicuous only in relation to other required
disclosures under proposed Sec. 226.38, and only as required under
proposed Sec. 226.37(c)(2) and Sec. 226.38(b). Proposed comment
37(c)-4 would provide guidance on how creditors can comply with the
more
[[Page 43291]]
conspicuous requirement for transactions secured by real property or a
dwelling.
The Board seeks comment on whether the APR should be made more or
less prominent using a larger or smaller font-size, and whether
different graphs or visuals could be used to provide better context for
the APR. The Board also seeks comment on the relative advantages and
disadvantages of a graphic-based versus text-based approach to
disclosing the APR, and the potential operational changes,
difficulties, or costs that would be incurred to implement the graphic-
based APR disclosure requirement for transactions secured by real
property or a dwelling.
37(d) Specific Formats
Currently, Sec. 226.17(a)(1) does not impose special format design
or location requirements on disclosures for closed-end credit. However,
as discussed more fully under proposed Sec. 226.38, consumer testing
showed that the current TILA form did not present key loan information
in a manner that was noticeable and easy for consumers to understand.
For example, the payment schedule required under current Sec.
226.18(g) did not effectively demonstrate to participants the
relationship between monthly payments and an adjustable interest rate
feature. Consumer testing also showed that the current TILA form
highlighted terms that confused many participants. For example, most
participants incorrectly assumed the amount financed was the same as
the loan amount, a term not required on the current TILA form. In other
instances, the current TILA form emphasized information that
participants generally understood, but did not find useful or
important, such as the total of payments. Many participants also noted
that the current TILA form failed to include information they would
find useful when shopping or evaluating a loan offer, such as the
contract interest rate and settlement charges.
As discussed under proposed Sec. 226.19, consumer testing of the
current ARM loan program disclosure and the CHARM booklet also revealed
ineffective presentation of information relating to adjustable rate
loan programs. Many participants found the narrative format and
terminology used in the current ARM loan program disclosure
complicated, dense, and difficult to read and understand. With respect
to the CHARM booklet, many participants generally indicated that the
information it contained was informative and educational, but they
would be unlikely to read it because it was too long.
In addition, as noted previously, consumer testing suggests that
consumers may not read information carefully if it is excessive in
length, and if unable to identify relevant information quickly are
likely to become frustrated and not read the disclosures. As discussed
more fully under proposed Sec. 226.37(a) through (c), this suggests
highlighting and structuring disclosures in a particular manner to
improve clarity, identification and comprehension of disclosed terms.
To address the problems with the current TILA form and ARM loan
program disclosures, the Board used various formats to present key loan
information, such as tabular forms and question and answer format.
Consumer testing suggests that using tabular forms improved
participants' ability to readily identify and understand key
information, as discussed under proposed Sec. Sec. 226.19(b) and
226.38(c). For example, current ARM loan program disclosures provide
information in narrative form, which participants found difficult to
read and understand. However, consumer testing showed that when
information about interest rate, monthly payment and loan features was
presented in tabular format, participants found the information easier
to locate and their comprehension of the disclosed terms improved. The
benefits of disclosing important information in a tabular format are
consistent with the results of consumer testing conducted by the Board
in revising credit card disclosures. 74 FR 5244; Jan. 29, 2009.
Consumer testing also showed that using question and answer format
improved participants' ability to recognize and understand potentially
risky or costly features of a loan, as discussed under proposed
Sec. Sec. 226.19 and 226.38(d). Consumer testing and basic document
design principles suggest that keeping language and design elements
consistent between forms improves consumers' ability to identify and
track changes in the information being disclosed. As a result, the
Board also integrated the question and answer format used on the
revised TILA model form into ARM loan program disclosures required
under proposed Sec. 226.19(b).
To present key loan terms more effectively, the Board also used
specific location and structure requirements. Consumer testing suggests
that the location and order in which information is presented impacts
consumers' ability to find and comprehend the information disclosed.
For example, as discussed under proposed Sec. 226.38(a), disclosing
key information, such as the loan term, amount, type, and settlement
charges, before other required disclosures and in a tabular format
improved participants' ability to quickly and accurately identify key
loan terms. In another example, participants' ability to identify the
frequency of rate adjustments after an introductory period expired also
improved when this information was included both in the loan summary
section at the top of the revised TILA model form, and then again below
in the interest rate and payment summary section.
Based on consumer testing results, basic document design
principles, and for the reasons discussed more fully under each of the
following subsections, the Board is proposing to establish special
format rules for: disclosures under proposed Sec. 226.38 for
transactions secured by real property or a dwelling; ARM loan program
disclosures under proposed Sec. 226.19(b) for adjustable rate
transactions; ARM adjustment notices under proposed Sec. 226.20(c);
and periodic statements required for payment option loans that are
negatively amortizing under proposed Sec. 226.20(d). The special rules
regarding format, structure and location of disclosures are noted in
proposed Sec. 226.37(d)(1) through (10). Proposed comments 37(d)-1 and
-2 would provide guidance to creditors on how to comply with the
special format rules noted in proposed Sec. 226.37(d)(1) through (10)
regarding prominence and close proximity of disclosed terms.
37(e) Electronic Disclosures
Currently, under Sec. 226.17(a)(1) creditors are permitted to
provide in electronic form any TILA disclosure for closed-end credit
that is required to be provided or made available to consumers in
writing if the consumer affirmatively consents to receipt of electronic
disclosures in a prescribed manner. Electronic Signatures in Global and
National Commerce Act (the E-Sign Act), 15 U.S.C. 7001 et seq. The
Board proposes Sec. 226.37(e) to allow creditors to provide required
disclosures for transactions covered by proposed Sec. 226.38 in
electronic form in accordance with the requirements under Sec.
226.17(a)(1).
Section 226.38 Content of Disclosures for Credit Secured by Real
Property or a Dwelling
38(a) Loan Summary
To shop for and understand the cost of credit, consumers must be
able to identify and understand the key credit terms offered to them.
As discussed
[[Page 43292]]
below, the Board's consumer testing suggested that loan amount, loan
term and loan type are key terms that consumers are familiar with and
expect to see on closed-end mortgage disclosures, together with
settlement charges and whether a prepayment penalty would apply to
their loan.
The Board's Proposal
The Board proposes to require creditors to provide the following
key loan features in a loan summary section: loan amount, loan term,
loan type, the total settlement charges, whether a prepayment penalty
applies and, the maximum amount of the penalty. The purpose of the
proposed disclosures is to improve their effectiveness and consumer
comprehension. A concise loan summary would help consumers compare loan
offers; a summary may also help consumers determine whether they can
afford the loan they are offered, and whether the disclosure presents
the same loan terms they discussed with their mortgage broker or
lender.
The Board conducted consumer testing of loan summary disclosures.
Participants were able to identify the exact loan amount, what type of
a loan they were being offered, how long they would have to pay off
their loan, how much they would have to pay in settlement charges, and
whether a prepayment penalty would apply. A discussion of the items
that would be included in the loan summary follows.
38(a)(1) Loan Amount
Currently creditors are not required to disclose the loan amount
for closed-end mortgages, except for loans subject to HOEPA. Under
Sec. 226.32(c)(5), creditors are required to disclose the total amount
borrowed. The Board is proposing to require a similar disclosure of the
loan amount for all transactions secured by a real property or a
dwelling. Proposed Sec. 226.38(a)(1) would require creditors to
disclose ``loan amount,'' which would be defined as the principal
amount the consumer will borrow reflected in the note or loan contract.
The loan amount is a core loan term that the consumer should be able to
verify readily on the disclosure. Disclosing the loan amount may also
alert the consumer to fees that are financed in addition to the
principal balance.
38(a)(2) Loan Term
Currently, Regulation Z requires creditors to disclose the number
of payments but not the term of the loan. The Board believes that the
loan term is an important fact about the loan that consumers should
know when evaluating a loan offer. Consumer testing of current model
forms conducted by the Board indicated that some consumers are not able
to readily identify the loan term from the number of payments disclosed
in the current disclosures. Although some participants could determine
the loan term by dividing by 12 the number of months shown in the
payment schedule disclosed under Sec. 226.18(g), other participants
could not readily figure the term of the loan offered, particularly for
loans that have multiple payment levels, such as discounted adjustable-
rate mortgages. For these reasons, the Board is proposing to require
disclosure of the loan term in the summary section for loans covered by
Sec. 226.38, and to define ``loan term'' for these purposes as the
time to repay the obligation in full. For instance, instead of
disclosing the number of months for each payment amount for variable
interest rate loans and requiring the consumer to add up those months
to determine the loan term, the proposed disclosure would state ``Loan
term: 30 years.'' Likewise, for a 10-year loan with a balloon payment
due in year 10 and an amortization schedule of 30 years, the proposed
disclosure would state ``Loan term: 10 years.''
38(a)(3) Loan Type and Features
Regulation Z does not require the creditor to disclose the type of
the loan, except in the case of loans with variable interest rates.
Current Sec. 226.18(f) requires a disclosure of a variable rate if the
annual percentage rate may increase after consummation. The Board's
consumer testing indicates that the current variable rate disclosures
may not clearly convey whether the loan has a fixed or a variable
interest rate. The Board believes that a specific disclosure of a loan
type offered will assist consumers in better understanding whether a
loan features a rate that may increase after consummation, so that the
consumer may evaluate whether they want a loan in which the rate and
payments can increase.
The Board is proposing to require a disclosure of the loan type in
the loan summary section for loans covered by Sec. 226.38. Proposed
Sec. 226.38(a)(3)(i) would require that a loan be classified as one of
three types: an ``adjustable-rate mortgage (ARM),'' a ``step-rate
mortgage,'' or a ``fixed-rate mortgage'' using those terms. The
categories proposed in Sec. 226.38(a)(3)(i) apply only to disclosures
requires for closed-end transaction secured by real property or a
dwelling, and are different from the categories in Sec. 226.18(f) and
commentary to Sec. 226.17(c)(1). Proposed Sec. 226.38(a)(3)(ii) would
require an additional disclosure if the loan has one or more of the
following three features: ``negative amortization,'' ``interest-only
payments,'' or ``step-payments,'' using those terms. The related
commentary would provide examples for each loan type and feature.
38(a)(3)(i) Loan Type
As discussed above, consumer testing indicated that the current
variable rate disclosure is not sufficiently clear for many consumers.
When presented with a current closed-end model form for an adjustable-
rate mortgage, over half of the participants understood that the
interest rate would change. However, several participants inferred this
from the different monthly payments in the payment schedule, not
because the check box on the form indicated that the loan had a
``variable rate.'' A few participants indicated that they did not know
whether the rate would change. Some participants commented that
although the current model form used the term ``variable rate,'' they
were more familiar with the term ``adjustable rate.'' As a result, the
Board tested revised disclosures using the term ``adjustable rate
mortgage'' in the loan summary section. All participants who were shown
a revised disclosure for a variable rate transaction using the term
``adjustable-rate mortgage'' understood that the interest rate and
payments could change during the loan's term.
Proposed Sec. 226.38(a)(3)(i) would define an adjustable-rate
mortgage as a transaction in which the annual percentage rate may
increase after consummation; a step-rate mortgage as a transaction in
which the interest rate will change after consummation as specified in
the legal obligation between the parties; and a fixed-rate mortgage as
a transaction that is neither an adjustable-rate mortgage nor a step-
rate mortgage. Proposed comment 38(a)(3)(i)(A)-2 would offer examples
of adjustable-rate mortgages and clarify that some variable-rate
transactions described in comment 17(c)(1)(iii)-4, such as certain
renewable balloon-payment, preferred-rate and price-level-adjusted
loans, would be considered fixed-rate mortgages for the purposes of the
``loan type'' disclosure in the loan summary required by Sec.
226.38(a). This follows the current approach in comment 17(c)(1)-11
which provide that disclosures for certain variable-rate transactions
should be based on the interest rate that applies at consummation.
Proposed Sec. 226.38(a)(3)(i)(B) would require the creditor to
disclose a loan as a ``step-rate mortgage'' if the interest rate will
change after consummation,
[[Page 43293]]
provided all such interest rates are specified in the legal obligation
between the parties. Under existing guidance, such a loan would not be
considered a variable rate loan. The Board believes that for the
purposes of the loan summary, which is to alert the consumer to the
possibility that their interest rate and payment could increase after
consummation, step-rate loans should not be identified as fixed or
variable rate loans, even though they share certain features with both
loan types. Proposed comment 38(a)(3)(i)(B)-2 would clarify that
certain preferred-rate loans would not be considered step-rate
mortgages for the purposes of the ``loan type'' disclosures. Proposed
comment 38(a)(3)(i)(C)-1 would offer examples of fixed-rate mortgages
and explain which variable-rate transactions described in comment
17(c)(1)(iii)-4 would be considered fixed-rate mortgages for the
purposes of the ``loan type'' disclosure.
38(a)(3)(ii) Loan Features
The general classification of loans as fixed rate, adjustable rate
and step rate would enable consumers to understand what loan type they
are being offered and to shop for loan products according to consumers'
needs and preferences. However, these broad categories of loan types
are not sufficient to warn consumers about the potential risks that a
specific loan may carry. As discussed previously, nontraditional
mortgage products with negatively amortizing or interest-only payments
grew in popularity in recent years, subjecting consumers to the risk of
payment shock. Disclosures should clearly alert consumers to these
features before the consumer becomes obligated on the loan. To alert
consumers to potentially risky loan features, the Board is proposing to
require an additional disclosure for each loan type in the loan summary
if the loan has step-payments, payment option or negative amortization
features, or interest-only payments.
Proposed Sec. 226.38(a)(3)(ii) would require creditors to disclose
whether a loan would have one or more of the following features: Step-
payments if the legal obligation permits the periodic monthly payment
to increase by a set amount for a specified amount of time; a payment
option feature if the legal obligation permits the consumer to make
payments that result in negative amortization and other types of
payments; a negative amortization feature if the legal obligation
requires the consumer to make payments that result in negative
amortization--that is, the legal obligation does not permit the
consumer to make payments that would cover all interest accrued or all
interest accrued and principal; or an interest-only feature if the
legal obligation permits or requires the consumer to make one or more
regular periodic payments of interest accrued and no principal, and the
legal obligation does not require or permit any payments that would
result in negative amortization.
Proposed comment 38(a)(3)(ii)(A)-1 would offer an example of a
step-payment feature. For example, if the consumer is offered a fixed-
rate mortgage with 24 monthly payments at $1,000 that will later
increase to $1,200 and remain at that level for a specified period of
time, and the loan amortizes fully over the loan term, the creditor
would disclose ``Fixed-Rate Mortgage, step-payments'' for the loan type
in the loan summary. Proposed comment 38(a)(3)(ii)(B) and (C)-1 would
clarify that a creditor should disclose the loan feature as either
``payment option'' or ``negative amortization'' but not both, whereas a
loan may have both a ``step-payment'' feature and either a ``payment
option'' or a ``negative amortization'' feature. Moreover, for a loan
to have a ``payment option'' feature, all periodic payment choices must
be specified in the legal obligation and must include a choice to make
payments that may result in negative amortization. Proposed comment
38(a)(3)(ii)(D)-1 would provide that a creditor should not disclose
both an ``interest-only'' feature and a ``payment option'' feature or
``negative amortization'' feature in a single transaction, whereas a
loan may have both an ``interest-only'' feature and a ``step-payment''
feature.
38(a)(4) Total Settlement Charges
Currently, TILA and Regulation Z disclose settlement charges
through the finance charge. TILA Section 128(a)(3) and Sec. 226.18(d)
require the creditor to disclose the finance charge. 15 U.S.C.
1638(a)(3). TILA Section 106(a) defines the ``finance charge'' as the
``sum of all charges, payable directly or indirectly by the person to
whom the credit is extended, and imposed directly or indirectly by the
credit or as an incident to the extension of credit.'' 15 U.S.C.
1605(a). Section 226.4(a) further defines the ``finance charge'' as
``the cost of consumer credit as a dollar amount.'' The finance charge
includes any interest due under the loan terms as well as other charges
incurred in connection with the credit transaction. See Sec. 226.4(a)
and (b).
Consumer testing indicated that participants did not understand the
term ``finance charge.'' Most participants believed the term referred
only to the total amount of interest they would pay if they kept the
loan to maturity, but did not always realize that it also includes the
fees and costs incurred as part of the credit transaction. Most
participants did not find the finance charge useful in evaluating a
loan offer.
The disclosure of settlement charges is governed by RESPA, 12
U.S.C. 2601-2617, and implemented by HUD under Regulation X, 24 CFR
part 3500. Under RESPA and Regulation X, creditors must provide a GFE
of settlement costs within three business days of application for a
mortgage, which is the same time creditors must provide the early TILA
disclosure. RESPA and Regulation X also require a statement of the
final settlement costs at loan closing (``HUD-1 or HUD-1A settlement
statement''). Under the new final rule for Regulation X, effective
January 1, 2010, the GFE is subject to certain accuracy requirements,
absent changed circumstances. RESPA and Regulation X do not, however,
provide any remedies for a violation of the accuracy requirements.
Consumer testing consistently demonstrated that participants wanted
to see settlement charges on the revised TILA disclosure. Participants
stated that including such a disclosure would help them confirm
information that the loan originator told them about the cost of the
loan during the mortgage application process. During consumer testing,
participants indicated that they were often surprised at the closing
table by substantial increases in the settlement charges. Despite these
changes, consumers reported that they proceeded with closing because
they lacked alternatives (especially in the case of a home purchase
loan), or were told that they could easily refinance with better terms
in the near future. Participants indicated that they would like an
estimate of their settlement charges as early as possible in the loan
process, and that it would be helpful to have the settlement charges
displayed in the context of the other loan terms, rather than on a
separate GFE or HUD-1 or HUD-1A settlement statement.
For these reasons, the Board proposes Sec. 226.38(a)(4) to require
creditors to disclose the ``total settlement charges,'' using that
term, as those charges are disclosed under Regulation X, 12 CFR part
3500. The proposed rule would further require, as applicable, a
statement of the amount of the charges already included in the loan
amount. Finally, the proposed rule would require disclosure of a
statement, as applicable, that the total amount does not include a down
payment, along with
[[Page 43294]]
a reference to the GFE or HUD-1 for more details.
Proposed comment 38(a)(4)-1 would clarify that on the early TILA
disclosure required by Sec. 226.19(a)(1)(i), the creditor must
disclose the amount of the ``Total Estimated Settlement Charges'' as
disclosed on the GFE under Regulation X, 12 CFR part 3500, Appendix C.
For the final TILA disclosure required by proposed Sec.
226.19(a)(2)(ii), the creditor would be required to disclose the sum of
the final settlement charges. The creditor would be permitted to use
the sum of the ``Charges That Cannot Increase,'' ``Charges That In
Total Cannot Increase By More Than 10%,'' and ``Charges That Can
Change'' as would be disclosed in the column entitled ``HUD-1'' on page
three of the HUD-1 or on page two of the HUD-1A settlement statement
under Regulation X, 12 CFR part 3500, Appendix A. Alternatively, the
creditor would be permitted to provide the consumer with the final HUD-
1 or HUD-1A settlement statement. For transactions in which a GFE, HUD-
1 or HUD-1A are not required, the proposed comment would clarify that
the creditor may look to such documents for guidance on how to comply
with the requirements of this section.
The Board recognizes that creditors are not currently required to
provide the final settlement charges before consummation. Regulation X,
24 CFR 3500.10(b), permits the settlement agent to provide the
completed HUD-1 or HUD-1A at settlement. However, proposed Sec.
226.19(a)(2)(ii) would require the creditor to provide the TILA
disclosure required by proposed Sec. 226.38, including the total
settlement charges disclosed under proposed Sec. 226.38(a)(4), so that
the consumer receives it at least three business days before
consummation. In addition, under proposed Sec. 226.19(a)(2)(iii)-
Alternative 1, if anything changes during the three-business-day
waiting period, including total settlement charges, the creditor would
be required to supply another final TILA disclosure and three-business-
day waiting period before consummation could occur. Consumers could
waive the three-day waiting periods for bona fide personal financial
emergencies.
The Board recognizes that proposed Sec. Sec. 226.19(a)(2)(ii),
226.19(a)(2)(iii)-Alternative 1, and 226.38(a)(4) would require the
creditor to disclose final settlement charge information several days
in advance of consummation. These requirements would impose a cost on
creditors, which may be passed on to consumers. Operational procedures
and systems would need to be changed significantly to determine several
days before closing the precise total amount of settlement charges that
the consumer would pay at settlement. The Board believes, however, that
the cost would be outweighed by the benefit to consumers of knowing
their final total settlement charges three business days before
consummation. This proposal would enable consumers to review and verify
cost information in advance of consummation, and contact the creditor
with questions or take other action, as appropriate.
38(a)(5) Prepayment Penalty
Current Disclosure Requirements
Under TILA Section 128(a)(11) and existing Sec. 226.18(k)(1), if
an obligation includes a finance charge computed by applying a rate to
the unpaid principal balance (a ``simple-interest obligation''),
creditors must disclose whether or not a penalty may be imposed if the
consumer prepays the obligation in full. Comment 18(k)(1)-1 states that
the term ``penalty'' refers only to charges that are assessed because
of the prepayment in full of a simple-interest obligation, in addition
to other amounts.
The existing model form in Appendix H-2 contains checkboxes for
creditors to indicate whether a consumer ``may'' or ``will not'' have
to pay a penalty if the consumer prepays the obligation in full. The
Board adopted these checkbox options in 1980, in response to concerns
that a statement that a prepayment penalty ``will be imposed'' would be
misleading. The Board noted that many credit contracts allow a penalty
to be imposed only if the loan is paid off within a certain time period
after consummation or under other specific circumstances. See 45 FR
80648, 80682; Dec. 5, 1980.
Discussion
Consumer testing of the current disclosure showed that participants
had difficulty identifying whether a loan would have a prepayment
penalty and in what circumstances it would apply. For example, in the
Board's consumer testing, participants did not understand that
refinancing a loan or paying off the loan with proceeds from the sale
of the home securing the loan could trigger a prepayment penalty.
Similarly, consumer testing conducted by FTC staff found that two-
thirds of participants who looked at a sample of the existing TILA
disclosure showing a loan with a two-year prepayment penalty did not
understand that a prepayment penalty would be charged if the consumer
refinanced the loan two years after origination.\70\ Some participants
thought that a prepayment penalty could be charged only if they paid
off their entire loan from their own funds, such as with money obtained
through a sudden financial windfall.\71\
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\70\ Improving Consumer Mortgage Disclosures at 78.
\71\ Id.
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The Board developed and tested a revised prepayment penalty
disclosure. Participants in the Board's consumer testing generally
understood that if they prepaid the loan within the time specified in
the disclosure, a penalty could be imposed. Participants also
understood that the penalty could be imposed if they refinanced or sold
the home during the time the penalty was in effect.
The Board's Proposal
Under proposed Sec. 226.38(a)(5), if the legal obligation permits
a creditor to impose a prepayment penalty the creditor must disclose in
the ``Loan Summary'' section the period during which the penalty
provision applies, the maximum possible penalty, and the circumstances
in which the creditor may impose the penalty. If the legal obligation
does not allow the creditor to impose a prepayment penalty, the
creditor would make no disclosure regarding prepayment penalties in the
``Loan Summary'' section. (However, proposed Sec. 226.38(d)(1)(iii)
requires the creditor to disclose whether or not the legal obligation
permits the creditor to charge a prepayment penalty in the ``Key
Questions about Risk'' section.)
Maximum penalty amount. The Board is proposing to require creditors
to disclose the maximum penalty possible under the legal obligation.
Prepayment penalties may be substantial. The existence of a prepayment
penalty may make it difficult to refinance a loan or sell a home. This
may be particularly difficult for consumers who have adjustable rate
loans or other loans that pose the risk of payment shock, as these
consumers may believe that they can refinance or sell the home to avoid
the increased payments. Thus, it is important for consumers to know the
maximum penalty amount before they are obligated on a loan.
Under proposed Sec. 226.38(a)(5) and (d)(1)(iii), creditors could
not disclose the method or formula they use to determine the penalty
with the disclosures required by Sec. 226.38. Although some consumers
might benefit from knowing how a prepayment penalty will be determined,
the Board is concerned that consumers may be overloaded with
information if the
[[Page 43295]]
calculation method is included with the segregated information. Many
consumers would not read the prepayment penalty disclosure at all if it
contains mathematical procedures and terms. Creditors may, of course,
disclose how a prepayment penalty will be determined, as long as the
disclosure is not disclosed together with the segregated disclosures.
Creditors also could not disclose a range of possible prepayment
penalties or give examples of penalty amounts assuming the consumer
prepaid at a hypothetical point in time under proposed Sec.
226.38(a)(5) or (d)(1)(iii). The Board believes that it is important
that prepayment penalty disclosures simply and clearly convey to
consumers the potential magnitude of the prepayment penalty.
Disclosures based on assumptions or averages could undermine the impact
of the maximum penalty disclosure.
Additional penalty disclosures. Consumer testing indicated that
some consumers do not understand that paying off the loan with the
proceeds of a refinance loan or a home sale can trigger a prepayment
penalty provision, as discussed above. Therefore, the proposed rule
would require creditors to disclose the conditions upon which and the
period during which they may impose a prepayment penalty.
It is important for a consumer to know what actions will trigger a
prepayment penalty provision before obtaining a loan with such a
provision. Consumers likely will not receive the loan agreement
containing the prepayment penalty provision until consummation and may
have little opportunity to review the agreement before becoming
obligated. Moreover, a prepayment penalty is but one of many loan terms
for consumers to consider at closing. The Board believes that including
key information about a prepayment penalty provision in transaction-
specific disclosures would help consumers avoid the uninformed use of
credit.
Coverage. Comment 226.18(k)(1)-1 clarifies that Sec. 226.18(k)(1)
applies to transactions in which interest calculations take into
account all scheduled reductions in principal, whether interest
calculations are made daily or at some other interval. Proposed comment
38(a)(5)-1 is consistent with comment 18(k)(1)-1. Proposed Sec.
38(j)(2) reflects existing Sec. 226.18(k)(2) on rebate disclosures, as
discussed below. Existing comment 18(k)-2 discusses cases where a
single transaction involves both a rebate and a penalty. Proposed
comment 38(a)(5)-8 reflects this existing commentary.
Definition of prepayment penalty. Comment 18(k)(1)-1 states that
under Sec. 226.18(k)(1) the term ``penalty'' refers only to those
charges that are assessed because of the prepayment in full of a
simple-interest obligation, in addition to other amounts. Comment
18(k)(1)-1 clarifies that interest charges for any period after
prepayment in full is made and minimum finance charges are examples of
prepayment penalties. The Board is proposing to revise comment
18(k)(1)-1 for clarity by substituting ``charges determined by treating
the loan balance as outstanding for a period after prepayment in full
and applying the interest rate to such `balance' '' for ``interest
charges for any period after prepayment,'' as discussed above. Proposed
comments 38(a)(5)-2(i) and (ii) are consistent with comment 18(k)(1)-1,
as it is proposed to be amended.
Proposed comment 38(a)(5)-2(iii) states that origination or other
charges that a creditor waives on the condition that the consumer does
not prepay the loan are prepayment penalties, for transactions secured
by real property or a dwelling. Fees imposed for a preparing a payoff
statement and performing other services when a consumer prepays the
obligation would not be considered a prepayment penalty under the
proposed rule, however. Such fees are not strictly linked to a
consumer's prepaying the obligation, as they are charged at the end of
a loan's term as well. The Board solicits comment on this distinction.
For purposes of some State laws, a minimum finance charge is not
considered a prepayment penalty. For purposes of disclosure under TILA,
a minimum finance charge is considered a prepayment penalty. Existing
comment 18(k)(1)-1 and proposed comment 38(a)(5)-2 are designed to
promote clear, consistent disclosure of charges creditors may impose
when a consumer prepays the obligation in full. The proposed rule would
not preempt State laws unless State law disclosure requirements are
inconsistent with the rule, and then only to the extent of any
inconsistency.
Existing comment 17(a)(1)-5(vii) allows creditors to disclose that
the borrower may pay a minimum finance charge as information directly
related to the penalty disclosure. Further, if a State or federal law
prohibits creditors from charging a prepayment penalty but permits the
charging of interest for some period after the consumer prepays from
that prohibition, existing comment 17(a)(1)-5(xi) permits creditors to
disclose that a consumer may have to pay interest for some period after
prepayment as information directly related to the prepayment penalty
disclosure. Comments 17(a)(1)-5(vii) and (xi), together with other
commentary in comment 17(a)(1)-5, would not apply to transactions
secured by real property or a dwelling, as discussed above.
Existing comment 18(k)(1)-1 states that loan guarantee fees are
examples of charges that are not penalties. The Board proposes to
retain this example in comment 38(a)(5)-2. (In a separate rulemaking,
the Board proposed to remove the example of interim interest on a
student loan as an example of charges that are not penalties. See 74 FR
12464, 12469; Mar. 29, 2009.)
Disclosed as applicable; disclosure content. Proposed comment
38(a)(5)-4 clarifies that if no prepayment penalty applies, creditors
need not disclose that fact in the ``Loan Summary'' section of
transaction-specific disclosures. Proposed Sec. 226.38(d)(1)(iii)
requires creditors to disclose whether or not the legal obligation
permits the creditor to charge a prepayment penalty in the ``Key
Questions about Risk'' section, however. Proposed comment 38(a)(5)-5
clarifies that creditors must disclose the maximum penalty as a
numerical amount. This is consistent with the general rule of
construction of the word ``amount'' required by Sec. 226.2(b)(5).
Basis of disclosure. Proposed comment 38(a)(5)-6 explains how
creditors determine the maximum penalty amount and contains examples
that illustrate how those principles are applied. (Proposed comment
38(d)(1)(iii) states that creditors may rely on proposed comment
38(a)(5)-6 in determining the maximum prepayment penalty to be
disclosed as one of the ``Key Questions about Risk'' disclosures.)
Proposed comment 38(a)(5)-6 states that in all cases, the creditor
should assume that the consumer prepays at a time when the prepayment
penalty may be charged. The comment also states that if more than one
type of prepayment penalty applies (for example, if the loan includes a
minimum finance charge and the creditor may collect interest after
prepayment), the creditor should include the maximum amount of each
type of prepayment penalty in determining the maximum penalty possible.
Existing comment 18(k)(1)-1 clarifies that interest charges for any
period after a consumer prepays in full and a minimum finance charge in
a simple interest transaction are deemed to be prepayment penalties.
Proposed comment 38(a)(5)-6(i) and (ii) clarifies that the amount of
such charges must be
[[Page 43296]]
counted in determining the maximum penalty.
Proposed comment 38(a)(5)-6(iii) provides examples of how creditors
may calculate a maximum prepayment penalty where the creditor
determines the penalty by applying a constant rate to the loan balance
at the time of prepayment. In such cases, the prepayment penalty amount
is largest when the balance is as high as possible. Proposed comment
38(a)(5)-6(iv) illustrates a method creditors could use to approximate
the maximum penalty where the penalty amount depends on both the loan
balance and the time at which the consumer prepays (for example, where
a prepayment penalty on an adjustable-rate loan equals six months'
interest payments). If the penalty amount depends on both the loan
balance and the time at which the consumer prepays, under the proposed
rule creditors would disclose the greater of (1) the penalty charged
when the balance is the highest possible and (2) the penalty charged
when the penalty rate is the highest possible (two-stage penalty
calculation).
The two-stage penalty calculation produces an amount that
approximates, but does not necessarily equal, the maximum prepayment
penalty. The Board believes, however, that the amount determined using
the two-stage penalty calculation ordinarily will be sufficiently close
to the actual maximum prepayment penalty that it would be appropriate
for creditors to use the method in complying with Sec. 226.38(a)(5)
and (d)(1)(iii). The Board solicits comment on whether the Board should
permit creditors to use the two-stage penalty calculation where the
penalty rate increases. Will this ``two-stage penalty calculation''
method produce a prepayment penalty amount that sufficiently
approximates the maximum prepayment penalty possible for a loan? Are
there cases where there will be a significant disparity between the
maximum penalty determined using the two-stage penalty calculation and
the actual maximum penalty?
Neither the simple penalty calculation nor the two-stage penalty
calculation will enable the creditor to determine the maximum penalty
where the penalty rate on a negatively amortizing loan declines. In
such a case, the creditor must determine the maximum prepayment penalty
by determining what the penalty would be at each point during the loan
term while the penalty is in effect.
Requiring all creditors to base maximum penalty disclosures on the
foregoing rules ensures standardization of disclosures. Allowing
creditors to select their own assumptions about when consumers are
likely to prepay would result in inconsistencies among the disclosures
given by different creditors. The Board considered other approaches,
such as requiring creditors to disclose the maximum prepayment penalty
based on a single hypothetical point in time (for example, one year
after origination). However, this approach would understate the amount
consumers who prepay earlier would have to pay.
Timely payment assumed. Proposed comment 38(a)(5)-7 states that
creditors may assume that the consumer makes payments on time and may
disregard any possible inaccuracies resulting from consumers' payment
patterns. This is consistent with existing comment 17(c)(2)(i)-3 and
proposed clarifications in comment 17(c)(1)-1. Proposed comment
38(a)(5)-7 further clarifies that where the payment required by a legal
obligation's terms is not a fully amortizing payment, the creditor must
base disclosures on the required periodic payment and may not assume
that the consumer will make payments that exceed the required payment.
38(b) Annual Percentage Rate
The Board proposes to improve the APR's utility to consumers by
making it a more inclusive measure of the cost of credit, as discussed
under Sec. 226.4, and also by improving the manner in which the APR is
disclosed on the TILA statement. Proposed Sec. 226.38(b)(1) would
require the APR to be disclosed, using the term ``annual percentage
rate'' and with the description, ``overall cost of this loan including
interest and settlement charges.'' Proposed Sec. 226.38(b)(2) would
require creditors to show the APR plotted on a graph, relative to (1)
the ``average prime offer rate'' (APOR) for borrowers with excellent
credit for a comparable loan type, in the week in which the disclosure
is provided, and (2) the higher-priced loan threshold under Sec.
226.35(a).\72\ Proposed Sec. 226.38(b)(3) would require an explanation
of the APOR and higher-priced threshold. Proposed Sec. 226.38(b)(4)
would require creditors to disclose the average per-period savings from
a 1 percentage-point reduction in the disclosed APR. Certain loans,
including construction loans, would be excluded from proposed Sec.
226.38(b)(2) and (b)(3).
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\72\ The Board issued Sec. 226.35(a) in its 2008 HOEPA Final
Rule; compliance with Sec. 226.35(a) is mandatory beginning on
October 1, 2009.
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Current Rules
For closed-end credit, TILA Section 128(a)(4) and (a)(8) require
creditors to disclose the ``annual percentage rate,'' using that term,
together with a brief description such as ``the cost of your credit as
a yearly rate.'' 15 U.S.C. 1638(a)(4), (a)(8). Section 226.18(e)
implements these requirements. As discussed in proposed Sec. 226.37,
TILA Section 122 and Sec. 226.17(a) require the APR, with the finance
charge, to be more conspicuous than other disclosures except the
disclosure of the creditor's identity. Changes to the requirements of
Sec. 226.17(a) are discussed under Sec. 226.37.
Discussion
The APR is the only single, unified number available to help
consumers understand the overall cost of a loan.\73\ 15 U.S.C.
1638(a)(4). Before enactment of TILA in 1968, creditors could advertise
a 6 percent loan rate, but were allowed to calculate the interest
charged to the consumer by using a simple interest, an add-on, or a
discount rate method.\74\ Although the advertised loan rate would
appear the same, the amount of interest consumers actually would pay
over the loan term would differ greatly under each of these calculation
methods.\75\ In addition, consumers were forced to evaluate different
components of a loan's costs, such as interest rate, points, and
closing costs, when comparing competing loan offers. The APR
standardizes the interest rate calculation and seeks to capture the
overall cost of the credit offered so that consumers can compare
competing loan more easily than if they had to evaluate the
relationship and impact of different loan costs themselves.\76\
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\73\ The 1998 Joint Report at 8; see also Bd. Of Governors of
Fed. Res. Sys., 1996 Report to Congress: Finance Charges for
Consumer Credit under the Truth in Lending Act at (April 1996).
\74\ The 1998 Joint Report at 8.
\75\ Id.
\76\ Id.
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Participants in the Board's consumer testing generally did not
understand the APR and often mistook it for the loan's interest
rate.\77\ The Board tested alternative descriptive statements and
formats for the APR, but consumers continued to be confused by the APR.
For example, some participants thought the APR reflected future
adjustments to the interest rate, or the maximum possible interest rate
for a variable rate loan. A few participants recognized that
[[Page 43297]]
the APR differed from the interest rate, but were unable to articulate
the reason. In addition, when presented with two hypothetical loan
offers, participants did not use the APR to compare and choose between
the offers. Instead, participants chose a loan based on one or more of
the following pieces of information: the interest rate, monthly
payment, and settlement costs.
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\77\ See also Improving Consumer Mortgage Disclosures at 35
(finding that most respondents in consumer testing did not
understand or were confused by the APR and generally mistook it for
the contract interest rate).
---------------------------------------------------------------------------
The Board's Proposal
The Board proposes to retain the APR disclosure, with several
changes designed to improve the APR's utility for consumers. These
proposed changes would apply only to closed-end transactions secured by
real property or a dwelling. First, the Board proposes to revise the
description to use simpler terminology. Proposed Sec. 226.38(b)(1)
would require creditors to disclose the APR, expressed as a percentage,
together with a statement that it represents the overall cost of the
loan, including interest and settlement charges. As discussed under
Sec. 226.4, the Board also proposes to make the APR more inclusive of
the cost of credit. Moreover, under Sec. 226.38(c), the interest rate
would be disclosed on the form, which would help some consumers
understand that the APR does not represent the interest rate.
Second, the proposed rule also would require creditors to disclose
the APR using a graph that shows the consumer how the APR for the loan
offered would compare to the average prime offer rate and the threshold
for higher-priced loans under Sec. 226.35(a). This disclosure would
help consumers understand how the APR on the loan offered to them
compares to APRs offered to borrowers with excellent credit for a
similar loan type, and higher-priced loans which generally are made to
borrowers who present higher risk. Such borrowers include those with
blemished credit histories, or with high loan-to-value ratios.
The Board's consumer testing shows that consumers do not understand
the APR's utility. Testing the APR with different names and
descriptions did not measurably increase consumers' understanding of
the APR. Although the APR was designed in part to facilitate comparison
of competing loan products, testing suggests that most consumers do not
compare competing loans by APR, probably because they receive only one
TILA disclosure before they consummate a loan. If consumers comparison
shop for a loan, they do so before they apply for a loan and likely
shop based on oral quotes of interest rates and points.
The Board's testing suggests that with little understanding of the
APR and no ready and appropriate basis for comparison, many consumers
ignore the APR in favor of information they find more accessible, such
as the loan's monthly payment or settlement costs. Therefore, the Board
is taking two steps to improve the disclosure of the APR. The first
step is designed to draw consumers' attention to the APR. To do so, the
Board proposes to require disclosure of the consumer's APR on a graph
to highlight the APR and distinguish it from other numerical
disclosures, including the interest rate. Consumers would be more
likely to notice the APR plotted on the graph, in a prominent location
on the disclosure statement. Principles of consumer design provide that
a graphic device accommodates different learning styles. And, consumer
research has shown that use of graphics or similar visual devices help
consumers attend to or notice important information.\78\
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\78\ Kozup, John, Elizabeth Howlett, and Michael Pagano. 2008.
``The Effects of Summary Information on Consumer Perception of
Mutual Fund Characteristics.'' The Journal of Consumer Affairs, vol.
42. See also Testimony of John Kozup, Assistant Professor,
Department of Marketing, and Director, Center for Marketing and
Public Policy, Villanova University; http://www.federalreserve.gov/events/publichearings/hoepa/2006/20060711/transcript.pdf.
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The Board's next proposed step is to present the APR in a context
that is designed to facilitate understanding of the APR. The Board
believes that consumers would be more likely to use the APR if it is
shown to them in context of other rates, rather than in isolation as is
presently often the case. Research on consumer behavior suggests that
consumer choice is affected by whether a consumer is presented with a
single option for a product or multiple options. Consumers making a
choice in the presence of more than one option are more likely to make
a selection based on the relative merits of the options presented,
rather than on their own existing ``references'' for the value of the
product.\79\ Here, the Board believes that presenting consumers with
information about other rates, current as of the week of the consumer's
application, would help consumers make more informed decisions about
the loan offered.
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\79\ See, e.g., Hsee, Christopher K. and France Leclerc. 1988.
``Will Products Look More Attractive When Presented Separately or
Together?'' Journal of Consumer Research, vol. 25.
---------------------------------------------------------------------------
Testing suggests that showing the consumer the APR in context of
information about other APRs would result in consumer benefits. For
example, the APR graph would cause consumers to ask the creditor
questions about the rate offered to them and when applicable, why it
differs from the average APR offered to borrowers with excellent credit
histories. The proposed APR disclosure would enable consumers to
determine whether they are being offered a loan that comports with
their creditworthiness. A borrower who knows his or her credit history
is excellent or very good would be informed that the loan offered is
higher-priced. Participants in the Board's testing stated that if they
knew they had excellent credit, they would ask the lender why they were
being offered a higher-priced loan and what they would need to do to
get a better offer. The Board notes that some participants indicated
that the disclosed APR, even if higher-priced, was lower than the
interest rate on their current loan and thus was attractive to them.
Nevertheless, while some consumers may not be prompted by the APR graph
to seek information about improved loan terms, testing suggests others
may do so and benefit as a result.
The Board recognizes that not all consumers are aware of their
credit history, and thus may not be able to assess whether the loan
offered is consistent with their credit standing. The Board anticipates
that the APR graph would cause some consumers to investigate their
credit reports. If there are errors, these consumers could take steps
to resolve the errors. If consumers in fact have impaired credit, some
consumers might consider whether to delay seeking a loan until they
could repair their credit standing.
In some instances the APR graph may be potentially confusing. That
is, a loan may be a higher-priced loan for reasons other than the
borrower's credit history. For example, a consumer might have little
home equity, resulting in a high loan-to-value ratio and a higher APR.
The Board believes that even in such cases, the APR graph nonetheless
would be beneficial to consumers. It would prompt the consumer to ask
questions, and creditors should be able to explain to consumers why the
APR on a loan is higher-priced. In many cases the explanation may help
the consumer determine whether they could take steps to get a lower
APR. For example, if the creditor explains that the offered loan is a
higher-priced loan because of a low down-payment, the borrower would be
alerted that providing a larger down payment would result in a reduced
APR and cost savings.
The Board also notes that certain loans may be higher-priced loans
simply because of the loan type. For example, loans that exceed the
threshold amount for eligibility for purchase by Fannie
[[Page 43298]]
Mae and Freddie Mac, known as ``nonconforming'' or ``jumbo loans,'' may
tend to be higher-priced loans because of the method for calculating
the APOR. The APOR is the average APR for conforming loans offered to
borrowers with excellent credit. In the case of such loans, creditors
would have to explain to consumers why the loan's APR is higher-priced.
Third, the proposal would require the creditor to disclose the
average per-period savings from a 1 percentage-point reduction in the
disclosed APR. The Board believes that showing consumers the
relationship between the APR and a concrete dollar figure would help
make the possible benefits of obtaining better loan terms more concrete
for consumers. Showing potential savings that could result from a lower
APR would help encourage consumers to shop and negotiate for better
loan terms, or as discussed, to increase their downpayment, resolve
errors in their credit report, or seek to improve their credit
standing.
38(b)(2)
Proposed Sec. 226.38(b)(2) would require a graph indicating the
consumer's APR within a range of APRs beginning with the average prime
offer rate (``APOR''), as defined in Sec. 226.35(a)(2), including the
higher-priced mortgage loan threshold, as defined in Sec.
226.35(a)(1), and terminating four percentage points greater than the
higher-priced mortgage loan threshold. Proposed Sec. 226.38(b)(3)
would require a statement of the APOR as defined in Sec. 226.35(a)(2),
and the higher-priced mortgage loan threshold, as defined in Sec.
226.35(a)(1), current as of the week the disclosure is produced. The
graphic would contain different shaded areas using different scales for
the range between the APOR and the higher-priced mortgage loan
threshold, and for the range above the higher-priced mortgage loan
threshold. The graphic would also label the range above the higher-
priced mortgage loan threshold as the ``high-cost zone.''
Creditors would use the Board's table of average prime offer rates
to find the APOR for the loan type that matches the loan being
disclosed, for the week in which the creditor provides the disclosure.
Creditors would follow the Board's guidance in commentary to Sec.
226.35(a) in determining how to select the appropriate APOR. In the
text explaining the APOR, creditors may include a statement clarifying
that the APOR is for conforming loans only.
The Board requests comment on any potential operational difficulty
in producing the graph proposed in Sec. 226.38(b)(2) in an accurate
and timely manner. Comment is also sought on whether a different
graphical device would better draw consumers' attention to the APR and
illustrate the APR's utility to consumers.
38(b)(3)
To help consumers navigate the information provided by the graph,
proposed Sec. 226.38(b)(3) would require an explanation of the average
prime offer rate as defined in Sec. 226.35(a)(2), and the higher-
priced mortgage loan threshold, as defined in Sec. 226.35(a)(1).
Participants in the Board's consumer testing found this statement
helpful in understanding the information in the graph.
38(b)(4)
Proposed Sec. 226.38(b)(4) would provide how creditors must
calculate the average per-period savings that would result from a 1
percentage-point reduction in the APR. (This discussion refers to
monthly savings because most mortgage loans require monthly payments.)
Creditors would calculate the average per-month savings by reducing the
interest rate (or rates in the case of an ARM, as discussed in comment
34(b)(4)-1) by 1 percentage point, computing a hypothetical total of
payments reflecting the payment schedule at the lower rate or rates.
The creditor would divide the difference between (1) the total of
payments disclosed under proposed Sec. 226.38(e)(5)(i), and (2) the
hypothetical total of payments by the number of payment periods
required under the terms of the legal obligation. The creditor would
report the results of this calculation as the average savings each
month from a 1 percentage-point reduction in the APR. Proposed comment
38(b)(4)-1 would provide guidance on this method, and would include
examples for fixed- and adjustable-rate mortgages.
The Board notes that the proposed method does not result in an
exact 1 percentage-point reduction in APR, but is likely to be within a
few basis points of a 1 percentage-point reduction. The results would
be sufficiently accurate to show consumers that a lower APR will yield
savings. Methods that might result in an actual 1 percentage-point
reduction in the APR would likely be more complicated and would vary
depending on the terms of the loan, such as whether the rate is
variable and whether the payments amortize the loan. The Board believes
that any additional consumer benefit from disclosing the precise 1
percentage-point APR reduction would not be sufficient to offset the
costs of a more complex calculation method. The Board seeks comment,
however, on its proposed method and whether another method would
achieve the objectives of the disclosure without imposing undue
compliance burdens.
38(b)(5) Exemptions
Proposed section 226.38(b)(5) would exempt construction loans,
bridge loans, and reverse mortgages from the requirement to show the
APR plotted on a graph (Sec. 226.38(b)(2)) and the statement of the
APOR and the higher-priced loan threshold (Sec. 226.38(b)(3)). The
exempted transactions are also exempt from the definition of a higher-
priced mortgage, under Sec. 226.35(a)(3) in the Board's 2008 HOEPA
Final Rule. The Board does not publish an average prime offer rate for
construction, bridge, or reverse mortgage loans. Thus, an exemption
seems appropriate. The Board seeks comment, however, on whether these
transactions should nevertheless be subject to Sec. 226.38(b)(2) and
(3).
38(c) Interest Rate and Payment Summary
Proposed Sec. 226.38(c) provides requirements for disclosure of
the contract interest rate and the periodic payment for transactions
secured by real property or a dwelling. The information proposed to be
required by this paragraph must be in the form of a table, as provided
in Sec. 226.38(c)(1), substantially similar to Model Forms H-19(A), H-
19(B), or H-19(C) in Appendix H. Additional formatting requirements
would be provided in Sec. 226.37. The rules for disclosing the
interest rate and periodic payments for an amortizing loan are provided
in proposed Sec. Sec. 226.38(c)(2)(i) and 226.38(c)(3). Rules for
disclosing the interest rate and periodic payments for a loan with
negative amortization are in proposed Sec. Sec. 226.38(c)(2)(ii) and
226.38(c)(4). Special rules for disclosing balloon payments are found
in proposed Sec. 226.38(c)(5). Additional explanations of introductory
rates and negative amortization are contained in proposed Sec. Sec.
226.38(c)(2)(iii) and 226.38(c)(6), respectively. Proposed Sec.
226.38(c)(7) provides definitions for certain terms used in Sec.
226.38(c).
Existing Requirements for Periodic Payments
TILA Section 128(a)(6) requires the creditor to disclose the
number, amount, and due dates or period of payments scheduled to repay
the total of payments, for closed-end credit. 15 U.S.C. 1648(a)(6).
Currently, Sec. 226.18(g) implements TILA 128(a)(6). Under
[[Page 43299]]
Sec. 226.18(g), creditors must show the number, amounts, and timing of
payments scheduled to repay the obligation, except as provided in Sec.
226.18(g)(2) for certain loans with varying payments.\80\ The creditor
must provide these disclosures on the TILA statement within three
business days of receiving the consumer's written application, as
provided in Sec. 226.19(a).
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\80\ For a mortgage transaction with rates or fees that exceed
certain thresholds, TILA Section 129 requires special disclosures
regarding payments three business days before consummation of the
transaction. See Sec. 226.32(c) (3), (4). The Board is not
proposing revisions to these disclosures.
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Comment 18(g)-1 provides that the payment schedule should include
all components of the finance charge, not just interest. Thus, if
mortgage insurance is required, the payment schedule must reflect the
consumer's mortgage insurance payments until the date on which the
creditor must automatically terminate coverage under applicable law.
See comment 18(g)-5. Commentary to Sec. 226.17(c) provides that for an
adjustable-rate loan, creditors should disclose the payments and other
disclosures based only on the initial rate and should not assume that
the rate will increase. However, the disclosures must reflect a
discounted or premium initial interest rate for as long as it is
charged. The commentary permits, but does not require, creditors to
include in the payments amounts that are not finance charges or part of
the amount financed. Thus, creditors may, but need not, include
insurance premiums excluded from the finance charge under Sec.
226.4(d), and ``real estate escrow amounts such as taxes added to the
payment in mortgage transactions.''
TILA Section 128(b)(2)(C), as recently added by the MDIA, requires
additional disclosures for loans secured by a dwelling in which the
interest rate or payments may vary. 15 U.S.C. 1638(b)(2)(C).
Specifically, creditors must provide ``examples of adjustments to the
regular required payment on the extension of credit based on the change
in the interest rates specified by the contract for such extension of
credit. Among the examples required * * * is an example that reflects
the maximum payment amount of the regular required payments on the
extension of credit, based on the maximum interest rate allowed under
the contract. * * *'' TILA Section 128(b)(2)(C), 15 U.S.C.
1638(b)(2)(C). Creditors must provide these disclosures within three
business days of receipt of the consumer's written application, as
provided in Sec. 226.19(a). TILA Section 128(b)(2)(C) provides that
these examples must be in conspicuous type size and format and that the
payment schedule be labeled ``Payment Schedule: Payments Will Vary
Based on Interest Rate Changes.'' Section 128(b)(2)(C) requires the
Board to conduct consumer testing to determine the appropriate format
for providing the disclosures to consumers so that the disclosures can
be easily understood, including the fact that the initial regular
payments are for a specific time period that will end on a certain
date, that payments will adjust afterwards potentially to a higher
amount, and that there is no guarantee that the borrower will be able
to refinance to a lower amount. 15 U.S.C. 1638(b)(2)(C).
The Board's Proposal
The Board proposes to add new Sec. 226.38(c) to implement TILA
Section 128(a)(6) and Section 128(b)(2)(C) for all closed-end
transactions secured by real property or a dwelling.\81\ (For all other
closed-end credit transactions, Sec. 226.18(g) would continue to
provide the rules for disclosing payments). Section 226.38(c) would
require creditors to disclose the contract interest rate, regular
periodic payment, and balloon payment if applicable. For adjustable-
rate or step-rate amortizing loans, up to three interest rates and
corresponding monthly payments would be required, including the maximum
possible interest rate and payment. If payments are scheduled to
increase independent of an interest-rate adjustment, the increased
payment must be disclosed. Payments for amortizing loans must include
an itemized estimate of the amount for taxes and insurance if the
creditor will establish an escrow account. If a borrower may make one
or more payments of interest only, all payments disclosed must be
itemized to show the amount that will be applied to interest and the
amount that will be applied to principal. Special rate and payment
disclosures would be required for loans with negative amortization.
Creditors must provide the information about interest rates and
payments in the form of a table, and creditors would not be permitted
to include other unrelated information in the table.
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\81\ TILA Section 128(b)(2)(C) also provides that the Board's
testing should ensure that consumers can understand that there is no
guarantee that they will be able to refinance. Proposed Sec.
226.38(f)(3) implements this aspect of Section 128(b)(2)(C).
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Scope of proposed Sec. 226.38(c). TILA Section 128(b)(2)(C)
applies to all transactions secured by a dwelling. The Board proposes
to expand the requirement in Section 128(b)(2)(C) to include loans
secured by real property that do not include a dwelling. As discussed
in Sec. 226.19(a), unimproved real property is likely to be a
significant asset for most consumers, and consumers should receive the
disclosures required in Section 128(b)(2)(C) before they become
obligated on a loan secured by such an asset. The disclosures would
alert consumers to the potential for interest rate and payment
increases and help them to determine whether these risks are
appropriate to their circumstances.
The Board proposes this adjustment to TILA Section 128(b)(2)(C)
pursuant to its authority under TILA Section 105(a). 15 U.S.C. 1604(a).
Section 105(a) authorizes the Board to make exceptions and adjustments
to TILA for any class of transactions to effectuate the statute's
purposes, which include facilitating consumers' ability to compare
credit terms and helping consumers avoid the uninformed use of credit.
15 U.S.C. 1601(a), 1604(a). The class of transactions that would be
affected is transactions secured by real property or a dwelling. As
discussed, providing examples of increased interest rates and payments
would help consumers understand the risks involved in certain loans.
The Board also proposes to revise the label for the interest rate and
payment information from the statutory language, ``Payment Schedule:
Payments Will Vary Based on Interest Rate Changes,'' based on plain
language principles, to make the disclosure more readily
understandable.
Disclosure of the interest rate. Currently, TILA does not require
disclosure of the contract interest rate for closed-end credit. In the
consumer testing conducted for the Board, when consumers were asked
what factors they considered when looking for a mortgage, by far the
most common answers were that they wanted to obtain the lowest interest
rate possible and that they wanted the loan with the lowest possible
monthly payment. However, as they described their thought process, most
consumers were primarily focused on the initial rate and payment,
rather than how those terms might vary over time. Testing conducted on
the current transaction-specific TILA disclosures indicated that
consumers would like to see the interest rate disclosed on the form.
In addition, testing indicated that the current TILA payment
schedule, which does not show the relationship between interest rate
and payment, is ineffective at communicating to consumers what could
happen to their payments over time on an ARM. Most participants said
they liked the current presentation of the payments because it was
specific and detailed. However, when shown a payment schedule for an
ARM with an
[[Page 43300]]
introductory rate, many incorrectly assumed that payments shown were in
fact their future payments, rather than payments based on the fully-
indexed rate at consummation.
Under the Board's proposal, the interest rate and payment would be
shown together in a table. The Board believes that highlighting the
relationship between the interest rate and payment will enhance
consumers' understanding of loan terms. If the interest rate is
adjustable, the table would indicate changes in the adjustable interest
rate over time. In addition, payment changes that are not based on
adjustments to the interest rate would also be indicated in the table.
Highlighting potential changes to the interest rate and payment based
on maximum interest rate increases, rather than showing a set payment
schedule based on the assumption that the index used to calculate a
adjustable interest rate will not change, will clarify to consumers not
only that their interest rate and payments may change, but also how the
interest rate and payment may change over time. Consumers would be
better able to determine if a adjustable rate or payment loan will be
affordable and appropriate for their individual circumstances.
Definitions for Sec. 226.38(c). Proposed Sec. 226.38(c) uses
several terms that are defined in proposed Sec. 226.38(c)(7). Under
Sec. 226.38(c)(7), the terms ``adjustable-rate mortgage,'' ``step-rate
mortgage,'' and ``interest-only'' would have the same meanings as in
Sec. 226.38(a)(3). An ``amortizing loan'' would be defined as a loan
in which the regular periodic payments cannot cause the principal
balance to increase; the term ``negative amortization'' would mean a
loan in which the regular periodic payments may cause the principal
balance to increase. Finally, the tern ``fully-indexed rate'' would
mean the interest rate calculated using the index value and margin.
Proposed Sec. 226.38(c)(2)(i) and (c)(3) would require disclosure
of interest rates and payment amounts for amortizing loans. Proposed
Sec. 226.38(c)(7) defines an amortizing loan as one in which the
regular periodic payments cannot cause the principal balance to
increase. Thus, loans with interest-only payments are amortizing loans.
If an escrow account will be established for an amortizing loan,
creditors would be required to itemize the payment to show amounts to
be included for taxes and insurance. See proposed Sec.
226.38(c)(3)(i)(C). Proposed Sec. Sec. 226.38(c)(2)(ii) and
226.38(c)(4) would require a special table for disclosures of interest
rates and payment amounts for negatively amortizing loans. For such
loans in which the consumer may choose between several payment options,
the table will show only two: the minimum required payment option, and
the fully amortizing option. Creditors may, however, disclose other
payment options to the consumer, outside the segregated information
required by this section.
38(c)(1) Format
Proposed Sec. 226.38(c)(1) would require the interest rate and
payment information to be disclosed in the form of a table. This would
ensure that payment examples required by the MDIA are in conspicuous
format as required by TILA Section 128(b)(2)(C). The MDIA also requires
conspicuous type size for the examples. Under the proposal, all
disclosures must be in a minimum 10 point font, including the table
required under Sec. 226.38(c), to ensure that they are clear and
conspicuous. See proposed Sec. 226.37(a).
The Board's proposal would prescribe the number of interest rates
and payments that could be shown in a table. The number of columns and
rows for the table required by this part would vary depending on
whether the loan is an amortizing loan and whether it has adjustable
rates. However, tables disclosed under this section would have no more
than 5 columns across, and creditors would not include information in
the table that is not required under 226.38(c), to avoid information
overload. Model and Sample Forms would be provided in Appendix H.
38(c)(2) Interest Rates
38(c)(2)(i) Amortizing Loans
Proposed Sec. 226.38(c)(2)(i) would provide disclosure of interest
rates for amortizing loans. For a fixed-rate mortgage with no scheduled
payment increases or balloon payments, the creditor would disclose only
one interest rate. Fixed-rate loans with payment increases would
require the creditor to disclose the interest rate with each increase.
For adjustable-rate mortgages and step-rate mortgages, more than one
interest rate must be shown, as discussed below.
Interest Rates for Fixed-Rate Mortgages
For fixed-rate mortgages, proposed Sec. 226.38(c)(2)(i)(A) would
require creditors to disclose the interest rate applicable at
consummation. If the transaction does not provide for any payment
increases, only one interest rate would be disclosed. However, some
fixed-rate mortgages will have scheduled payment increases and in those
cases the creditor must show the interest rate again, even though it is
redundant, as discussed under Sec. 226.38(c)(2)(i)(C) below.
Interest Rates for Adjustable-Rate Mortgages and Step-Rate Mortgages
Interest rates at consummation, maximum possible at first
adjustment, and maximum possible interest rate. As discussed, TILA
Section 128(b)(2)(C) requires creditors to disclose examples of payment
increases including the maximum possible payment, for adjustable-rate
mortgages and mortgages where payments may vary. Under Sec.
226.38(c)(2)(i), creditors would disclose more than one interest rate
and corresponding monthly payment for adjustable-rate mortgages and
step-rate mortgages. Under proposed Sec. 226.38(c)(2)(i)A)(I), the
creditor must provide the interest rate at consummation, and the period
of time until the first adjustment. If the interest rate at
consummation is less than the fully-indexed rate (the sum of the index
and margin at consummation), the interest rate must be labeled as
``introductory.'' Additional explanation of discounted introductory
rates is required in proposed Sec. 226.38(c)(2)(iii), as discussed
below.
Maximum at first adjustment. The Board proposes to require
disclosure of the maximum rate and payment at first adjustment, as one
of the examples required by TILA Section 128(b)(2)(C). Proposed Sec.
226.38(c)(2)(i)(B)(1) requires the creditor to provide the maximum
interest rate applicable at the first interest rate adjustment, and the
calendar month and year in which the first scheduled adjustment occurs
would be required to be disclosed. The creditor would take into account
any limitations on interest rate increases when determining the
interest rate to be disclosed under Sec. 226.38(c)(2)(i)(B)(2). If the
interest rate may reach the maximum possible at the first adjustment,
the creditor should disclose the rate as the maximum possible as
discussed below.
The Board proposes to require disclosure of the maximum interest
rate at first adjustment because many consumers may take out
adjustable-rate mortgages, planning to sell the home or refinance the
loan before the first interest rate adjustment. It is important for
consumers to know how much their rate and payment might increase at
that point, if they are unable to refinance or sell the home before the
first adjustment. The Board believes that for the same reason, the
first interest rate increase should be shown for step-rate mortgages.
Although such mortgages do
[[Page 43301]]
not present the uncertainty that an adjustable-rate mortgage does,
consumers need to be informed of what their rate will increase to at
the first increase. Consumer testing conducted for the Board shows that
most consumers would find this information useful in determining
whether the loan is affordable and suitable to their needs.
Maximum possible interest rate. Proposed Sec.
226.38(c)(2)(i)(B)(3) would require creditors to disclose the maximum
interest rate that could apply, and the earliest possible year in which
that rate could apply, as required by TILA Section 128(b)(2)(C). The
Board proposes to require this disclosure for step-rate mortgages as
well, because the rate and payment will increase in such loans.
Consumer testing conducted for the Board suggests that consumers find
this information about the maximum rate and payment particularly
important in evaluating a loan offer for an adjustable-rate mortgage.
Participants indicated that this information is most useful to them in
determining whether such a loan was affordable. If an amortizing
adjustable-rate mortgage has intermediate limitation on interest rate
increases, then the table required by proposed Sec. 226.38(c) would
have at least three columns; if the transaction has no intermediate
limitation on interest rates then the table would have two columns, one
showing the rate at consummation and the other showing the maximum
possible under the loan's terms.
Interest rate applicable at scheduled payment increase. Some
mortgages provide for a payment increase that is not attributable to an
interest rate adjustment or increase. For example, a loan may permit
the borrower to make payments that cover only accrued interest for some
specified period, such as the first five years following consummation;
at the end of this ``interest-only'' period, the borrower must begin
making larger payments to cover both interest accrued and principal.
Proposed Sec. 226.38(c)(2)(i)(C) would provide that, where such an
increase will not coincide with an interest rate adjustment or
increase, the creditor must include a column that discloses the
interest rate that would apply at the time the adjustment is scheduled
to occur, and the date in which the increase would occur. The creditor
must include a description such as ``first increase'' or ``first
adjustment.'' Thus, for a fixed-rate mortgage, the creditor would show
the same interest rate twice (and the corresponding payments as
discussed in Sec. 226.38(c)(4) below). The Board believes this would
help the consumer understand that the increase in payment is due to the
requirement to begin repaying loan principal and not to an interest-
rate adjustment.
The same is true for adjustable-rate mortgages and step-rate
mortgages. For example, some adjustable-rate mortgages permit the
borrower to make interest-only payments for a specified period, such as
the first five years following consummation. A scheduled payment
increase may or may not coincide with a scheduled interest rate
adjustment. Under proposed Sec. 226.38(c)(2)(i)(C), if a scheduled
payment increase does not coincide with an interest rate adjustment (or
rate increase for a step-rate mortgage), creditors must include a
column that discloses the interest rate that would apply at the time of
the increase, the date the increase is scheduled to occur, and an
appropriate description such as ``first increase'' or ``first
adjustment'' as appropriate. Proposed comment 38(c)(2)(i)(C)-1 provides
clarifying examples. The Board is not aware of step-rate loans with
interest-only features; however, if such a loan is offered, creditors
would disclose the payment increase in the same manner as for an
adjustable-rate mortgage.
38(c)(2)(ii) Negative Amortization Loans
Proposed Sec. 226.38(c)(2)(ii) would require disclosure of the
interest rate applicable at consummation. Many payment option loans do
not provide any limitations on interest rate increases (``interest rate
caps''); the only cap is the maximum possible interest rate required by
Sec. 226.30(a.) For payment option loans, the creditor would disclose
the interest rate in effect at consummation, and assume that the
interest rate reaches the maximum at the next adjustment--often the
second month after consummation. The creditor would disclose that rate
for the first and second scheduled payment increases, as explained more
fully in Sec. 226.38(c)(4) below, and in the last column, when the
loan has recast and the consumer must first make a fully amortizing
payment. The proposed approach to interest rates for negative
amortization loans is consistent with the MDIA, which requires
disclosure of the payment at the maximum possible rate, and other
examples of payment increases.
Additional proposed rules for disclosing the interest rate on a
loan with negative amortization are discussed under 38(c)(6) Special
Disclosures for Loans with Negative Amortization, below.
38(c)(2)(iii) Introductory Rate Disclosure for Adjustable-Rate
Mortgages
Many adjustable-rate mortgages have an introductory or teaser rate,
set below the index and margin used for later adjustments. Proposed
Sec. 226.38(c)(2)(iii) would require a special disclosure in the case
of an introductory rate. In consumer testing conducted for the Board,
many participants did not understand the ramifications of an
introductory interest rate. Participants understood that if market
interest rates increased, the interest rate and payment on their loan
would increase. However, participants did not understand that if they
had an introductory rate, their interest rate and payment would
increase when the introductory rate expired, even if market interest
rates did not increase. Several different disclosures designed to show
the impact of an introductory rate were tested in tabular form, with
mixed results. Therefore, the Board proposes to require an explanation
of the introductory rate below the table itself. Proposed Sec.
226.38(c)(2)(iii) would require disclosure of the introductory rate,
how long it will last, and that the interest rate will increase at the
first scheduled adjustment even if market rates do not increase.
Creditors would also disclose the fully indexed rate that otherwise
would apply at consummation. Proposed Sec. 226.37(d)(4) would provide
that this disclosure must be prominent and placed in a box under the
table.
38(c)(3) Payments for Amortizing Loans
38(c)(3)(i) Principal and Interest Payments
Section 226.38(c)(3)(i) would require disclosure of the principal
and interest payment that corresponds to each interest rate disclosed
under proposed Sec. 226.38(c)(2)(i). Special itemization of the
payment is required, however, if the loan permits the consumer to make
any payments that will be applied only to interest accrued. Proposed
Sec. 226.3(c)(3)(ii)(C) would require disclosure of an estimate of the
amount of taxes and insurance, including mortgage insurance. Proposed
Sec. 226.3(c)(3)(i)(D) would require disclosure of the estimated total
payment including principal, interest, and taxes and insurance.
Principal and interest payments. Proposed Sec. 226.38(c)(3)(i)
would require the disclosure of payment amounts that correspond to the
interest rates disclosed under Sec. 226.38(c)(2)(i). Proposed comment
38(c)(3)-1 would clarify that the interest rate and payment amount
applicable at consummation are required to be
[[Page 43302]]
disclosed for all loans. In addition, the comment would clarify that if
a payment amount is required to be disclosed under more than one
subparagraph, the payment should only be disclosed once. For example,
in an adjustable-rate transaction with a balloon payment, if the
balloon payment will occur at the same time the loan may reach its
maximum interest rate, only one disclosure of the interest rate and
payment is required. Proposed comment 38(c)(3)-2 provides examples of
the types of loans that trigger additional payment disclosures.
Fixed-rate mortgages. Under proposed Sec. 226.38(c)(3)(i)(A), for
fixed-rate transactions where the regular periodic payment fully
amortizes the loan and there are no scheduled payment increases (such
as upon the expiration of an interest-only feature), the payment amount
including both principal and interest would be required to be
disclosed.
Fixed-rate interest-only loans. For fixed-rate transactions in
which the consumer may make one or more interest-only payments,
proposed Sec. 226.38(c)(3)(i)(B) would require disclosure of the
payment at any scheduled increase in the payment amount and the date on
which the increase is scheduled to occur. For example, in a fixed-rate
interest-only loan a scheduled increase in the payment amount from an
interest-only payment to a fully amortizing payment would be required
to be disclosed. Similarly, in a fixed-rate balloon loan, the balloon
payment must be disclosed, but it would be disclosed under the table
pursuant to Sec. 226.38(c)(5).
Adjustable-rate and step-rate transactions. Under proposed Sec.
226.38(c)(3)(i), for adjustable-rate and step-rate transactions, a
payment amount corresponding to each interest rate in Sec.
226.38(c)(2) would be required to be disclosed.
Adjustable-rate interest-only and balloon loans. For adjustable-
rate transactions in which the consumer may make interest-only
payments, proposed Sec. 226.38(c)(3)(ii) would require additional
disclosures. Section 226.38(c)(3)(i)(B) would require disclosure of the
payment amount at any scheduled payment increase that does not coincide
with an interest rate adjustment, and the date on which the increase is
scheduled to occur. In addition, for an adjustable-rate balloon loan,
if the balloon payment will not coincide with either the first interest
rate adjustment or the time when the interest rate reaches its maximum,
the balloon payment is required to be disclosed separately, below the
table, in accordance with Sec. 226.38(c)(5).
Principal and interest payment itemization. Under proposed Sec.
226.38(c)(3)(i) and (ii), the format of the payment disclosure would
vary depending on whether all regular periodic payment amounts will
include principal and interest. If all regular periodic payments
include principal and interest, under Sec. 226.38(c)(3)(i) each
payment amount would be listed in a single row in the table with a
description such as principal and interest (except that a balloon
payment would be disclosed in accordance with Sec. 226.38(c)(5)). If
any regular periodic payment amounts will include interest but not
principal, under Sec. 226.38(c)(3)(ii) all payments for the loan must
be itemized into principal and interest. For a payment that includes no
principal, the creditor must indicate that none of the payment amount
will be applied to principal. The creditor must label the dollar amount
to be applied to interest ``Interest Payment.'' The Board proposes this
itemization and labeling to emphasize for consumers the impact of
making interest-only payments. Many participants in the Board's
consumer testing did not clearly understand that an ``interest-only''
loan was different from a loan in which all payments are applied to
principal and interest without this emphasis and the statement in the
loan summary required in proposed Sec. 226.38(a)(3).
Balloon payment. Under proposed Sec. 226.38(c)(5)(i), if a payment
amount is a balloon payment, the payment must be disclosed in the last
row of the table rather than in a column, unless it coincides with an
interest rate adjustment or other payment increase such as the
expiration of an interest-only option. Section 226.38(c)(5)(i) would
clarify that a payment is a balloon payment if it is more than twice
the amount of other payments. This is consistent with how balloon
payments are defined for purposes of restrictions on balloon payments
for higher-priced and HOEPA loans.
Escrows; mortgage insurance premiums. Proposed Sec.
226.38(c)(3)(i)(C) would provide that if an escrow account will be
established, the creditor must disclose the estimated payment amount
for taxes and insurance, including mortgage insurance. For transactions
secured by real property or a dwelling, creditors would no longer have
the flexibility provided in existing 226.18(g) to exclude escrow
amounts. Consumer testing conducted for the Board shows that many
consumers compare loans based on the monthly payment amount. The Board
believes that in order for consumers to fully understand the monthly
amount they actually will be required to pay for a particular loan,
information about payments for taxes and insurance is necessary. Escrow
information would be included in the table to make it easier for
consumers to identify whether there is an escrow and how much of their
payment would apply to the escrow.
Proposed comment 38(c)(3)(i)(C)-1 would clarify the types of taxes
and insurance that would be required to be included in the estimate.
Proposed comment 38(c)(i)(C)-2 would provide guidance on how to
determine the length of time for which mortgage insurance payments must
be included in the estimate. Under the proposed comment, which is
substantially similar to current comment 18(g)-5, the payment amount
should reflect the consumer's mortgage insurance payments until the
date on which the creditor must automatically terminate coverage under
applicable law, even though the consumer may have a right to request
that the insurance be canceled earlier.
The Board solicits comment on whether premiums or other amounts for
credit life insurance, debt suspension and debt cancellation agreements
and other similar products should be included or excluded from the
disclosure of escrows for taxes and insurance. Including such amounts
in the estimated escrow and monthly payment, particularly on the early
TILA disclosures delivered within three days of application, may cause
some consumers to believe these products are required as part of the
loan agreement. This may affect consumers' ability to weigh the
relative merits of credit insurance and other similar products and
determine whether the product is appropriate for their circumstances.
Total periodic payments. Proposed Sec. 226.38(c)(3)(i)(D) would
require disclosure of the total estimated monthly payment. The total
estimated monthly payment is the sum of the principal and interest
payments and the estimated taxes and insurance payments required to be
disclosed in Sec. 226.38(c)(3)(i)(C).
38(c)(4) Periodic Payments for Loans With Negative Amortization
For each interest rate disclosed under Sec. 226.38(c)(2)(ii), the
creditor would disclose a corresponding payment. One row of the table
would show the fully amortizing payment for each interest rate; for
purposes of calculating these payments the creditor would assume the
interest rate reaches the maximum at the
[[Page 43303]]
earliest date, and that the consumer makes only fully amortizing
payments. The other row of the table would show the minimum required
payment for each rate, until the recast point. At the recast point, the
minimum payment row would show the fully amortizing payment. For
purposes of the minimum payment row, creditors must assume the interest
rate reaches the maximum at the earliest date, and that the consumer
makes only the minimum required payment for as long as permitted under
the terms of the legal obligation.
Minimum payment amounts. Proposed Sec. 226.38(c)(4)(i)(A) would
require disclosure of the minimum required payment at consummation. The
proposal would require a disclosure of the amount of the minimum
payment applicable for each interest rate required to be disclosed
under Sec. 226.38(c)(2)(ii), and the date. Under proposed Sec.
226.38(c)(4)(i)(C), the creditor must provide a statement that the
minimum payment will cover only some of the interest accrued and none
of the principal, and will cause the principal balance to increase. The
Board proposes this required statement to ensure that consumers are
informed about the consequences of making minimum payments. As stated
above, participants in the Board's consumer testing were unfamiliar
with the concept of negative amortization and struggled to understand
why a loan's balance would increase when payments were made.
Payment increases. As noted above, many payment option loans do not
have interest rate caps, and thus the interest rate may reach its
maximum possible amount at the first interest rate adjustment. However,
such loans may have limits on the amount that the minimum payment may
increase following an interest rate adjustment. For example, a minimum
payment increase may be limited by a certain percentage, such as 7.5%
greater than the previous minimum payment. (Such limits are generally
subject to conditions and will not apply either at a specific time,
such as at the fifth year of the loan, or when the loan balance reaches
a certain maximum.) Under proposed Sec. 226.38(c)(2)(ii)(D), if
adjustments in the minimum payment amount are limited such that the
payment will not fully amortize the loan even after the interest rate
has reached the maximum, a disclosure of the minimum payment amount at
the first and second payment adjustments would be required. That is, in
cases where the first interest rate adjustment will be the only
interest rate adjustment, but payment adjustments will continue to
occur before the minimum payment recasts to a fully amortizing payment,
a disclosure of one additional minimum payment adjustment would be
required.
Fully amortizing payment amount. Proposed Sec. 226.38(c)(4)(iii)
would require disclosure of the amount of the fully amortizing payment,
assuming that the consumer makes only fully amortizing payments
beginning at consummation. The fully amortizing payment row must be
filled in for each interest rate required to be disclosed under Sec.
226.38(c)(4)(ii) and (iv). The Board believes that contrasting the
fully amortizing payment with the minimum required payment will help
consumers to understand the implications of making the fully amortizing
payment and the minimum payment. In consumer testing, participants
understood from the table that if they made the fully amortizing
payment each month they would pay their loan off, and that if they
instead made the minimum payment they would not pay the loan off and in
fact would increase the amount that they owe.
Statement of balance increase and other information. Proposed Sec.
226.38(c)(4)(vi) would require a statement of the amount of the
increase in the loan's principal balance if the consumer makes only
minimum payments and the earliest month and year in which the minimum
payment will recast to a fully amortizing payment under the terms of
the legal obligation, assuming that the interest-rate reaches its
maximum at the earliest possible time. As noted, participants in
testing expressed confusion about negative amortization; the Board
believes this disclosure and the other required disclosures in the
table should help consumers understand the risks of making minimum
payments.
In addition, the explanation preceding the table would provide the
consumer's option to make fully amortizing payments or to make minimum
payments, the maximum possible interest rate, the earliest number of
months or years in which the interest rate could reach its maximum, and
the amount of estimated taxes and insurance included in each payment
disclosed. If the maximum interest rate may be reached in less than a
year the statement would be required to provide the number of months
after consummation in which the interest rate may reach its maximum,
otherwise the statement would provide the number of years. In addition,
the creditor would disclose whether an escrow account will be
established and if so, an estimate of the amount for taxes and
insurance included in each periodic payment.
38(c)(6) Special Disclosures for Loans With Negative Amortization
Some mortgage transactions permit the borrower to make payments
that are insufficient to cover all of the interest accrued, and the
unpaid interest is added to the loan's balance. Thus, although the
borrower is making payments, the loan balance is increasing instead of
decreasing. Negative amortization could occur on a fixed-rate mortgage
or an adjustable-rate mortgage. Mortgages with negative amortization
were relatively rare until the early part of this decade, when the
``payment option'' loan began to grow in popularity.\82\ Payment option
loans have adjustable rates, and allow the borrower to choose among up
to five monthly payment options, including a minimum payment that would
result in negative amortization. Other options would include an
interest-only option, a fully amortizing option, and the option to make
extra payments of principal and pay the loan off early. Typically,
payment option loans permit consumers to make minimum payments for a
limited time, such as for the first five years following consummation
or until the loan's principal balance reaches 115 percent of the
original balance, whichever occurs first. Upon either event, the
consumer must begin to make fully amortizing payments.
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\82\ Interagency Guidance on Nontraditional Mortgage Product
Risks, 71 FR 58609; October 4, 2006.
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Payment option loans and other nontraditional mortgages can result
in significant ``payment shock'' for borrowers, particularly when the
loan ``recasts'' and a fully amortizing payment must be made. Concerns
about payment shock led the Board, OCC, OTS, FDIC and NCUA to propose
supervisory guidance on nontraditional mortgages in 2005, and issue
final guidance in October 2006.\83\ The guidance emphasizes that
institutions should use prudence in underwriting nontraditional
mortgages, and should provide accurate and balanced information to
consumers before the consumer is obligated on such a mortgage. The
agencies published illustrations to assist financial institutions in
providing information that would help consumers understand the risks
involved in nontraditional mortgages.\84\ Those illustrations were not
consumer tested.
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\83\ Id.
\84\ 72 FR 31825, 318231; Jun. 8, 2007
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The Board's consumer testing indicates that the unusual and complex
nature of negative amortization loans requires a different approach to
the
[[Page 43304]]
disclosure of interest rates and payments than for amortizing loans.
Nearly all participants in the Board's consumer testing were unfamiliar
with the concept of negative amortization, and technical explanations
of negative amortization proved challenging for them. The Board
believes that selected information about payment option loans may be
more effective in conveying the risks of such mortgages than extensive
text explaining negative amortization and its impact.
Accordingly, the Board developed and tested an interest rate and
payment summary table designed to inform consumers about the risks of a
payment option loan. The proposed rules would also require disclosure
of the interest rate and payment for a loan with negative amortization
that is not an adjustable rate mortgage. However, the Board found no
examples of such loans in the marketplace, and seeks comment on whether
such loans are offered and if so, whether proposed Sec. 226.38(c)
provides sufficient guidance on disclosing such loans.
The interest rate and payment summary would display only two
payment options, even if the terms of the legal obligation provide for
others, such as an option to make interest-only payments. The table
would show only the option to make minimum payments that would result
in negative amortization, and the option to make fully amortizing
payments. The Board believes that displaying all of the options in the
table would have the unintended consequence of confusion and
information overload for consumers. Creditors would be free to provide
information on options not displayed in the table, outside the
segregated information required under this subsection.
In addition, to help consumers navigate the information in the
table, proposed Sec. 226.38(c)(6) would require a statement directly
above the interest rate and payment summary table explaining that the
loan offers payment options. A disclosure of the maximum possible
balance would also be required, directly below the table, to help
ensure that consumers understand the nature and risks involved in loans
with negative amortization.
38(d) Key Questions About Risk
Based on consumer testing, as discussed in greater detail in Sec.
226.19(b)(2) above, the Board proposes to require creditors to disclose
certain information grouped together under the heading ``Key Questions
about Risk,'' using that term. This disclosure would be specific to the
loan program for which the consumer applied. Proposed Sec.
226.38(d)(1) would require the creditor to disclose information about
the following three terms: (1) Rate increases, (2) payment increases,
and (3) prepayment penalties. Proposed Sec. 226.38(d)(2) would require
the creditor to disclose information about the following six terms, but
only if they are applicable to the loan program: (1) interest-only
payments, (2) negative amortization, (3) balloon payment, (4) demand
feature, (5) no-documentation or low-documentation loans, and (6)
shared-equity or shared-appreciation. The ``Key Questions about Risk''
disclosure would be subject to special format requirements, including a
tabular format and a question and answer format, as described under
proposed Sec. 226.38(d)(3).
38(d)(1) Required Disclosures
As noted above, proposed Sec. 226.38(d)(1) would require the
creditor to disclose information about the following three terms: (1)
Rate increases, (2) payment increases, and (3) prepayment penalties.
The Board believes that these three factors should always be disclosed.
Rate and payment increases pose the most direct risk of payment shock.
In addition, consumer testing consistently showed that interest rate
and monthly payment were the two most common terms that participants
used to shop for a mortgage. The Board also believes that the
prepayment penalty is a key risk factor because it is critical to the
consumer's ability to sell the home or refinance the loan to obtain a
lower rate and payments. While the other risk factors are important if
contained in the loan program, the Board believes it appropriate to
include those factors only as applicable to avoid information overload.
Rate increases. Proposed Sec. 226.38(d)(1)(i) would require the
creditor to indicate whether or not the interest rate on the loan may
increase. If the interest rate on the loan may increase, then the
creditor would indicate the frequency with which the interest rate may
increase and the date on which the first interest rate increase may
occur. Proposed comment 38(d)(1)-1 would clarify that disclosing the
date means that the creditor must disclose the calendar month and year.
Payment increases. Proposed Sec. 226.38(d)(1)(ii) would require
the creditor to indicate whether or not the periodic payment on the
loan may increase. If the periodic payment on the loan may increase,
then the creditor would be required to indicate the date on which the
first payment increase may occur. For payment option loans, the
creditor would be required to disclose the dates on which the full and
minimum payments may increase. Proposed comment 38(d)(1)-1 would
clarify that disclosing the date means that the creditor must disclose
the calendar month and year.
Prepayment penalty. As currently required under TILA Section
128(a)(11), 15 U.S.C. 1638(a)(11), and Sec. 226.18(k)(1), if the
obligation includes a finance charge computed from time to time by
application of a rate to the unpaid principal balance, proposed Sec.
226.38(d)(1)(iii) would require the creditor to indicate whether or not
a penalty will be imposed if the obligation is prepaid in full. If the
creditor may impose a prepayment penalty, the creditor would disclose
the circumstances under which and period in which the creditor would
impose the penalty and the amount of the maximum penalty. Because of
the importance of prepayment penalties, the proposed rule would also
require disclosure of prepayment penalties, if applicable, under
proposed Sec. 226.38(a)(5). To avoid duplication, proposed comments
38(d)(1)(iii)-1 to -3 would cross-reference proposed comments 38(a)(5)-
1 to -3 for information about whether there is a prepayment penalty,
and examples of charges that are or are not prepayment penalties. In
addition, proposed comment 38(d)(1)(iii)-4 would cross-reference
comment 38(a)(5)-6 to determine the maximum prepayment penalty.
Proposed comment 38(d)(1)(iii)-5 would cross-reference comment
38(a)(5)-7 for information about any differences resulting from the
consumer's payment patterns and basing disclosures on the required
payment for a negative amortization loan. Although under proposed Sec.
226.38(a)(5) the disclosure of the prepayment penalty would appear on
the first page of the transaction-specific TILA disclosure only if this
feature were present in the loan, the disclosure would always appear on
the second page in the ``Key Questions'' disclosure in order for the
consumer to verify whether or not there is a prepayment penalty
associated with the loan.
38(d)(2) Additional Disclosures
As noted above, proposed Sec. 226.38(d)(2) would require the
creditor to disclose information about the following six terms, as
applicable: (1) Interest-only payments, (2) negative amortization, (3)
balloon payment, (4) demand feature, (5) no-documentation or low-
documentation loans, and (6) shared-equity or shared-appreciation.
Proposed comment 38(d)(2)-1 would
[[Page 43305]]
clarify that ``as applicable'' means that any disclosure not relevant
to a particular loan may be omitted. Although consumer testing showed
that some participants felt reassured by seeing all of the risk factors
whether the factors were a feature of the loan or not, the Board is
concerned about the potential for information overload if the entire
list is included.
Interest-only payments. Proposed Sec. 226.38(d)(2)(i) would
require the creditor to disclose that periodic payments will be applied
only toward interest on the loan. The creditor would also disclose any
limitation on the number of periodic payments that will be applied only
toward interest on the loan, that such payments will cover the interest
owed each month, but none of the principal, and that making these
periodic payments means the loan amount will stay the same and the
consumer will be not have paid any of the loan amount. For payment
option loans, the creditor would disclose that the loan gives the
consumer the choice to make periodic payments that cover the interest
owed each month, but none of the principal, and that making these
periodic payments means the loan amount will stay the same and the
consumer will not have paid any of the loan amount.
Negative amortization. Proposed Sec. 226.38(d)(2)(ii) would
require the creditor to disclose that the loan balance may increase
even if the consumer makes the periodic payments. In addition, the
creditor would be required to disclose that the minimum payment covers
only a part of the interest the consumer owes each period and none of
the principal, that the unpaid interest will be added to the consumer's
loan amount, and that over time this will increase the total amount the
consumer is borrowing and cause the consumer to lose equity in the
home.
Balloon payment. Proposed Sec. 226.38(d)(2)(iii) would require the
creditor to disclose that the consumer will owe a balloon payment,
along with a statement of the amount that will be due and the date on
which it will be due. Proposed comment 38(d)(2)(iii)-1 would clarify
that the creditor must make this disclosure if the loan program
includes a payment schedule with regular periodic payments that when
aggregated do not fully amortize the outstanding principal balance.
Demand feature. As currently required under Sec. 226.18(i),
proposed Sec. 226.38(d)(2)(iv) would require the creditor to disclose
a statement that the creditor may demand full repayment of the loan,
along with a statement of the timing of any advance notice the creditor
is required to give the consumer before the creditor exercises such
right. Proposed comment 38(d)(2)(iv)-1 would clarify that this
requirement would apply not only to transactions payable on demand from
the outset, but also to transactions that convert to a demand status
after a stated period. Proposed comment 38(d)(2)(iv)-2 would cross-
reference comment 18(i)-2 regarding covered demand features.
No-documentation or low-documentation loans. Proposed Sec.
226.38(d)(2)(v) would require the creditor to disclose that the
consumer's loan will have a higher rate or fees because the consumer
did not document employment, income, or other assets. In addition, the
creditor would disclose that if the consumer provides more
documentation, the consumer could decrease the interest rate or fees.
Shared-equity or shared-appreciation. Proposed Sec.
226.38(d)(2)(vi) would require the creditor to disclose a statement
that any future equity or appreciation in the real property or dwelling
that secures the loan must be shared, along with a statement of the
events that may trigger such obligation.
38(d)(3) Format Requirements
Based on consumer testing, as discussed more fully in Sec. Sec.
226.19(b)(2) and 226.37, proposed Sec. 226.38(d)(3) would require the
creditor to disclose the ``Key Questions about Risk'' using a special
format. Proposed Sec. 226.38(d)(3)(i) would require the creditor to
provide the disclosures required in Sec. 226.38(d)(1) and (d)(2), as
applicable, in the form of a table with headings, content and format
substantially similar to Model Forms H-19(A), H-19(B), or H-19(C) in
Appendix H. Only the information required or permitted by Sec.
226.38(d)(1) and (2) would be permitted in this table. In addition,
under Sec. 226.38(d)(3)(ii), the disclosures would be required to be
grouped together and presented in the format of a question and answer
in a manner substantially similar to Model Form H-19(A), H-19(B), or H-
19(C) in Appendix H. Proposed Sec. 226.38(d)(3)(iii) would further
require the creditor to disclose each affirmative answer in bold text
and in all capitalized letters, but negative answers would be disclosed
in nonbold text. Finally, proposed 226.38(d)(3)(iv) would require the
creditor to make the disclosures, as applicable, in the following
order: rate increases under Sec. 226.38(d)(1)(i), payment increases
under Sec. 226.38(d)(1)(ii), interest-only payments under Sec.
226.38(d)(2)(i), negative amortization under Sec. 226.38(d)(2)(ii),
balloon payments under Sec. 226.38(d)(2)(iii), prepayment penalties
under Sec. 226.38(d)(1)(iiii), demand feature under Sec.
226.38(d)(2)(iv), no-documentation or low-documentation loans under
Sec. 226.38(d)(2)(v), and shared-equity or shared-appreciation under
Sec. 226.38(d)(2)(vi). This order would ensure that consumers receive
critical information about their payments first.
38(e) Information About Payments
Proposed Sec. 226.38(e) would require disclosure of additional
information about interest rates and payments, including disclosure of
the amount financed, the ``interest and settlement charges,''
(currently the ``finance charge''), the total of payments, and the
number of payments. Proposed Sec. 226.38(e) would also require
disclosure of whether or not an escrow account for taxes and insurance
is required, a disclosure about private mortgage insurance, if
applicable, and information about limitations on rate and payment
changes. In the consumer testing conducted by the Board, consumers did
not find certain terms that are prominently disclosed on the current
transaction-specific TILA form to be useful. Specifically, the amount
financed, the total of payments, and the finance charge were less
useful to consumers than other information such as information about
the loan amount, interest rates, and monthly payments. The Board
believes that it would enhance consumers' overall understanding of the
disclosures if these items were placed less prominently on the form. In
addition, by placing these terms in the context of a larger explanatory
statement, some consumers may better be able to understand these terms.
At the same time, consumer testing conducted for the Board has shown
that there is other information about the loan terms that consumers
find beneficial that is not currently disclosed on the transaction-
specific form. Specifically, the Board believes that consumers would
find it beneficial to have explanations of how the interest rate or
payment amounts can change and whether there are limits on those
changes, and notification of whether an escrow account or private
mortgage insurance are required.
38(e)(1) and (2) Rate Calculation; Rate and Payment Change Limits
Proposed Sec. Sec. 226.38(e)(1) and 226.38(e)(2) would require
disclosures of how the consumer's variable interest rate is calculated,
of any limitations on adjustments to the interest rate, and of any
limitations on payment adjustments in negatively amortizing loans. The
[[Page 43306]]
requirements under proposed Sec. Sec. 226.38(e)(1) and 226.38(e)(2) to
provide disclosures of how the rate is calculated and any limitations
on adjustments to the interest rate are similar to the requirements of
current Sec. Sec. 226.18(f)(1)(i) and 226.18(f)(1)(ii) for
transactions not secured by the consumer's principal dwelling or
secured by the consumer's principal dwelling with a term of one year or
less. Currently, for transactions secured by the consumer's principal
dwelling with a term greater than one year, Sec. 226.19(b)(2) requires
information about the variable interest rate to be disclosed at the
time an application form is provided to the consumer, or before the
consumer pays a nonrefundable fee, whichever is earlier. However, under
current Sec. 226.18(f)(2), in the transaction-specific disclosures
provided before consummation, only a statement that the transaction
contains a variable-rate feature, and a statement that variable-rate
disclosures have been provided earlier, are required. The Board
believes that providing information about how the interest rate is
calculated and about limitations on interest rate adjustments along
with other transaction-specific disclosures would provide consumers
with meaningful information about their particular interest rate in the
context of the entire transaction being disclosed. For adjustable-rate
mortgages, proposed Sec. 226.38(e)(1) would require a statement of how
the interest rate is calculated. In addition, if the interest rate at
consummation is not based on the index and margin that will be used to
make later interest rate adjustments, the statement would be required
to include the time period when the initial interest rate expires.
Proposed comment 38(e)(1)-1 is similar to current comment
18(f)(1)(i)-1 for credit not secured by the consumer's principal
dwelling, or secured by the consumer's principal dwelling with a term
of one year or less. The proposed comment would clarify that if the
interest rate is calculated based on the addition of a margin to an
index the statement would have to identify the index to which the rate
is tied and the margin that will be added to the index, as well as any
conditions or events on which the increase is contingent. When no
specific index is used, the factors used to determine whether to
increase the rate would be required to be disclosed. When the increase
in the rate is discretionary, the fact that any increase is within the
creditor's discretion would be required to be disclosed. When the index
is internal (for example, the creditor's prime rate), the creditor
would be permitted to comply with the disclosure requirement by
providing either a brief description of that index or a statement that
any increase is in the discretion of the creditor. An external index,
however, would be required to be identified.
Proposed Sec. 226.38(e)(2) would require a statement of any
limitations on the increase in the interest rate in a variable-rate
transaction, and, for negatively amortizing loans, a statement of any
limitations on the increase in the minimum payment amount and the
circumstances under which the minimum payment required may recast to a
fully amortizing payment. Proposed comment 38(e)(2)-1, covering
variable-rate transactions, would be similar to current comment
18(f)(1)(ii)-1 and would clarify that the disclosure of limitations on
adjustments to the interest rate must provide any maximum imposed on
the amount of an increase in the rate at any time, as well as any
maximum on the total increase over the transaction's term to maturity.
Proposed comment 38(e)(2)-2, covering negatively amortizing loans,
would clarify that any limit imposed on the change of a minimum payment
amount, whether or not the change follows an adjustment to the interest
rate, would be required to be disclosed. In addition, any conditions to
the limitation on payment increases would also be required to be
disclosed. For example, some loan programs provide that the minimum
payment will not increase by more than a certain percentage, regardless
of the corresponding increase in the interest rate. However, there may
be exceptions to the limitation on the payment increase, such as if the
consumer's principal balance reaches a certain threshold, or if the
legal obligation sets out a scheduled time when payment increases will
not be limited.
38(e)(3) Escrow
Proposed Sec. 226.38(e)(3) would require, if applicable, a
statement substantially similar to the following: ``An escrow account
is required for property taxes and insurance (such as homeowner's
insurance). Your escrow payment is an estimate and can change at any
time. See your Good Faith Estimate or HUD-1 form for more details.'' If
no escrow is required, the creditor would be required to state that
fact and that the consumer must pay property taxes and insurance
directly.
38(e)(4) Mortgage Insurance
Proposed Sec. 226.38(e)(4) would require, if applicable, a
statement substantially similar to the following: ``Private Mortgage
Insurance (PMI) is required for this loan. It is included in your
escrow.'' If other mortgage insurance is required, such as insurance or
guaranty obtained from a government agency, the creditor would be
required to omit the word ``private'' from the description.
38(e)(5) Total Payments
38(e)(5)(i) Total Payments
Section 226.18(h), which implements TILA Section 128(a)(5) and (8),
requires creditors to disclose the total of payments, using that term,
together with a descriptive statement that the disclosed amount
reflects the sum of all scheduled payments disclosed under Sec.
226.18(g).\85\ 15 U.S.C. 1638(a)(5), (a)(8). Current comment 18(h)-1
allows creditors to revise the total of payments descriptive statement
for variable rate transactions to convey that the disclosed amount is
based on the annual percentage rate and may change. In addition,
current comments 18(h)-3 and -4 permit creditors to omit the total of
payments disclosure in certain single-payment transactions and for
demand obligations that have no alternate maturity date.
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\85\ Section 128(a)(5) of TILA states that the total of payments
should be disclosed as the sum of the amount financed and finance
charge. 15 U.S.C. 1638(a)(5). Since 1969, the Board has required
that the total of payments equal the sum of payments disclosed in
the payment schedule under TILA Section 128(a)(6) and Sec.
226.18(g), which can include amounts beyond the amount financed and
the finance charge. 15 U.S.C. 1638(a)(6). Thus, if a creditor
includes escrowed taxes and insurance in its disclosure of scheduled
payments under Sec. 226.18(g), it must also include those amounts
in the total of payments disclosed under Sec. 226.18(h). 34 FR
02002; Feb. 11, 1969.
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Consumer testing conducted by the Board showed that participants
did not find the total of payments to be helpful in evaluating a loan
offer. Most participants understood that the total of payments
generally represented the sum of scheduled payments and charges,
including interest; several suggested that an explanation of how the
total of payments is calculated would facilitate comprehension of the
term. Some participants expressed interest in knowing the total of
payments required to pay off the loan obligation, but regarded this
information as marginally useful to their shopping and decision-making
process. On the other hand, some participants commented that
information about the total of payments was unnecessary and therefore,
could be removed from the form entirely.
As part of consumer testing, the Board shortened the term ``total
of payments'' to ``total payments'' because it is a more
[[Page 43307]]
direct and simple term to communicate to consumers what the dollar
amount represented. In addition, an explanation of the assumptions
underlying the total payments calculation was added with an explicit
reference to whether the amount included escrowed amounts. The total
payment amount was disclosed with a statement explaining that a portion
of it goes towards interest and settlement charges. This approach
enhanced consumer comprehension of the total payments and, as discussed
more fully below, the interest and settlement charges disclosure.
The Board proposes to rename ``total of payments'' as ``total
payments,'' and require that it be disclosed with a descriptive
statement, for transactions secured by real property or a dwelling. The
Board proposes to make this adjustment pursuant to its exception
authority under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a)
authorizes the Board to make exceptions and adjustments to TILA to
effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms and helping consumers avoid
the uninformed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board
believes that proposing the exception is appropriate. Consumer testing
indicates that ``total payments'' is more understandable to consumers
than ``total of payments.''
The Board proposes to add new Sec. 226.38(e)(5)(i), which would
implement TILA Sections 128(a)(5), 128(a)(6), in part, and 128(a)(8)
for transactions secured by real property or a dwelling. 15 U.S.C.
1638(a)(5), (a)(6), and (a)(8). Proposed Sec. 226.38(e)(5)(i) would
require creditors to disclose for transactions secured by real property
or a dwelling, the number and total amount of payments that the
consumer would make over the full term of the loan. The Board proposes
that this disclosure be made together with a brief statement that the
amount is calculated assuming market rates will not change, and that
the consumer will make all payments as scheduled for the full term of
the loan. The Board believes that although the total payments
disclosure is not critical to the shopping or decision-making process
for many consumers, it provides information about the total cost of the
loan that provides context for, and increases understanding of, other
required disclosures, such as interest and settlement charges (formerly
finance charge) and amount financed.
Proposed comments 38(e)(5)(i)-1 through -3 would be added to
provide guidance to creditors on how to calculate and disclose the
total payments amount and the number of payments. As discussed more
fully under proposed Sec. 226.38(c), the Board is proposing to require
creditors to provide interest rate and monthly payment disclosures in a
tabular format for transactions secured by real property or a dwelling.
As a result, creditors would not be subject to the disclosure
requirements for payment schedules under current Sec. 226.18(g).
However, proposed comment 38(e)(5)(i)-1 would clarify that creditors
should continue to follow the rules in Sec. 226.18(g) and associated
commentary, and comments 17(c)(1)-8 and -10 for adjustable rate
transactions, to calculate the total payments for transactions secured
by real property or a dwelling. New comment 38(e)(5)(i)-2 would cross-
reference to comment 18(g)-3, which the Board proposes to revise to
require creditors to disclose the total number of payments for all
payment levels as a single figure for transactions secured by real
property or a dwelling. Proposed comment 38(e)(5)(i)-3 would provide
guidance regarding demand obligations. In technical revisions, the text
from current footnote 44 would be moved to the regulation text in Sec.
226.18(h); however, this text is not included in proposed Sec.
226.38(e)(5)(ii) because it is not applicable to transactions secured
by real property or a dwelling.
As discussed more fully under proposed Sec. 226.38(e)(5)(ii) for
interest and settlement charges (formerly ``finance charge''),
creditors would be required to group the total payments disclosure
together with the interest and settlement charges and amount financed
disclosures under proposed Sec. 226.38(e)(5)(ii) and (iii),
respectively.
38(e)(5)(ii) Finance Charge: Interest and Charges
Section 226.18(d), which implements TILA Sections 128(a)(3) and
(a)(8), requires creditors to disclose the ``finance charge,'' using
that term, and a brief description such as ``the dollar amount the
credit will cost you.'' 15 U.S.C. 1638(a)(3), (a)(8). Current comment
18(d)-1 allows creditors to modify this description for variable rate
transactions with a phrase that the disclosed amount is subject to
change. In addition, Sec. 226.17(a)(2), which implements TILA Section
122(a), requires creditors to disclose the finance charge, and the
annual percentage rate, more conspicuously than any other required
disclosure, except the creditor's identity. 15 U.S.C. 1633(a). The
rules addressing which charges must be included in the finance charge
are set forth under TILA Section 106 and Sec. 226.4, and are discussed
more fully under Sec. 226.4 of this proposal. 15 U.S.C. 1605.
Consumer testing conducted by the Board indicated that many
participants could not correctly explain the term ``finance
charge.''\86\ Most participants thought that the finance charge
represented the amount of interest the borrower would pay over the life
of the loan, but did not realize that it also included fees until
directed to read a statement that explained fees were included.
Consumer testing showed that comprehension of the finance charge
improved when it was renamed to reflect the costs it actually
represented--the interest and settlement charges paid over the life of
the loan. However, even when participants understood what the finance
charge signified they tended to disregard it, often because it was such
a large dollar amount. Several participants commented that it is
helpful to know the total amount of interest and fees that would be
paid, but that they could not otherwise purchase a home, or refinance
an existing obligation, in cash and therefore, already understood they
would pay a significant amount in interest and fees when repaying the
loan. Still, participants expressed an interest in knowing the total
amount of interest and other charges they would pay over the full term
of the loan.
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\86\ See also Improving Consumer Mortgage Disclosures (stating
that a number of respondents misinterpreted the finance charge).
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The Board proposes to exercise its authority under TILA Section
105(a) to rename ``finance charge'' as ``interest and settlement
charges,'' except it from the requirement under TILA Section 122(a)
that it be disclosed more conspicuously, and require that it be
disclosed with a descriptive statement. 15 U.S.C. 1632(a); 1604(a),
(f). Section 105(a) authorizes the Board to make exceptions or
adjustments to TILA for any class of transactions to effectuate the
statute's purposes, which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uninformed use of
credit. 15 U.S.C. 1601(a), 1604(a). In this case, the Board believes an
exception from TILA's requirements are necessary to effectuate the
Act's purposes for transactions secured by real property or a dwelling.
Although some consumers expressed interest in the finance charge when
evaluating a loan offer, consumer testing showed that for most
consumers it is not as useful in the shopping or decision-making
process as other terms, and therefore, should be de-emphasized relative
to other disclosed terms. Consumer testing also showed that
[[Page 43308]]
participants had a better understanding of the finance charge when it
was disclosed as a portion of the total payments amount, accompanied by
a statement that explained the finance charge amount plus the amount
financed is used to calculate the APR. Thus, based on consumer testing,
the Board believes that consumers will find the finance charge
disclosure more meaningful when described in a manner consistent with
consumers' general understanding, and disclosed in context with other
information that relate to loan payments, such as the total payments.
The Board proposes to add new Sec. 226.38(e)(5)(ii), which would
implement TILA Section 128(a)(3) and (8) for closed-end mortgage loans
covered by Sec. 226.38. 15 U.S.C. 1638(a)(3), (8). Section
226.38(e)(5)(ii) would require creditors to disclose the ``interest and
settlement charges,'' using that term, together with a brief statement
that the disclosed amount represents part of the total payments amount
disclosed. Creditors would also be required to disclose the ``interest
and settlement charges'' grouped together with the ``total payments''
and ``amount financed'' disclosures under proposed Sec.
226.38(e)(5)(i) and (iii), respectively, under the subheading ``Total
Payments,'' using that term. Based on consumer testing, the Board
believes this approach is appropriate to help serve TILA's purpose of
assuring a meaningful disclosure of credit terms. Consumer testing
suggests that providing the disclosure of ``interest and settlement
charges'' in context of the total payments improves consumers' ability
to understand that this disclosure represents the cost (i.e., interest
and fees) of borrowing the loan amount.
The Board also proposes comment 38(e)(5)(ii)-1 to provide guidance
on how creditors must calculate and disclose the interest and
settlement charges. However, the proposed rule would not allow
creditors to modify the description that accompanies the disclosure for
variable-rate transactions. The Board proposes this restriction under
TILA Section 105(a) to help serve TILA's purpose of meaningful
disclosure of credit terms so that consumers will be able to compare
more readily the various credit terms available, and avoid the
uninformed use of credit. 15 U.S.C. 1601(a). Consumer testing showed
that the simple disclosure aided consumer understanding. The Board
believes that adding language that states the disclosed amount is
subject to change could dilute the significance of the disclosure.
38(e)(5)(iii) Amount Financed
Disclosure of amount financed. Section 226.18(b), which implements
TILA Section 128(a)(2)(A) and (a)(8), requires creditors to disclose
the amount financed, using that term, together with a brief description
that it represents the amount of credit of which the consumer has
actual use. 15 U.S.C. 1638(a)(2)(A), (a)(8). Section 226.18(b)
delineates how creditors should calculate the amount financed so that
it reflects the net amount of credit being extended.
In consumer testing conducted for the Board, virtually no
participant understood the disclosure of the amount financed.\87\ The
Board tested several versions of the amount financed disclosure, with
alternative formatting and descriptions, to explain briefly that it
represents the amount of credit of which the consumer has actual use to
purchase a home or refinance an existing loan. However, these changes
made no difference in participants' understanding of the term. In
addition, consumer testing showed that the amount financed disclosure
actually detracted from consumers' understanding of other disclosures.
Many consumers mistook the amount financed for the loan amount. Some of
these consumers were confused, however, because the amount financed was
slightly lower than the amount borrowed in the hypothetical loan offer.
Consumers offered various explanations regarding the difference in the
disclosed amounts, including that the amount financed was the cost of
purchasing a home less a down payment. Other participants stated that
the amount financed represented escrowed amounts. Sample disclosures
were used to try to explain that the difference between the loan amount
and amount financed is attributable to prepaid finance charges, but
this explanation did not appear to improve consumer comprehension.
Consumer testing also indicated that participants would not consider
the amount financed when shopping for a mortgage or evaluating
competing loan offers.
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\87\ See also Improving Consumer Mortgage Disclosures at 35
(finding that most respondents in consumer testing did not
understand the term ``amount financed,'' and confused it for the
loan amount, and discussing the risks of falling subject to
predatory lending practices as a result of this confusion).
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For these reasons, the Board proposes to add new Sec.
226.38(e)(5)(iii), which would implement TILA Section 128(a)(2)(A) and
(a)(8) for transactions secured by real property or a dwelling. 15
U.S.C. 1638(a)(2)(A), (a)(8). Section 226.38(e)(5)(iii) would require
creditors to disclose the amount financed with a brief statement that
the amount financed, plus the interest and settlement charges, is the
amount used to calculate the annual percentage rate. As noted above,
creditors would be required to disclose the amount financed grouped
together with the total payments and interest and settlement charges
required under proposed Sec. 226.38(e)(5)(i) and (ii).
The Board proposes this approach pursuant to its authority under
TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a) authorizes the
Board to prescribe regulations to effectuate the statute's purposes,
which include facilitating consumers' ability to compare credit terms
and helping consumers avoid the uninformed use of credit. 15 U.S.C.
1601(a), 1604(a). Based on consumer testing, the Board believes this
proposal is appropriate to help serve TILA's purpose of assuring a
meaningful disclosure of credit terms. The Board believes that
requiring creditors to disclose the amount financed in the loan summary
with other key loan terms would add unnecessary complexity and result
in ``information overload.'' Consumer testing showed that when the
amount financed was disclosed with the total payments and interest and
settlement charges, that consumer comprehension of the term improved
slightly, and confusion over other key loan terms, such as the loan
amount, was eliminated. The Board believes that disclosing the amount
financed as one component in the APR calculation provided consumers
with a better understanding of its significance to the loan
transaction. The Board also proposes new comment 38(e)(5)(iii)-3 to
provide guidance regarding disclosure of the ``amount financed.''
Calculation of amount financed. The Board proposes to simplify the
calculation of the amount financed for transactions subject to the
disclosure requirements of proposed Sec. 226.38, pursuant to the
Board's authority under TILA Section 105(a). The Board believes that
the proposed simplification would improve understanding of the rules
and facilitate compliance with Regulation Z. Under proposed Sec.
226.38(e)(5)(iii), for a transaction secured by real property or a
consumer's dwelling, the creditor would determine the amount financed
by subtracting all prepaid finance charges from the loan amount as
defined in proposed Sec. 226.38(a)(1), discussed above. Under existing
Sec. 226.18(b) and its staff commentary, creditors may elect from
among multiple alternatives in calculating the amount financed. All of
[[Page 43309]]
the permissible methods yield the same mathematical result.
The Board has received input from bank examiners and others that
providing multiple approaches to calculation of the amount financed
creates unnecessary complication. Examiners also indicate that, of the
permissible approaches, mortgage lenders generally use the one that is
simplest and most straightforward. The Board is now proposing to
require that approach and to eliminate the alternatives. The Board also
is proposing to make a conforming amendment to the staff commentary
under Sec. 226.18(b) to reflect the fact that it would not apply to
mortgages.
TILA provides that the amount financed is calculated as follows:
(1) Take the principal amount of the loan (or cash price less
downpayment);
(2) Add any charges that are not part of the finance charge or of
the principal amount and that are financed by the consumer; and
(3) Subtract any prepaid finance charge.
TILA Section 128(a)(2)(A), 15 U.S.C. 1638(a)(2)(A). Regulation Z
provides a substantially identical calculation. See Sec. 226.18(b).
Neither the statute nor Regulation Z defines ``principal amount of the
loan.'' As a result, more than one understanding of that term is
possible, and Regulation Z seeks to address several of those
understandings rather than to define principal amount definitively.
Current Regulation Z permits non-finance charges and prepaid
finance charges that are financed to be included in the principal loan
amount under step (1) or not, at the creditor's option. The creditor
then must add in under step (2) any financed non-finance charges that
were not included under step (1). See comment 18(b)(2)-1. Similarly,
the creditor must subtract under step (3) any financed prepaid finance
charges only if they were included under step (1). See comment
18(b)(3)-1. Proposed Sec. 226.38(e)(5)(iii) effectively would define
``principal loan amount'' as the loan amount, as that is defined in
proposed Sec. 226.38(a)(1), which would mean the principal amount the
consumer will borrow reflected in the loan contract. Under that
definition, all amounts that are financed necessarily would be included
in step (1), whether they are finance charges or not. Consequently, no
amount ever would be added under step (2). The new provision therefore
would streamline the calculation to eliminate that step. Similarly, the
current commentary providing that financed prepaid finance charges
should be subtracted in step (3) only if they were included in step (1)
would be unnecessary, as such finance charges always would be included
in step (1). Proposed Sec. 226.38(e)(5)(iii) would provide
definitively that the amount financed is determined simply by
subtracting the prepaid finance charge from the loan amount.
The Board also is proposing comment 38(e)(5)(iii)-2 to clarify how
to treat creditor or third-party premiums and buy-downs for purposes of
the amount financed calculation. This proposed comment is based on
existing comment 18(b)-2, which relates to rebates and loan premiums.
The discussion in comment 18(b)-2 was primarily intended to address
situations that are more common in non-mortgage transactions,
especially credit sales, such as automobile financing. It provides that
creditor-paid premiums and seller- or manufacturer-paid rebates may be
reflected in the disclosures under Sec. 226.18 or not, at the
creditor's option. Although such premiums and rebates are less likely
to exist in mortgage transactions precisely as they are described in
comment 18(b)-2, analogous situations can apply to mortgage financing.
For example, real estate developers may offer to pay some or all
closing costs or to buy down the consumer's interest rate, and
creditors may agree to pay certain closing costs in return for a
particular interest rate. Rather than permit any treatment at the
creditor's option, however, proposed comment 38(e)(5)(iii)-2 would
reflect the Board's belief that such situations are analogous to
buydowns. Like buydowns, such premiums and rebates may or may not be
funded by the creditor and reduce costs otherwise borne by the
consumer. Accordingly, their impact on the amount financed, like that
of buydowns, properly depends on whether they are part of the legal
obligation. See comments 17(c)(1)-1 through -5. Proposed comment
38(e)(5)(iii)-2 would clarify that the disclosures, including the
amount financed, must reflect loan premiums and rebates regardless of
their source, but only if they are part of the terms of the legal
obligation between the creditor and the consumer. As noted above, the
Board also is proposing similar revisions to existing comment 18(b)-2.
38(f) Additional Disclosures
38(f)(1) No Obligation Statement
The MDIA amended Section 128(b)(2) of TILA to require creditors to
disclose, in conspicuous type size and format, that receiving and
signing a TILA disclosure does not obligate a consumer to accept the
loan (``the MDIA statement''). 15 U.S.C. 1638(b)(2). The MDIA sets
forth the following language for creditors to use in making this
disclosure: ``You are not required to complete this agreement merely
because you have received these disclosures or signed a loan
application.'' \88\ The Board proposes to modify this statutory
language to facilitate consumers' use and understanding of the MDIA
statement pursuant to its authority under TILA Section 105(a) to make
adjustments that are necessary to effectuate the purposes of TILA. 15
U.S.C. 1604(a). Based on consumer testing, the Board believes that
using plain language principles to revise the statutory language
improves consumers' ability to understand the disclosure and would help
serve TILA's purpose to provide meaningful disclosure of credit terms.
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\88\ Housing and Economic Recovery Act, Public Law 110-289, 122
Stat. 2655, Sec. 2502(a)(6) (July 30, 2008).
---------------------------------------------------------------------------
As part of consumer testing, the Board included the MDIA statement
on the front page of the TILA, modified to replace legalistic phrasing
with more common word usage. On the second page, the Board included a
signature line and date, as most creditors require the consumer to sign
the disclosure form to establish compliance with TILA. Most
participants did not notice the MDIA statement, but indicated that they
understood they were under no obligation to accept the loan;
participants who did notice the text similarly understood they were
under no obligation to accept the loan. However, upon seeing the
signature line, some participants believed they would be obligated to
accept the loan if they signed or initialized the disclosure. Based on
consumer testing, the Board is concerned that although consumers may
initially understand they are not obligated to accept a loan, this
belief may be altered by creditors' practice of requiring consumers to
sign or initial receipt of the disclosures. This may further discourage
negotiation and shopping among loan products and lenders.
To implement the new disclosure required by the MDIA, the Board
proposes to add new Sec. 226.38(f)(1) for all transactions secured by
real property or a dwelling. Proposed Sec. 226.38(f)(1) would require
a statement that a consumer is not obligated to accept the loan because
he or she has signed the disclosure. In addition, the Board proposes
that if a creditor provides space for the consumer to sign or initial
the TILA disclosures, then the creditor
[[Page 43310]]
must place the statement in close proximity to the space provided for
the consumer's signature or initials. The statement must also specify
that a signature only confirms receipt of the disclosure statement.
The Board proposes this approach pursuant to its authority under
TILA Section 105(a) to effectuate the statute's purposes, which include
facilitating consumers' ability to compare credit terms and helping
consumers avoid the uninformed use of credit. 15 U.S.C. 1601(a),
1604(a). The Board believes that this proposal is necessary to
encourage consumers to shop among available credit alternatives. The
Board tested the disclosure as proposed under Sec. 226.38(f)(1). Most
participants understood they were not obligated to accept the loan and
could refuse to accept the loan offer even after signing. As a result,
the Board believes the disclosure proposed by new Sec. 226.38(f)(1) is
necessary to ensure that consumers are not discouraged from shopping or
negotiating with the lender.
38(f)(2) Security Interest
TILA Section 128(a)(9), 15 U.S.C. 1638(a)(9), and Sec. 226.18(m)
require the creditor to disclose whether it has a security interest in
the property securing the transaction. During consumer testing of the
current TILA disclosure, participants were shown the following
language: ``Security: You are giving a security interest in the real
property, and fixtures and rents if indicated in the rider mortgage.''
Very few participants understood the current language regarding a
security interest. The Board is concerned that consumers might not
understand that the creditor can take the consumer's home if the
consumer defaults on the loan agreement. To clarify the significance of
the security interest disclosure to consumers, the Board proposes Sec.
226.38(f)(2) to require the creditor to state that the consumer could
lose the home if the consumer is unable to make the payments on the
loan. This would provide a clearer disclosure regarding the effect of
the lender taking a security interest in the home.
38(f)(3) No Guarantee to Refinance Statement
The MDIA also amended Section 128(b)(2) of TILA to require
creditors to disclose for variable rate transactions, in conspicuous
type size and format, that there is no guarantee that the consumer will
be able to refinance the transaction to lower the interest rate or
monthly payments (``MDIA refinancing warning'').\89\ 15 U.S.C.
1638(b)(2). To implement the disclosure required by the MDIA, the Board
proposes to add Sec. 226.38(f)(3) to require that creditors disclose
that there is no guarantee that the consumer will be able to refinance
the loan to obtain a lower interest rate and payment. The Board
believes that including such a statement on the TILA disclosure form
will alert consumers to consider the impact of future rate adjustments
and increased monthly payments
---------------------------------------------------------------------------
\89\ Specifically, the MDIA requires that the Board use consumer
testing to develop disclosures for variable rate transactions,
including the fact that ``there is no guarantee that the borrower
will be able to refinance to a lower amount.'' Public Law 109-8, 119
Stat. 23, Sec. 2502(a)(6).
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Although the MDIA requires this refinancing warning only for
variable rate transactions secured by a dwelling, the Board proposes to
expand the scope of the requirement to also include fixed-rate
transactions secured by a dwelling, as well as transactions secured by
real property without a dwelling. The Board proposes this approach
pursuant to its authority under TILA Section 105(a) to effectuate the
statute's purposes, which include facilitating consumers' ability to
compare credit terms and helping consumers avoid the uninformed use of
credit. 15 U.S.C. 1601(a), 1604(a). The Board is concerned that some
consumers may accept loan terms that could present refinancing concerns
similar to variable rate transactions, such as a three-year fixed-rate
mortgage with a balloon payment. Based on consumer testing, the Board
believes all consumers, regardless of transaction-type, would benefit
from a statement that encourages consideration of future possible
market rate increases.
38(f)(4) Tax Deductibility
The Board is also proposing changes to the closed-end disclosures
to implement provisions of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 (the ``Bankruptcy Act'') which requires
disclosure of the tax implications for home-secured credit that may
exceed the dwelling's fair market value. See Public Law 109-8, 119
Stat. 23. The Bankruptcy Act primarily amended the federal bankruptcy
code, but also contained several provisions amending TILA. Section 1302
of the Bankruptcy Act amendments requires that advertisements and
applications for credit (either open-end or closed-end) that may exceed
the fair market value of the dwelling include a statement that the
interest on the portion of the credit extension that exceeds the fair
market value is not tax-deductible and a statement that the consumer
should consult a tax advisor for further information on tax
deductibility.
The Board stated its intent to implement the Bankruptcy Act
amendments in an ANPR published in October 2005 as part of the Board's
ongoing review of Regulation Z (October 2005 ANPR). 70 FR 60235; Oct.
17, 2005. The Board received approximately 50 comment letters: forty-
five letters were submitted by financial institutions and their trade
groups, and five letters were submitted by consumer groups. In general,
creditors asked for flexibility in providing the disclosure regarding
the tax implications for home-secured credit that may exceed the
dwelling's fair market value, either by permitting the notice to be
provided to all mortgage applicants, or to be provided later in the
approval process after creditors have determined whether the disclosure
is triggered. Creditor commenters asked for guidance on loan-to-value
calculations and safe harbors for how creditors should determine
property values. Consumer advocates favored triggering the disclosure
when negative amortization could occur. A number of commenters stated
that in order for the disclosure to be effective and useful to the
borrower, it should be given when the new extension of credit, combined
with existing credit secured by the dwelling (if any), may exceed the
fair market value of the dwelling. A few industry comments took the
opposite view that the disclosure should be limited only to when a new
extension of credit itself exceeds fair market value, citing the
difficulty in determining how much debt is already secured by the
dwelling at the time of application.
The Board implemented section 1302 with regard to advertisements in
its 2008 HOEPA Final Rule. See 73 FR 44522, 44600; July 30, 2008. In
the supplementary information to that rule, the Board stated that it
intends to implement the application disclosure portion of the
Bankruptcy Act during its forthcoming review of closed-end and HELOC
disclosures under TILA. Proposed Sec. 226.38(f)(4) would implement
provisions of the Bankruptcy Act by requiring creditors to include the
disclosure of the tax implications for a loan secured by a dwelling, if
extension of credit may, by its terms, exceed the fair market value of
the dwelling. The text of the proposed disclosure is based on the
Board's consumer testing of model HELOC disclosure forms. The
disclosure would be segregated and located directly below the table.
The Board recognizes that creditors may not be able to determine
whether the amount of credit extended exceeds
[[Page 43311]]
the fair market value of the dwelling, especially three days after
application when they are required to provide an early transaction-
specific disclosures. The creditor may not be able to verify the value
on the property until later in the loan underwriting process. The Board
has considered whether the disclosure should be provided later in the
approval process after the creditor has determined that the disclosure
is triggered, for instance, after receiving the appraisal report or
completing the underwriting process. However, such late timing of the
disclosure would not satisfy the requirements of the Bankruptcy Act
which requires that the disclosures be provided at the time of
application. See 15 U.S.C. 1638(a)(15).
The Board also considered whether the disclosure should be provided
to all mortgage applicants, regardless of whether the amount of credit
extended exceeds the fair market value of the dwelling. To address the
situations in which the creditor is not certain whether the credit
extended may exceed the fair market value of the dwelling, comment
38(f)(4)-2 permits the disclosure to be provided to all mortgage
applicants at creditors' discretion and provides model language.
The Board recognizes that the scope of the proposed Sec.
226.38(f)(4) is limited to dwellings whereas proposed Sec. 226.38
would apply to real property and dwellings. While the Bankruptcy Act
amendment specifically references ``consumer's dwelling,'' the Board
believes that it would be unnecessarily burdensome to require creditors
to create separate disclosures for the transactions secured by real
property and those secured by a dwelling solely for the purposes of the
tax implications disclosure. For that reason, a creditor would be
permitted, but not required, to provide the disclosures about the tax
implications in connection with transactions secured by both real
property and dwellings.
38(f)(5) Additional Information and Web Site
Consumer testing showed that many participants educated themselves
about the mortgage process through informal networking with family,
friends, and colleagues, while others relied on the Internet for
information. To improve consumers' ability to make informed decisions
about credit, the Board proposes Sec. 226.38(f)(5) to require the
creditor to disclose that if the consumer does not understand any of
the disclosures, then the consumer should ask questions. The creditor
would also disclose that the consumer may obtain additional information
at the Web site of the Federal Reserve Board and disclose a reference
to that Web site. The Board will enhance its Web site to further assist
consumers in shopping for a mortgage. Although it is hard to predict
from the results of the consumer testing how many consumers might use
the Board's Web site, and recognizing that not all consumers have
access to the Internet, the Board believes that this Web site may be
helpful to some consumers as they shop for a mortgage. The Board seeks
comment on the content for the Web site.
38(f)(6) Format
The Board is proposing to specify precise formatting requirements
for the disclosures required by Sec. 226.38(f)(1) through (5).
Proposed Sec. 226.38(f)(6)(i) would set forth location requirements,
providing that the no obligation and confirmation of receipt statements
must be disclosed together, the security interest and no guarantee to
refinance statements must be disclosed together, and the recommendation
to ask questions and statement regarding the Board's Web site must be
disclosed together. Proposed Sec. 226.38(f)(6)(ii) would set forth
highlighting requirements, providing that the no obligation and
security interest statements, and the advice to ask questions, must be
disclosed in bold text.
38(g) Identification of Originator and Creditor
38(g)(1) Creditor
Currently, Sec. 226.18(a), which implements TILA Section
128(a)(1), 15 U.S.C. 1638(a)(1), requires the creditor to disclose the
identity of the creditor making the disclosure. Proposed Sec.
226.38(g)(1) would require the same disclosure. In addition, proposed
comment 38(g)(1)-1 would parallel existing comment 18(a)-1 to clarify
that use of the creditor's name is sufficient, but the creditor may
also include an address and/or telephone number. In transactions with
multiple creditors, any one of them may make the disclosures, but the
one doing so must be identified. The Board solicits comment on whether
the creditor making the disclosures should be required to disclose its
contact information, such as its address and/or telephone number.
Existing footnote 38 to Sec. 226.17(a), which implements TILA
Section 128(b)(1), 15 U.S.C. 1638(b)(1), states that the creditor's
identity may be made together with or separately from the other
required disclosures. The Board proposes to amend the substance of
current footnote 38 to remove the reference to the creditor's identity
disclosure required under Sec. 226.18(a), thereby making it subject to
the grouped-together and segregation requirement for all non-mortgage
closed-end credit. Similarly, Sec. 226.37(a)(2) would require the
disclosure of the creditor's identity to be subject to the grouped-
together and segregation requirement for closed-end credit transactions
secured by real property or a dwelling.
The Board proposes to make this adjustment pursuant to its
authority under TILA Section 105(a). 15 U.S.C. 1604(a). Section 105(a)
authorizes the Board to make exceptions and adjustments to TILA to
effectuate the statute's purposes, which include facilitating
consumers' ability to compare credit terms, and avoid the uninformed
use of credit. 15 U.S.C. 1604(a), 15 U.S.C. 1601(a). The Board believes
it is important to disclose the creditor's identity so that consumers
can more easily identify the appropriate entity. Thus, the Board
believes this proposal would help serve TILA's purpose to provide
meaningful disclosure of credit terms.
38(g)(2) Loan Originator
On July 30, 2008, the Secure and Fair Enforcement for Mortgage
Licensing Act of 2008 (SAFE Act), 12 U.S.C. 5101-5116, was enacted to
create a Nationwide Mortgage Licensing System and Registry of loan
originators to increase uniformity, reduce fraud and regulatory burden,
and enhance consumer protection. 12 U.S.C. 5102. Under the SAFE Act, a
``loan originator'' is defined as ``an individual who (I) takes a
residential mortgage loan application; and (II) offers or negotiates
terms of a residential mortgage loan for compensation or gain.'' 12
U.S.C. 5102(3)(A)(i). Each loan originator is required to obtain a
unique identifier through the Nationwide Mortgage Licensing System and
Registry. 12 U.S.C. 5103(a)(2). The term ``unique identifier'' is
defined as ``a number or other identifier that (i) permanently
identifies a loan originator; (ii) is assigned by protocols established
by the Nationwide Mortgage Licensing System and Registry and the
Federal banking agencies to facilitate electronic tracking of loan
originators and uniform identification of, and public access to, the
employment history of and the publicly adjudicated disciplinary and
enforcement actions against loan originators; and (iii) shall not be
used for purposes other than those set forth under this title.'' 15
U.S.C. 5102(12)(A). The system is intended to provide
[[Page 43312]]
consumers with easily accessible information to research a loan
originator's history of employment and any disciplinary or enforcement
actions against that person. 12 U.S.C. 5101(7).
To facilitate the use of the Nationwide Mortgage Licensing System
and Registry and promote the informed use of credit, the Board proposes
Sec. 226.38(g)(2) to require the loan originator to disclose his or
her unique identifier on the TILA disclosure, as defined by the SAFE
Act. Proposed comment 38(g)(2)-1 would clarify that in transactions
with multiple loan originators, each loan originator's unique
identifier must be listed on the disclosure. For example, in a
transaction where a mortgage broker meets the SAFE Act definition of a
loan originator, the identifiers for the broker and for its employee
loan originator meeting that definition would be listed on the
disclosure.
The Board notes that the Board, FDIC, OCC, OTS, NCUA, and Farm
Credit Administration have published a proposed rule to implement the
SAFE Act. See 74 FR 27386; June 9, 2009. In this proposed rule, the
federal banking agencies have requested comment on whether there are
mortgage loans for which there may be no mortgage loan originator. For
example, the agencies query whether there are situations where a
consumer applies for and is offered a loan through an automated process
without contact with a mortgage loan originator. See id. at 27397. The
Board solicits comments on the scope of this problem and its impact on
the requirements of proposed Sec. 226.38(g)(2).
38(h) Credit Insurance and Debt Cancellation and Debt Suspension
Coverage
As discussed more fully in Sec. 226.4(d)(1) and (3), concerns have
been raised that consumers do not understand the voluntary nature,
costs, and eligibility restrictions of credit insurance and debt
cancellation and debt suspension coverage. For this reason, the Board
proposes Sec. 226.38(h) to require creditors to provide certain
disclosures, which would be grouped together and substantially similar
in headings, content and format to Model Clause H-17(C) in Appendix H
to this part. Proposed comment 38(h)-1 would clarify that this
disclosure may, at the creditor's option, appear apart from the other
disclosures. It may appear with any other information, including the
amount financed itemization, any information prescribed by State law,
or other information. When this information is disclosed with the other
segregated disclosures, however, no additional explanatory material may
be included.
The proposed disclosures seek to address concerns that consumers
may not understand that some products are voluntary and not required as
a condition of receiving credit. If the product is optional, proposed
Sec. 226.38(h)(1)(i) would require the creditor to disclose the term
``OPTIONAL COSTS,'' in capitalized and bold letters, along with the
name of the program in bold letters. If the product is required, then
proposed Sec. 226.38(h)(1)(ii) would require the creditor to disclose
only the name of the program in bold letters. In addition, if the
product is optional, proposed Sec. 226.38(h)(2) would require the
creditor to disclose the term ``STOP,'' in capitalized and bold
letters, along with a statement that the consumer does not have to buy
the product to get the loan. The term ``not'' would be in bold letters
and underlined.
Concerns have also been raised that consumers may not realize that
there are alternatives to the product. Therefore, under proposed Sec.
226.38(h)(3), the creditor would disclose that if the consumer already
has insurance, then the policy or coverage may not provide the consumer
with additional benefits. Under proposed Sec. 226.38(h)(4), the
creditor would disclose that other types of insurance may give the
consumer similar benefits and are often less expensive.
As described more fully in Sec. 226.4(d)(1) and (3), concerns have
been raised that consumers are not aware that they could incur a cost
for a product that may offer no benefit if the eligibility criteria are
not met at the time of enrollment. That is, consumers may not be aware
that if they do not meet the eligibility criteria at the time of
enrollment, the product would not pay off, cancel, or suspend the
credit obligation. Although the creditor typically has information
about the consumer's age or employment status, some creditors do not
use this information to determine whether the consumer meets the age or
employment eligibility restrictions at the time of enrollment. Some
consumers are later denied benefits based on these eligibility
restrictions.
For these reasons, the Board is proposing under Sec.
226.38(h)(5)(i) to require the creditor to disclose a statement that
based on the creditor's review of the consumer's age and/or employment
status at the time of enrollment, the consumer would be eligible to
receive benefits. However, if there are other eligibility restrictions,
such as pre-existing health conditions, the creditor would be required
to make certain other disclosures. Under proposed Sec.
226.38(h)(5)(ii), the creditor would disclose that based on the
creditor's review of the consumer's age and/or employment status at the
time of enrollment, the consumer may be eligible to receive benefits.
Under proposed Sec. 226.38(h)(6), the creditor would also disclose
that the consumer may not be eligible to receive any benefits because
of other eligibility restrictions.
Proposed comment 38(h)(5)-1 would state that if, based on the
creditor's review of the consumer's age and/or employment status at the
time of enrollment in the product, the consumer would not qualify for
the benefits of the product, then providing the disclosure under Sec.
226.38(h)(5) would not comply with this provision. That is, if the
consumer does not meet the age and/or employment eligibility criteria,
then the creditor cannot state that the consumer may be eligible to
receive benefits and cannot comply with this provision. In addition,
the proposed comment would clarify that if the creditor offers a
bundled product (such as credit life insurance combined with credit
involuntary unemployment insurance) and the consumer is not eligible
for all of the bundled products, then the disclosure under Sec.
226.38(h)(5) would not comply with this provision. Finally, the
proposed comment would clarify that the disclosure would still satisfy
this provision if an event subsequent to enrollment, such as the
consumer passing the age limit of the product, made the consumer
ineligible for the product based on the product's age or employment
eligibility restrictions.
Proposed comment 38(h)(5)-2 would clarify that the disclosure under
Sec. 226.38(h)(5) would be deemed to comply with this provision if the
creditor used reasonably reliable evidence to determine whether the
consumer met the age or employment eligibility criteria of the product.
Reasonably reliable evidence of a consumer's age would include using
the date of birth on the consumer's credit application, on the driver's
license or other government-issued identification, or on the credit
report. Reasonably reliable evidence of a consumer's employment status
would include a consumer's statement on a credit application form, an
Internal Revenue Service Form W-2, tax returns, payroll receipts, or
other written evidence such as a letter or e-mail from the consumer or
the consumer's employer.
Finally, the disclosure would contain the debt suspension coverage
disclosure, a Web site reference, cost
[[Page 43313]]
information, and a space for the consumer's signature and the date. To
ensure consistency with the debt suspension coverage provisions of the
December 2008 Open-End Final Rule, proposed Sec. 226.38(h)(7) would
require the creditor to disclose, as applicable, a statement that the
obligation to pay loan principal and interest is only suspended, and
that interest will continue to accrue during the period of suspension.
To provide more information to consumers, proposed Sec. 226.38(h)(8)
would require the creditor to disclose a statement that the consumer
may obtain additional information about credit insurance or debt
suspension or debt cancellation coverage at the Web site of the Federal
Reserve Board, and a reference to that Web site. If the product is
optional, proposed Sec. 226.38(h)(9)(i) would require the creditor to
disclose a statement of the consumer's request to purchase or enroll in
the optional product and a statement of the cost of the product
expressed as a dollar amount per month or per year, as applicable,
together with the loan amount and the term of the product in years.
This disclosure parallels Sec. 226.4(d)(1) and (3), which requires
cost disclosures in order to exclude from the finance charge the credit
insurance premium or debt cancellation or debt suspension coverage
charge. If the product is required, proposed Sec. 226.38(h)(9)(ii)
would require the creditor to disclose that fact, along with a
statement of the cost of the product expressed as a dollar amount per
month or per year, as applicable, together with the loan amount and the
term of the product in years. The cost, month or year, loan amount, and
term of the product would be underlined. The provisions regarding
required products would be applicable to the extent Regulation Y, 12
CFR part 225, or State or other law would not prohibit requiring the
product. Finally, proposed Sec. 226.38(h)(10) would require the
creditor to provide a designation for the signature of the consumer and
the date of the signing.
The Board proposes to require this disclosure using its authority
under TILA Section 105(a), 15 U.S.C. 1604(a). Because proposed Sec.
226.4(g) would treat a premium or charge for credit insurance or debt
cancellation or debt suspension as a finance charge for closed-end
credit transactions secured by real property or a dwelling, the
creditor would not be required to provide the disclosure under Sec.
226.4(d)(1) and (3) to exclude the premium or charge from the finance
charge. The Board believes, however, that the consumer would still
benefit from a disclosure of the voluntary nature, costs, and
eligibility restrictions of credit insurance or debt cancellation or
debt suspension coverage, and thus the proposal would require a
substantially similar disclosure.
TILA Section 105(a), 15 U.S.C. 1604(a), authorizes the Board to
prescribe regulations to carry out the purposes of the act. TILA's
purpose includes promoting ``the informed use of credit,'' which
``results from an awareness of the cost thereof by consumers.'' TILA
Section 102(a), 15 U.S.C. 1601(a). A premium or charge for credit
insurance or debt cancellation or debt suspension coverage is a cost
assessed in connection with credit. The credit transaction and the
relationship between the creditor and the consumer are the reasons the
product is offered or available. Because the merits of this product
have long been debated,\90\ the Board believes that consumers would
benefit from clear and meaningful disclosures regarding the costs,
benefits, and risks associated with this product. As discussed more
fully in Sec. 226.4(d)(1) and (3), consumer testing showed that
without clear disclosures participants were unaware of the voluntary
nature, costs, and eligibility restrictions. For these reasons, the
Board believes that this proposed rule would serve to inform consumers
of the cost of this credit product.
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\90\ See, e.g., Credit CARD Act of 2009, Public Law No. 111-24,
Sec. 509; 123 Stat. 1734, 1763 (2009) (requiring the General
Accounting Office to provide a report to Congress by December 31,
2010, of the suitability of credit insurance, debt cancellation
agreements, and debt suspension agreements for target customers, the
``predatory nature'' of such offers, and the loss rates compared to
more traditional insurance products).
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38(i) Required Deposit
Proposed Sec. 226.38(i) addresses disclosure requirements when
creditors require consumers to maintain deposits as a condition to the
specific transaction, for transactions secured by real property or a
dwelling. Proposed Sec. 226.38(i) is consistent with Sec. 226.18(r),
which applies to transactions not secured by real property or a
dwelling. The Board is proposing to revise Sec. 226.18(r) and
associated commentary, as discussed above, and proposed Sec. 226.38(i)
reflects the revised text and associated commentary.
38(j) Separate Disclosures
Consumer testing indicated that participants generally felt
overwhelmed by the amount of information presented throughout the loan
process and especially at consummation. As a result, the Board seeks to
streamline the TILA disclosures and focus on the terms that
participants stated were important for shopping and for understanding
their loan terms. Currently, TILA and Regulation Z mandate that the
following disclosures be grouped together with the required disclosures
and segregated from everything else: rebate, late payment, property
insurance, contract reference, and assumption policy. See TILA Sections
128(a)(9), (10), (11), (12), (13) and (b) and 106(c); 15 U.S.C.
Sec. Sec. 1638(a)(9), (10), (11), (12), (13) and (b) and 1605(c);
Sec. Sec. 226.4(d)(2), 226.17(a)(1), and 226.18(k)(2), (l), (n), (p),
and (q). Consumer testing showed that these terms were not of primary
importance to consumers in choosing a mortgage. With respect to
assumption, for example, very few participants understood the language
indicating that the loan was assumable, and even fewer felt it was
important information. With respect to property insurance, most
participants understood the language indicating that the borrower can
obtain property insurance from anyone that is acceptable to the lender,
but the participants felt that this was not important to their decision
making.
TILA Section 105(a) authorizes the Board to make exceptions to TILA
to effectuate the statute's purposes, which includes promoting the
informed use of credit. 15 U.S.C. 1601(a), 1604(a). The Board believes
that requiring these disclosures to appear separately from the other
required disclosures would improve the consumer's ability to focus on
the terms most useful to evaluating the proposed credit transaction.
TILA Section 105(f) authorizes the Board to exempt any class of
transactions from coverage under any part of TILA if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
15 U.S.C. 1604(f)(1). TILA Section 105(f) directs the Board to make
this determination in light of specific factors. 15 U.S.C. 1604(f)(2).
These factors are (1) the amount of the loan and whether the disclosure
provides a benefit to consumers who are parties to the transaction; (2)
the extent to which the requirement complicates, hinders, or makes more
expensive the credit process for the class of transactions; (3) the
status of the borrower, including any related financial arrangements of
the borrower, the financial sophistication of the borrower relative to
the type of transaction, and the importance to the borrower of the
credit, related supporting property, and coverage under TILA; (4)
whether the loan is secured by the principal residence of
[[Page 43314]]
the consumer; and (5) whether the exemption would undermine the goal of
consumer protection. Although a credit transaction secured by real
property or a dwelling is important to the borrower, the Board believes
that removing these disclosures from the other segregated information
would further, rather than undermine, the goal of consumer protection
because consumers would then focus on the terms that are most important
to their decision making process. The proposed rule would still require
that the information be disclosed but would simply no longer require
the disclosures to be provided with the segregated information.
38(j)(1) Itemization of Amount Financed
TILA Section 128(a)(2)(B), 15 U.S.C. 1638(a)(2)(B), and Sec.
226.18(c) currently require that the creditor provide the consumer with
a notice that an itemization of amount financed is available on request
and to provide it when the consumer so requests. Regulation Z also
provides that the good faith estimate of settlement costs (GFE)
provided pursuant to RESPA suffices to satisfy the itemization of
amount financed requirement. See Sec. 226.18(c)(1), fn. 40. The staff
commentary provides further that the HUD-1 settlement statement
provided at settlement under RESPA also may be substituted for the
itemization in connection with later disclosures made pursuant to Sec.
226.19(a). See comment 18(c)-4.
Proposed Sec. 226.38(j)(1) would mirror the rules currently found
under Sec. 226.l8(c) permitting a creditor to provide disclosures
pursuant to RESPA in lieu of the itemization of amount financed. These
rules originally were established by the Board pursuant to its
authority under TILA Section 105(a) to make exceptions to facilitate
compliance with TILA, and the Board is proposing to permit similar
treatment under the same authority. Proposed Sec. 226.38(j)(1) would
differ from current Sec. 226.18(c), as discussed below, to reflect
recent changes to Regulation Z.
Under the proposal, the provisions permitting substitution of RESPA
disclosures for the itemization of amount financed would be removed
from Sec. 226.18 and included under proposed Sec. 226.38(j)(1). That
section would govern the itemization disclosure contents for mortgage
transactions, including all those subject to RESPA. As noted above, the
Board also is proposing to make certain technical and conforming
amendments under Sec. 226.18(c).
Proposed Sec. 226.38(j)(1)(i) would provide the same four
categories of the itemization as currently appear in Sec.
226.18(c)(1)--the amount of proceeds distributed directly to the
consumer, the amount credited to the consumer's account, amounts paid
to other persons on the consumer's behalf, and the prepaid finance
charge. Proposed Sec. 226.38(j)(1)(ii) similarly would provide to
creditors the alternative under current Sec. 226.18(c)(2) of
disclosing the right to receive an itemization and providing it when
the consumer so requests, instead of delivering the itemization
routinely. Finally, proposed Sec. 226.38(j)(1)(iii) would provide the
alternative of substituting the RESPA GFE for the itemization. It also
would state a parallel alternative of substituting the HUD-1 settlement
statement for the itemization when a creditor provides later
disclosures pursuant to Sec. 226.19(a)(2), which currently is
addressed only in the staff commentary under Sec. 226.18(c). And
proposed Sec. 226.38(j)(1)(iii) would provide that the substitution is
permissible for any transaction subject to Sec. 226.38, whether
subject to RESPA or not.
The Board notes that the timing of the HUD-1 settlement statement
no longer is consistent with the timing of the TILA redisclosure under
Sec. 226.19(a)(2). Regulation X under RESPA requires the HUD-1 to be
provided at settlement,\91\ which generally corresponds with
consummation of the transaction under Regulation Z. Under the MIDA
final rule, and the proposed revisions to Sec. 226.19 under this
proposal, the redisclosure required under Sec. 226.19(a)(2) must be
received by the consumer at least three business days before
consummation of the transaction. As current comment 18(c)-1 provides,
and proposed Sec. 226.38(j)(1) also would require, the itemization
must be provided at the same time as the segregated disclosures.
Accordingly, proposed Sec. 226.38(j)(1)(iii) would provide that the
HUD-1 settlement statement is a permissible substitute for the
itemization of amount financed only if it is received by the consumer
at least three business days prior to consummation, in accordance with
Sec. 226.19(a)(2).
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\91\ 24 CFR 3500.10(b). The settlement agent must provide the
borrower with an opportunity to inspect the HUD-1 during the
business day preceding settlement, but only completed to reflect all
information known to the settlement agent at the time. Id.
3500.10(a).
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The Board realizes that, in general, consumers currently receive a
fully completed HUD-1 settlement statement only at consummation, in
accordance with RESPA's requirements. For this reason, mortgage
creditors might not take advantage of the alternative in proposed Sec.
226.38(j)(1)(iii) as widely as they historically have done under Sec.
226.18(c)(1), fn. 40. On the other hand, the Board notes that a
creditor that does not avail itself of that alternative must follow one
of the other two alternatives. Under proposed Sec. Sec. 226.19(a) and
226.38(j)(1)(i), the creditor still must provide substantially the same
information three business days before consummation. Under proposed
Sec. Sec. 226.19(a) and 226.38(j)(1)(ii), the creditor also must do
so, at least in those cases where the consumer requests the
itemization. Further, given the proposed expansion of the finance
charge under Sec. 226.4, discussed above, all of the information
contained in either the good faith estimate or the itemization would
have to be firmly established by three business days before
consummation so that the creditor can comply with the timing
requirements of proposed Sec. 226.19(a)(2).
In any event, the Board believes that to permit substitution of the
HUD-1 settlement statement for the itemization without requiring that
it be delivered three business days before consummation would be
inconsistent with the purposes of the MDIA amendments. The Board seeks
comment on whether creditors would continue to make significant use of
this alternative as proposed Sec. 226.38(j)(1)(iii) would implement it
and, if not, whether the alternative should be retained. If it should
be retained, the Board seeks comment on how it might be structured
without requiring that the HUD-1 settlement statement be received by
the consumer earlier than RESPA requires while also preserving the
purposes of the MDIA.
38(j)(2) Through (6) Rebate; Late Payment; Property Insurance; Contract
Reference; Assumption Policy
The Board proposes to use its exception and exemption authorities
under TILA Section 105(a), 15 U.S.C. 1604(a), to require creditors to
provide the following disclosures separately from the other required
disclosures: rebate under proposed Sec. 226.38(j)(2), late payment
under proposed Sec. 226.38(j)(3), property insurance under proposed
Sec. 226.38(j)(4), contract reference under proposed Sec.
226.38(j)(5), and assumption policy under proposed Sec. 226.38(j)(6).
The Board is not proposing to change the substantive content of these
disclosures. Proposed Sec. 226.38(j) would mirror Sec. 226.18, except
that the proposed requirement would be provided separately from the
other required disclosures. The proposed comments for these
[[Page 43315]]
disclosures would also parallel the applicable comments under Sec.
226.18.
In addition, the Board proposes Model Clauses at Appendix H-23 for
the following non-segregated disclosures: rebate, late payment,
property insurance, contract reference, and assumption policy. The
Model Clauses are based on the Board's consumer testing and the Board
believes that model clauses will enhance consumer understanding of the
information, helping consumers to avoid the uninformed use of credit.
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
Appendices G and H set forth model forms, model clauses and sample
forms that creditors may use to comply with the requirements of
Regulation Z. Appendix G contains model forms, model clauses and sample
forms applicable to open-end plans. Appendix H contains model forms,
model clauses and sample forms applicable to closed-end loans. Although
use of the model forms and clauses is not required, creditors using
them properly will be deemed to be in compliance with the regulation
with regard to those disclosures. As discussed above, the Board
proposes to revise or add several model forms, model clauses and sample
forms to Appendix H for transactions secured by real property or a
dwelling. The revised or new model forms and clauses, and sample forms,
are discussed above in the section-by-section analysis applicable to
the regulatory provisions to which the forms or clauses relate. See
discussion under Sec. Sec. 226.19(b), 226.20(c)-(e), and 226.38(a)-
(j). In addition, the Board proposes to add new model clauses and a
sample form relating to credit insurance, debt cancellation and debt
suspension coverage to both Appendix G and H for open-end and closed-
end loans. These model clauses and sample forms are discussed under
proposed Sec. 226.4(d)(1) and (3) and 226.38(h). In Appendix H, all
other existing forms and clauses applicable to transactions not secured
by real property or a dwelling have been retained without revision.
The Board also proposes to revise or add commentary to the model
forms, model clauses and sample forms in Appendix H, as discussed
below. The Board solicits comments on the proposed revisions below, as
well as whether any additional commentary should be added to explain
the forms and clauses contained in Appendix H.
Permissible Changes
The commentary to appendices G and H currently states that
creditors may make certain changes in the format and content of the
model forms and clauses, and may delete any disclosures that are
inapplicable to a transaction or a plan without losing the Act's
protection from liability. However, certain formatting changes may not
be made with respect to certain model and sample forms in Appendix G.
See comment app. G and H-1. As discussed above, the Board is proposing
format and content requirements with respect to disclosures for
transactions secured by real property or a dwelling, such as a tabular
requirement for ARM loan program disclosures and ARM adjustment
notices, and transaction-specific disclosures required for loans
secured by real property or a dwelling. See proposed Sec. Sec.
226.19(b), 226.20(c), and 226.38(a)-(j). Accordingly, the Board would
amend comment app. G and H-1 to indicate that certain formatting
changes may not be made with respect to certain model forms, model
clauses and sample forms in Appendix H. In addition, as discussed more
fully under Sec. 226.38, the Board proposes to require creditors to
provide disclosures for transactions secured by real property or a
dwelling only as applicable. As a result, the Board would not allow
creditors to use multi-purpose forms; the Board would amend comment
app. G and H-1(vi) to clarify that the use of multipurpose standard
forms is not permitted for transactions secured by real property or a
dwelling. See discussion under Sec. 226.37(a)(2).
Debt Cancellation Coverage
Currently, commentary to appendices G and H states that creditors
are not authorized to characterize debt-cancellation fees as insurance
premiums for purposes of the regulation. The Board proposes to amend
comment app. G and H-2 to clarify that the commentary also applies to
debt suspension fees.
Appendix H--Closed-End Model Forms and Clauses
Model Forms, Model Clauses, and Sample Forms for Closed-End Disclosures
As noted above, the Board proposes a new disclosure regime under
Sec. 226.38 for transactions secured by real property or a dwelling.
As a result, the following sample forms are rendered unnecessary and
deleted: Sample H-13 (mortgage with demand feature sample); Sample H-14
(variable-rate mortgage sample); and Sample H-15 (graduated-payment
mortgage sample). Comment app. H-1 would be revised to reflect the
deletion of Samples H-13 through H-15. The Board would further amend
comment app. H-1 to reflect that, under the proposal, new model clauses
are added regarding credit life insurance, debt cancellation, or debt
suspension disclosures, and creditor-placed property insurance
disclosures. See discussion under Sec. Sec. 226.4(d)(1) and (3),
226.38(h), and 226.20(e). These deleted samples forms and new model
clauses are discussed more fully below.
Currently, comment app. H-2 addresses the flexibility given to
creditors in providing the itemization of amount financed disclosure
required under current Sec. 226.18(c) and illustrated by Model Clause
H-3. As discussed above, the Board is proposing new Sec. 226.38(j)(1)
regarding disclosure of the itemization of amount financed for
transactions secured by real property or a dwelling. As a result, the
Board would amend comment app. H-2 to update cross-references. In a
technical revision, the Board would amend comment app. H-3 to clarify
that the guidance applies to new Model Clauses H-4(B) and H-4(C), H-
4(H), H-16, H-17(A) and H-17(C), H-18, and H-20 through H-23. These new
model clauses are discussed more fully below.
Model Forms, Model Clauses, and Sample Forms for ARM Loan Program
Disclosures
Currently, Appendix H contains several model clauses, and a sample
form, related to variable-rate loan program disclosures required under
current Sec. 226.18(f)(1), 226.18(f)(2) and 226.19(b). Current Model
Clause H-4(A) contains model clauses for variable-rate disclosures
required under Sec. 226.18(f)(1) for transactions not secured by a
principal dwelling, or transactions secured by a dwelling with a term
of one year or less. Current Model Clause H-4(B) contains model clauses
for variable-rate disclosures for transactions that are secured by a
principal dwelling with a term greater than one year. Current Model
Clause H-4(C) contains model clauses related to variable-rate loan
program disclosures required under Sec. 226.19(b). Current Sample H-14
is a sample disclosure illustrating required disclosures under current
Sec. 226.19(b) of interest rate and monthly payment changes, as well
as an historical example, for variable-rate loan programs.
Under the proposal, the Board would require new disclosures under
Sec. 226.19(b) for adjustable-rate loan programs, and would revise
Sec. 226.18(f)(1) and delete Sec. 226.18(f)(2) to
[[Page 43316]]
reflect such proposed changes to Sec. 226.19(b). Accordingly, the
Board proposes to delete current Model Clause H-4(B) and add new Model
H-4(B) to illustrate, in the tabular format, the disclosures required
under Sec. 226.19(b) for adjustable-rate transactions secured by real
property or a dwelling. The Board also would delete current Model
Clause H-4(C) and add new Model Clauses H-4(C) to reflect the proposed
changes to Sec. 226.19(b), as discussed above, and to provide model
clauses regarding interest rate carryover, conversion features, and
preferred rates. The Board proposes to add Samples H-4(D) through H-
4(F) to provide examples of how certain disclosures under Sec.
226.19(b) may be provided, in the tabular format, for adjustable-rate
loan programs that contain a hybrid, interest only, or payment option
feature, respectively. In addition, the heading to Model Clause H-4(A)
would be revised to update the cross-reference to Sec. 226.18(f), and
current Sample H-14 regarding variable-rate disclosures would be
deleted and reserved.
The Board also proposes to revise existing commentary that provides
guidance to creditors on how to use current Model Clauses H-4(A)
through (C). Currently, comments app. H-4 through H-6 provide guidance
regarding variable-rate loan program disclosures required under current
Sec. Sec. 226.18(f)(1)-(2) and 226.19(b). Under the proposal, the
Board would delete guidance contained in current comment app. H-5
regarding disclosures under Sec. 226.18(f)(2) as unnecessary, and
instead provide that disclosures required under Sec. 226.19(b) for
adjustable-rate transactions be provided in the tabular format, as
illustrated by Model H-4(B), and Samples H-4(D) through H-4(F). The
Board also would delete guidance currently contained in comment app. H-
6 relating to variable-rate disclosures, and instead provide guidance
regarding model clauses on carryover interest, a conversion feature, or
a preferred rate. In a technical revision, the Board would revise
comment app. H-4 to update the cross-reference to Sec. 226.18(f).
Model Forms, Model Clauses, and Sample Forms for ARM Adjustment Notices
Currently, Appendix H contains Model Clause H-4(D), which contains
model clauses regarding interest rate and payment adjustment notices
required for variable-rate transactions under current Sec. 226.20(c).
As discussed above under proposedSec. 226.20(c), the Board proposes
new timing and disclosure requirements regarding interest rate and
payment changes for adjustable-rate transactions secured by real
property or a dwelling. Accordingly, the Board would add a model form
and two samples forms to illustrate, in the tabular format, the
disclosures required under proposed Sec. 226.20(c)(2) for ARM
adjustment notices when there is an interest rate and payment change.
See proposed Model H-4(G) and Samples H-4(I) and H-4(J). In addition,
the Board proposes to add a model form to illustrate disclosures
required under proposed Sec. 226.20(c)(3) when there is an interest
rate adjustment without any change to payment. See proposed Model H-
4(K). Current Model Clause H-4(D) would be deleted and new Model
Clauses H-4(H) would be added to reflect the proposed changes to Sec.
226.20(c), as discussed above. The Board also proposes to revise
current comment app. H-7 to provide that disclosures required under
Sec. 226.20(c) be provided in the tabular format, as illustrated by
new Model H-4(G), and Samples H-4(I) and H-4(J).
Model Forms, Model Clauses, and Sample Forms for Periodic Statements
Currently, creditors are not required to provide certain
disclosures with respect to periodic statements for loans that are
negatively amortizing. As discussed under proposed Sec. 226.20(d), the
Board would require creditors to disclose periodic payment options on a
monthly basis for transactions secured by real property or a dwelling
that offer payment options and are negatively amortizing. Accordingly,
the Board is proposing to add new Model Form H-4(L) that creditors may
use to comply with the requirements in proposed Sec. 226.20(d).
Model Clauses for Section 32 (HOEPA) Disclosures
Currently, Appendix H contains Mortgage Sample H-16, which provides
model clauses for disclosures required under Sec. 226.32(c), such as a
notice to the borrower that he or she is not obligated to accept the
terms of the loan and security interest disclosures. As discussed under
proposed Sec. 226.32(c)(1), the Board would require creditors to
provide plain-language versions of the ``no obligation'' and ``security
interest'' disclosures to better inform consumers who are considering
obtaining HOEPA loans. The Board would revise Mortgage Sample H-16
accordingly. In addition, the Board proposes to revise commentary
currently contained in comment app. H-20 to clarify that these
disclosures are required for all HOEPA loans, and as noted below, would
move this commentary to current comment app. H-17. In a technical
revision, the Board would revise the heading to Mortgage Sample H-16 to
reflect that it contains model clauses.
Model Clause for Credit Insurance, Debt Cancellation, or Debt
Suspension
Currently, Appendix H contains a model clause and sample form that
creditors may use to comply with the disclosure requirements under
current Sec. 226.4(d)(3) for debt suspension. See Model Clause H-17(A)
and Sample H-17(B). As discussed above, the Board proposes new
disclosure requirements for credit insurance, debt cancellation and
debt suspension for all closed-end loans. See proposed Sec. Sec.
226.4(d)(1), (d)(3) and 226.38(h). Accordingly, the Board proposes to
add Model Clause H-17(C) and Sample H-17(D) that creditors may use to
comply with the proposed requirements under Sec. Sec. 226.4(d)(1),
(d)(3) and 226.38(h).
Model Clause for Creditor-Placed Property Insurance
Currently, creditors are not required to provide any disclosures to
the consumer with respect to creditor-placed property insurance. As
discussed under proposed Sec. 226.20(e), the Board would require
creditors to provide notice of the cost and coverage of creditor-placed
property insurance before charging the consumer for such insurance for
transactions secured by real property or a dwelling. For all other
closed-end loans, these disclosures would be required if creditors
intend to exclude the creditor-placed property insurance fee from the
finance charge under Sec. 226.4(d). Accordingly, the Board proposes to
add Model Clause H-18 that creditors may use to comply with the
proposed requirements under Sec. 226.20(e).
Model Forms, Model Clauses, and Sample Forms for Transaction-Specific
Disclosures for Loans Secured by Real Property or a Dwelling
Currently, Appendix H contains several model forms, model clauses
and samples that creditors may use to comply with the disclosures
required under current Sec. 226.18 for transactions secured by real
property or a dwelling. Current Model H-2 illustrates the format and
content of disclosures currently required under Sec. 226.18 for
mortgages. Current Model Clause H-6 contains a model clause for an
assumption policy. Current Samples H-13 and H-15 are sample disclosures
illustrating a mortgage with a demand feature and a graduated-payment
mortgage, respectively.
[[Page 43317]]
As discussed under proposed Sec. 226.38, the Board proposes a new
disclosure regime for transactions secured by real property or a
dwelling. Accordingly, the Board proposes to add new Model Forms, Model
Clauses, and Sample Forms H-19 through H-23 that creditors may use to
comply with the requirements in proposed Sec. 226.38(a) through (j).
The Board proposes to add Models H-19(A) through H-19(C) to illustrate
the format and content of disclosures required under proposed Sec.
226.38 for fixed-rate, hybrid adjustable-rate, and payment option
mortgages, respectively. In addition, the Board would add Model Clauses
H-20 and H-21 to provide guidance to creditors on how to disclose a
balloon payment or introductory rate feature, respectively. Model
Clause H-22 would be added to provide model clauses relating to key
questions about risk disclosures required under proposed Sec.
226.38(d)(2). Model Clause H-23 would be added to provide model clauses
for the following disclosures required under proposed Sec.
226.38(j)(2)-(6) for transactions secured by real property or a
dwelling: rebate; late payment; property insurance; contract reference;
and assumption policy. Under the proposal, current Samples H-13 and H-
15 would be rendered unnecessary and therefore, are deleted and
reserved. Model Clause H-6, which contains the current model clause for
assumption, would be deleted because assumption policies are only
applicable to transactions secured by real property or a dwelling; H-6
would be reserved.
In addition, the Board proposes to add several sample forms to
provide examples of how creditors can provide certain disclosures
required under proposed Sec. 226.38 in the tabular format or scaled
graph, as applicable, for various transaction types secured by real
property or a dwelling. Specifically, proposed Samples H-19(D) through
H-19(I) illustrate disclosures required under proposed Sec. 226.38 for
the following transaction-types, respectively: a fixed mortgage with
balloon payment; an interest only, fixed mortgage; a step-payment
mortgage; a hybrid adjustable-rate mortgage; an interest-only ARM; and
a payment option ARM.
The Board also proposes to add or revise commentary to provide
guidance to creditors on the purpose of the sample forms, and how to
use Model Forms, Model Clauses, and Sample Forms H-19 through H-23 for
transactions secured by real property or a dwelling. Current comment
app. H-12 provides guidance to creditors regarding the purpose of
sample forms generally. Under the proposal, the Board would update the
cross-references contained in current comment app. H-12 to clarify that
the commentary applies to proposed Sample H-4(D) through-4(F) for ARM
loan program disclosures required under proposed Sec. 226.19(b);
Samples H-4(I) and H-4(J) for ARM adjustment notice disclosures
required under Sec. 226.20(c); Sample H-17(D) for credit insurance,
debt cancellation or debt suspension disclosures required under Sec.
226.4(d)(1), (d)(3) and 226.38(h); and Samples H-19(D) through H-19(I)
for disclosures required under Sec. 226.38 for transactions secured by
real property or a dwelling.
Current comment app. H-16 provides guidance regarding the sample
forms that creditors may use to illustrate required disclosures for
mortgages subject to RESPA and would be updated to include cross-
references to proposed Samples H-19(D) through H-19(I), and to the
itemization of amount financed disclosure under proposed Sec.
226.38(j)(1)(iii). Under the proposal, guidance contained in current
comment app. H-17 regarding disclosure of a mortgage with a demand
feature under Sec. 226.18 would be deleted as unnecessary. As noted
above, commentary regarding disclosures required under Sec. 226.32(c)
for HOEPA loans would be moved from comment app. H-20 to comment app.
H-17.
In addition, under the proposal, current comment app. H-18, which
contains guidance relating to variable-rate disclosures required under
current Sec. 226.19(b), would be deleted. New commentary would be
added to comment app. H-18 to provide format details about proposed
sample forms that illustrate the disclosures required for transactions
secured by real property or a dwelling under proposed Sec. 226.19(b)
or 226.38, as applicable. For example, the commentary indicates that
Samples H-4(D) through H-4(F), and H-19(D) through H-19(I) are designed
to be printed on an 8\1/2\x11 inch sheet of paper. In addition, the
following formatting techniques were used in presenting the information
in the table to ensure that the information was readable:
1. A readable font style and font size (10-point Ariel font style,
except for the APR which is shown in 16-point type).
2. Sufficient spacing between lines of the text. That is, words
were not compressed to appear smaller than 10-point type, except for
headings used to provide interest rate and payment summary disclosures
required under proposed Sec. 226.28(c), in the tabular format, which
are shown in 9-point type.
3. Standard spacing between words and characters.
4. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the sides
of the text.
5. Sufficient contrast between the text and the background. Black
text was used on white paper.
Although the Board is not requiring creditors to use the above
formatting techniques in presenting information in the table (except
for the 10-point and 16-point font size), the Board encourages
creditors to consider these techniques when disclosing information in
the tabular format, or scaled graph, to ensure that the information is
presented in a readable format.
Under the proposal, commentary currently contained in comment app.
H-19 regarding the terms of a graduated-payment mortgage would be
deleted, and would instead indicate the terms of the fixed-rate
mortgage illustrated in Sample H-19(D). As noted above, guidance
contained in current app. H-20 regarding disclosures required under
Sec. 226.32(c) would be moved to comment app. H-17. The Board proposes
to add new commentary to comment app. H-20 to indicate the terms of the
interest-only, fixed-rate mortgage illustrated in Sample H-19(E). The
Board also proposes to add comments app. H-21 through -24 to indicate
the terms of the following transaction types, which are illustrated in
Samples H-19(F) through 19(I), respectively: a step-payment mortgage; a
hybrid ARM; an interest-only ARM; and a payment option ARM. The
transactions discussed in revised comments app. H-19 and H-20, and new
comments app. H-21 through -24, all assume the average prime offer
rates (APORs) that would be used in providing the disclosures required
under proposed Sec. 226.38(b), and are not representative of the
actual APORs for the respective weeks.
Further, the Board proposes to add comments app. H-25 through -28
relating to the following, respectively: the disclosure required under
proposed Sec. 226.38(c) for a balloon payment feature; the disclosure
required under proposed Sec. 226.38(c)(2)(iii) for transactions that
have an initial discounted rate that later adjusts; disclosures
required under proposed Sec. 226.19(d)(2) for key questions about risk
that would be provided only as applicable; and disclosures required
under proposed Sec. 226.38(j)(2)-(6) that would be provided separately
from disclosures required under proposed Sec. 226.38(a)-(j). In a
technical revision,
[[Page 43318]]
current comments app. H-21 through -24, which contain guidance relating
to forms issued by the U.S. Department of Health and Human Services and
approved for certain student loans, would be redesignated as comments
app. H-29 through -32, respectively; no substantive change is intended.
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the
proposed rule under the authority delegated to the Board by the Office
of Management and Budget (OMB). The collection of information that is
required by this proposed rule is found in 12 CFR part 226. The Board
may not conduct or sponsor, and an organization is not required to
respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0199.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board
does not collect any information, no issue of confidentiality arises.
The respondents/recordkeepers are creditors and other entities subject
to Regulation Z.
TILA and Regulation Z are intended to ensure effective disclosure
of the costs and terms of credit to consumers. For open-end credit,
creditors are required to, among other things, disclose information
about the initial costs and terms and to provide periodic statements of
account activity, notice of changes in terms, and statements of rights
concerning billing error procedures. Regulation Z requires specific
types of disclosures for credit and charge card accounts and home
equity plans. For closed-end loans, such as mortgage and installment
loans, cost disclosures are required to be provided prior to
consummation. Special disclosures are required in connection with
certain products, such as reverse mortgages, certain variable-rate
loans, and certain mortgages with rates and fees above specified
thresholds. TILA and Regulation Z also contain rules concerning credit
advertising. Creditors are required to retain evidence of compliance
for two years, Sec. 226.25, but Regulation Z identifies only a few
specific types of records that must be retained.\92\
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\92\ See comments 25(a)-3 and -4 and proposed comment 25(a)-5.
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Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the State member banks and other
creditors supervised by the Federal Reserve that engage in consumer
credit activities covered by Regulation Z and, therefore, are
respondents under the PRA. Appendix I of Regulation Z defines the
Federal Reserve-regulated institutions as: State member banks, branches
and agencies of foreign banks (other than federal branches, federal
agencies, and insured State branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act. Other federal agencies account for the paperwork burden imposed on
the entities for which they have administrative enforcement authority.
The current total annual burden to comply with the provisions of
Regulation Z is estimated to be 734,127 hours for the 1,138 Federal
Reserve-regulated institutions that are deemed to be respondents for
the purposes of the PRA. To ease the burden and cost of complying with
Regulation Z (particularly for small entities), the Board provides
model forms, which are appended to the regulation.
As discussed in the preamble, the Board proposes changes to format,
timing, and content requirements for the four main types of credit
disclosures for closed-end mortgages governed by Regulation Z: (1)
Disclosures at or before application; (2) disclosures within three days
after application; (3) disclosures before consummation; and (4)
disclosures after consummation. The proposed rule would impose a one-
time increase in the total annual burden under Regulation Z for all
respondents regulated by the Federal Reserve by 227,600 hours, from
734,127 to 961,727 hours. In addition, the Board estimates that, on a
continuing basis, the proposed revisions to the rules would increase
the total annual burden on a continuing basis from 734,127 to 1,280,367
hours.
The total estimated burden increase, as well as the estimates of
the burden increase associated with each major section of the proposed
rule as set forth below, represents averages for all respondents
regulated by the Federal Reserve. The Board expects that the amount of
time required to implement each of the proposed changes for a given
institution may vary based on the size and complexity of the
respondent. Furthermore, the burden estimate for this rulemaking does
not include the burden of complying with proposed disclosure and timing
requirements that apply to private educational lenders making private
education loans as announced in a separate proposed rulemaking (Docket
No. R-1353) or the proposed disclosure and timing requirements of the
Board's separate notice published simultaneously with this proposal for
open-end credit plans secured by real property.
The Board estimates that 1,138 respondents regulated by the Federal
Reserve would take, on average, 200 hours (five business weeks) to
update their systems, internal procedure manuals, and provide training
for relevant staff to comply with the proposed disclosure requirements
in Sec. Sec. 226.38 and 226.20(d), and revisions to existing
disclosure requirements in Sec. Sec. 226.19(b) and 226.20(c). This
one-time revision would increase the burden by 227,600 hours. On a
continuing basis the Board estimates that 1,138 respondents regulated
by the Federal Reserve would take, on average, 40 hours a month to
comply with the closed-end disclosure requirements and would increase
the ongoing burden from 304,756 hours to 546,240 hours. To ease the
burden and cost of complying with the new and proposed requirements
under Regulation Z the Board proposes to revise or add several model
forms, model clauses and sample forms to Appendix H.
The other federal financial agencies: Office of the Comptroller of
the Currency (OCC), Office of Thrift Supervision (OTS), the Federal
Deposit Insurance Corporation (FDIC), and the National Credit Union
Administration (NCUA) are responsible for estimating and reporting to
OMB the total paperwork burden for the domestically chartered
commercial banks, thrifts, and federal credit unions and U.S. branches
and agencies of foreign banks for which they have primary
administrative enforcement jurisdiction under TILA Section 108(a), 15.
U.S.C. 1607(a). These agencies are permitted, but are not required, to
use the Board's burden estimation methodology. Using the Board's
method, the total current estimated annual burden for the approximately
17,200 domestically chartered commercial banks, thrifts, and federal
credit unions and U.S. branches and agencies of foreign banks
supervised by the Federal Reserve, OCC, OTS, FDIC, and NCUA under TILA
would be approximately 13,568,725 hours. The proposed rule would impose
a one-time increase in the estimated annual burden for such
institutions by 3,440,000 hours to 17,765,525 hours. On a continuing
basis the proposed rule would impose an increase in the estimated
annual burden by 8,256,000 to 21,824,725 hours. The above estimates
represent an average across all respondents; the Board expects
[[Page 43319]]
variations between institutions based on their size, complexity, and
practices.
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Board's
functions; including whether the information has practical utility; (2)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (3) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
Comments on the collection of information should be sent to Cynthia
Ayouch, Acting Federal Reserve Board Clearance Officer, Division of
Research and Statistics, Mail Stop 95-A, Board of Governors of the
Federal Reserve System, Washington, DC 20551, with copies of such
comments sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0199), Washington, DC 20503.
VIII. Initial Regulatory Flexibility Analysis
In accordance with section 3(a) of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601-612, the Board is publishing an initial regulatory
flexibility analysis for the proposed amendments to Regulation Z. The
RFA requires an agency either to provide an initial regulatory
flexibility analysis with a proposed rule or to certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. Under regulations issued by the
Small Business Administration, an entity is considered ``small'' if it
has $175 million or less in assets for banks and other depository
institutions; and $7 million or less in revenues for non-bank mortgage
lenders and mortgage brokers.\93\
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\93\ 13 CFR 121.201.
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Based on its analysis and for the reasons stated below, the Board
believes that this proposed rule will have a significant economic
impact on a substantial number of small entities. A final regulatory
flexibility analysis will be conducted after consideration of comments
received during the public comment period. The Board requests public
comment in the following areas.
A. Reasons for the Proposed Rule
Congress enacted TILA based on findings that economic stability
would be enhanced and competition among consumer credit providers would
be strengthened by the informed use of credit resulting from consumers'
awareness of the cost of credit. One of the stated purposes of TILA is
to provide a meaningful disclosure of credit terms to enable consumers
to compare credit terms available in the marketplace more readily and
avoid the uninformed use of credit. In this regard, the goal of the
proposed amendments to Regulation Z is to improve the effectiveness of
the disclosures that creditors provide to consumers beginning before
application and throughout the life of a closed-end mortgage
transaction. Accordingly, the Board is proposing changes to format,
timing, and content requirements for closed-end disclosures required by
Regulation Z: (1) Program and other educational information provided
before application; (2) transaction-specific disclosures provided at or
shortly after application; (3) transaction-specific disclosures
provided at or three business days before consummation; and notices of
changes to the transaction's terms and regarding certain payment
options provided during the life of the credit.
Congress enacted HOEPA in 1994 as an amendment to TILA. TILA is
implemented by the Board's Regulation Z. HOEPA imposed additional
substantive protections on certain high-cost mortgage transactions.
HOEPA also charged the Board with prohibiting acts or practices in
connection with mortgage loans that are unfair, deceptive, or designed
to evade the purposes of HOEPA, and acts or practices in connection
with refinancing of mortgage loans that are associated with abusive
lending or are otherwise not in the interest of borrowers.
The proposed regulations would revise and enhance many of the
closed-end disclosure requirements of Regulation Z for transactions
secured by real property or a dwelling. The Board's proposal also would
require TILA disclosures for closed-end mortgages to be provided to the
consumer earlier in the loan process and would expand on the post-
consummation notification requirements concerning changes in mortgage
terms. These amendments are proposed in furtherance of the Board's
responsibility to prescribe regulations to carry out the purposes of
TILA, including promoting consumers' awareness of the cost of credit
and their informed use thereof. Finally, the proposal would restrict
certain loan originator compensation practices for closed-end mortgage
loans to address problems that have been observed in the mortgage
market. These restrictions are proposed pursuant to the Board's
statutory responsibility to prohibit unfair and deceptive acts and
practices in connection with mortgage loans.
B. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION contains this information. In
summary, the proposed amendments to Regulation Z are designed to
achieve three goals: (1) Revise the disclosures required for closed-end
mortgage loans; (2) restrict certain loan originator compensation
practices for mortgage loans; and (3) require disclosures for closed-
end mortgage loans to be provided earlier in the transaction and
additional post-consummation disclosures for certain changes in terms.
The legal basis for the proposed rule is in Sections 105(a),
105(f), and 129(l)(2) of TILA. 15 U.S.C. 1604(a), 1604(f), and
1639(l)(2). A more detailed discussion of the Board's rulemaking
authority is set forth in part IV of the SUPPLEMENTARY INFORMATION.
C. Description of Small Entities to Which the Proposed Rule Would Apply
The proposed regulations would apply to all institutions and
entities that engage in originating or extending closed-end, home-
secured credit. The Board is not aware of a reliable source for the
total number of small entities likely to be affected by the proposal,
and the credit provisions of TILA and Regulation Z have broad
applicability to individuals and businesses that originate, extend and
service even small numbers of home-secured credit. See Sec.
226.1(c)(1).\94\ All small entities that originate, extend, or service
closed-end loans secured by real property or a dwelling potentially
could be subject to at least some aspects of the proposed rule.
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\94\ Regulation Z generally applies to ``each individual or
business that offers or extends credit when four conditions are met:
(i) The credit is offered or extended to consumers; (ii) the
offering or extension of credit is done regularly, (iii) the credit
is subject to a finance charge or is payable by a written agreement
in more than four installments, and (iv) the credit is primarily for
personal, family, or household purposes.'' Sec. 226.1(c)(1).
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The Board can, however, identify through data from Reports of
Condition and Income (``call reports'') approximate numbers of small
depository institutions that would be subject to the proposed rules.
Based on December 2008 call report data, approximately 9,418 small
institutions would be subject to the proposed rule. Approximately
16,345 depository institutions in the United States filed call report
data, approximately 11,907 of which had total
[[Page 43320]]
domestic assets of $175 million or less and thus were considered small
entities for purposes of the Regulatory Flexibility Act. Of 4,231
banks, 565 thrifts and 7,111 credit unions that filed call report data
and were considered small entities, 4,091 banks, 530 thrifts, and 4,797
credit unions, totaling 9,418 institutions, extended mortgage credit.
For purposes of this analysis, thrifts include savings banks, savings
and loan entities, co-operative banks and industrial banks.
The Board cannot identify with certainty the number of small non-
depository institutions that would be subject to the proposed rule.
Home Mortgage Disclosure Act (HMDA) \95\ data indicate that 1,752 non-
depository institutions filed HMDA reports in 2007.\96\ Based on the
small volume of lending activity reported by these institutions, most
are likely to be small.
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\95\ The 8,610 lenders (both depository institutions and
mortgage companies) covered by HMDA in 2007 accounted for an
estimated 80% of all home lending in the United States (2008 HMDA
data are not yet available). Under HMDA, lenders use a ``loan/
application register'' (HMDA/LAR) to report information annually to
their Federal supervisory agencies for each application and loan
acted on during the calendar year. Lenders must make their HMDA/LARs
available to the public by March 31 following the year to which the
data relate, and they must remove the two date-related fields to
help preserve applicants' privacy. Only lenders that have offices
(or, for non-depository institutions, are deemed to have offices) in
metropolitan areas are required to report under HMDA. However, if a
lender is required to report, it must report information on all of
its home loan applications and loans in all locations, including
non-metropolitan areas.
\96\ The 2007 HMDA Data, http://www.federalreserve.gov/pubs/bulletin/2008/articles/hmda/default.htm.
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The proposal's restrictions on compensation of loan originators
would apply to mortgage brokers. Loan originators other than mortgage
brokers that would be affected by the proposal are employees of
creditors (or of brokers) and, as such, are not business entities in
their own right. In its 2008 proposed rule under HOEPA, 73 FR 1672,
1720; Jan. 9, 2008, the Board noted that, according to the National
Association of Mortgage Brokers (NAMB), in 2004 there were 53,000
mortgage brokerage companies that employed an estimated 418,700
people.\97\ The Board estimated that most of these companies are small
entities. On the other hand, the U.S. Census Bureau's 2002 Economic
Census indicates that there were only 17,041 ``mortgage and nonmortgage
loan brokers'' in the United States at that time.\98\
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\97\ http://www.namb.org/namb/Industry_Facts.asp?SnID=719224934. This page of the NAMB Web site, however,
no longer provides an estimate of the number of mortgage brokerage
companies.
\98\ http://www.census.gov/prod/ec02/ec0252a1us.pdf (NAICS code
522310). Data on this industry sector are not yet available from the
2007 Economic Census.
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The compliance requirements of the proposed rules are described in
parts V and VI of the SUPPLEMENTARY INFORMATION. The effect of the
proposed revisions to Regulation Z on small entities is unknown. Some
small entities would be required, among other things, to modify their
home-secured credit disclosures and processes for delivery thereof to
comply with the revised rules. The precise costs to small entities of
updating their systems and disclosures are difficult to predict. These
costs will depend on a number of unknown factors, including, among
other things, the specifications of the current systems used by such
entities to prepare and provide disclosures and to administer and
maintain accounts, the complexity of the terms of credit products that
they offer, and the range of such product offerings.
Additionally, the proposed rules could affect how loan originators
are compensated and would impose certain related recordkeeping
requirements on creditors. The precise costs that the proposed rule
would impose on mortgage creditors and loan originators are also
difficult to ascertain. Nevertheless, the Board believes that these
costs will have a significant economic effect on small entities,
including small mortgage creditors and brokers. The Board seeks
information and comment on any costs, compliance requirements, or
changes in operating procedures arising from the application of the
proposed rule to small businesses.
E. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
Other Federal Rules
The Board has not identified any federal rules that conflict with
the proposed revisions to Regulation Z.
Overlap With SAFE Act
The proposed rule's required disclosure contents for closed-end
mortgage transactions would overlap with the Secure and Fair
Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) by requiring
that the disclosure include the loan originator's unique identifier, as
defined by that Act, if applicable.
Overlap With RESPA
Certain terms defined in the proposed rule, such as ``total
settlement charges'' cross-reference definitions under the U.S.
Department of Housing and Urban Development's (HUD's) Regulation X
under the Real Estate Settlement Procedures Act (RESPA). The proposed
rule also would modify the existing prerequisites for use of the RESPA
good faith estimate of settlement costs and HUD-1 settlement statement
in lieu of the itemization of the amount financed under Regulation Z.
Overlap With HUD's Guidance
The Board recognizes that HUD has issued policy statements
regarding creditor payments to mortgage brokers under RESPA and
guidance as to disclosure of such payments on the Good Faith Estimate
and HUD-1 Settlement Statement. HUD also has published revised
disclosures for broker compensation under RESPA to become effective
January 1, 2010. The Board intends that its proposal would complement
HUD's final rule. The proposed provision regarding creditor payments to
loan originators is intended to be consistent with HUD's existing
guidance regarding broker compensation under Section 8 of RESPA. The
proposed provision regarding record retention to evidence compliance
with the provision regarding creditor payments to loan originators
would cross-reference the HUD-1 settlement statement as an acceptable
record of such compensation paid in a given transaction.
F. Identification of Duplicative, Overlapping, or Conflicting State
Laws
State Laws Regulating Creditor Payments to Loan Originators
The Board is aware that many states regulate loan originators,
especially mortgage brokers, and their compensation in various
respects. Under TILA Section 111, the proposed rule would not preempt
such State laws except to the extent they are inconsistent with the
proposal's requirements. 15 U.S.C. 1610.
State Equivalents to TILA and HOEPA
Many states regulate consumer credit through statutory disclosure
schemes similar to TILA. Similarly to State laws regulating loan
originator compensation, such state disclosure laws would be preempted
only to the extent they are inconsistent with the proposal's
requirements. Id.
The Board also is aware that many states regulate ``high-cost'' or
``high-priced'' mortgage loans, under laws that
[[Page 43321]]
resemble HOEPA. Many such State laws set their coverage tests in part
on the APR of the transaction. The proposed rule would overlap with
these laws indirectly by virtue of the proposal to modify the
definition of the finance charge for closed-end mortgage transactions,
which would result in APRs being higher generally and potentially more
loans being covered under such State laws.
The Board seeks comment regarding any State or local statutes or
regulations that would duplicate, overlap, or conflict with the
proposed rule.
G. Discussion of Significant Alternatives
The Board considered whether improved disclosures could protect
consumers against unfair loan originator compensation practices for
mortgages as well as the proposed rule. While the Board is proposing
improvements to mortgage loan disclosures, it does not appear that
better disclosures would address loan originator compensation practices
adequately.
The Board welcomes comments on any significant alternatives,
consistent with the requirements of TILA, that would minimize the
impact of the proposed rule on small entities.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System,
Mortgages, Reporting and recordkeeping requirements, Truth in lending.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside bold arrows, and language that
would be deleted is shown inside bold brackets.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and
1639(l); Public Law 111-24 Sec. 2, 123 Stat. 1734.
Subpart A--General
2. Section 226.1, as amended on January 29, 2009 (74 FR 5397) is
amended by revising paragraphs (b) and (d)(5) to read as follows:
Sec. 226.1 Authority, purpose, coverage, organization, enforcement
and liability.
* * * * *
(b) Purpose. The purpose of this regulation is to promote the
informed use of consumer credit by requiring disclosures about its
terms and cost. The regulation also gives consumers the right to cancel
certain credit transactions that involve a lien on a consumer's
principal dwelling, regulates certain credit card practices, and
provides a means for fair and timely resolution of credit billing
disputes. The regulation does not govern charges for consumer credit.
The regulation requires a maximum interest rate to be stated in
variable-rate contracts secured by the consumer's dwelling. It also
imposes limitations on home-equity plans that are subject to the
requirements of Sec. 226.5b and mortgages that are subject to the
requirements of Sec. 226.32. The regulation prohibits certain acts or
practices in connection with credit secured by [rtrif]real property
or[ltrif] a consumer's [principal] dwelling [rtrif]in Sec. 226.36, and
credit secured by a consumer's principal dwelling in Sec.
226.35.[ltrif]
* * * * *
(d) * * *
(5) Subpart E contains special rules for mortgage transactions.
Section 226.32 requires certain disclosures and provides limitations
for [rtrif]closed-end[ltrif] loans that have rates and fees above
specified amounts. Section 226.33 requires disclosures, including the
total annual loan cost rate, for reverse mortgage transactions. Section
226.34 prohibits specific acts and practices in connection with
[rtrif]closed-end[ltrif] mortgage transactions that are subject to
Sec. 226.32. Section 226.35 prohibits specific acts and practices in
connection with [rtrif]closed-end[ltrif] higher-priced mortgage loans,
as defined in Sec. 226.35(a). Section 226.36 prohibits specific acts
and practices in connection with [rtrif]extensions of[ltrif] credit
secured by [rtrif]real property or[ltrif] a consumer's [principal]
dwelling. [rtrif]Section 226.37 provides general disclosure
requirements for closed-end extensions of credit secured by real
property or a consumer's dwelling. Section 38 provides the content of
disclosures for closed-end extensions of credit secured by real
property or a consumer's dwelling.[ltrif]
* * * * *
3. Section 226.4, as amended on January 29, 2009 (74 FR 5399) is
revised to read as follows:
Sec. 226.4 Finance charge.
(a) Definition. The finance charge is the cost of consumer credit
as a dollar amount. It includes any charge payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to or a condition of the extension of credit.
It does not include any charge of a type payable in a comparable cash
transaction.
(1) Charges by third parties. The finance charge includes fees and
amounts charged by someone other than the creditor, unless otherwise
excluded under this section, if the creditor:
(i) Requires the use of a third party as a condition of or an
incident to the extension of credit, even if the consumer can choose
the third party; or
(ii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(2) Special rule; closing agent charges. [rtrif]Except as provided
in Sec. 226.4(g), fees[ltrif] [Fees] charged by a third party that
conducts the loan closing (such as a settlement agent, attorney, or
escrow or title company) are finance charges only if the creditor:
(i) Requires the particular services for which the consumer is
charged;
(ii) Requires the imposition of the charge; or
(iii) Retains a portion of the third-party charge, to the extent of
the portion retained.
(3) Special rule; mortgage broker fees. Fees charged by a mortgage
broker (including fees paid by the consumer directly to the broker or
to the creditor for delivery to the broker) are finance charges even if
the creditor does not require the consumer to use a mortgage broker and
even if the creditor does not retain any portion of the charge.
(b) Examples of finance charge. The finance charge includes the
following types of charges, except for charges specifically excluded by
paragraphs (c) through (e) of this section:
(1) Interest, time price differential, and any amount payable under
an add-on or discount system of additional charges.
(2) Service, transaction, activity, and carrying charges, including
any charge imposed on a checking or other transaction account to the
extent that the charge exceeds the charge for a similar account without
a credit feature.
(3) Points, loan fees, assumption fees, finder's fees, and similar
charges.
(4) Appraisal, investigation, and credit report fees.
(5) Premiums or other charges for any guarantee or insurance
protecting the creditor against the consumer's default or other credit
loss.
(6) Charges imposed on a creditor by another person for purchasing
or accepting a consumer's obligation, if the consumer is required to
pay the charges in cash, as an addition to the obligation,
[[Page 43322]]
or as a deduction from the proceeds of the obligation.
(7) Premiums or other charges for credit life, accident, health, or
loss-of-income insurance, written in connection with a credit
transaction.
(8) Premiums or other charges for insurance against loss of or
damage to property, or against liability arising out of the ownership
or use of property, written in connection with a credit transaction.
(9) Discounts for the purpose of inducing payment by a means other
than the use of credit.
(10) Charges or premiums paid for debt cancellation or debt
suspension coverage written in connection with a credit transaction,
whether or not the debt cancellation coverage is insurance under
applicable law.
(c) Charges excluded from the finance charge. [rtrif]Except as
provided in Sec. 226.4(g), the[ltrif] [The] following charges are not
finance charges:
(1) Application fees charged to all applicants for credit, whether
or not credit is actually extended.
(2) Charges for actual unanticipated late payment, for exceeding a
credit limit, or for delinquency, default, or a similar occurrence.
(3) Charges imposed by a financial institution for paying items
that overdraw an account, unless the payment of such items and the
imposition of the charge were previously agreed upon in writing.
(4) Fees charged for participation in a credit plan, whether
assessed on an annual or other periodic basis.
(5) Seller's points.
(6) Interest forfeited as a result of an interest reduction
required by law on a time deposit used as security for an extension of
credit.
(7) Real-estate related fees. The following fees in [rtrif]an open-
end credit plan[ltrif] [a transaction] secured by real property or in
[rtrif]an open-end[ltrif] [a] residential mortgage transaction, if the
fees are bona fide and reasonable in amount:
(i) Fees for title examination, abstract of title, title insurance,
property survey, and similar purposes.
(ii) Fees for preparing loan-related documents, such as deeds,
mortgages, and reconveyance or settlement documents.
(iii) Notary and credit report fees.
(iv) Property appraisal fees or fees for inspections to assess the
value or condition of the property if the service is performed prior to
closing, including fees related to pest infestation or flood hazard
determinations.
(v) Amounts required to be paid into escrow or trustee accounts if
the amounts would not otherwise be included in the finance charge.
(8) Discounts offered to induce payment for a purchase by cash,
check, or other means, as provided in section 167(b) of the Act.
(d) Insurance and debt cancellation and debt suspension coverage.
(1) Voluntary credit insurance premiums. [rtrif]Except as provided in
Sec. 226.4(g), premiums[ltrif] [Premiums] for credit life, accident,
health, or loss-of-income insurance may be excluded from the finance
charge if the following conditions are met:
(i) The insurance coverage is not required by the creditor, and
this fact is disclosed in writing.
(ii) The premium for the initial term of insurance coverage is
disclosed in writing. If the term of insurance is less than the term of
the transaction, the term of insurance also shall be disclosed. The
premium may be disclosed on a unit-cost basis only in open-end credit
transactions, closed-end credit transactions by mail or telephone under
Sec. 226.17(g), and certain closed-end credit transactions involving
an insurance plan that limits the total amount of indebtedness subject
to coverage.
(iii) The consumer signs or initials an affirmative written request
for the insurance after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
[rtrif](iv) The creditor determines at the time of enrollment that
the consumer meets any applicable age or employment eligibility
criteria for insurance coverage.[ltrif]
(2) Property insurance premiums. Premiums for insurance against
loss of or damage to property, or against liability arising out of the
ownership or use of property, including single interest insurance if
the insurer waives all right of subrogation against the consumer,\5\
may be excluded from the finance charge if the following conditions are
met:
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\5\ [Reserved].
---------------------------------------------------------------------------
(i) The insurance coverage may be obtained from a person of the
consumer's choice,\6\ and this fact is disclosed. (A creditor may
reserve the right to refuse to accept, for reasonable cause, an insurer
offered by the consumer.)
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\6\ [Reserved].
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(ii) If the coverage is obtained from or through the creditor, the
premium for the initial term of insurance coverage shall be disclosed.
If the term of insurance is less than the term of the transaction, the
term of insurance shall also be disclosed. The premium may be disclosed
on a unit-cost basis only in open-end credit transactions, closed-end
credit transactions by mail or telephone under Sec. 226.17(g), and
certain closed-end credit transactions involving an insurance plan that
limits the total amount of indebtedness subject to coverage.
(3) Voluntary debt cancellation or debt suspension fees.
[rtrif]Except as provided in Sec. 226.4(g), charges[ltrif] [Charges]
or premiums paid for debt cancellation coverage for amounts exceeding
the value of the collateral securing the obligation or for debt
cancellation or debt suspension coverage in the event of the loss of
life, health, or income or in case of accident may be excluded from the
finance charge, whether or not the coverage is insurance, if the
following conditions are met:
(i) The debt cancellation or debt suspension agreement or coverage
is not required by the creditor, and this fact is disclosed in writing.
(ii) The fee or premium for the initial term of coverage is
disclosed in writing. If the term of coverage is less than the term of
the credit transaction, the term of coverage also shall be disclosed.
The fee or premium may be disclosed on a unit-cost basis only in open-
end credit transactions, closed-end credit transactions by mail or
telephone under Sec. 226.17(g), and certain closed-end credit
transactions involving a debt cancellation agreement that limits the
total amount of indebtedness subject to coverage.
(iii) The following are disclosed, as applicable, for debt
suspension coverage: That the obligation to pay loan principal and
interest is only suspended, and that interest will continue to accrue
during the period of suspension.
(iv) The consumer signs or initials an affirmative written request
for coverage after receiving the disclosures specified in this
paragraph, except as provided in paragraph (d)(4) of this section. Any
consumer in the transaction may sign or initial the request.
[rtrif](v) The creditor determines at the time of enrollment that
the consumer meets any applicable age or employment eligibility
criteria for the debt cancellation or debt suspension agreement or
coverage.[ltrif]
(4) Telephone purchases. If a consumer purchases credit insurance
or debt cancellation or debt suspension coverage for an open-end [(not
home-secured)] plan by telephone, the creditor must make the
disclosures under
[[Page 43323]]
paragraphs (d)(1)(i) and (ii) or (d)(3)(i) through (iii) of this
section, as applicable, orally. In such a case, the creditor shall:
(i) Maintain evidence that the consumer, after being provided the
disclosures orally, affirmatively elected to purchase the insurance or
coverage; and
(ii) Mail the disclosures under paragraphs (d)(1)(i) and (ii) or
(d)(3)(i) through (iii) of this section, as applicable, within three
business days after the telephone purchase.
(e) Certain security interest charges. [rtrif]Except as provided in
Sec. 226.4(g), if[ltrif] [If] itemized and disclosed, the following
charges may be excluded from the finance charge:
(1) Taxes and fees prescribed by law that actually are or will be
paid to public officials for determining the existence of or for
perfecting, releasing, or satisfying a security interest.
(2) The premium for insurance in lieu of perfecting a security
interest to the extent that the premium does not exceed the fees
described in paragraph (e)(1) of this section that otherwise would be
payable.
(3) Taxes on security instruments. Any tax levied on security
instruments or on documents evidencing indebtedness if the payment of
such taxes is a requirement for recording the instrument securing the
evidence of indebtedness.
(f) Prohibited offsets. Interest, dividends, or other income
received or to be received by the consumer on deposits or investments
shall not be deducted in computing the finance charge.
[rtrif](g) Special rule; closed-end mortgage transactions.
Paragraphs (a)(2) and (c) through (e) of this section, other than
Sec. Sec. 226.4(c)(2), 226.4(c)(5) and 226.4(d)(2), do not apply to
closed-end transactions secured by real property or a dwelling.[ltrif]
Subpart C--Closed-End Credit
4. Section 226.17 is revised to read as follows:
Sec. 226.17 General disclosure requirements.
(a) Form of disclosures. (1) The creditor shall make the
disclosures required by this subpart clearly and conspicuously in
writing, in a form that the consumer may keep. [rtrif]In addition,
transactions secured by real property or a dwelling are subject to the
requirements under Sec. 226.37.[ltrif] The disclosures required by
this subpart may be provided to the consumer in electronic form,
subject to compliance with the consumer-consent and other applicable
provisions of the Electronic Signatures in Global and National Commerce
Act (E-Sign Act) (15 U.S.C. 7001 et seq.). [rtrif]For transactions
secured by real property or a dwelling, disclosures required by Sec.
226.19(b) or (c) must be provided in electronic form in specified
circumstances.[ltrif] The disclosures required by Sec. Sec. 226.17(g),
226.19(b),[rtrif] 226.19(c),[ltrif] and 226.24 may be provided to the
consumer in electronic form without regard to the consumer consent or
other provisions of the E-Sign Act in the circumstances set forth in
those sections. The disclosures [rtrif]required by Sec. 226.18 or
Sec. 226.38[ltrif] shall be grouped together, shall be segregated from
everything else, and shall not contain any information not directly
related \37\ to the disclosures required under Sec. 226.18
\38\[rtrif]or Sec. 226.38; however, the disclosures may include an
acknowledgement of receipt, the date of the transaction, and the
consumer's name, address, and account number. The following disclosures
may be made together with or separately from other required
disclosures: the variable-rate example under Sec. 226.18(f)(4),
insurance, debt cancellation, or debt suspension under Sec. 226.18(n),
and certain security interest charges under Sec. 226.18(o)[ltrif]. The
itemization of the amount financed under Sec. 226.18(c)(1) must be
separate from the other disclosures under that section.
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\37\ [rtrif][Reserved][ltrif][The disclosures may include an
acknowledgment of receipt, the date of the transaction, and the
consumer's name, address, and account number.]
\38\ [rtrif][Reserved][ltrif][The following disclosures may be
made together with or separately from other required disclosures:
the creditor's identity under Sec. 226.18(a), the variable-rate
example under Sec. 226.18(f)(1)(iv), insurance or debt cancellation
under Sec. 226.18(n), and certain security interest charges under
Sec. 226.18(o).]
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(2)[rtrif]Except for transactions secured by real property or a
dwelling subject to Sec. 226.38, t[ltrif][T]he terms finance charge
and annual percentage rate, when required to be disclosed under Sec.
226.18(d) and (e) together with a corresponding amount or percentage
rate, shall be more conspicuous than any other disclosure, except the
creditor's identity under Sec. 226.18(a).
(b) Time of disclosures. The creditor shall make disclosures before
consummation of the transaction. [In certain mortgage transactions,
special timing requirements are set forth in Sec. 226.19(a). In
certain variable-rate transactions, special timing requirements for
variable-rate disclosures are set forth in Sec. 226.19(b) and Sec.
226.20(c).] [rtrif]Special disclosure timing requirements for
transactions secured by real property or a dwelling are set forth in
Sec. 226.19(a). Additional disclosure timing requirements for
adjustable-rate transactions secured by real property or a dwelling are
set forth in Sec. 226.19(b) and Sec. 226.20(c).[ltrif] In certain
transactions involving mail or telephone orders or a series of sales,
the timing of disclosures may be delayed in accordance with paragraphs
(g) and (h) of this section.
(c) Basis of disclosures and use of estimates. (1) [rtrif]Legal
obligation.[ltrif] The disclosures [rtrif]required by this
subpart[ltrif] shall reflect the terms of the legal obligation between
the parties.
[rtrif](i) Buydowns. The creditor shall disclose an annual
percentage rate that is a composite rate based on the interest rate in
effect during the initial period of the term of the loan and the
interest rate in effect for the remainder of the term, if the
consumer's interest rate or payments are reduced for all or part of the
loan term based on payments made by:
(A) The seller or another third party, if the legal obligation
reflects such an arrangement; or
(B) The consumer.
(ii) Wrap-around financing. If a transaction involves combining the
outstanding balance on an existing loan with additional funds advanced
to a consumer without paying off the outstanding balance, the amount
financed shall equal the sum of the outstanding balance and the new
funds advanced.
(iii) Variable- or adjustable-rate transactions. The creditor shall
base disclosures for a variable- or adjustable-rate transaction on the
full term of the transaction. Except as otherwise provided in Sec.
226.38(a)(3) and (c) for adjustable-rate mortgage transactions secured
by real property or a dwelling:
(A) If the initial interest rate for a transaction with a variable
or adjustable rate is determined using the index or formula used to
adjust the interest rate, the disclosures shall reflect the terms in
effect at the time of consummation.
(B) If the initial interest rate for a transaction with a variable
or adjustable rate is not determined using the index or formula used to
adjust the interest rate, the disclosures shall reflect a composite
annual percentage rate based on the initial rate for the time it is in
effect and, for the remainder of the term, the rate that would have
applied if such index or formula had been used at the time of
consummation.
(iv) Repayment upon occurrence of future event. If disbursements
for a transaction secured by real property or a dwelling are made
during a specified period but repayment is required only upon the
occurrence of a future event, the creditor shall base disclosures on
[[Page 43324]]
the assumption that repayment will occur when disbursements end.
(v) Tax refund-anticipation loans. For a tax refund-anticipation
loan, the creditor shall estimate the time a tax refund will be
delivered to the consumer and shall include in the finance charge any
repayment amount that exceeds the loan amount that is not otherwise
excluded from the finance charge under Sec. 226.4.
(vi) Pawn transactions. For a pawn transaction, the creditor shall
disclose:
(A) The initial sum paid to the consumer as the amount financed;
(B) A finance charge that includes the difference between the
initial sum paid to the consumer and the price at which the item is
pledged or sold; and
(C) The annual percentage rate is determined using the earliest
date on which the item pledged or sold may be redeemed as the end of
the loan term.[ltrif]
(2)[rtrif]Estimates.[ltrif] (i) [rtrif]Reasonably available
information.[ltrif] If any information necessary for an accurate
disclosure is unknown to the creditor, the creditor shall make the
disclosure based on the best information reasonably available at the
time the disclosure is provided to the consumer[,] and shall state
clearly that the disclosure is an estimate[rtrif](except that Sec.
226.19(a) limits the circumstances in which creditors may provide
estimated disclosures, for mortgage transactions secured by real
property or a dwelling)[ltrif].
(ii)[rtrif]Per-diem interest.[ltrif] For a transaction in which a
portion of the interest is determined on a per-diem basis and collected
at consummation, any disclosure affected by the per-diem interest shall
be considered accurate if the disclosure is based on the information
known to the creditor at the time that the disclosure documents are
prepared for consummation of the transaction.
(3)[rtrif]Disregarded effects.[ltrif] The creditor may disregard
the effects of the following in making calculations and disclosures:
(i) That payments must be collected in whole cents.
(ii) That dates of scheduled payments and advances may be changed
because the scheduled date is not a business day.
(iii) That months have different numbers of days.
(iv) The occurrence of leap year.
(4)[rtrif]Disregarded irregularities.[ltrif] In making calculations
and disclosures, the creditor may disregard any irregularity in the
first period that falls within the limits described below and any
[payment schedule] irregularity [rtrif]in the payment schedule, in a
transaction not secured by real property or a dwelling, or payment
summary, in a transaction secured by real property or a
dwelling,[ltrif] that results from the irregular first period:
(i) For transactions in which the term is less than 1 year, a first
period not more than 6 days shorter or 13 days longer than a regular
period;
(ii) For transactions in which the term is at least 1 year and less
than 10 years, a first period not more than 11 days shorter or 21 days
longer than a regular period; and
(iii) For transactions in which the term is at least 10 years, a
first period shorter than or not more than 32 days longer than a
regular period.
(5)[rtrif]Demand obligations.[ltrif] If an obligation is payable on
demand, the creditor shall make the disclosures based on an assumed
maturity of 1 year. If an alternate maturity date is stated in the
legal obligation between the parties, the disclosures shall be based on
that date.
(6) Multiple advance loans. (i)[rtrif]Series of advances.[ltrif] A
series of advances under an agreement to extend credit up to a certain
amount may be considered as one transaction.
(ii)[rtrif]Multiple-advance construction loan.[ltrif] When a
multiple-advance loan to finance the construction of a dwelling may be
permanently financed by the same creditor, the construction phase and
the permanent phase may be treated as either one transaction or more
than one transaction.
(d) Multiple creditors; multiple consumers. If a transaction
involves more than one creditor, only one set of disclosures shall be
given and the creditors shall agree among themselves which creditor
must comply with the requirements that this regulation imposes on any
or all of them. If there is more than one consumer, the disclosures may
be made to any consumer who is primarily liable on the obligation. If
the transaction is rescindable under Sec. 226.23, however, the
disclosures shall be made to each consumer who has the right to
rescind.
(e) Effect of subsequent events. If a disclosure becomes inaccurate
because of an event that occurs after the creditor delivers the
required disclosures, the inaccuracy is not a violation of this
regulation, although new disclosures may be required under paragraph
(f) of this section, Sec. 226.19, or Sec. 226.20.
(f) Early disclosures. If disclosures required by this subpart are
given before the date of consummation of a transaction and a subsequent
event makes them inaccurate, the creditor shall disclose before
consummation ([subject to the provisions of][rtrif]except that
additional timing requirements apply under[ltrif] Sec. 226.19(a)(2)
and [rtrif]alternative timing requirements apply under[ltrif] Sec.
226.19(a)[(5)][rtrif](4)[ltrif](iii)): \39\
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\39\ [Reserved.]
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(1) Any changed term unless the term was based on an estimate in
accordance with Sec. 226.17(c)(2) and was labelled an estimate;
(2) All changed terms, if the annual percentage rate at the time of
consummation varies from the annual percentage rate disclosed earlier
by more than \1/8\ of 1 percentage point in a regular transaction, or
more than \1/4\ of 1 percentage point in an irregular transaction, as
defined in Sec. 226.22(a).
(g) Mail or telephone orders--delay in disclosures. [rtrif]Except
for transactions secured by real property or a dwelling subject to
Sec. 226.38, i[ltrif][I]f a creditor receives a purchase order or a
request for an extension of credit by mail, telephone, or facsimile
machine without face-to-face or direct telephone solicitation, the
creditor may delay the disclosures until the due date of the first
payment, if the following information for representative amounts or
ranges of credit is made available in written form or in electronic
form to the consumer or to the public before the actual purchase order
or request:
(1) The cash price or the principal loan amount.
(2) The total sale price.
(3) The finance charge.
(4) The annual percentage rate, and if the rate may increase after
consummation, the following disclosures:
(i) The circumstances under which the rate may increase.
(ii) Any limitations on the increase.
(iii) The effect of an increase.
(5) The terms of repayment.
(h) Series of sales--delay in disclosures. If a credit sale is one
of a series made under an agreement providing that subsequent sales may
be added to an outstanding balance, the creditor may delay the required
disclosures until the due date of the first payment for the current
sale, if the following two conditions are met:
(1) The consumer has approved in writing the annual percentage rate
or rates, the range of balances to which they apply, and the method of
treating any unearned finance charge on an existing balance.
(2) The creditor retains no security interest in any property after
the creditor has received payments equal to the cash price and any
finance charge attributable to the sale of that property. For purposes
of this provision, in the case of items purchased on different
[[Page 43325]]
dates, the first purchased is deemed the first item paid for; in the
case of items purchased on the same date, the lowest priced is deemed
the first item paid for.
(i) Interim student credit extensions. For each transaction
involving an interim credit extension under a student credit program,
the creditor need not make the following disclosures: the finance
charge under Sec. 226.18(d), the payment schedule under Sec.
226.18(g), the total of payments under Sec. 226.18(h), or the total
sale price under Sec. 226.18(j).
5. Section 226.18 is revised to read as follows:
Sec. 226.18 General disclosure requirements.
For each transaction, the creditor shall disclose the following
information as applicable[rtrif], except that for each transaction
secured by real property or a dwelling, the creditor shall make the
disclosures required by Sec. 226.38[ltrif]:
(a) Creditor. The identity of the creditor making the disclosures.
(b) Amount financed. The amount financed, using that term, and a
brief description such as the amount of credit provided to you or on
your behalf. The amount financed is calculated by:
(1) Determining the principal loan amount or the cash price
(subtracting any downpayment);
(2) Adding any other amounts that are financed by the creditor and
are not part of the finance charge; and
(3) Subtracting any prepaid finance charge.
(c) Itemization of amount financed. (1) A separate written
itemization of the amount financed, including: \40\
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\40\ [rtrif][Reserved][ltrif][Good faith estimates of settlement
costs provided for transactions subject to the Real Estate
Settlement Procedures Act (12 U.S.C. 2601 et seq.) may be
substituted for the disclosures required by paragraph (c) of this
section.]
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(i) The amount of any proceeds distributed directly to the
consumer.
(ii) The amount credited to the consumer's account with the
creditor.
(iii) Any amounts paid to other persons by the creditor on the
consumer's behalf. The creditor shall identify those
persons[rtrif],[ltrif][.]\41\ [rtrif]except that the following payees
may be described using generic or other general terms and need not be
further identified: public officials or government agencies, credit
reporting agencies, appraisers, and insurance companies.[ltrif]
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\41\ [rtrif][Reserved][ltrif][The following payees may be
described using generic or other general terms and need not be
further identified: public officials or government agencies, credit
reporting agencies, appraisers, and insurance companies.]
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(iv) The prepaid finance charge.
(2) The creditor need not comply with paragraph (c)(1) of this
section if the creditor provides a statement that the consumer has the
right to receive a written itemization of the amount financed, together
with a space for the consumer to indicate whether it is desired, and
the consumer does not request it.
(d) Finance charge. The finance charge, using that term, and a
brief description such as ``the dollar amount the credit will cost
you.''
[(1) Mortgage loans. In a transaction secured by real property or a
dwelling, the disclosed finance charge and other disclosures affected
by the disclosed finance charge (including the amount financed and the
annual percentage rate) shall be treated as accurate if the amount
disclosed as the finance charge--
(i) Is understated by no more than $100; or
(ii) Is greater than the amount required to be disclosed.
(2) Other credit. In any other transaction, the][rtrif]The[ltrif]
amount disclosed as the finance charge shall be treated as accurate
if[,][rtrif]:
(1)[ltrif]In a transaction involving an amount financed of $1,000
or less, it is not more than $5 above or below the amount required to
be disclosed; or[,]
[rtrif](2)[ltrif] In a transaction involving an amount financed of
more than $1,000, it is not more than $10 above or below the amount
required to be disclosed.
(e) Annual percentage rate. The annual percentage rate, using that
term, and a brief description such as ``the cost of your credit as a
yearly rate.'' \42\ [rtrif]For any transaction involving a finance
charge of $5 or less on an amount financed of $75 or less, or a finance
charge of $7.50 or less on an amount financed of more than $75, the
creditor need not disclose the annual percentage rate.[ltrif]
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\42\ [rtrif][Reserved][ltrif] [For any transaction involving a
finance charge of $5 or less on an amount financed of $75 or less,
or a finance charge of $7.50 or less on an amount financed of more
than $75, the creditor need not disclose the annual percentage
rate.]
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(f) Variable-rate loan [with term of one year or less][rtrif]not
secured by real property or a dwelling[ltrif].
[(1)] If the annual percentage rate may increase after consummation
in a transaction not secured by [the consumer's principal dwelling or a
transaction secured by the consumer's principal dwelling with a term of
one year or less][rtrif]real property or a dwelling[ltrif], the
following disclosures: \43\
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\43\ [rtrif][Reserved][ltrif][Information provided in accordance
with Sections 226.18(f)(2) and 226.19(b), may be substituted for the
disclosures required by paragraph (f)(1) of this section.]
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[(i)][rtrif](1)[ltrif] The circumstances under which the interest
rate may increase.
[(ii)][rtrif](2)[ltrif] Any limitations on the increase.
[(iii)][rtrif](3)[ltrif] The effect of an increase.
[(iv)][rtrif](4)[ltrif] An example of the payment terms that would
result from an increase.
[(2) If the annual percentage rate may increase after consummation
in a transaction secured by the consumer's principal dwelling with a
term greater than one year, a following disclosures:
(i) The fact that the transaction contains a variable-rate feature.
(ii) A statement that variable-rate disclosure have been provided
earlier.]
(g) Payment schedule. The number, amounts, and timing of payments
scheduled to repay the obligation.
(1) In a demand obligation with no alternate maturity date, the
creditor may comply with this paragraph by disclosing the due dates or
payment periods of any scheduled interest payments for the first year.
(2) In a transaction in which a series of payments varies because a
finance charge is applied to the unpaid principal balance, the creditor
may comply with this paragraph by disclosing the following information:
(i) The dollar amounts of the largest and smallest payments in the
series.
(ii) A reference to the variations in the other payments in the
series.
(h) Total of payments. The ``total of payments,'' using that term,
and a descriptive explanation such as ``the amount you will have paid
when you have made all scheduled payments.'' \44\ [rtrif]In any
transaction involving a single payment, the creditor need not disclose
the total of payments.[ltrif]
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\44\ [rtrif][Reserved][ltrif] [In any transaction involving a
single payment, the creditor need not disclose the total of
payments.]
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(i) Demand feature. If the obligation has a demand feature, that
fact shall be disclosed. When the disclosures are based on an assumed
maturity of 1 year as provided in Sec. 226.17(c)(5), that fact shall
also be disclosed.
(j) Total sale price. In a credit sale, the total sale price, using
that term, and a descriptive explanation (including the amount of any
downpayment) such as ``the total price of your purchase on credit,
including your downpayment of $------.'' The total sale price is the
sum of the cash price, the items described in paragraph (b)(2), and the
finance charge disclosed under paragraph (d) of this section.
(k) Prepayment. (1) When an obligation includes a finance charge
computed from time to time by application of a rate to the unpaid
principal balance, a statement indicating whether or not a penalty may
[[Page 43326]]
be imposed if the obligation is prepaid in full.
(2) When an obligation includes a finance charge other than the
finance charge described in paragraph (k)(1) of this section, a
statement indicating whether or not the consumer is entitled to a
rebate of any finance charge if the obligation is prepaid in full.
(l) Late payment. Any dollar or percentage charge that may be
imposed before maturity due to a late payment, other than a deferral or
extension charge.
(m) Security interest. The fact that the creditor has or will
acquire a security interest in the property purchased as part of the
transaction, or in other property identified by item or type.
(n) Insurance[rtrif],[ltrif] [and] debt cancellation [rtrif], and
debt suspension[ltrif]. The items required by Sec. 226.4(d) in order
to exclude certain insurance premiums[rtrif],[ltrif] and debt-
cancellation [rtrif]or debt suspension[ltrif] fees from the finance
charge.
(o) Certain security interest charges. The disclosures required by
Sec. 226.4(e) in order to exclude from the finance charge certain fees
prescribed by law or certain premiums for insurance in lieu of
perfecting a security interest.
(p) Contract reference. A statement that the consumer should refer
to the appropriate contract document for information about nonpayment,
default, the right to accelerate the maturity of the obligation, and
prepayment rebates and penalties. At the creditor's option, the
statement may also include a reference to the contract for further
information about security interests and, in a residential mortgage
transaction, about the creditor's policy regarding assumption of the
obligation.
(q) [Assumption policy. In a residential mortgage transaction, a
statement whether or not a subsequent purchaser of the dwelling from
the consumer may be permitted to assume the remaining obligation on its
original terms.] [rtrif][Reserved.][ltrif]
(r) Required deposit. If the creditor requires the consumer to
maintain a deposit as a condition of the specific transaction, a
statement that the annual percentage rate does not reflect the effect
of the required deposit.\45\ [rtrif]A required deposit need not
include:
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\45\ [rtrif][Reserved][ltrif] [A required deposit need not
include, for example: (1) An escrow account for items such as taxes,
insurance or repairs; (2) a deposit that earns not less than 5
percent per year; or (3) payments under a Morris Plan.]
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(1) An escrow account for items such as taxes, insurance or
repairs; or
(2) A deposit that earns not less than 5 percent per year.[ltrif]
6. Section 226.19 is revised to read as follows:
Sec. 226.19 [Certain mortgage and variable-rate
transactions.][rtrif]Early disclosures and adjustable-rate disclosures
for transactions secured by real property or a dwelling.
In connection with a closed-end transaction secured by real
property or a dwelling, subject to paragraph (a)(4) of this section,
the following requirements shall apply:[ltrif]
(a) Mortgage transactions [subject to RESPA]--(1)(i) Time of
[rtrif]good faith estimates of[ltrif] disclosures. [In a mortgage
transaction subject to the Real Estate Settlement Procedures Act (12
U.S.C. 2601 et seq.) that is secured by the consumer's dwelling, other
than a home equity line of credit subject to Sec. 226.5b or mortgage
transaction subject to paragraph (a)(5) of this section,
t][rtrif]T[ltrif]he creditor shall make good faith estimates of the
disclosures required by [Sec. 226.18][rtrif]Sec. 226.38[ltrif] and
shall deliver or place them in the mail not later than the third
business day after the creditor receives the consumer's written
application.
(ii) Imposition of fees. Except as provided in paragraph
(a)(1)(iii) of this section, neither a creditor nor any other person
may impose a fee on a consumer in connection with the consumer's
application for a mortgage transaction subject to paragraph (a)(1)(i)
of this section before the consumer has received the disclosures
required by paragraph (a)(1)(i) of this section. If the disclosures are
mailed to the consumer [rtrif]or delivered to the consumer by means
other than delivery in person[ltrif], the consumer is considered to
have received them three business days after they are mailed [rtrif]or
delivered[ltrif].
(iii) Exception to fee restriction. A creditor or other person may
impose a fee for obtaining the consumer's credit history before the
consumer has received the disclosures required by paragraph (a)(1)(i)
of this section, provided the fee is bona fide and reasonable in
amount.
[(2) Waiting periods for early disclosures and corrected
disclosures. (i)][rtrif](2)(i) Seven-business-day waiting
period.[ltrif] The creditor shall deliver or place in the mail the good
faith estimates required by paragraph (a)(1)(i) of this section not
later than the seventh business day before consummation of the
transaction.
[rtrif](ii) Three-business-day waiting period. After providing the
disclosures required by paragraph (a)(1)(i) of this section, the
creditor shall provide the disclosures required by Sec. 226.38 before
consummation. The consumer must receive the new disclosures no later
than three business days before consummation. Only the disclosures
required by Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C),
226.38(c)(6)(i) and 226.38(e)(5)(i) may be estimated
disclosures.[ltrif]
Alternative 1--Paragraph (a)(2)(iii)
[(ii) If the annual percentage rate disclosed under paragraph
(a)(1)(i) of this section becomes inaccurate, as defined in Sec.
226.22, the creditor shall provide corrected disclosures with all
changed terms.][rtrif](iii) Additional three-business-day waiting
period. If a subsequent event makes the disclosures required by
paragraph (a)(2)(ii) inaccurate, the creditor shall provide corrected
disclosures, subject to paragraph (a)(2)(iv) of this section.[ltrif]
The consumer must receive the corrected disclosures no later than three
business days before consummation. [rtrif] Only the disclosures
required by Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C),
226.38(c)(6)(i) and 226.38(e)(5)(i) may be estimated
disclosures.[ltrif] [If the corrected disclosures are mailed to the
consumer or delivered to the consumer by means other than delivery in
person, the consumer is deemed to have received the corrected
disclosures three business days after they are mailed or delivered.]
Alternative 2--Paragraph (a)(2)(iii)
[(ii)][rtrif](iii) Additional three-business-day waiting
period.[ltrif] If the annual percentage rate disclosed under paragraph
[(a)(1)(i)][rtrif](a)(2)(ii)[ltrif] of this section becomes inaccurate,
as defined in Sec. 226.22, [rtrif]or a transaction that was disclosed
as a fixed-rate transaction becomes an adjustable-rate
transaction,[ltrif] the creditor shall provide corrected disclosures
with all changed terms[rtrif], subject to paragraph (a)(2)(iv) of this
section[ltrif]. The consumer must receive the corrected disclosures no
later than three business days before consummation. [rtrif] Only the
disclosures required by Sec. Sec. 226.38(c)(3)(i)(C),
226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and 226.38(e)(5)(i) may be
estimated disclosures.[ltrif] [If the corrected disclosures are mailed
to the consumer or delivered to the consumer by means other than
delivery in person, the consumer is deemed to have received the
corrected disclosures three business days after they are mailed or
delivered.]
[rtrif](iv) Annual percentage rate accuracy. An annual percentage
rate disclosed under paragraph (a)(2)(ii) or (a)(2)(iii) shall be
considered accurate as provided by Sec. 226.22, except that even if
one of the following subsequent events makes the disclosed annual
percentage rate inaccurate under
[[Page 43327]]
Sec. 226.22, the APR shall be considered accurate for purposes of
paragraph (a)(2)(ii) and (a)(2)(iii) of this section:
(A) A decrease in the loan's annual percentage rate due to a
discount the creditor gives the consumer to induce periodic payments by
automated debit from a consumer's deposit or other account.
(B) A decrease in the loan's annual percentage rate due to a
discount a title insurer gives the consumer on voluntary owners' title
insurance.
(v) Timing of receipt. If the disclosures required by paragraph
(a)(2)(ii) or paragraph (a)(2)(iii) of this section are mailed to the
consumer or delivered by means other than delivery in person, the
consumer is considered to have received the disclosures three business
days after they are mailed or delivered.[ltrif]
(3) Consumer's waiver of waiting period before consummation. If the
consumer determines that the extension of credit is needed to meet a
bona fide personal financial emergency, the consumer may modify or
waive the seven-business-day waiting period or [the][rtrif]a[ltrif]
three-business-day waiting period required by paragraph (a)(2) of this
section, after receiving the disclosures required by [Sec.
226.18][rtrif]Sec. 226.38[ltrif]. To modify or waive a waiting period,
the consumer shall give the creditor a dated written statement that
describes the emergency, specifically modifies or waives the waiting
period, and bears the signature of all the consumers who are primarily
liable on the legal obligation. Printed forms for this purpose are
prohibited.
[(4) Notice. Disclosures made pursuant to paragraph (a)(1) or
paragraph (a)(2) of this section shall contain the following statement:
``You are not required to complete this agreement merely because you
have received these disclosures or signed a loan application.'' The
disclosure required by this paragraph shall be grouped together with
the disclosures required by paragraph (a)(1) or (a)(2) of this
section.]
[(5)][rtrif](4)[ltrif] Timeshare plans. In a mortgage transaction
[subject to the Real Estate Settlement Procedures Act (12 U.S.C. 2601
et seq.)] that is secured by a consumer's interest in a timeshare plan
described in 11 U.S.C. 101(53(D)):
(i) The requirements of paragraphs (a)(1) through
[(a)(4)][rtrif](a)(3)[ltrif] of this section do not apply;
(ii) The creditor shall make good faith estimates of the
disclosures required by [Sec. 226.18] [rtrif]Sec. 226.38[ltrif]
before consummation, or shall deliver or place them in the mail not
later than three business days after the creditor receives the
consumer's written application, whichever is earlier; and
(iii) If the annual percentage rate at the time of consummation
varies from the annual percentage rate disclosed under paragraph
(a)[(5)][rtrif](4)[ltrif](ii) of this section by more than \1/8\; of 1
percentage point in a regular transaction or [frac14] of 1 percentage
point in an irregular transaction, the creditor shall disclose all the
changed terms no later than consummation or settlement.
[(b) Certain variable-rate transactions.\45a\ If the annual
percentage rate may increase after consummation in a transaction
secured by the consumer's principal dwelling with a term greater than
one year, the following disclosures must be provided at the time an
application form is provided or before the consumer pays a non-
refundable fee, whichever is earlier: \45b\
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\45a\ [rtrif]Reserved.[ltrif][Information provided in accordance
with variable-rate regulations of other Federal agencies may be
substituted for the disclosures required by paragraph (b) of this
section.]
\45b\ [rtrif]Reserved.[ltrif][Disclosures may be delivered or
placed in the mail not later than three business days following
receipt of a consumer's application when the application reaches the
creditor by telephone, or through an intermediary agent or broker.]
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(1) The booklet titled Consumer Handbook on Adjustable Rate
Mortgages published by the Board and the Federal Home Loan Bank Board,
or a suitable substitute.
(2) A loan program disclosure for each variable-rate program in
which the consumer expresses an interest. The following disclosures, as
applicable, shall be provided:
(i) The fact that the interest rate, payment, or term of the loan
can change.
(ii) The index or formula used in making adjustments, and a source
of information about the index or formula.
(iii) An explanation of how the interest rate and payment will be
determined, including an explanation of how the index is adjusted, such
as by the addition of a margin.
(iv) A statement that the consumer should ask about the current
margin value and current interest rate.
(vii) Any rules relating to changes in the index, interest rate,
payment amount, and outstanding loan balance including, for example, an
explanation of interest rate or payment limitations, negative
amortization, and interest rate carryover.
(viii) At the option of the creditor, either of the following:
(A) A historical example, based on a $10,000 loan amount,
illustrating how payments and the loan balance would have been affected
by interest rate changes implemented according to the terms of the loan
program disclosure. The example shall reflect the most recent 15 years
of index values. The example shall reflect all significant loan program
terms, such as negative amortization, interest rate carryover, interest
rate discounts, and interest rate and payment limitations, that would
have been affected by the index movement during the period.
(B) The maximum interest rate and payment for a $10,000 loan
originated at the initial interest rate (index value plus margin,
adjusted by the amount of any discount or premium) in effect as of an
identified month and year for the loan program disclosure assuming the
maximum periodic increases in rates and payments under the program; and
the initial interest rate and payment for that loan and a statement
that the periodic payment may increase or decrease substantially
depending on changes in the rate.
(ix) An explanation of how the consumer may calculate the payments
for the loan amount to be borrowed based on either:
(A) The most recent payment shown in the historical example in
paragraph (b)(2)(viii)(A) of this section; or
(B) The initial interest rate used to calculate the maximum
interest rate and payment in paragraph (b)(2)(viii)(B) of this section.
(x) The fact that the loan program contains a demand feature.
(xi) The type of information that will be provided in notices of
adjustments and the timing of such notices.
(xii) A statement that disclosure forms are available for the
creditor's other variable-rate loan programs.]
[rtrif](b) Adjustable-rate loan program disclosures. For
adjustable-rate mortgages described in Sec. 226.38(a)(3) secured by
real property or a consumer's dwelling, the creditor shall provide to
the consumer an adjustable-rate loan program disclosure for each loan
program in which the consumer expresses an interest. The creditor shall
disclose the heading ``Adjustable-Rate Mortgage'' or ``ARM'' in
accordance with Sec. 226.19(b)(4)(iii). The creditor shall provide
disclosures under this paragraph (b) in circumstances where an open-end
credit account converts to a closed-end mortgage transaction under a
written agreement with the consumer. The creditor need not provide such
disclosures in circumstances where the consumer assumes an adjustable-
rate mortgage originated to another consumer.
(1) Interest rate and payment. As applicable, the creditor shall
disclose the information required in paragraph
[[Page 43328]]
(b)(1) of this section, grouped together under the heading ``Interest
Rate and Payment,'' using that term:
(i) Introductory period. The time period for which the interest
rate or payment remains fixed, a statement that the interest rate or
payment may increase after that period, and an explanation of the
effect on the interest rate of having an initial interest rate that is
not determined using the index or formula that applies for interest
rate adjustments.
(ii) Frequency of rate and payment change. The frequency of
interest rate and payment changes permitted under the legal obligation.
(iii) Index. The index or formula used in making adjustments, a
source of information about the index or formula, and an explanation of
how the interest rate will be determined [rtrif]when adjusted[ltrif],
including an explanation of how the index is adjusted, such as by the
addition of a margin.
(iv) Limit on rate changes. An explanation of interest rate or
payment limitations and interest rate carryover.
(v) Conversion feature. An explanation of any fixed-rate conversion
feature that describes any limitations on the period during which the
loan may be converted, a statement that the fixed interest rate may be
higher than the adjustable rate at the time of conversion, a statement
that conversion fees may be charged, and any interest rate and payment
limitations that apply if the consumer exercises the conversion option.
(vi) Preferred rate. An explanation of the events that will cause
the interest rate on an adjustable rate mortgage with a preferred rate
to increase, a statement of the increase in the interest rate, and a
statement that fees may be charged if one or more of the events occurs.
(2) Key questions about risk. The creditor shall disclose the
information required in paragraphs (b)(2)(i) and (b)(2)(ii) of this
section, grouped together under the heading ``Key Questions About
Risk,'' using that term:
(i) Required disclosures. The creditor shall disclose the following
information--
(A) Rate increases. A statement that the interest rate may
increase, along with a statement indicating when the first interest
rate increase may occur and the frequency with which the interest rate
may increase.
(B) Payment increases. A statement indicating whether or not the
periodic payment on the loan may increase. If the periodic payment may
increase, a statement that if the interest rate increases, the periodic
payment will increase. For a pay option loan, if the periodic payment
may increase, a statement indicating when the first minimum payment may
increase.
(C) Prepayment penalty. If the obligation includes a finance charge
computed from time to time by application of a rate to the unpaid
principal balance, a statement indicating whether or not a penalty
could be imposed if the obligation is prepaid in full. If the creditor
could impose a prepayment penalty, a statement of the circumstances
under which and period in which the creditor could impose the penalty.
(ii) Additional disclosures. The creditor shall disclose the
following information as applicable:
(A) Interest-only payments. A statement that periodic payments will
be applied only toward interest on the loan, along with a statement of
any limitation on the number of periodic payments that will be applied
only toward interest on the loan, that such payments will cover the
interest owed each month, but none of the principal, and that making
these periodic payments means the loan amount will stay the same and
the consumer will not have paid any of the loan amount. For payment-
option loans, a statement that the loan gives the consumer the choice
to make periodic payments that cover the interest owed each month, but
none of the principal, and that making these periodic payments means
the loan amount will stay the same and the consumer will not have paid
any of the loan amount.
(B) Negative amortization. A statement that the loan balance may
increase even if the consumer makes the periodic payments, along with a
statement that the minimum payment covers only a part of the interest
the consumer owes each period and none of the principal, that the
unpaid interest will be added to the consumer's loan amount, and that
over time this will increase the total amount the consumer is borrowing
and cause the consumer to lose equity in the home.
(C) Balloon payment. A statement that the consumer will owe a
balloon payment, along with a statement of when it will be due.
(D) Demand feature. A statement that the creditor may demand full
repayment of the loan, along with a statement of the timing of any
advance notice the creditor will give the consumer before the creditor
exercises such right.
(E) No-documentation or low-documentation loans. A statement that
the consumer's loan could have a higher rate or fees if the consumer
does not document employment, income or other assets, along with a
statement that if the consumer provides more documentation, the
consumer could decrease the interest rate or fees.
(F) Shared-equity or shared-appreciation. A statement that any
future equity or appreciation in the real property or dwelling that
secures the loan must be shared, along with a statement of the
percentage of future equity or appreciation to which the creditor is
entitled, and the events that may trigger such an obligation.
(3) Additional information and Web site. The creditor shall
disclose a statement that the consumer may obtain additional
information about adjustable-rate mortgages and a list of licensed
housing counselors at the Web site of the Federal Reserve Board, and a
reference to that Web site.
(4) Format requirements. (i) Application of Sec. 226.37. Except as
otherwise provided by this paragraph (b)(4), the format requirements in
Sec. 226.37 apply to loan program disclosures made under this section.
(ii) Prominent location. The disclosures required by paragraphs
(b)(1) through (b)(3) of this section shall be grouped together and
placed in a prominent location.
(iii) Disclosure of heading. The disclosure of the heading required
by paragraph (b) of this section shall be more conspicuous than, and
shall precede, the other disclosures required by paragraph (b) and
shall be located outside of the tables required by paragraph
(b)(4)(iv). The creditor may make the heading disclosure using the name
of the creditor and the name of the loan program.
(iv) Form of disclosures; tabular format. The creditor shall
provide the disclosures required by paragraphs (b)(1) and (b)(2) of
this section in the form of two tables with headings, content, and
format substantially similar to Form H-4(B) in Appendix H to this part.
The table shall contain only the information required or permitted by
paragraphs (b)(1) and (b)(2). The table containing the disclosures
required by paragraph (b)(1) shall precede the table containing the
disclosures required by paragraph (b)(2).
(v) Question and answer format. The creditor shall provide the
disclosures required by paragraph (b)(2) of this section grouped
together and presented in the format of question and answer, in a
manner substantially similar to Form H-4(B) in Appendix H to this part.
(vi) Highlighting. Each affirmative answer for a feature required
to be disclosed under paragraph (b)(2) shall be disclosed in bold text
and in all capitalized letters. Any negative answer shall be in nonbold
text.
[[Page 43329]]
(vii) Order of key questions disclosure. The key questions
disclosure shall be provided, as applicable, in the following order:
rate increases under Sec. 226.19(b)(2)(i)(A), payment increases under
Sec. 226.19(b)(2)(i)(B), interest-only payments under Sec.
226.19(b)(2)(ii)(A), negative amortization under Sec.
226.19(b)(2)(ii)(B), balloon payment under Sec. 226.19(b)(2)(ii)(C),
prepayment penalty under Sec. 226.19(b)(2)(i)(C), demand feature under
Sec. 226.19(b)(2)(ii)(D), no-documentation or low-documentation loans
under Sec. 226.19(b)(2)(ii)(E), shared-equity or shared-appreciation
under Sec. 226.19(b)(2)(ii)(F).
(viii) Disclosure of additional information and Web site. The
disclosure and Web site information required by paragraph (b)(3) of
this section shall be located outside and beneath the tables required
by paragraph (b)(4)(iv).
(c) Publications for transactions secured by real property or a
dwelling. In a closed-end consumer credit transaction secured by real
property or a dwelling, the creditor shall provide the following Board
publications:
(1) The publication entitled ``Key Questions to Ask about Your
Mortgage,'' as published by the Board.
(2) The publication entitled ``Fixed vs. Adjustable Rate
Mortgages,'' as published by the Board.
(d) Timing of disclosures. (1) General. Except as otherwise
provided by this paragraph (d), the creditor shall provide the
disclosures and publications required by paragraphs (b) and (c) of this
section at the time an application form is provided to the consumer or
before the consumer pays a non-refundable fee, including a fee for
obtaining the consumer's credit history, whichever is earlier.[ltrif]
[(c)][rtrif](2)[ltrif] Electronic disclosures. For an application
that is accessed by the consumer in electronic form, the disclosures
and publications required by paragraph (b) [rtrif]and (c)[ltrif] of
this section may be provided to the consumer in electronic form on or
with the application.
[rtrif](i) Except as provided in paragraph (d)(2)(ii), if a
consumer accesses an ARM loan application electronically, the creditor
shall provide the disclosures and publications required under
paragraphs (b) and (c) of this section in electronic form.
(ii) If a consumer who is physically present in the creditor's
office accesses a loan application electronically, the creditor may
provide disclosures and publications required under paragraphs (b) and
(c) of this section in either electronic or paper form.
(3) Applications made by telephone or through intermediary. If the
creditor receives the consumer's application through an intermediary
agent or broker or by telephone, the creditor satisfies the
requirements of paragraph (b) or paragraph (c) of this section if the
creditor delivers the disclosures and publications or places them in
the mail not later than three business days after the creditor receives
the consumer's application.
(4) Adjustable-rate feature added after application. If the
consumer first expresses interest in an adjustable-rate mortgage
transaction after an application form has been provided or accessed or
the consumer has paid a non-refundable fee, the creditor shall provide
to the consumer the disclosures required by paragraph (b) of this
section within three business days after the creditor is informed of
such interest by the consumer or by an intermediary broker or agent.
(5) Terms not usually offered. If the consumer expresses an
interest in negotiating loan terms that are not generally offered, the
creditor need not provide the disclosures required by paragraph (b) of
this section before an application form is provided but shall provide
such disclosures as soon as reasonably possible after the terms to be
disclosed have been determined and not later than the time the consumer
pays a non-refundable fee. In all cases the creditor shall provide the
disclosures required by paragraph (c) of this section at the time an
application form is provided or before the consumer pays a non-
refundable fee, including a fee for obtaining a consumer's credit
history, whichever is earlier.
(6) Additional loan program disclosures. If, after an application
form is provided or the consumer pays a non-refundable fee, a consumer
expresses an interest in an adjustable-mortgage loan program for which
the creditor has not provided the disclosures required by paragraph (b)
of this section, the creditor shall provide such disclosures within a
reasonable time after the consumer expresses such interest. [ltrif]
7. Section 226.20 is revised to read as follows:
Sec. 226.20 Subsequent disclosure requirements.
(a) Refinancings. A refinancing occurs when an existing obligation
that was subject to this subpart is satisfied and replaced by a new
obligation undertaken by the same consumer. A refinancing is a new
transaction requiring new disclosures to the consumer. The new finance
charge shall include any unearned portion of the old finance charge
that is not credited to the existing obligation. The following shall
not be treated as a refinancing:
(1) A renewal of a single payment obligation with no change in the
original terms.
(2) A reduction in the annual percentage rate with a corresponding
change in the payment schedule.
(3) An agreement involving a court proceeding.
(4) A change in the payment schedule or a change in collateral
requirements as a result of the consumer's default or delinquency,
unless the rate is increased, or the new amount financed exceeds the
unpaid balance plus earned finance charge and premiums for continuation
of insurance of the types described in Sec. 226.4(d).
(5) The renewal of optional insurance purchased by the consumer and
added to an existing transaction, if disclosures relating to the
initial purchase were provided as required by this subpart.
(b) Assumptions. An assumption occurs when a creditor expressly
agrees in writing with a subsequent consumer to accept that consumer as
a primary obligor on an existing [residential mortgage
transaction][rtrif]closed-end credit transaction secured by real
property or a dwelling[ltrif]. Before the assumption occurs, the
creditor shall make new disclosures to the subsequent consumer, based
on the remaining obligation. If the finance charge originally imposed
on the existing obligation was an add-on or discount finance charge,
the creditor need only disclose:
(1) The unpaid balance of the obligation assumed.
(2) The total charges imposed by the creditor in connection with
the assumption.
(3) The information required to be disclosed under [Sec.
226.18(k), (l), (m), and (n)] [rtrif]Sec. 226.38 (a)(5), (f)(2), (h),
(j)(2), (j)(3), and (j)(4)[ltrif].
(4) The annual percentage rate originally imposed on the
obligation.
(5) The [payment schedule under Sec. 226.18(g)] [rtrif]interest
rate and payment summary under Sec. 226.38(c)[ltrif] and the total
[of] payments under [Sec. 226.18(h)], [rtrif]Sec. 226.38(e)(5)[ltrif]
based on the remaining obligation.
(c) [Variable-rate adjustments.] [rtrif]Rate adjustments.[ltrif]
\45c\ An adjustment to the interest rate with or without a
corresponding adjustment to the payment in [a variable-rate][rtrif]an
adjustable-rate[ltrif] mortgage subject to
[[Page 43330]]
Sec. 226.19(b) is an event requiring new disclosures to the consumer.
[rtrif]An adjustment to the interest rate with a corresponding
adjustment to the payment due to the conversion of an adjustable-rate
mortgage subject to Sec. 226.19(b) to a fixed-rate mortgage also is an
event requiring new disclosures to the consumer.[ltrif][At least once
each year during which an interest rate adjustment is implemented
without an accompanying payment change, and at least 25, but no more
than 120, calendar days before a payment at a new level is due, the
following disclosures, as applicable, must be delivered or placed in
the mail:
---------------------------------------------------------------------------
\45c\ [rtrif]Reserved.[ltrif][Information provided in accordance
with variable-rate subsequent disclosure regulations of other
Federal agencies may be substituted for the disclosure required by
paragraph (c) of this section.]
---------------------------------------------------------------------------
(1) The current and prior interest rates.
(2) The index values upon which the current and prior interest
rates are based.
(3) The extent to which the creditor has foregone any increase in
the interest rate.
(4) The contractual effects of the adjustment, including the
payment due after the adjustment is made, and a statement of the loan
balance.
(5) The payment, if different from that referred to in paragraph
(c)(4) of this section, that would be required to fully amortize the
loan at the new interest rate over the remainder of the loan term.]
[rtrif](1) Timing of disclosures. (i) Payment change. If an
interest rate adjustment is accompanied by a payment change, the
creditor shall deliver or place in the mail the disclosures required by
paragraph (c)(2) of this section at least 60, but no more than 120,
calendar days before a payment at a new level is due.
(ii) No payment change. At least once each year during which an
interest rate adjustment is implemented without an accompanying payment
change, the creditor shall deliver or place in the mail the disclosures
required by paragraph (c)(3) of this section.
(2) Content of payment change disclosures. The creditor must
provide the following information on the notice provided pursuant to
paragraph (c)(1)(i) of this section:
(i) A statement that changes are being made to the interest rate,
the date such change is effective, and a statement that more detailed
information is available in the loan agreement(s).
(ii) A table containing the following disclosures--
(A) The current and new interest rates.
(B) If payments on the loan may be interest-only or negatively
amortizing, the amount of the current and new payment allocated to pay
principal, interest, and taxes and insurance in escrow, as applicable.
The current payment allocation disclosed shall be based on the payment
allocation in the last payment period during which the current interest
rate applies. The new payment allocation disclosed shall be based on
the payment allocation in the first payment period during which the new
interest rate applies.
(C) The current and new payment and the due date for the new
payment.
(iii) A description of the change in the index or formula and any
application of previously foregone interest.
(iv) The extent to which the creditor has foregone any increase in
the interest rate and the earliest date the creditor may apply foregone
interest to future adjustments, subject to rate caps.
(v) Limits on interest rate or payment increases at each
adjustment, if any, and the maximum interest rate or payment over the
life of the loan.
(vi) A statement of whether or not part of the new payment will be
allocated to pay the loan principal and a statement of the payment
required to fully amortize the loan at the new interest rate over the
remainder of the loan term or to fully amortize the loan without
extending the loan term, if different from the new payment disclosed
pursuant to paragraph (c)(2)(ii)(C) of this section.
(vii) A statement of the loan balance as of the date the interest
rate change will become effective.
(3) Content of annual interest rate notice. The creditor shall
provide the following information on the annual notice provided
pursuant to paragraph (c)(1)(ii) of this section, as applicable:
(i) The specific time period covered by the disclosure, and a
statement that the interest rate on the loan has changed during the
past year without changing required payments.
(ii) The highest and lowest interest rates that applied during the
period specified under paragraph (c)(3)(i) of this section.
(iii) Any foregone increase in the interest rate or application of
previously foregone interest.
(iv) The maximum interest rate that may apply over the life of the
loan.
(v) A statement of the loan balance as of the last day of the time
period required to be disclosed by paragraph (c)(3)(i) of this section.
(4) Additional information. In addition to the disclosures provided
under paragraph (c)(2) or (c)(3) of this section, the creditor shall
provide the following information:
(i) If the creditor may impose a penalty if the obligation is
prepaid in full, a statement of the circumstances under which and
period in which the creditor may impose the penalty and the amount of
the maximum penalty possible during the period between the date the
creditor delivers or mails the disclosures required by this paragraph
(c) and the last day the creditor may impose the penalty.
(ii) A telephone number the consumer may call to obtain additional
information about the consumer's loan.
(iii) A telephone number and Internet Web site for housing
counseling resources maintained by the Department of Housing and Urban
Development.
(5) Format of disclosures. (i) The disclosures required by this
paragraph (c) shall be provided in the form of tables with headings,
content and format substantially similar to Form H-4(G) in Appendix H
to this part, where an interest rate adjustment is accompanied by a
payment change, or Form H-4(K) in Appendix H to this part, where a
creditor provides an annual notice of interest rate adjustments without
an accompanying payment change. The disclosures required by paragraph
(c)(2) or (c)(3) of this section shall be grouped together with the
disclosures required by paragraph (c)(4) of this section, and shall be
in a prominent location.
(ii) The disclosures required by paragraph (c)(2)(i) or paragraph
(c)(3)(i) of this section shall precede the other disclosures required
by paragraph (c)(2) or (c)(3). The disclosures required by paragraph
(c)(4) shall be located directly beneath the disclosures required by
paragraph (c)(2) or (c)(3).
(iii) The disclosures required by paragraph (c)(2)(ii) shall be in
the form of a table with headings, content, and format substantially
similar to Form H-4(G) in Appendix H to this part. The disclosures
required by paragraphs (c)(2)(iii) through (c)(2)(vii) of this section
shall be located directly below the table required by paragraph
(c)(2)(ii).
(d) Periodic statement. (1) Timing and content of disclosures. If a
mortgage transaction secured by real property or a dwelling provides a
consumer with multiple payment options that include a payment that
results in negative amortization, for each period after consummation
and not later than fifteen days before payment is due, subject to
paragraph (c) of this section, the creditor shall mail or deliver to
the consumer a periodic statement that discloses the following
information, as applicable:
(i) Payment. Based on the interest rate in effect at the time the
disclosure is made, the payment amount required to--
(A) Pay off the loan balance in full by the end of the term through
regular
[[Page 43331]]
periodic payments without a balloon payment, with a statement that the
payment is ``recommended to reduce loan balance,'' using that term;
(B) Prevent negative amortization, if the legal obligation
explicitly permits the consumer to elect to pay interest only without
paying principal; and
(C) Pay the minimum amount required under the legal obligation.
(ii) Effects. A statement of the interest and principal, if any,
covered by the payment amounts disclosed under paragraph (d)(1)(i) of
this section, a statement describing the effects of making such
payments, and the earliest date payments at a higher level may be due.
(iii) Unpaid interest. The amount that will be added to the loan
balance each period due to unpaid interest.
(2) Format of disclosures. (i) Form of a table. The disclosures
required by paragraph (d)(1) of this section shall be in the form of a
table with headings, content and format substantially similar to Form
H-4(L) in Appendix H to this part.
(ii) Location of disclosures. The disclosures required by this
paragraph (d) shall be placed in a prominent location, except that if
the disclosures are made concurrently with the disclosures required by
paragraph (c) of this section, the disclosures required by paragraph
(c) shall precede the disclosures required by this paragraph (d).
(iii) Segregation of disclosures. The table described in paragraph
(d)(2)(i) of this section shall contain only the information required
by paragraph (d)(1). Other information may be presented with the table,
provided such information appears outside the required table.
(e) Creditor-placed property insurance. (1) ``Creditor-placed
property insurance'' means property insurance coverage obtained by the
creditor when the property insurance required by the credit agreement
has lapsed.
(2) A creditor may not charge a consumer for obtaining property
insurance on property securing a credit transaction, unless:
(i) The creditor has made a reasonable determination that the
required property insurance has lapsed;
(ii) The creditor has mailed or delivered a written notice to the
consumer with the disclosures set forth in paragraph (e)(3) of this
section at least 45 days before a charge is imposed on the consumer for
creditor-placed property insurance; and
(iii) During the 45-day notice period, the consumer has not
provided the creditor with evidence of adequate property insurance.
(3) The creditor must provide the following information, clearly
and conspicuously, on the notice required in paragraph (e)(2)(ii) of
this section:
(i) The creditor's name and contact information, the loan number,
and the address or description of the property securing the credit
transaction;
(ii) That the consumer is obligated to maintain property insurance
on the property securing the credit transaction;
(iii) That the required property insurance has lapsed;
(iv) That the creditor is authorized to obtain the property
insurance on the consumer's behalf;
(v) The date the creditor can charge the consumer for the cost of
creditor-placed property insurance;
(vi) How the consumer may provide evidence of property insurance;
(vii) The cost of creditor-placed property insurance stated as an
annual premium, and that this premium is likely significantly higher
than a premium for property insurance purchased by the consumer; and
(viii) That creditor-placed property insurance may not provide as
much coverage as homeowner's insurance.
(4) Within 15 days after a creditor charges the consumer for
creditor-placed property insurance, the creditor must mail or deliver
to the consumer a copy of the individual policy, certificate or other
evidence of the creditor-placed property insurance.[ltrif]
Subpart E--Special Rules for Certain Home Mortgage Transactions
8. Section 226.32 is amended by revising paragraphs (b)(1), (c)(1),
and (c)(5), to read as follows:
Sec. 226.32 Requirements for certain closed-end home mortgages.
* * * * *
(b) * * *
(1) For purposes of paragraph (a)(1)(ii) of this section, points
and fees means [rtrif]all items included in the finance charge,
pursuant to Sec. 226.4, except interest or the time-price
differential.[ltrif] [:]
(i) All items required to be disclosed under Sec. 226.4(a) and
226.4(b), except interest or the time-price differential;
(ii) All compensation paid to mortgage brokers;
(iii) All items listed in Sec. 226.4(c)(7) (other than amounts
held for future payment of taxes) unless the charge is reasonable, the
creditor receives no direct or indirect compensation in connection with
the charge, and the charge is not paid to an affiliate of the creditor;
and
(iv) Premiums or other charges for credit life, accident, health,
or loss-of-income insurance, or debt-cancellation coverage (whether or
not the debt-cancellation coverage is insurance under applicable law)
that provides for cancellation of all or part of the consumer's
liability in the event of the loss of life, health, or income or in the
case of accident, written in connection with the credit transaction.]
* * * * *
(c) * * *
(1) Notices. The following statement [rtrif]in bold text and
minimum 10-point font[ltrif]: [``You are not required to complete this
agreement merely because you have received these disclosures or have
signed a loan application. If you obtain this loan, the lender will
have a mortgage on your home. You could lose your home, and any money
you have put into it, if you do not meet your obligations under the
loan.''][rtrif]``If you are unable to make the payments on this loan,
you could lose your home. You have no obligation to accept this loan.
Your signature below only confirms that you have received this
form.''[ltrif]
* * * * *
(5) Amount borrowed. For a mortgage refinancing, the total amount
the consumer will borrow, as reflected by the [face] amount of the note
[rtrif]or other loan agreement[ltrif]; and where the amount borrowed
includes premiums or other charges for optional credit insurance or
debt-cancellation [rtrif]or debt suspension[ltrif] coverage, that fact
shall be stated, grouped together with the disclosure of the amount
borrowed. The disclosure of the amount borrowed shall be treated as
accurate if it is not more than $100 above or below the amount required
to be disclosed.
* * * * *
9. Section 226.36, as added on July 30, 2008 (73 FR 44604), is
amended by:
A. Revising the section heading,
B. Revising paragraph (a),
C. Revising paragraphs (b)(1) introductory text, (b)(1)(i)(A)
through (D), (b)(1)(ii)(A) and (D), and (b)(2),
D. Revising the introductory text of paragraph (c)(1),
E. Redesignating paragraph (d) as paragraph (f), and
F. Adding new paragraphs (d) and (e).
The additions and revisions read as follows:
Sec. 226.36 Prohibited acts or practices in connection with credit
secured by [rtrif]real property or a dwelling[ltrif] [a consumer's
principal dwelling].
(a) [rtrif]Loan originator and[ltrif] mortgage broker defined.
[rtrif](1) Loan originator. For purposes of this section, the term
``loan originator'' means with respect to
[[Page 43332]]
a particular transaction, a person[ltrif] [For purposes of this section
``mortgage broker'' means a person, other than an employee of a
creditor,] who for compensation or other monetary gain, or in
expectation of compensation or other monetary gain, arranges,
negotiates, or otherwise obtains an extension of consumer credit for
another person. [The term includes a person meeting this definition,
even if the consumer credit obligation is initially payable to such
person, unless the person provides] [rtrif]The term ``loan originator''
includes employees of the creditor. The term includes the creditor if
the creditor does not provide[ltrif] the funds for the transaction at
consummation out of the [rtrif]creditor's[ltrif] [person's] own
resources, out of deposits held by the [rtrif]creditor[ltrif] [person],
or by drawing on a bona fide warehouse line of credit.
[rtrif](2) Mortgage broker. For purposes of this section, a
mortgage broker with respect to a particular transaction is any loan
originator that is not an employee of the creditor.[ltrif]
(b) Misrepresentation of value of consumer's dwelling--(1) Coercion
of appraiser. In connection with a consumer credit transaction secured
by [rtrif]real property or[ltrif] a [consumer's principal] dwelling, no
creditor or mortgage broker, and no affiliate of a creditor or mortgage
broker, shall directly or indirectly coerce, influence, or otherwise
encourage an appraiser to misstate or misrepresent the value of such
dwelling.
(i) * * *
(A) Implying to an appraiser that current or future retention of
the appraiser depends on the amount at which the appraiser values a
[consumer's principal] dwelling;
(B) Excluding an appraiser from consideration for future engagement
because the appraiser reports a value of a [consumer's principal]
dwelling that does not meet or exceed a minimum threshold;
(C) Telling an appraiser a minimum reported value of a [consumer's
principal] dwelling that is needed to approve the loan;
(D) Failing to compensate an appraiser because the appraiser does
not value a [consumer's principal] dwelling at or above a certain
amount; and
* * * * *
(ii) * * *
(A) Asking an appraiser to consider additional information about a
[consumer's principal] dwelling or about comparable properties;
* * * * *
(D) Obtaining multiple appraisals of a [consumer's principal]
dwelling, so long as the creditor adheres to a policy of selecting the
most reliable appraisal, rather than the appraisal that states the
highest value;
* * * * *
(2) When extension of credit prohibited. In connection with a
consumer credit transaction secured by [rtrif]real property or[ltrif] a
[consumer's principal] dwelling, a creditor who knows, at or before
loan consummation, of a violation of paragraph (b)(1) of this section
in connection with an appraisal shall not extend credit based on such
appraisal unless the creditor documents that it has acted with
reasonable diligence to determine that the appraisal does not
materially misstate or misrepresent the value of such dwelling.
* * * * *
(c) Servicing practices. (1) In connection with a consumer credit
transaction secured by [rtrif]real property or[ltrif] a [consumer's
principal] dwelling, no servicer shall--
* * * * *
ALTERNATIVE 1--PARAGRAPH (d).
[rtrif](d) Prohibited payments to loan originators. (1) Payments
based on transaction terms and conditions. In connection with a
consumer credit transaction secured by real property or a dwelling, no
loan originator shall receive and no person shall pay to a loan
originator, directly or indirectly, compensation in an amount that is
based on any of the transaction's terms or conditions. For purposes of
this paragraph, the principal amount of credit extended is deemed to be
a transaction term. This paragraph (d)(1) shall not apply to any
transaction in which paragraph (d)(2) of this section applies.
(2) Payments by persons other than consumer. If a loan originator
receives compensation directly from the consumer in a transaction
secured by real property or a dwelling:
(i) The loan originator shall not receive compensation, directly or
indirectly, from any person other than the consumer in connection with
the transaction; and
(ii) No person who knows or has reason to know of the consumer-paid
compensation to the loan originator, other than the consumer, shall pay
any compensation to the loan originator, directly or indirectly, in
connection with the transaction.
(3) Affiliates. For purposes of paragraph (d) of this section,
affiliated entities shall be treated as a single ``person.''[ltrif]
ALTERNATIVE 2--PARAGRAPH (d).
[rtrif](d) Prohibited payments to loan originators. (1) Payments
based on terms and conditions. In connection with a consumer credit
transaction secured by real property or a dwelling, no loan originator
shall receive and no person shall pay to a loan originator, directly or
indirectly, compensation in an amount that is based on any of the
transaction's terms or conditions. For purposes of this paragraph the
principal amount of credit extended is not deemed to be a transaction
term or condition. This paragraph (d)(1) shall not apply to any
transaction in which paragraph (d)(2) applies.
(2) Payments by persons other than consumer. If a loan originator
receives compensation directly from the consumer in a transaction
secured by real property or a dwelling:
(i) The loan originator shall not receive compensation, directly or
indirectly, from any person other than the consumer in connection with
the transaction; and
(ii) No person who knows or has reason to know of the consumer-paid
compensation to the loan originator, other than the consumer, shall pay
any compensation to the loan originator, directly or indirectly, in
connection with the transaction.
(3) Affiliates. For purposes of paragraph (d) of this section,
affiliated entities shall be treated as a single ``person.''[ltrif]
OPTIONAL PROPOSAL--PARAGRAPH (e).
[rtrif](e) Prohibition on steering. (1) General. In connection with
a credit transaction secured by real property or a dwelling, a loan
originator shall not direct or ``steer'' a consumer to consummate a
transaction based on the fact that the originator will receive greater
compensation from the creditor in that transaction than in other
transactions the originator offered or could have offered to the
consumer, unless the transaction is in the consumer's interest.
(2) Permissible transactions. A transaction does not violate
paragraph (e)(1) of this section if the loan was chosen by the consumer
from at least three loan options for each type of transaction in which
the consumer expressed an interest, and the conditions specified in
paragraph (e)(3) of this section are met. For purposes of paragraph (e)
of this section, the phrase ``type of transaction'' refers to whether a
loan has:
(i) An annual percentage rate that cannot increase after
consummation, or
(ii) An annual percentage rate that may increase after
consummation.
(3) Loan options presented. A transaction satisfies paragraph
(e)(2) of this section only if the loan originator
[[Page 43333]]
presents the loan options required by that paragraph and all of the
following conditions are met:
(i) The loan originator obtains loan options from a significant
number of the creditors with which the originator regularly does
business and, for each type of transaction in which the consumer
expressed an interest the originator must present and permit the
consumer to choose from at least three loans that include:
(A) The loan with the lowest interest rate;
(B) The loan with the second lowest interest rate; and
(C) The loan with the lowest total dollar amount for origination
points or fees and discount points, as offered by the creditors.
(ii) The loan originator must have a good faith belief that the
options presented to the consumer pursuant to paragraph (e)(3)(i) of
this section are loans for which the consumer likely qualifies.
(iii) For each type of transaction, if the originator presents to
the consumer more than three loans, the originator must highlight the
loans that satisfy the criteria specified in paragraph (e)(3)(i) of
this section.[ltrif]
[rtrif](f)[ltrif] [(d)] This section does not apply to a home
equity line of credit subject to Sec. 226.5b.
10. A new Sec. 226.37 is added to Subpart E to read as follows:
[rtrif]Sec. 226.37 Special disclosure requirements for closed-end
mortgages.
(a) Form of disclosures--(1) General. The creditor shall make the
disclosures required by Sec. Sec. 226.19, 226.20(c), 226.20(d) and
226.38 clearly and conspicuously in writing, in a form that the
consumer may keep.
(2) Grouped and segregated. The disclosures required by Sec.
226.19, as applicable, Sec. 226.20(c), Sec. 226.20(d), or Sec.
226.38 shall be grouped together and segregated from everything else,
except as provided in paragraph (b) of this section, and shall not
contain any information not directly related to the disclosures
required under Sec. Sec. 226.19, 226.20(c), 226.20(d), or 226.38,
except:
(i) The disclosures may include the date of the transaction and the
consumer's name, address, and account number; and
(ii) The following disclosures may be made together with or
separately from other required disclosures under Sec. 226.38: the tax
deductibility disclosure under Sec. 226.38(f)(4); and insurance, debt
cancellation, or debt suspension disclosure under Sec. 226.38(h).
(b) Separate disclosures. The following disclosures must be
provided separately from other required disclosures under Sec. 226.38:
itemization of amount financed under Sec. 226.38(j)(1); rebate under
Sec. 226.38(j)(2); late payment under Sec. 226.38(j)(3); property
insurance under Sec. 226.38(j)(4); contract reference under Sec.
226.38(j)(5); and assumption under Sec. 226.38(j)(6).
(c) Terminology. (1) Terminology used in providing the disclosures
required by Sec. Sec. 226.19, 226.20(c), 226.20(d) and 226.38 shall be
consistent.
(2) The term annual percentage rate, when required to be disclosed
under Sec. 226.38(b)(1) together with a corresponding percentage rate,
shall be more conspicuous than any other required disclosure, disclosed
in at least a 16-point font, and be placed in a prominent location and
in close proximity to a scaled graph in accordance with the
requirements under Sec. 226.38(b)(2).
(d) Specific formats. (1) The disclosures required by Sec.
226.38(a)(1) through (5) shall be provided in accordance with the
requirements of Sec. 226.38(a), and precede all other disclosures,
except the identification required by Sec. 226.38(g) and the
disclosures permitted under paragraph (a)(2)(i) of this section;
(2) The disclosures required by Sec. 226.38(b)(2) shall be
provided in the form of a graph with shading, scaling and content in
accordance with the requirements of Sec. 228.38(b)(2), placed in a
prominent location and in close proximity to the disclosures required
by Sec. Sec. 226.38(b)(1), 226.38(b)(3) and 226.38(b)(4);
(3) The disclosures required by Sec. 226.38(c), as applicable,
shall be provided in a tabular format in accordance with the
requirements of Sec. 226.38(c), and placed in a prominent location;
(4) The disclosure required by Sec. 226.38(c)(2)(iii) shall be
outlined in a box and placed directly beneath the table required by
Sec. 226.38(c)(1) in accordance with the requirements of Sec.
226.38(c)(2)(iii);
(5) The disclosures required by Sec. 226.38(d) shall be provided
in a question and answer format in a tabular format in accordance with
the requirements of Sec. 226.38(d), and shall not precede the
disclosures required by Sec. 226.38(a) through (c).
(6) The disclosures required by Sec. 226.38(e) shall be provided
in a tabular format in accordance with the requirements of Sec.
226.38(e), and precede any information not directly related to the
disclosures required by Sec. 226.38.
(7) The disclosures required by Sec. 226.38(f) shall be provided
in accordance with the requirements of Sec. 226.38(f), and precede the
disclosures required by Sec. 226.38(j).
(8) The loan program disclosures required by Sec. 226.19(b) for an
adjustable-rate mortgage shall be provided in a tabular format in
accordance with the requirements of Sec. 226.19(b).
(9) The disclosures required by Sec. 226.20(c)(2)-(4) for an
adjustable-rate adjustment notice shall be provided in a tabular format
in accordance with the requirements of Sec. 226.20(c)(2)-(5).
(10) The disclosures required by Sec. 226.20(d)(1) for loans with
negative amortization shall be provided in a tabular format in
accordance with the requirements of Sec. 226.20(d).
(e) Electronic disclosures. The disclosures required by Sec.
226.38 may be provided to the consumer in electronic form in accordance
with the requirements under Sec. 226.17(a)(1).[ltrif]
11. A new Sec. 226.38 is added to Subpart E to read as follows:
[rtrif]Sec. 226.38 Content of disclosures for closed-end mortgages.
In connection with a closed-end transaction secured by real
property or a dwelling, the creditor shall disclose the following
information:
(a) Loan summary. A separate section, labeled ``Loan Summary.''
(1) Loan amount. The principal amount the consumer will borrow as
reflected in the loan contract.
(2) Loan term. The period of time to repay the obligation in full.
(3) Loan type and features. The loan types and loan features
described in this section.
(i) Loan type. The loan type, as applicable:
(A) Adjustable-rate mortgage. If the annual percentage rate may
increase after consummation, the creditor shall disclose that the loan
is an ``adjustable-rate mortgage,'' using that term.
(B) Step-rate mortgage. If the interest rate will change after
consummation, and the rates and periods in which they will apply are
known, the creditor shall disclose that the loan is a ``step-rate
mortgage,'' using that term.
(C) Fixed-rate mortgage. If the transaction is not an adjustable-
rate mortgage or a step-rate mortgage, the creditor shall disclose that
the loan is a ``fixed-rate mortgage,'' using that term.
(ii) Loan features. No more than two loan features, as applicable:
(A) Step-payments. If, under the terms of the legal obligation, the
regular periodic payments will gradually increase by a set amount at
predetermined times, the creditor shall disclose that the loan has a
``step-payment'' feature, using that term; and
[[Page 43334]]
(B) Payment option. If, under the terms of the legal obligation,
the consumer may choose to make one or more regular periodic payments
that may cause the loan balance to increase, the creditor shall
disclose that the loan has a ``payment option'' feature, using that
term;
(C) Negative amortization. If, under the terms of the legal
obligation, the regular periodic payments will cause the loan balance
to increase and the loan is not a loan described in paragraphs
(a)(3)(ii)(B) or (a)(3)(ii)(D) of this section, the creditor shall
disclose that the loan has a ``negative amortization'' feature, using
that term; or
(D) Interest-only payments. If, under the terms of the legal
obligation, one or more regular periodic payments may be applied to
interest accrued only and not to loan principal, and the loan is not a
loan described in paragraphs (a)(3)(ii)(A) or (a)(3)(ii)(B) of this
section, the creditor shall disclose that the loan has an ``interest-
only payment'' feature, using that term.
(4) Total settlement charges. The ``total settlement charges,''
using that term, as disclosed under Regulation X, 12 CFR part 3500. As
applicable, a statement of the amount of the charges already included
in the loan amount and a statement that the total does not include a
down payment, with a reference to the Good Faith Estimate or HUD-1 for
details.
(5) Prepayment penalty. If the obligation includes a finance charge
computed from time to time by application of a rate to the unpaid
principal balance and permits the creditor to impose a penalty if the
obligation is prepaid in full, a statement indicating the amount of the
maximum penalty and the circumstances and period in which the creditor
may impose the penalty.
(6) Form of disclosures; tabular format. The disclosures required
by paragraphs (a)(1) through (5) of this section shall be in the form
of a table, with headings, content and format substantially similar to
Forms H-19(A), H-19(B), or H-19(C) in Appendix H to this part. The
table shall contain only the information required or permitted by
paragraphs (a)(1) through (5).
(b) Annual percentage rate. The disclosures specified in paragraph
(b)(1)-(4) of this section shall be grouped together with headings,
content and format substantially similar to Forms H-19(A), H-19(B), or
H-19(C) in Appendix H to this part.
(1) The ``annual percentage rate,'' using that term, and the
following description: ``overall cost of this loan including interest
and settlement charges.''
(2) A graph depicting the annual percentage rate (APR) disclosed
under paragraph (b)(1) of this section and how it relates to a range of
rates including the average prime offer rate as defined in Sec.
226.35(a)(2) for the week in which the disclosure required under this
section is provided, and the higher-priced mortgage loan threshold as
defined in Sec. 226.35(a)(1).
(i) The graph shall consist of a horizontal line or axis, with a
shaded bar extending above and below the line. The horizontal axis
shall be used to depict a range of APRs and the shaded bar shall use
lighter shading on the left and darker shading on the right to
distinguish between the rates on the graph that are below and above the
APR representing the higher-priced mortgage loan threshold.
(ii) The lighter shaded area shall comprise the first two-thirds of
the graph to represent the rates that are below the higher-priced
mortgage loan threshold. On the horizontal axis, a range of APRs shall
be plotted in the lighter shaded area, starting with the average prime
offer rate depicted as the lowest APR on the left, and increasing in
increments of .50 percentage points, up to the APR that is the higher-
priced mortgage loan threshold. The average prime offer rate shall be
plotted as the lowest APR on the horizontal axis and shall be labeled
as ``Average Best APR'' or ``Avg. Best APR.''
(iii) The darker shaded area to the right side of the APR
representing the higher-priced mortgage loan threshold shall comprise
the last third of the graph, shall contain the words ``high cost zone''
and the APR that is 4 percentage points higher than the higher-priced
mortgage threshold shall be plotted as the highest APR on the
horizontal axis. Ellipses shall separate the APR representing the
higher-priced mortgage threshold and the highest APR on the graph.
(iv) The graph shall include the APR disclosed under paragraph
(b)(1) of this section and:
(A) Identify its location on the horizontal axis, which shall be
labeled ``this loan: ----% APR,'' or
(B) If the APR disclosed under paragraph (b)(1) exceeds the highest
APR on the axis, identify its location beyond the rightmost edge of the
shaded graph, or
(C) If the APR disclosed under paragraph (b)(1) is below the
average prime offer rate, identify its location beyond the leftmost
edge of the shaded graph.
(v) The lighter and darker shaded areas shall each extend past the
lowest and highest APRs depicted on the axis, with a left pointing
arrow to the left of lowest APR and a right-pointing arrow to the right
of the highest APR.
(3) A statement of the average prime offer rate as defined in Sec.
226.35(a)(2), and the higher-priced mortgage loan threshold, as defined
in Sec. 226.35(a)(1), current as of the week the disclosure is
produced.
(4) The average per-period savings from a 1 percentage point
reduction in the APR, which shall be calculated as follows:
(i) Reduce the interest rate by 1 percentage point and compute the
total of payments that would result from the reduced interest rate;
(ii) Compute the difference between the total of payments in
paragraph (b)(4)(i) of this section and the total of payments for the
loan disclosed under Sec. 226.38(e)(5)(i), and divide the difference
by the total number of payments required to pay the loan off by its
maturity.
(5) Exemptions. The following transactions are exempt from the
disclosures required under paragraphs (b)(2) and (b)(3) of this
section:
(i) A transaction to finance the initial construction of a
dwelling;
(ii) A temporary or ``bridge'' loan with a term of twelve months or
less, such as a loan to purchase a new dwelling where the consumer
plans to sell a current dwelling within twelve months; and
(iii) A reverse-mortgage transaction subject to Sec. 226.33.
(c) Interest rate and payment summary. The creditor shall disclose
the following information about the interest rate and periodic
payments:
(1) The information in paragraphs (c)(2)-(4) of this section shall
be in the form of a table, with no more than five columns, with
headings, content and format substantially similar to Forms H-19(A), H-
19(B), or H-19(C) in Appendix H to this part. The table shall contain
only the information required in paragraphs (c)(2)-(4).
(2) Interest rates--(i) Amortizing loans. (A) For fixed-rate
mortgages, the interest rate at consummation.
(B) For an adjustable-rate mortgage or a step-rate mortgage--
(1) The interest rate at consummation and the period of time until
the first interest rate adjustment, labeled as the ``introductory rate
and monthly payment'';
(2) The maximum possible interest rate at the first scheduled
interest rate adjustment and the date on which the
[[Page 43335]]
adjustment will occur, labeled as ``maximum at first adjustment''; and
(3) The maximum possible interest rate at any time and the earliest
date on which that rate may apply, labeled as ``maximum ever.''
(C) If the loan provides for payment increases in paragraph
(c)(3)(i)(B) of this section, the interest rate in effect at the time
the first payment increase is scheduled to occur and the date on which
the increase will occur.
(ii) Negative amortization loans. The creditor shall disclose--
(A) The interest rate at consummation and if it will adjust after
consummation, the length of time until it will adjust and the label
``introductory'';
(B) The maximum possible interest rate that could apply when the
consumer must begin making fully amortizing payments under the terms of
the legal obligation;
(C) If the minimum required payment will increase before the
consumer must begin making fully amortizing payments, the maximum
possible interest rate that would be in effect at the first payment
increase and the date the increase is scheduled to occur; and
(D) If a second payment increase in the minimum required payment
may occur before the consumer must begin making fully amortizing
payments, the maximum possible interest rate that would in effect at
the second payment increase and the date the increase is scheduled to
occur.
(iii) Introductory rate disclosure for amortizing adjustable-rate
mortgage. If the interest rate at consummation is less than the fully-
indexed rate--
(A) The interest rate that applies at consummation and the period
of time the interest rate applies;
(B) A statement that even if market rates do not change, the
interest rate will increase at the first adjustment and the date of
such rate adjustment; and
(C) The fully-indexed rate.
(3) Payments for amortizing loans--(i) Principal and interest
payments. If all regular periodic payments will be applied to the
interest accrued and the principal, for each interest rate disclosed
under paragraph (c)(2)(i) of this section--
(A) The corresponding regular periodic payment of principal and
interest, labeled as ``principal and interest;''
(B) If the regular periodic payment may increase without regard to
an interest rate adjustment, the payment that corresponds to the first
increase and the earliest date on which the increase could occur;
(C) That an escrow account is required, if applicable, and an
estimate of the amount of taxes and insurance, including any mortgage
insurance;
(D) The sum of the amounts disclosed under paragraph (c)(3)(i)(A)-
(C) of this section, with a description such as ``total estimated
monthly payment.''
(ii) Interest-only payments. If the loan is an interest-only loan,
for each interest rate disclosed under paragraph (c)(2)(i) of this
section, the corresponding payment and--
(A) If the payment will be applied to only the interest accrued,
the amount applied to interest and an indication that none of the
payment is being applied to principal;
(B) If the payment will be applied to interest accrued and
principal, the earliest date that payment will be required and the
payment amount itemized by the amount applied to interest accrued and
the amount applied to principal;
(C) The escrow information in paragraph (c)(3)(i)(C) of this
section; and
(D) The sum of all amounts required to be disclosed under paragraph
(c)(3)(i)(A)-(C) of this section, with a description such as ``total
estimated monthly payment.''
(4) Payments for negative amortization loans. (i) The minimum
payment--
(A) Required until the first payment increase or interest rate
increase;
(B) That would be due at the first payment increase and the second,
if any, in paragraphs (c)(2)(ii)(C) and (D) of this section; and
(C) A statement that the minimum payment covers only some interest,
does not cover any principal, and will cause the loan amount to
increase.
(ii) The fully amortizing payment amount at the earliest time when
such a payment must be made; and, if applicable,
(iii) In addition to the payments in paragraphs (c)(4)(i) and (ii)
of this section, for each interest rate required under paragraph
(c)(2)(ii) of this section, the amount of the fully amortizing payment,
labeled as the ``full payment option,'' and a statement that payments
cover all principal and interest.
(5) Balloon payments. (i) Except as provided in paragraph
(c)(5)(ii) of this section, if the transaction will require a balloon
payment, defined as a payment that is more than two times a regular
periodic payment, the balloon payment must be disclosed separately from
other regular periodic payments disclosed under this paragraph (c), in
a manner substantially similar to Model Clause H-20 in Appendix H to
this part.
(ii) If the balloon payment is scheduled to occur at the same time
as another required payment in paragraph (c)(3) or (c)(4) of this
section, then the balloon payment must be disclosed in the table.
(6) Special disclosures for loans with negative amortization. The
following information, in close proximity to the table required in
paragraph (c)(1) of this section, with headings, content and format
substantially similar to Form H-19(C) in Appendix H to this part:
(i) The maximum possible interest rate, the period of time in which
the interest rate could reach its maximum, the amount of estimated
taxes and insurance included in each payment disclosed, and a statement
that the loan offers payment options, two of which are shown.
(ii) The dollar amount of the increase in the loan's principal
balance if the consumer makes only the minimum required payments for
the maximum possible time, and the earliest date on which the consumer
must make a fully amortizing payment, assuming that the interest rate
reaches its maximum at the earliest possible time.
(7) Definitions. For the purposes of this paragraph (c):
(i) The terms ``adjustable-rate mortgage,'' ``step-rate mortgage,''
``fixed-rate mortgage,'' and ``interest-only'' shall have the meaning
given to them in paragraphs (a)(3)(i) and (a)(3)(ii)(D) of this
section;
(ii) The term ``amortizing loan'' means a loan in which the regular
periodic payments cannot cause the principal balance to increase under
the terms of the legal obligation; the term ``negative amortization''
means a loan in which the regular periodic payments may or will cause
the principal balance to increase under the terms of the legal
obligation; and
(iii) The term ``fully indexed rate'' means the interest rate
calculated using the index value and margin at the time of
consummation.
(d) Key questions about risk. The creditor shall disclose the
information required in paragraphs (d)(1) and (d)(2) of this section,
grouped together under the heading ``Key Questions About Risk,'' using
that term:
(1) Required disclosures. The creditor shall disclose the following
information--
(i) Rate increases. A statement indicating whether or not the
interest rate on the loan may increase. If the interest rate on the
loan may increase, a statement indicating the frequency with which the
interest rate may increase and the date on which the first interest
rate increase may occur.
(ii) Payment increases. A statement indicating whether or not the
periodic payment on the loan may increase. If the
[[Page 43336]]
periodic payment on the loan may increase, a statement indicating the
date on which the first payment increase may occur. For a payment
option loan, if the periodic payment on the loan may increase,
statements indicating the dates on which the full and minimum payments
may increase.
(iii) Prepayment penalty. If the obligation includes a finance
charge computed from time to time by application of a rate to the
unpaid principal balance, a statement indicating whether or not a
penalty will be imposed if the obligation is prepaid in full. If the
creditor may impose a prepayment penalty, a statement of the
circumstances under which and period in which the creditor may impose
the penalty and the amount of the maximum penalty.
(2) Additional disclosures. The creditor shall disclose the
following information, as applicable--
(i) Interest-only payments. A statement that periodic payments will
be applied only toward interest on the loan, along with a statement of
any limitation on the number of periodic payments that will be applied
only toward interest on the loan, that such payments will cover the
interest owed each month, but none of the principal, and that making
these periodic payments means the loan amount will stay the same and
the consumer will not have paid any of the loan amount. For payment-
option loans, a statement that the loan gives the consumer the choice
to make periodic payments that cover the interest owed each month, but
none of the principal, and that making these periodic payments means
the loan amount will stay the same and the consumer will not have paid
any of the loan amount.
(ii) Negative amortization. A statement that the loan balance may
increase even if the consumer makes the periodic payments, along with a
statement that the minimum payment covers only a part of the interest
the consumer owes each period and none of the principal, that the
unpaid interest will be added to the consumer's loan amount, and that
over time this will increase the total amount the consumer is borrowing
and cause the consumer to lose equity in the home.
(iii) Balloon payment. A statement that the consumer will owe a
balloon payment, along with a statement of the amount that will be due
and the date on which it will be due.
(iv) Demand feature. A statement that the creditor may demand full
repayment of the loan, along with a statement of the timing of any
advance notice the creditor will give the consumer before the creditor
exercises such right.
(v) No-documentation or low-documentation loans. A statement that
the consumer's loan will have a higher rate or fees because the
consumer did not document employment, income or other assets, along
with a statement that if the consumer provides more documentation, the
consumer could decrease the interest rate or fees.
(vi) Shared-equity or shared-appreciation. A statement that any
future equity or appreciation in the real property or dwelling that
secures the loan must be shared, along with a statement of the
percentage of equity or appreciation to which the creditor is entitled,
and the events that may trigger such obligation.
(3) Format requirements. (i) Form of disclosures; tabular format.
The creditor shall provide the disclosures required by paragraphs
(d)(1) and (2) of this section, as applicable, in the form of a table
with headings, content and format substantially similar to Forms H-
19(A), H-19(B), or H-19(C) in Appendix H to this part. The table shall
contain only the information required or permitted by paragraphs (d)(1)
and (2).
(ii) Question and answer format. The creditor shall provide the
disclosures required by paragraphs (d)(1) through (d)(2) of this
section grouped together and presented in the format of question and
answer, in a manner substantially similar to Forms H-19(A), H-19(B), or
H-19(C) in Appendix H to this part.
(iii) Highlighting. Each affirmative answer for a feature required
to be disclosed under paragraphs (d)(1) and (2) of this section shall
be disclosed in bold text and in all capitalized letters. Any negative
answer shall be in nonbold text.
(iv) Order. The disclosures shall be provided, as applicable, in
the following order: rate increases under Sec. 226.38(d)(1)(i),
payment increases under Sec. 226.38(d)(1)(ii), interest-only payments
under Sec. 226.38(d)(2)(i), negative amortization under Sec.
226.38(d)(2)(ii), balloon payment under Sec. 226.38(d)(2)(iii),
prepayment penalty under Sec. 226.38(d)(1)(iii), demand feature under
Sec. 226.38(d)(2)(iv), no-documentation or low-documentation loans
under Sec. 226.38(d)(2)(v), and shared-equity or shared-appreciation
under Sec. 226.38(d)(2)(vi).
(e) Information about payments. A creditor shall disclose the
following information, grouped together under the heading ``More
Information About Your Payments'':
(1) Rate calculation. For an adjustable-rate mortgage, a statement
labeled ``Rate Calculation'' that describes the method used to
calculate the interest rate and the frequency of interest rate
adjustments. If the interest rate that applies at consummation is not
based on the index and margin that will be used to make later interest
rate adjustments, the statement must include the time period when the
initial interest rate expires.
(2) Rate and payment change limits. (i) For an adjustable-rate
mortgage, any limitations on the increase in the interest rate labeled
in bold type ``Rate Change Limits,'' together with a statement of the
maximum rate that may apply pursuant to such limitations during the
transaction's term to maturity.
(ii) If the regular periodic payment required under the terms of
the legal obligation may cause the principal balance to increase, any
limitations on the increase in the minimum payment amount and an
identification of the circumstances under which the minimum required
payment may recast to a fully amortizing payment labeled, in bold type,
``Payment Change Limits.''
(3) Escrow. If applicable, a statement, labeled in bold type
``Escrow,'' that explains that an escrow account is required for
property taxes and insurance, that the escrow payment is an estimate
that can change at any time, and that the consumer should consult the
good faith estimate of settlement costs and HUD-1 settlement statement
for more details. If no escrow is required, a statement of that fact
and that the consumer will have to pay property taxes, homeowners', and
other insurance directly.
(4) Mortgage insurance. If applicable, a statement, labeled in bold
type, ``Private Mortgage Insurance,'' that private mortgage insurance
is required and, if applicable, whether such insurance is included in
any escrow account. If other mortgage insurance is required, for
example, for a transaction insured by a government entity, the
statement shall be labeled, in bold type, ``Mortgage Insurance.''
(5) Total payments. A creditor shall disclose the following
information, grouped together under the subheading ``Total Payments,''
using that term:
(i) Total payments. The total payments amount, calculated based on
the number and amount of scheduled payments in accordance with the
requirements of Sec. 226.18(g), together with a statement that the
total payments is calculated on the assumption that market rates do not
change, if applicable, and that the consumer makes all payments as
scheduled. The statement must also specify the total
[[Page 43337]]
number of payments and whether the total payments amount includes
estimated escrow.
(ii) Interest and settlement charges. The interest and settlement
charges, using that term, calculated as the finance charge in
accordance with the requirements of Sec. 226.4 and expressed as a
dollar figure, together with a brief statement that the interest and
settlement charges amount represents part of the total payments amount.
The disclosed interest and settlement charges, and other disclosures
affected by the disclosed interest and settlement charges (including
the amount financed and annual percentage rate), shall be treated as
accurate if the amount disclosed as the interest and settlement
charges--
(A) Is understated by no more than $100;
(B) Is greater than the amount required to be disclosed.
(iii) Amount financed. The amount financed, using that term and
expressed as a dollar figure, together with a brief statement that the
interest and settlement charges and the amount financed are used to
calculate the annual percentage rate. The amount financed is calculated
by subtracting all prepaid finance charges from the loan amount
required to be disclosed under Sec. 226.38(a)(1).
(6) Form of disclosures; tabular format. The creditor must provide
the disclosures required by paragraphs (e)(1) through (5) of this
section in the form of a table, with headings, content, and format
substantially similar to Forms H-19(A), H-19(B), or H-19(C) in Appendix
H to this part. The table shall contain only the information required
or permitted by paragraphs (e)(1) through (e)(5).
(f) Additional disclosures. The creditor shall disclose the
following information, grouped together:
(1) No obligation statement. A statement that the consumer has no
obligation to accept the loan. If the creditor provides space for a
consumer's signature, a statement that a signature by the consumer only
confirms receipt of the disclosure statement.
(2) Security interest. A statement that the consumer could lose the
home if he or she is unable to make payments on the loan.
(3) No guarantee to refinance statement. A statement that there is
no guarantee the consumer can refinance the transaction to lower the
interest rate or monthly payments.
(4) Tax deductibility. For a transaction secured by a dwelling, if
the extension of credit may exceed the fair market value of the
dwelling, the creditor shall disclose that:
(i) The interest on the portion of the credit extension that is
greater than the fair market value of the dwelling may not be tax
deductible for Federal income tax purposes; and
(ii) The consumer should consult a tax adviser for further
information regarding the deductibility of interest and charges.
(5) Additional information and Web site. A statement that if the
consumer does not understand any disclosure required by this section
the consumer should ask questions, a statement that the consumer may
obtain additional information at the Web site of the Federal Reserve
Board, and a reference to that Web site.
(6) Format--(i) Location. The statements required by paragraph
(f)(1) of this section must be disclosed together. The disclosure
required by paragraph (f)(2) of this section must be made together with
the disclosure paragraph (f)(3) of this section. The statements
required by paragraph (f)(5) of this section must be made together.
(ii) Highlighting. The first statement required to be disclosed by
paragraphs (f)(1) and (f)(5) of this section, and the statement
required to be disclosed by paragraph (f)(2), must be disclosed in bold
text.
(iii) Form of disclosures. The creditor must provide the
disclosures required by paragraphs (f)(1) through (5) of this section
in a manner substantially similar to Forms H-19(A), H-19(B), or H-19(C)
in Appendix H to this part.
(g) Identification of creditor and loan originator--(1) Creditor.
The identity of the creditor making the disclosures.
(2) Loan originator. The loan originator's unique identifier, as
defined by the Secure and Fair Enforcement for Mortgage Licensing Act
of 2008 Sections 1503(3) and (12), 12 U.S.C. 5102(3) and (12).
(h) Credit insurance and debt cancellation and debt suspension
coverage. The disclosures specified in paragraphs (h)(1)-(10) of this
section, which shall be grouped together and substantially similar in
headings, content and format to Model Clauses H-17(A) and H-17(C) in
Appendix H to this part.
(1)(i) If the product is optional, the term ``OPTIONAL COSTS,'' in
capitalized and bold letters, along with the name of the program, in
bold letters; or
(ii) If the product is required, the name of the program, in bold
letters.
(2) If the product is optional, the term ``STOP,'' in capitalized
and bold letters, along with a statement that the consumer does not
have to buy the product to get the loan. The term ``not'' shall be in
bold text and underlined.
(3) A statement that if the consumer already has insurance, then
the policy or coverage may not provide the consumer with additional
benefits.
(4) A statement that other types of insurance may give the consumer
similar benefits and are often less expensive.
(5) (i) If the eligibility restrictions are limited to age and/or
employment, a statement that based on the creditor's review of the
consumer's age and/or employment status at this time, the consumer
would be eligible to receive benefits.
(ii) If there are other eligibility restrictions in addition to age
and/or employment, a statement that based on the creditor's review of
the consumer's age and/or employment status at this time, the consumer
may be eligible to receive benefits.
(6) If there are other eligibility restrictions in addition to age
and/or employment, such as pre-existing health conditions, a statement
that the consumer may not qualify to receive any benefits because of
other eligibility restrictions.
(7) If the product is a debt suspension agreement, a statement that
the obligation to pay loan principal and interest is only suspended,
and that interest will continue to accrue during the period of
suspension.
(8) A statement that the consumer may obtain additional information
about the product at the Web site of the Federal Reserve Board, and
reference to that Web site.
(9)(i) If the product is optional, a statement of the consumer's
request to purchase or enroll in the optional product and a statement
of the cost of the product expressed as a dollar amount per month or
per year, as applicable, together with the loan amount and the term of
the product in years; or
(ii) If the product is required, a statement that the product is
required, along with a statement of the cost of the product expressed
as a dollar amount per month or per year, as applicable, together with
the loan amount and the term of the product in years.
(iii) The cost, month or year, loan amount, and term of the product
shall be underlined.
(10) A designation for the signature of the consumer and the date
of the signing.
(i) Required deposit. If the creditor requires the consumer to
maintain a deposit as a condition of the specific transaction, a
statement that the annual
[[Page 43338]]
percentage rate does not reflect the effect of the required deposit. A
required deposit need not include:
(1) An escrow account for items such as taxes, insurance or
repairs; or
(2) A deposit that earns not less than 5 percent per year.
(j) Separate disclosures. The following information must be
provided separately from the other information required to be disclosed
under this section.
(1) Itemization of amount financed. The creditor shall provide one
of the following disclosures:
(i) A separate written itemization of the amount financed,
including:
(A) The amount of any proceeds distributed directly to the
consumer.
(B) The amount credited to the consumer's account with the
creditor.
(C) Any amounts paid to other persons by the creditor on the
consumer's behalf. The creditor shall identify those persons, except
that the following payees may be described using general terms and need
not be further identified: Public officials or government agencies,
credit reporting agencies, appraisers, and insurance companies.
(D) The prepaid finance charge.
(ii) A statement that the consumer has the right to receive a
written itemization of the amount financed, together with a space for
the consumer to indicate whether it is desired. If the consumer
requests it, the creditor shall provide an itemization that satisfies
paragraph (j)(1)(i) of this section at the same time as the other
disclosures required by this section.
(iii) A good faith estimate of settlement costs provided under the
Real Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq. (RESPA),
in connection with disclosures under this section delivered within
three business days of application pursuant to Sec. 226.19(a)(1), or
the HUD-1 settlement statement provided under RESPA, in connection with
disclosures under this section delivered three business days before
consummation pursuant to Sec. 226.19(a)(2). The alternative provided
by this paragraph (j)(1)(iii) is available whether or not those
disclosures are required by RESPA, but the HUD-1 settlement statement
satisfies this requirement only if it is provided to the consumer at
the time required by Sec. 226.19(a)(2).
(2) Rebate. If the obligation includes a finance charge other than
one computed from time to time by application of a rate to the unpaid
principal balance, a statement indicating whether or not the consumer
is entitled to a rebate of any finance charge if the obligation is
prepaid in full.
(3) Late payment. Any dollar or percentage charge that may be
imposed before maturity due to a late payment, other than a deferral or
extension charge.
(4) Property insurance. A statement that the consumer may obtain
property insurance from any insurer that is acceptable to the creditor.
(5) Contract reference. A statement that the consumer should refer
to the appropriate contract document for information about nonpayment,
default, the right to accelerate the maturity of the obligation, and
prepayment rebates and penalties. At the creditor's option, the
statement may also include a reference to the contract for further
information about security interests and about the creditor's policy
regarding assumption of the obligation.
(6) Assumption policy. A statement whether or not a subsequent
purchaser of the real property or dwelling from the consumer may be
permitted to assume the remaining obligation on its original terms.
12. Appendix G to Part 226, as amended on January 29, 2009 (74 FR
5422) is amended by:
A. Adding entries for G-16(C) and G-16(D) to the table of contents
at the beginning of the appendix; and
B. Adding new Model Clause G-16(C) and new Sample G-16(D) in
numerical order.
Appendix G to Part 226--Open-End Model Forms and Clauses
* * * * *
[rtrif]G-16(C) Credit Insurance, Debt Cancellation or Debt Suspension
Model Clause (Sec. 226.4(d)(1) and (d)(3))
G-16(D) Credit Insurance, Debt Cancellation or Debt Suspension Sample
(Sec. 226.4(d)(1) and (d)(3))[ltrif]
* * * * *
[rtrif]G-16(C) Credit Insurance, Debt Cancellation or Debt Suspension
Model Clause
OPTIONAL COSTS
(Name of Program)
STOP. You do not have to buy this product to get this loan.
If you have insurance already, this policy may not
provide you with any additional benefits.
Other types of insurance can give you similar benefits
and are often less expensive.
Based on our review of your age and/or employment
status at this time, you [would][may] be eligible to receive
benefits.
[However, you may not qualify to receive any benefits
because of other eligibility restrictions.]
To learn more about [credit insurance][debt cancellation
coverage][debt suspension coverage], go to (Board's Web site).
[ballot] Yes, I want to purchase optional (name of program) at an
additional cost of (cost) per (month or year) for a loan of (loan
amount) with a [policy/coverage] term of (term in years) years.
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Signature of Borrower(s)
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Date
G-16(D) Credit Insurance, Debt Cancellation or Debt Suspension Sample
OPTIONAL COSTS
Credit Life Insurance
STOP. You do not have to buy this product to get this loan.
If you have insurance already, this policy may not
provide you with any additional benefits.
Other types of insurance can give you similar benefits
and are often less expensive.
Based on our review of your age and/or employment
status at this time, you may be eligible to receive benefits.
However, you may not qualify to receive any benefits
because of other eligibility restrictions.
To learn more about credit insurance, go to http://www.xxx.gov.
[ballot] Yes, I want to purchase optional credit life insurance at
an additional cost of $72 per month for a loan of $100,000 with a
policy term of 10 years.
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Signature of Borrower(s)
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Date[ltrif]
13. Appendix H to Part 226, as amended on January 29, 2009 (74
FR 5441) is amended by:
A. Revising the table of contents at the beginning of the
appendix;
B. Republishing H-4(A);
C. Removing H-4(B), H-4(C) and H-4(D);
D. Republishing H-5;
E. Removing and reserving H-6;
F. Republishing H-7;
G. Removing and reserving H-13 through H-15;
H. Revising H-16; and
I. Adding new H-4(B) through H-4(L), H-17(C) and H-17(D), and H-
18 through H-23 in numerical order.
Appendix H to Part 226--Closed-End Model Forms and Clauses
* * * * *
H-4(A)--Variable-Rate Model Clauses (Sec. 226.18(f)[(1)])
H-4(B)--[Variable-Rate Model Clauses (Sec.
226.18(f)(2)][rtrif]Adjustable-Rate Loan Program Model Form (Sec.
226.19(b))[ltrif]
H-4(C)--[Variable-Rate Model Clauses (Sec.
226.19(b))][rtrif]Adjustable-Rate Loan Program Model Clauses (Sec.
226.19(b))[ltrif]
H-4(D)--[Variable-Rate Model Clauses (Sec.
226.20(c))][rtrif]Adjustable-Rate Loan Program Sample (Hybrid ARM)
(Sec. 226.19(b))[ltrif]
[rtrif]H-4(E)--Adjustable-Rate Loan Program Sample (Interest Only
ARM) (Sec. 226.19(b))
[[Page 43339]]
H-4(F)--Adjustable-Rate Loan Program Sample (Payment Option ARM)
(Sec. 226.19(b))
H-4(G)--Adjustable-Rate Adjustment Notice Model Form (Sec.
226.20(c))
H-4(H)--Adjustable-Rate Adjustment Notice Model Clauses (Sec.
226.20(c))
H-4(I)--Adjustable-Rate Adjustment Notice Sample (Interest Only ARM)
(Sec. 226.20(c))
H-4(J)--Adjustable-Rate Adjustment Notice Sample (Hybrid ARM) (Sec.
226.20(c))
H-4(K)--Adjustable-Rate Annual Notice Model Form (Sec. 226.20(c))
H-4(L)--Negative Amortization Monthly Disclosure Model Form (Sec.
226.20(d))[ltrif]
* * * * *
H-6--[Assumption Policy Model Clause (Sec.
226.18(q))][rtrif]Reserved[ltrif]
* * * * *
H-13--[Mortgage with Demand Feature Sample][rtrif]Reserved[ltrif]
H-14--[Variable-Rate Mortgage Sample (Sec.
226.19(b))][rtrif]Reserved[ltrif]
H-15--[Graduated-Payment Mortgage Sample][rtrif]Reserved[ltrif]
H-16--[Mortgage Sample (Sec. 226.32)][rtrif]Section 32 Loan Model
Clauses (Sec. 226.32(c))[ltrif]
* * * * *
[rtrif]H-17(C)--Credit Insurance, Debt Cancellation or Debt
Suspension Model Clause (Sec. 226.4(d)(1), (d)(3) and Sec.
226.38(h))
H-17(D)--Credit Insurance, Debt Cancellation or Debt Suspension
Sample (Sec. 226.4(d)(1), (d)(3), and Sec. 226.38(h))
H-18--Creditor-Placed Property Insurance Model Clause (Sec.
226.20(e))
H-19(A)--Fixed Rate Mortgage Model Form (Sec. 226.38)
H-19(B)--Adjustable-Rate Mortgage Model Form (Sec. 226.38)
H-19(C)--Mortgage with Negative Amortization Model Form (Sec.
226.38)
H-19(D)--Fixed Rate Mortgage with Balloon Payment Sample (Sec.
226.38)
H-19(E)--Fixed Rate Mortgage with Interest Only Sample (Sec.
226.38)
H-19(F)--Step-Payment Mortgage Sample (Sec. 226.38)
H-19(G)--Hybrid Adjustable-Rate Mortgage Sample (Sec. 226.38)
H-19(H)--Adjustable-Rate Mortgage with Interest Only Sample (Sec.
226.38)
H-19(I)--Adjustable-Rate Mortgage with Payment Options Sample (Sec.
226.38)
H-20--Balloon Payment Model Clause (Sec. 226.38(c)(5))
H-21--Introductory Rate Model Clause (Sec. 226.38(c)(2)(iii))
H-22--Key Questions About Risk Model Clauses (Sec. 226.38(d))
H-23--Separate Disclosure Model Clauses (Sec. 226.38(j)(2)-
(6))[ltrif]
* * * * *
H-4(A)--Variable Rate Model Clauses
The annual percentage rate may increase during the term of this
transaction if:
[the prime interest rate of (creditor) increases.]
[the balance in your deposit account falls below $--------.]
[you terminate your employment with (employer).]
[The interest rate will not increase above----%.]
[The maximum interest rate increase at one time will be----%.]
[The rate will not increase more than once every (time period).]
Any increase will take the form of:
[higher payment amounts.]
[more payments of the same amount.]
[a larger amount due at maturity.]
Example based on the specific transaction
[If the interest rate increases by----% in (time period),
[your regular payments will increase to $--------.]
[you will have to make----additional payments.]
[your final payment will increase to $--------.]]
Example based on a typical transaction
[If your loan were for $--------at----% for (term) and the rate
increased to----% in (time period),
[your regular payments would increase by $--------.]
[you would have to make----additional payments.]
[your final payment would increase by $--------.]]
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H-4(C)--Adjustable-Rate Loan Program Model Clauses
Interest Rate and Payment
(a) Limits on rate or payment changes
[If a rate cap prevents us from adding part of an interest rate,
we can add that increase at a later adjustment date.]
(b) Conversion feature
[Conversion Feature
You have the option to convert your loan to a fixed rate loan
for (length of time). If you convert your loan to a fixed rate loan,
the [rate] [payment] may not increase more than (frequency)[ or ----
% overall]. [You may have a higher interest rate when you convert to
a fixed rate loan.]
[You may have to pay fees when you convert to a fixed rate
loan.]]
(c) Preferred rate
[Preferred Rate
The interest rate is a preferred rate that could [increase]
[decrease] by----% if (description of event).] [You could pay fees
if [one or more] (description of event(s)) occur(s).]
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H-4(H) Adjustable-Rate Adjustment Notice Model Clauses
Disclosure of New Monthly Payment
[Your new payment covers all of the interest that you owe this
month, but none of the principal, and therefore will not reduce your
loan balance. The payment needed to fully pay off your loan by the
end of the loan term at the new interest rate is $--------.]
[Your new payment covers only part of the interest that you owe
this month, and therefore unpaid interest will be added to your loan
balance. The payment needed to fully pay off your loan by the end of
the loan term at the new interest rate is $--------.]
[Your new payment covers only part of the interest that you owe
this month, and therefore the term of your loan will increase. The
payment needed to fully pay off your loan by the end of the previous
loan term at the new interest rate is $--------.]
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* * * * *
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[[Page 43348]]
* * * * *
H-5--Demand Feature Model Clauses
This obligation [is payable on demand.][has a demand feature.]
[All disclosures are based on an assumed maturity of one year.]
H-6--[Assumption Policy Model Clause][rtrif]Reserved[ltrif]
[Assumption: Someone buying your house [may, subject to
conditions, be allowed to][cannot] assume the remainder of the
mortgage on the original terms.]
H-7--Required Deposit Model Clause
The annual percentage rate does not take into account your
required deposit.
* * * * *
H-13--[Mortgage With Demand Feature Sample][rtrif]Reserved[ltrif]
H-14--[Variable-Rate Mortgage Sample][rtrif]Reserved[ltrif]
H-15--[Graduated-Payment Mortgage Sample][rtrif]Reserved[ltrif]
H-16--[Mortgage Sample][rtrif]Section 32 Loan Model Clauses[ltrif]
[You are not required to complete this agreement merely because
you have received these disclosures or have signed a loan
application.
If you obtain this loan, the lender will have a mortgage on your
home.
YOU COULD LOSE YOUR HOME, AND ANY MONEY YOU HAVE PUT INTO IT, IF
YOU DO NOT MEET YOUR OBLIGATIONS UNDER THE LOAN.]
[rtrif]IF YOU ARE UNABLE TO MAKE THE PAYMENTS ON THIS LOAN, YOU
COULD LOSE YOUR HOME.
You have no obligation to accept this loan. Your signature below
only confirms that you have received this form.[ltrif]
You are borrowing $-------- (optional credit insurance is
[square] is not [square] included in this amount).
The annual percentage rate on your loan will be:--------%.
Your regular (frequency) payment will be: $--------.
[At the end of your loan, will still owe use: $ (balloon
payment).]
[Your interest rate may increase. Increase in the interest rate
could increase your payment. The highest amount your payment could
increase is to $--------.]
* * * * *
[rtrif]H-17(C)--Credit Insurance, Debt Cancellation or Debt Suspension
Model Clause
[OPTIONAL COSTS]
(Name of Program)
[STOP. You do not have to buy this product to get this loan.]
If you have insurance already, this policy may not
provide you with any additional benefits.
Other types of insurance can give you similar benefits
and are often less expensive.
Based on our review of your age and/or employment
status at this time, you [would][may] be eligible to receive
benefits.
[However, you may not qualify to receive any benefits
because of other eligibility restrictions.]
To learn more about [credit insurance][debt cancellation
coverage][debt suspension coverage], go to (Web site of the Federal
Reserve Board).
[ballot] [Yes, I want to purchase optional (name of program) at an
additional cost of (cost) per (month or year) for a loan of (loan
amount) with a (policy/coverage) term of (term in years) years.]
[(Name of program) is required and costs (cost) per (month or
year) for a loan of (loan amount) with a [policy/coverage] term of
(term in years) years.]
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Signature of Borrower(s)
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Date
H-17(D)--Credit Insurance, Debt Cancellation or Debt Suspension Sample
OPTIONAL COSTS
Credit Life Insurance
STOP. You do not have to buy this product to get this loan.
If you have insurance already, this policy may not
provide you with any additional benefits.
Other types of insurance can give you similar benefits
and are often less expensive.
Based on our review of your age and/or employment
status at this time, you may be eligible to receive benefits.
However, you may not qualify to receive any benefits
because of other eligibility restrictions.
To learn more about credit insurance, go to www.xxx.gov.
[ballot] Yes, I want to purchase optional credit life insurance at
an additional cost of $72 per month for a loan of $100,000 with a
policy term of 10 years.
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Signature of Borrower(s)
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Date
H-18--Creditor-Placed Property Insurance Model Clause
(Creditor name and contact information)
Re: (loan number) and (property address/description)
Under our agreement, you must maintain adequate insurance
coverage on the property. Our records show that your insurance
policy has expired or been cancelled, and we do not have evidence
that you have obtained new insurance coverage. Under our agreement,
we can buy property insurance on your behalf and charge you for the
cost as early as (date). Therefore, we request that you provide us
with proof of insurance by (description of procedure for providing
proof of insurance).
Please consider the following facts about the insurance policy
that we buy:
The cost of this insurance policy is $-------- per year
and is probably significantly higher than the cost of insurance you
can buy through your own insurance agent.
This insurance policy may not provide as much coverage
as an insurance policy you buy through your own insurance agent].
If you have any questions, please contact us at (contact
information).
[[Page 43349]]
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BILLING CODE 6210-01-C
[[Page 43367]]
H-20--Balloon Payment Model Clause
[Final Balloon Payment due (date): $--------]
H-21--Introductory Rate Model Clause
[Introductory Rate Notice
You have a discounted introductory rate of --------% that ends after
(period).
In the (date), even if market rates do not change, this rate will
increase to----%.]
H-22--Key Questions About Risk Model Clauses
(a) Interest only feature
[Will any of my monthly payments be interest-only?]
[YES. Your (frequency) payments for the first (period) of the
loan][This loan gives you the choice to make (frequency) payments
that] cover the interest you owe each month, but none of the
principal. Making these (frequency) payments means your loan amount
will stay the same and you will be no closer to having it paid off.]
(b) Negative amortization feature
[Even if I make my monthly payments, could my loan balance
increase?]
[YES. Your minimum payment covers only part of the interest you
owe each (period) and none of the principal. The unpaid interest
will be added to your loan amount, which over time will increase the
total amount you are borrowing and cause you to lose equity in your
home.]
(c) Balloon payment feature
[Will I owe a balloon payment?]
[YES. You will owe a balloon payment of $--------, due in (date
of payment).]
(d) Demand feature
[Can my lender demand full repayment at any time?]
[YES. We can demand that you pay off the full amount of your
loan. We will give you at least (period) notice.]
(e) No-documentation or low-documentation feature
[Will my loan have a higher rate or fees because I did not
document my employment, income or other assets?]
[YES. If you provide more documentation, you could decrease your
interest rate or fees.]
(f) Shared-equity or shared-appreciation feature
[Do I have to share any equity I gain?]
[YES. We are entitled to ----% of any gain you make when you
sell or refinance this property.]
H-23--Separate Disclosure Model Clauses
(a) Rebate
[If you pay off or refinance your loan, or sell this property
early, you will receive a refund of some of the interest and fees
you have paid on your loan.]
(b) Late Payment
[If you make a payment more than (number of days) days late, you
may be charged a penalty equal to [$--------][----%].]
(c) Property Insurance
[You may get property insurance from any insurer that is
acceptable to us.]
(d) Contract Reference
Read your loan contract to find out what happens if you stop
making payments, default, or pay off or refinance the loan early.
(e) Assumption Policy
[If you sell your home after you take out this loan, we may
permit the new buyer to take over the payments on your
mortgage.][ltrif]
14. In Supplement I to Part 226, as amended on July 30, 2008 (73
FR 44604), and on January 29, 2009 (74 FR 5450):
A. Under Section 226.2--Definitions and Rules of Construction,
2(a)(24) Residential mortgage transaction, paragraphs 1, 2, and
5(ii) and 5(iii) are revised.
B. Section 226.4--Finance Charge, Section 226.17--General
Disclosure Requirements, Section 226.18--Content of Disclosures,
Section 226.19--Certain Mortgage and Variable-Rate Transactions, and
Section 226.20--Subsequent Disclosure Requirements are revised.
C. Under Section 226.24--Advertising, 24(c) Advertisement of
rate of finance charge, paragraph 4 is revised.
D. Under Section 226.25--Record Retention, 25(a) General rule,
new paragraph 5 is added.
E. Under Section 226.30--Limitation on Rates, paragraph 1 is
revised.
F. Under Section 226.32--Requirements for Certain Closed-End
Home Mortgages, 32(b) Definitions is removed, 32(c) Disclosures,
paragraph 1 is removed, and 32(c)(5) Amount borrowed, paragraph 1 is
revised.
G. Under Section 226.35--Prohibited Acts or Practices in
Connection With Higher-Priced Mortgage Loans, 35(a) Higher-priced
mortgage loans, Paragraph 35(a)(2), paragraph 4 is revised and new
paragraph 5 is added.
H. Under Section 226.36--Prohibited Acts or Practices in
Connection with Credit Secured by a Consumer's Principal Dwelling,
the heading is revised, 36(a) Mortgage broker defined, the heading
is revised, paragraph 1 is revised, and new paragraph 2 is added,
36(b) Misrepresentation of value of consumer's principal dwelling,
the heading is revised, and new 36(d) Prohibited payments to loan
originators and 36(e) Prohibition on steering are added.
I. New Section 226.37--Special Disclosure Requirements for
Closed-End Mortgages and Section 226.38--Content of Disclosures for
Closed-End Mortgages are added.
J. Under Appendices G and H--Open-End and Closed-End Model Forms
and Clauses, paragraphs 1 and 2 are revised.
K. Appendix H--Closed-End Model Forms and Clauses is revised.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
SUBPART A--GENERAL
* * * * *
Section 226.2--Definitions and Rules of Construction
* * * * *
2(a)(24) Residential mortgage transaction.
1. Relation to other sections. This term is important in
[five][rtrif]three[ltrif] provisions in the regulation:
i. Section 226.4(c)(7)--exclusions from the finance charge
ii. Section 226.15(f)--exemption from the right of rescission
[Section 226.18(q)--whether or not the obligation is assumable]
[Section 226.20(b)--disclosure requirements for assumptions]
iii. Section 226.23(f)--exemption from the right of rescission
2. Lien status. The definition is not limited to first-lien
transactions. [For example, a consumer might assume a paid-down first
mortgage (or borrow part of the purchase price) and borrow the balance
of the purchase price from a creditor who takes a second mortgage. The
second mortgage transaction is a ``residential mortgage transaction''
if the dwelling purchased is the consumer's principal residence.]
* * * * *
5. Acquisition. * * *
ii. Examples of new transactions involving a previously acquired
dwelling include the financing of a balloon payment due under a land
sale contract and an extension of credit made to a joint owner of
property to buy out the other joint owner's interest. [In these
instances, disclosures are not required under Sec. 226.18(q
(assumability policies). However, the][rtrif]The[ltrif] rescission
rules of Sec. Sec. 226.15 and 226.23 do apply to these new
transactions.
[iii. In other cases, the disclosure and rescission rules do not
apply. For example, where a buyer enters into a written agreement with
the creditor holding the seller's mortgage, allowing the buyer to
assume the mortgage, if the buyer had previously purchased the property
and agreed with the seller to make the mortgage payments, Sec.
226.20(b) does not apply (assumptions involving residential
mortgages).]
* * * * *
Sec. 226.4--Finance Charge.
4(a) Definition.
1. Charges in comparable cash transactions. Charges imposed
uniformly in cash and credit transactions are not finance charges. In
determining whether an item is a finance charge, the creditor should
compare the credit transaction in question with a similar cash
transaction. A creditor financing the sale of property or services may
compare charges with
[[Page 43368]]
those payable in a similar cash transaction by the seller of the
property or service.
i. For example, the following items are not finance charges:
A. Taxes, license fees, or registration fees paid by both cash and
credit customers.
B. Discounts that are available to cash and credit customers, such
as quantity discounts.
C. Discounts available to a particular group of consumers because
they meet certain criteria, such as being members of an organization or
having accounts at a particular financial institution. This is the case
even if an individual must pay cash to obtain the discount, provided
that credit customers who are members of the group and do not qualify
for the discount pay no more than the nonmember cash customers.
D. Charges for a service policy, auto club membership, or policy of
insurance against latent defects offered to or required of both cash
and credit customers for the same price.
ii. In contrast, the following items are finance charges:
A. Inspection and handling fees for the staged disbursement of
construction-loan proceeds.
B. Fees for preparing a Truth in Lending disclosure statement, if
permitted by law (for example, the Real Estate Settlement Procedures
Act prohibits such charges in certain transactions secured by real
property).
C. Charges for a required maintenance or service contract imposed
only in a credit transaction.
iii. If the charge in a credit transaction exceeds the charge
imposed in a comparable cash transaction, only the difference is a
finance charge. For example:
A. If an escrow agent is used in both cash and credit sales of real
estate and the agent's charge is $100 in a cash transaction and $150 in
a credit transaction, only $50 is a finance charge.
2. Costs of doing business. Charges absorbed by the creditor as a
cost of doing business are not finance charges, even though the
creditor may take such costs into consideration in determining the
interest rate to be charged or the cash price of the property or
service sold. However, if the creditor separately imposes a charge on
the consumer to cover certain costs, the charge is a finance charge if
it otherwise meets the definition. For example:
i. A discount imposed on a credit obligation when it is assigned by
a seller-creditor to another party is not a finance charge as long as
the discount is not separately imposed on the consumer. (See Sec.
226.4(b)(6).)
ii. A tax imposed by a State or other governmental body on a
creditor is not a finance charge if the creditor absorbs the tax as a
cost of doing business and does not separately impose the tax on the
consumer. (For additional discussion of the treatment of taxes, see
other commentary to Sec. 226.4(a).)
3. Forfeitures of interest. If the creditor reduces the interest
rate it pays or stops paying interest on the consumer's deposit account
or any portion of it for the term of a credit transaction (including,
for example, an overdraft on a checking account or a loan secured by a
certificate of deposit), the interest lost is a finance charge. (See
the commentary to Sec. 226.4(c)(6).) For example:
i. A consumer borrows $5,000 for 90 days and secures it with a
$10,000 certificate of deposit paying 15% interest. The creditor
charges the consumer an interest rate of 6% on the loan and stops
paying interest on $5,000 of the $10,000 certificate for the term of
the loan. The interest lost is a finance charge and must be reflected
in the annual percentage rate on the loan.
ii. However, the consumer must be entitled to the interest that is
not paid in order for the lost interest to be a finance charge. For
example:
A. A consumer wishes to buy from a financial institution a $10,000
certificate of deposit paying 15% interest but has only $4,000. The
financial institution offers to lend the consumer $6,000 at an interest
rate of 6% but will pay the 15% interest only on the amount of the
consumer's deposit, $4,000. The creditor's failure to pay interest on
the $6,000 does not result in an additional finance charge on the
extension of credit, provided the consumer is entitled by the deposit
agreement with the financial institution to interest only on the amount
of the consumer's deposit.
B. A consumer enters into a combined time deposit/credit agreement
with a financial institution that establishes a time deposit account
and an open-end line of credit. The line of credit may be used to
borrow against the funds in the time deposit. The agreement provides
for an interest rate on any credit extension of, for example, 1%. In
addition, the agreement states that the creditor will pay 0% interest
on the amount of the time deposit that corresponds to the amount of the
credit extension(s). The interest that is not paid on the time deposit
by the financial institution is not a finance charge (and therefore
does not affect the annual percentage rate computation).
4. Treatment of transaction fees on credit card plans. Any
transaction charge imposed on a cardholder by a card issuer is a
finance charge, regardless of whether the issuer imposes the same,
greater, or lesser charge on withdrawals of funds from an asset account
such as a checking or savings account. For example:
i. Any charge imposed on a credit cardholder by a card issuer for
the use of an automated teller machine (ATM) to obtain a cash advance
(whether in a proprietary, shared, interchange, or other system) is a
finance charge regardless of whether the card issuer imposes a charge
on its debit cardholders for using the ATM to withdraw cash from a
consumer asset account, such as a checking or savings account.
ii. Any charge imposed on a credit cardholder for making a purchase
or obtaining a cash advance outside the United States, with a foreign
merchant, or in a foreign currency is a finance charge, regardless of
whether a charge is imposed on debit cardholders for such transactions.
The following principles apply in determining what is a foreign
transaction fee and the amount of the fee:
A. Included are fees imposed when transactions are made in a
foreign currency and converted to U.S. dollars; fees imposed when
transactions are made in U.S. dollars outside the U.S.; and fees
imposed when transactions are made (whether in a foreign currency or in
U.S. dollars) with a foreign merchant, such as via a merchant's Web
site. For example, a consumer may use a credit card to make a purchase
in Bermuda, in U.S. dollars, and the card issuer may impose a fee
because the transaction took place outside the United States.
B. Included are fees imposed by the card issuer and fees imposed by
a third party that performs the conversion, such as a credit card
network or the card issuer's corporate parent. (For example, in a
transaction processed through a credit card network, the network may
impose a 1 percent charge and the card-issuing bank may impose an
additional 2 percent charge, for a total of a 3 percentage point
foreign transaction fee being imposed on the consumer.)
C. Fees imposed by a third party are included only if they are
directly passed on to the consumer. For example, if a credit card
network imposes a 1 percent fee on the card issuer, but the card issuer
absorbs the fee as a cost of doing business (and only passes it on to
consumers in the general sense that the interest and fees are imposed
on all its customers to recover its costs), then the fee is not a
foreign transaction fee and
[[Page 43369]]
need not be disclosed. In another example, if the credit card network
imposes a 1 percent fee for a foreign transaction on the card issuer,
and the card issuer imposes this same fee on the consumer who engaged
in the foreign transaction, then the fee is a foreign transaction fee
and a finance charge.
D. A card issuer is not required to disclose a fee imposed by a
merchant. For example, if the merchant itself performs the currency
conversion and adds a fee, this fee need not be disclosed by the card
issuer. Under Sec. 226.9(d), a card issuer is not obligated to
disclose finance charges imposed by a party honoring a credit card,
such as a merchant, although the merchant is required to disclose such
a finance charge if the merchant is subject to the Truth in Lending Act
and Regulation Z.
E. The foreign transaction fee is determined by first calculating
the dollar amount of the transaction by using a currency conversion
rate outside the card issuer's and third party's control. Any amount in
excess of that dollar amount is a foreign transaction fee. Conversion
rates outside the card issuer's and third party's control include, for
example, a rate selected from the range of rates available in the
wholesale currency exchange markets, an average of the highest and
lowest rates available in such markets, or a government-mandated or
government-managed exchange rate (or a rate selected from a range of
such rates).
F. The rate used for a particular transaction need not be the same
rate that the card issuer (or third party) itself obtains in its
currency conversion operations. In addition, the rate used for a
particular transaction need not be the rate in effect on the date of
the transaction (purchase or cash advance).
5. Taxes.
i. Generally, a tax imposed by a State or other governmental body
solely on a creditor is a finance charge if the creditor separately
imposes the charge on the consumer.
ii. In contrast, a tax is not a finance charge (even if it is
collected by the creditor) if applicable law imposes the tax:
A. Solely on the consumer;
B. On the creditor and the consumer jointly;
C. On the credit transaction, without indicating which party is
liable for the tax; or
D. On the creditor, if applicable law directs or authorizes the
creditor to pass the tax on to the consumer. (For purposes of this
section, if applicable law is silent as to passing on the tax, the law
is deemed not to authorize passing it on.)
iii. For example, a stamp tax, property tax, intangible tax, or any
other State or local tax imposed on the consumer, or on the credit
transaction, is not a finance charge even if the tax is collected by
the creditor.
iv. In addition, a tax is not a finance charge if it is excluded
from the finance charge by another provision of the regulation or
commentary (for example, if the tax is imposed uniformly in cash and
credit transactions).
[rtrif]6. Transactions with no seller. In a transaction where there
is no seller, such as a refinancing of an existing extension of credit
described in Sec. 226.20(a), there is no comparable cash transaction.
Thus, the exclusion from the finance charge of charges of a type
payable in a comparable cash transaction does not apply to such
transactions.[ltrif]
4(a)(1) Charges by third parties.
1. Choosing the provider of a required service. An example of a
third-party charge included in the finance charge is the cost of
required mortgage insurance, even if the consumer is allowed to choose
the insurer.
2. Annuities associated with reverse mortgages. Some creditors
offer annuities in connection with a reverse-mortgage transaction. The
amount of the premium is a finance charge if the creditor requires the
purchase of the annuity incident to the credit. Examples include the
following:
i. The credit documents reflect the purchase of an annuity from a
specific provider or providers.
ii. The creditor assesses an additional charge on consumers who do
not purchase an annuity from a specific provider.
iii. The annuity is intended to replace in whole or in part the
creditor's payments to the consumer either immediately or at some
future date.
4(a)(2) Special rule; closing agent charges.
1. General. This rule applies to charges by a third party serving
as the closing agent for the particular loan. An example of a closing
agent charge included in the finance charge is a courier fee where the
creditor requires the use of a courier.
2. Required closing agent. If the creditor requires the use of a
closing agent, fees charged by the closing agent are included in the
finance charge only if the creditor requires the particular service,
requires the imposition of the charge, or retains a portion of the
charge. Fees charged by a third-party closing agent may be otherwise
excluded from the finance charge under Sec. 226.4. For example, a fee
that would be paid in a comparable cash transaction may be excluded
under Sec. 226.4(a). A charge for conducting or attending a closing is
a finance charge and may be excluded only if the charge is included in
and is incidental to a lump-sum fee excluded under Sec. 226.4(c)(7).
[rtrif]3. Closed-end mortgage transactions. Comments 4(a)(2)-1 and
4(a)(2)-2 do not apply to closed-end transactions secured by real
property or a dwelling, pursuant to Sec. 226.4(g).[ltrif]
4(a)(3) Special rule; mortgage broker fees.
1. General. A fee charged by a mortgage broker is excluded from the
finance charge if it is the type of fee that is also excluded when
charged by the creditor. For example, to exclude an application fee
from the finance charge under Sec. 226.4(c)(1), a mortgage broker must
charge the fee to all applicants for credit, whether or not credit is
extended.
2. Coverage. This rule applies to charges paid by consumers to a
mortgage broker in connection with a consumer credit transaction
secured by real property or a dwelling.
3. Compensation by lender. The rule requires all mortgage broker
fees to be included in the finance charge. Creditors sometimes
compensate mortgage brokers under a separate arrangement with those
parties. Creditors may draw on amounts paid by the consumer, such as
points or closing costs, to fund their payment to the broker.
Compensation paid by a creditor to a mortgage broker under an agreement
is not included as a separate component of a consumer's total finance
charge (although this compensation may be reflected in the finance
charge if it comes from amounts paid by the consumer to the creditor
that are finance charges, such as points and interest).
4(b) Examples of finance charges.
1. Relationship to other provisions. Charges or fees shown as
examples of finance charges in Sec. 226.4(b) may be excludable under
Sec. 226.4(c), (d), or (e). For example[:
i. Premiums][rtrif], premiums[ltrif] for credit life insurance,
shown as an example of a finance charge under Sec. 226.4(b)(7), may be
excluded if the requirements of Sec. 226.4(d)(1) are met. [rtrif]They
may not be excluded, however, in transactions subject to Sec.
226.4(g).[ltrif]
[ii. Appraisal fees mentioned in Sec. 226.4(b)(4) are excluded for
real property or residential mortgage transactions under Sec.
226.4(c)(7).]
Paragraph 4(b)(2).
1. Checking account charges. A checking or transaction account
charge imposed in connection with a credit feature is a finance charge
under
[[Page 43370]]
Sec. 226.4(b)(2) to the extent the charge exceeds the charge for a
similar account without a credit feature. If a charge for an account
with a credit feature does not exceed the charge for an account without
a credit feature, the charge is not a finance charge under Sec.
226.4(b)(2). To illustrate:
i. A $5 service charge is imposed on an account with an overdraft
line of credit (where the institution has agreed in writing to pay an
overdraft), while a $3 service charge is imposed on an account without
a credit feature; the $2 difference is a finance charge. (If the
difference is not related to account activity, however, it may be
excludable as a participation fee. See the commentary to Sec.
226.4(c)(4).
ii. A $5 service charge is imposed for each item that results in an
overdraft on an account with an overdraft line of credit, while a $25
service charge is imposed for paying or returning each item on a
similar account without a credit feature; the $5 charge is not a
finance charge.
Paragraph 4(b)(3).
1. Assumption fees. The assumption fees mentioned in Sec.
226.4(b)(3) are finance charges only when the assumption occurs and the
fee is imposed on the new buyer. The assumption fee is a finance charge
in the new buyer's transaction.
Paragraph 4(b)(5).
1. Credit loss insurance. Common examples of the insurance against
credit loss mentioned in Sec. 226.4(b)(5) are mortgage guaranty
insurance, holder in due course insurance, and repossession insurance.
Such premiums must be included in the finance charge only for the
period that the creditor requires the insurance to be maintained.
2. Residual value insurance. Where a creditor requires a consumer
to maintain residual value insurance or where the creditor is a
beneficiary of a residual value insurance policy written in connection
with an extension of credit (as is the case in some forms of automobile
balloon-payment financing, for example), the premiums for the insurance
must be included in the finance charge for the period that the
insurance is to be maintained. If a creditor pays for residual value
insurance and absorbs the payment as a cost of doing business, such
costs are not considered finance charges. (See comment 4(a)-2.)
Paragraphs 4(b)(7) and (b)(8).
1. Pre-existing insurance policy. The insurance discussed in Sec.
226.4(b)(7) and (b)(8) does not include an insurance policy (such as a
life or an automobile collision insurance policy) that is already owned
by the consumer, even if the policy is assigned to or otherwise made
payable to the creditor to satisfy an insurance requirement. Such a
policy is not ``written in connection with'' the transaction, as long
as the insurance was not purchased for use in that credit extension,
since it was previously owned by the consumer.
2. Insurance written in connection with a transaction. Credit
insurance sold before or after an open-end [(not home-secured)] plan is
opened is considered ``written in connection with a credit
transaction.'' Insurance sold after consummation in closed-end credit
transactions [or after the opening of a home-equity plan subject to the
requirements of Sec. 226.5b] is not considered ``written in connection
with'' the credit transaction if the insurance is written because of
the consumer's default (for example, by failing to obtain or maintain
required property insurance) or because the consumer requests insurance
after consummation [or the opening of a home-equity plan subject to the
requirements of Sec. 226.5b] (although credit-sale disclosures may be
required for the insurance sold after consummation if it is financed).
3. Substitution of life insurance. The premium for a life insurance
policy purchased and assigned to satisfy a credit life insurance
requirement must be included in the finance charge, but only to the
extent of the cost of the credit life insurance if purchased from the
creditor or the actual cost of the policy (if that is less than the
cost of the insurance available from the creditor). If the creditor
does not offer the required insurance, the premium to be included in
the finance charge is the cost of a policy of insurance of the type,
amount, and term required by the creditor.
4. Other insurance. Fees for required insurance not of the types
described in Sec. 226.4(b)(7) and (b)(8) are finance charges and are
not excludable. For example:
i. The premium for a hospitalization insurance policy, if it is
required to be purchased only in a credit transaction, is a finance
charge.
Paragraph 4(b)(9).
1. Discounts for payment by other than credit. The discounts to
induce payment by other than credit mentioned in Sec. 226.4(b)(9)
include, for example, the following situation:
i. The seller of land offers individual tracts for $10,000 each. If
the purchaser pays cash, the price is $9,000, but if the purchaser
finances the tract with the seller the price is $10,000. The $1,000
difference is a finance charge for those who buy the tracts on credit.
2. Exception for cash discounts.
i. Creditors may exclude from the finance charge discounts offered
to consumers for using cash or another means of payment instead of
using a credit card or an open-end plan. The discount may be in
whatever amount the seller desires, either as a percentage of the
regular price (as defined in section 103(z) of the act, as amended) or
a dollar amount. Pursuant to section 167(b) of the act, this provision
applies only to transactions involving an open-end credit plan or a
credit card (whether open-end or closed-end credit is extended on the
card). The merchant must offer the discount to prospective buyers
whether or not they are cardholders or members of the open-end credit
plan. The merchant may, however, make other distinctions. For example:
A. The merchant may limit the discount to payment by cash and not
offer it for payment by check or by use of a debit card.
B. The merchant may establish a discount plan that allows a 15%
discount for payment by cash, a 10% discount for payment by check, and
a 5% discount for payment by a particular credit card. None of these
discounts is a finance charge.
ii. Pursuant to section 171(c) of the act, discounts excluded from
the finance charge under this paragraph are also excluded from
treatment as a finance charge or other charge for credit under any
State usury or disclosure laws.
3. Determination of the regular price.
i. The regular price is critical in determining whether the
difference between the price charged to cash customers and credit
customers is a discount or a surcharge, as these terms are defined in
amended section 103 of the act. The regular price is defined in section
103 of the act as ``* * * the tag or posted price charged for the
property or service if a single price is tagged or posted, or the price
charged for the property or service when payment is made by use of an
open-end credit plan or a credit card if either (1) no price is tagged
or posted, or (2) two prices are tagged or posted * * *.''
ii. For example, in the sale of motor vehicle fuel, the tagged or
posted price is the price displayed at the pump. As a result, the
higher price (the open-end credit or credit card price) must be
displayed at the pump, either alone or along with the cash price.
Service station operators may designate separate pumps or separate
islands as being for either cash or credit purchases and display only
the appropriate prices at the various pumps. If a pump is capable of
displaying on its meter either a cash or a credit price depending upon
the
[[Page 43371]]
consumer's means of payment, both the cash price and the credit price
must be displayed at the pump. A service station operator may display
the cash price of fuel by itself on a curb sign, as long as the sign
clearly indicates that the price is limited to cash purchases.
4(b)(10) Debt cancellation and debt suspension fees.
1. Definition. Debt cancellation coverage provides for payment or
satisfaction of all or part of a debt when a specified event occurs.
The term ``debt cancellation coverage'' includes guaranteed automobile
protection, or ``GAP,'' agreements, which pay or satisfy the remaining
debt after property insurance benefits are exhausted. Debt suspension
coverage provides for suspension of the obligation to make one or more
payments on the date(s) otherwise required by the credit agreement,
when a specified event occurs. The term ``debt suspension'' does not
include loan payment deferral arrangements in which the triggering
event is the bank's unilateral decision to allow a deferral of payment
and the borrower's unilateral election to do so, such as by skipping or
reducing one or more payments (``skip payments'').
2. Coverage written in connection with a transaction. Coverage sold
after consummation in closed-end credit transactions [or after the
opening of a home-equity plan subject to the requirements of Sec.
226.5b] is not ``written in connection with'' the credit transaction if
the coverage is written because the consumer requests coverage after
consummation [or the opening of a home-equity plan subject to the
requirements of Sec. 226.5b] (although credit-sale disclosures may be
required for the coverage sold after consummation if it is financed).
Coverage sold before or after an open-end [(not home-secured)] plan is
opened is considered ``written in connection with a credit
transaction.''
4(c) Charges excluded from the finance charge.
Paragraph 4(c)(1).
1. Application fees. An application fee that is excluded from the
finance charge is a charge to recover the costs associated with
processing applications for credit. The fee may cover the costs of
services such as credit reports, credit investigations, and appraisals.
The creditor is free to impose the fee in only certain of its loan
programs, such as [rtrif]automobile[ltrif] [mortgage] loans. However,
if the fee is to be excluded from the finance charge under Sec.
226.4(c)(1), it must be charged to all applicants, not just to
applicants who are approved or who actually receive credit.
Paragraph 4(c)(2).
1. Late-payment charges.
i. Late-payment charges can be excluded from the finance charge
under Sec. 226.4(c)(2) whether or not the person imposing the charge
continues to extend credit on the account or continues to provide
property or services to the consumer. In determining whether a charge
is for actual unanticipated late payment on a 30-day account, for
example, factors to be considered include:
A. The terms of the account. For example, is the consumer required
by the account terms to pay the account balance in full each month? If
not, the charge may be a finance charge.
B. The practices of the creditor in handling the accounts. For
example, regardless of the terms of the account, does the creditor
allow consumers to pay the accounts over a period of time without
demanding payment in full or taking other action to collect? If no
effort is made to collect the full amount due, the charge may be a
finance charge.
ii. Section 226.4(c)(2) applies to late-payment charges imposed for
failure to make payments as agreed, as well as failure to pay an
account in full when due.
2. Other excluded charges. Charges for ``delinquency, default, or a
similar occurrence'' include, for example, charges for reinstatement of
credit privileges or for submitting as payment a check that is later
returned unpaid.
Paragraph 4(c)(3).
1. Assessing interest on an overdraft balance. A charge on an
overdraft balance computed by applying a rate of interest to the amount
of the overdraft is not a finance charge, even though the consumer
agrees to the charge in the account agreement, unless the financial
institution agrees in writing that it will pay such items.
Paragraph 4(c)(4).
1. Participation fees--periodic basis. The participation fees
described in Sec. 226.4(c)(4) do not necessarily have to be formal
membership fees, nor are they limited to credit card plans. The
provision applies to any credit plan in which payment of a fee is a
condition of access to the plan itself, but it does not apply to fees
imposed separately on individual closed-end transactions. The fee may
be charged on a monthly, annual, or other periodic basis; a one-time,
nonrecurring fee imposed at the time an account is opened is not a fee
that is charged on a periodic basis, and may not be treated as a
participation fee.
2. Participation fees--exclusions. Minimum monthly charges, charges
for nonuse of a credit card, and other charges based on either account
activity or the amount of credit available under the plan are not
excluded from the finance charge by Sec. 226.4(c)(4). Thus, for
example, a fee that is charged and then refunded to the consumer based
on the extent to which the consumer uses the credit available would be
a finance charge. (See the commentary to Sec. 226.4(b)(2). Also, see
comment 14(c)-2 for treatment of certain types of fees excluded in
determining the annual percentage rate for the periodic statement.)
Paragraph 4(c)(5).
1. Seller's points. The seller's points mentioned in Sec.
226.4(c)(5) include any charges imposed by the creditor upon the non-
creditor seller of property for providing credit to the buyer or for
providing credit on certain terms. These charges are excluded from the
finance charge even if they are passed on to the buyer, for example, in
the form of a higher sales price. Seller's points are frequently
involved in real estate transactions guaranteed or insured by
governmental agencies. A commitment fee paid by a non-creditor seller
(such as a real estate developer) to the creditor should be treated as
seller's points. Buyer's points (that is, points charged to the buyer
by the creditor), however, are finance charges.
2. Other seller-paid amounts. Mortgage insurance premiums and other
finance charges are sometimes paid at or before consummation or
settlement on the borrower's behalf by a non-creditor seller. The
creditor should treat the payment made by the seller as seller's points
and exclude it from the finance charge if, based on the seller's
payment, the consumer is not legally bound to the creditor for the
charge. A creditor who gives disclosures before the payment has been
made should base them on the best information reasonably available.
Paragraph 4(c)(6).
1. Lost interest. Certain federal and State laws mandate a
percentage differential between the interest rate paid on a deposit and
the rate charged on a loan secured by that deposit. In some situations,
because of usury limits the creditor must reduce the interest rate paid
on the deposit and, as a result, the consumer loses some of the
interest that would otherwise have been earned. Under Sec.
226.4(c)(6), such ``lost interest'' need not be included in the finance
charge. This rule applies only to an interest reduction imposed because
a rate differential is required by law and a usury limit precludes
compliance by any other means. If the creditor imposes a differential
that exceeds that required, only the lost interest attributable to the
excess amount is a finance charge. (See the commentary to Sec.
226.4(a).)
[[Page 43372]]
Paragraph 4(c)(7).
1. [Real estate or residential mortgage transaction] [rtrif]Open-
end real-property-secured credit[ltrif]charges. The list of charges in
Sec. 226.4(c)(7) applies [rtrif]to open-end credit plans secured by
real property and open-end residential mortgage transactions[ltrif]
[both to residential mortgage transactions (which may include, for
example, the purchase of a mobile home) and to other transactions
secured by real estate.] The fees are excluded from the finance charge
even if the services for which the fees are imposed are performed by
the creditor's employees rather than by a third party. In addition, the
cost of verifying or confirming information connected to the item is
also excluded. For example, credit-report fees cover not only the cost
of the report but also the cost of verifying information in the report.
In all cases, charges excluded under Sec. 226.4(c)(7) must be bona
fide and reasonable.
2. Lump-sum charges. If a lump sum charged for several services
includes a charge that is not excludable, a portion of the total should
be allocated to that service and included in the finance charge.
However, a lump sum charged for conducting or attending a closing (for
example, by a lawyer or a title company) is excluded from the finance
charge if the charge is primarily for services related to items listed
in Sec. 226.4(c)(7) (for example, reviewing or completing documents),
even if other incidental services such as explaining various documents
or disbursing funds for the parties are performed. The entire charge is
excluded even if a fee for the incidental services would be a finance
charge if it were imposed separately.
3. Charges assessed during the loan term. [rtrif]Charges[ltrif]
[Real estate or residential mortgage transaction charges] excluded
under Sec. 226.4(c)(7) are those charges imposed solely in connection
with the initial decision to grant credit. This would include, for
example, a fee to search for tax liens on the property or to determine
if flood insurance is required. The exclusion does not apply to fees
for services to be performed periodically during the loan term,
regardless of when the fee is collected. For example, a fee for one or
more determinations during the loan term of the current tax-lien status
or flood-insurance requirements is a finance charge, regardless of
whether the fee is imposed at closing, or when the service is
performed. If a creditor is uncertain about what portion of a fee to be
paid at consummation or loan closing is related to the initial decision
to grant credit, the entire fee may be treated as a finance charge.
4(d) Insurance and debt cancellation and debt suspension coverage.
1. General. Section 226.4(d) permits insurance premiums and charges
and debt cancellation and debt suspension charges to be excluded from
the finance charge. The required disclosures must be made in writing,
except as provided in Sec. 226.4(d)(4). The rules on location of
insurance and debt cancellation and debt suspension disclosures for
closed-end transactions are in Sec. 226.17(a). For purposes of Sec.
226.4(d), all references to insurance also include debt cancellation
and debt suspension coverage unless the context indicates otherwise.
2. Timing of disclosures. If disclosures are given early, for
example under Sec. 226.17(f)[or Sec. 226.19(a)], the creditor must
redisclose if the actual premium is different at the time of
consummation. If insurance disclosures are not given at the time of
early disclosure and insurance is in fact written in connection with
the transaction, the disclosures under Sec. 226.4(d) must be made in
order to exclude the premiums from the finance charge.
3. Premium rate increases. The creditor should disclose the premium
amount based on the rates currently in effect and need not designate it
as an estimate even if the premium rates may increase. An increase in
insurance rates after consummation of a closed-end credit transaction
or during the life of an open-end credit plan does not require
redisclosure in order to exclude the additional premium from treatment
as a finance charge.
4. Unit-cost disclosures.
i. Open-end credit. The premium or fee for insurance or debt
cancellation or debt suspension for the initial term of coverage may be
disclosed on a unit-cost basis in open-end credit transactions. The
cost per unit should be based on the initial term of coverage, unless
one of the options under comment 4(d)-12 is available.
ii. Closed-end credit. One of the transactions for which unit-cost
disclosures (such as 50 cents per year for each $100 of the amount
financed) may be used in place of the total insurance premium involves
a particular kind of insurance plan. For example, a consumer with a
current indebtedness of $8,000 is covered by a plan of credit life
insurance coverage with a maximum of $10,000. The consumer requests an
additional $4,000 loan to be covered by the same insurance plan. Since
the $4,000 loan exceeds, in part, the maximum amount of indebtedness
that can be covered by the plan, the creditor may properly give the
insurance-cost disclosures on the $4,000 loan on a unit-cost basis.
5. Required credit life insurance; debt cancellation or suspension
coverage. Credit life, accident, health, or loss-of-income insurance,
and debt cancellation and suspension coverage described in Sec.
226.4(b)(10), must be voluntary in order for the premium or charges to
be excluded from the finance charge. Whether the insurance or coverage
is in fact required or optional is a factual question. If the insurance
or coverage is required, the premiums must be included in the finance
charge, whether the insurance or coverage is purchased from the
creditor or from a third party. If the consumer is required to elect
one of several options--such as to purchase credit life insurance, or
to assign an existing life insurance policy, or to pledge security such
as a certificate of deposit--and the consumer purchases the credit life
insurance policy, the premium must be included in the finance charge.
(If the consumer assigns a preexisting policy or pledges security
instead, no premium is included in the finance charge. The security
interest would be disclosed under Sec. 226.6(a)(4), Sec.
226.6(b)(5)(ii), or Sec. 226.18(m). See the commentary to Sec.
226.4(b)(7) and (b)(8).)
6. Other types of voluntary insurance. Insurance is not credit
life, accident, health, or loss-of-income insurance if the creditor or
the credit account of the consumer is not the beneficiary of the
insurance coverage. If the premium for such insurance is not imposed by
the creditor as an incident to or a condition of credit, it is not
covered by Sec. 226.4.
7. Signatures. If the creditor offers a number of insurance options
under Sec. 226.4(d), the creditor may provide a means for the consumer
to sign or initial for each option, or it may provide for a single
authorizing signature or initial with the options selected designated
by some other means, such as a check mark. The insurance authorization
may be signed or initialed by any consumer, as defined in Sec.
226.2(a)(11), or by an authorized user on a credit card account.
8. Property insurance. To exclude property insurance premiums or
charges from the finance charge, the creditor must allow the consumer
to choose the insurer and disclose that fact. This disclosure must be
made whether or not the property insurance is available from or through
the creditor. The requirement that an option be given does not require
that the insurance be readily available from other sources. The premium
or charge must be disclosed only if the consumer elects to purchase the
insurance from [rtrif]or through[ltrif] the creditor; in such a case,
the creditor must also disclose the term of the property insurance
coverage if it is less
[[Page 43373]]
than the term of the obligation. [rtrif]Insurance is available ``from
or through a creditor'' if it is available from the creditor's
affiliate, as defined under the Bank Holding Company Act, 12 U.S.C.
1841(k).[ltrif]
9. Single-interest insurance. Blanket and specific single-interest
coverage are treated the same for purposes of the regulation. A charge
for either type of single-interest insurance may be excluded from the
finance charge if:
i. The insurer waives any right of subrogation.
ii. The other requirements of Sec. 226.4(d)(2) are met. This
includes, of course, giving the consumer the option of obtaining the
insurance from a person of the consumer's choice. The creditor need not
ascertain whether the consumer is able to purchase the insurance from
someone else.
10. Single-interest insurance defined. The term single-interest
insurance as used in the regulation refers only to the types of
coverage traditionally included in the term vendor's single-interest
insurance (or VSI), that is, protection of tangible property against
normal property damage, concealment, confiscation, conversion,
embezzlement, and skip. Some comprehensive insurance policies may
include a variety of additional coverages, such as repossession
insurance and holder-in-due-course insurance. These types of coverage
do not constitute single-interest insurance for purposes of the
regulation, and premiums for them do not qualify for exclusion from the
finance charge under Sec. 226.4(d). If a policy that is primarily VSI
also provides coverages that are not VSI or other property insurance, a
portion of the premiums must be allocated to the non-excludable
coverages and included in the finance charge. However, such allocation
is not required if the total premium in fact attributable to all of the
non-VSI coverages included in the policy is $1.00 or less (or $5.00 or
less in the case of a multiyear policy).
11. Initial term.
i. The initial term of insurance or debt cancellation or debt
suspension coverage determines the period for which a premium amount
must be disclosed, unless one of the options discussed under comment
4(d)-12 is available. For purposes of Sec. 226.4(d), the initial term
is the period for which the insurer or creditor is obligated to provide
coverage, even though the consumer may be allowed to cancel the
coverage or coverage may end due to nonpayment before that term
expires.
ii. For example:
A. The initial term of a property insurance policy on an automobile
that is written for one year is one year even though premiums are paid
monthly and the term of the credit transaction is four years.
B. The initial term of an insurance policy is the full term of the
credit transaction if the consumer pays or finances a single premium in
advance.
12. Initial term; alternative.
i. General. A creditor has the option of providing cost disclosures
on the basis of one year of insurance or debt cancellation or debt
suspension coverage instead of a longer initial term (provided the
premium or fee is clearly labeled as being for one year) if:
A. The initial term is indefinite or not clear, or
B. The consumer has agreed to pay a premium or fee that is assessed
periodically but the consumer is under no obligation to continue the
coverage, whether or not the consumer has made an initial payment.
ii. Open-end plans. For open-end plans, a creditor also has the
option of providing unit-cost disclosure on the basis of a period that
is less than one year if the consumer has agreed to pay a premium or
fee that is assessed periodically, for example monthly, but the
consumer is under no obligation to continue the coverage.
iii. Examples. To illustrate:
A. A credit life insurance policy providing coverage for a
[rtrif]seven-year automobile[ltrif] [30-year mortgage] loan has an
initial term of [rtrif]seven[ltrif] [30] years, even though premiums
are paid monthly and the consumer is not required to continue the
coverage. Disclosures may be based on the initial term, but the
creditor also has the option of making disclosures on the basis of
coverage for an assumed initial term of one year.
13. Loss-of-income insurance. The loss-of-income insurance
mentioned in Sec. 226.4(d) includes involuntary unemployment
insurance, which provides that some or all of the consumer's payments
will be made if the consumer becomes unemployed involuntarily.
[rtrif]14. Age or employment eligibility criteria. A premium or
charge for credit life, accident, health, or loss-of-income insurance,
or debt cancellation or debt suspension coverage is voluntary and can
be excluded from the finance charge only if the consumer meets the
product's age or employment eligibility criteria at the time of
enrollment. To exclude such a premium or charge from the finance
charge, the creditor must determine at the time of enrollment that the
consumer is eligible for the product under the product's age or
employment eligibility restrictions. The creditor may use reasonably
reliable evidence of the consumer's age or employment status to satisfy
this condition. Reasonably reliable evidence of a consumer's age would
include using the date of birth on the consumer's credit application,
on the driver's license or other government-issued identification, or
on the credit report. Reasonably reliable evidence of a consumer's
employment status would include the consumer's information on a credit
application, an Internal Revenue Service Form W-2, tax returns, payroll
receipts, or other evidence such as a letter or e-mail from the
consumer or the consumer's employer. If the consumer does not meet the
product's age or employment eligibility criteria at the time of
enrollment, then the premium or charge is not voluntary. In such
circumstances, the premium or charge is a finance charge. If the
creditor offers a bundled product (such as credit life insurance
combined with credit involuntary unemployment insurance) and the
consumer is not eligible for all of the bundled products, then the
creditor must either: (1) treat the entire premium or charge for the
bundled product as a finance charge, or (2) offer the consumer the
option of selecting only the products for which the consumer is
eligible and exclude the premium or charge from the finance charge if
the consumer chooses an optional product for which the consumer meets
the age or employment eligibility criteria at the time of
enrollment.[ltrif]
4(d)(3) Voluntary debt cancellation or debt suspension fees.
1. General. Fees charged for the specialized form of debt
cancellation agreement known as guaranteed automobile protection
(``GAP'') agreements must be disclosed according to Sec. 226.4(d)(3)
rather than according to Sec. 226.4(d)(2) for property insurance.
2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by
providing a disclosure that refers to debt cancellation or debt
suspension coverage whether or not the coverage is considered
insurance. Creditors may use the model credit insurance disclosures
only if the debt cancellation or debt suspension coverage constitutes
insurance under State law. (See Model Clauses and Samples at G-16 and
H-17 in Appendix G and Appendix H to part 226 for guidance on how to
provide the disclosure required by Sec. 226.4(d)(3)(iii) for debt
suspension products.)
3. Multiple events. If debt cancellation or debt suspension
coverage for two or more events is provided at a single charge, the
entire charge may be excluded from the finance charge if at least one
of the events is accident or loss
[[Page 43374]]
of life, health, or income and the conditions specified in Sec.
226.4(d)(3) or, as applicable, Sec. 226.4(d)(4), are satisfied.
4. Disclosures in programs combining debt cancellation and debt
suspension features. If the consumer's debt can be cancelled under
certain circumstances, the disclosure may be modified to reflect that
fact. The disclosure could, for example, state (in addition to the
language required by Sec. 226.4(d)(3)(iii)) that ``In some
circumstances, my debt may be cancelled.'' However, the disclosure
would not be permitted to list the specific events that would result in
debt cancellation.
4(d)(4) Telephone purchases.
1. Affirmative request. A creditor would not satisfy the
requirement to obtain a consumer's affirmative request if the
``request'' was a response to a script that uses leading questions or
negative consent. A question asking whether the consumer wishes to
enroll in the credit insurance or debt cancellation or suspension plan
and seeking a yes-or-no response (such as ``Do you want to enroll in
this optional debt cancellation plan?'') would not be considered
leading.
4(e) Certain security interest charges.
1. Examples.
i. Excludable charges. Sums must be actually paid to public
officials to be excluded from the finance charge under Sec.
226.4(e)(1) and (e)(3). Examples are charges or other fees required for
filing or recording security agreements, mortgages [rtrif](for open-end
credit; but see Sec. 226.4(g) regarding closed-end mortgage
credit)[ltrif], continuation statements, termination statements, and
similar documents, as well as intangible property or other taxes even
when the charges or fees are imposed by the state solely on the
creditor and charged to the consumer (if the tax must be paid to record
a security agreement). (See comment 4(a)-5 regarding the treatment of
taxes, generally.)
ii. Charges not excludable. If the obligation is between the
creditor and a third party (an assignee, for example), charges or other
fees for filing or recording security agreements, mortgages,
continuation statements, termination statements, and similar documents
relating to that obligation are not excludable from the finance charge
under this section.
2. Itemization. The various charges described in Sec. 226.4(e)(1)
and (e)(3) may be totaled and disclosed as an aggregate sum, or they
may be itemized by the specific fees and taxes imposed. If an aggregate
sum is disclosed, a general term such as security interest fees or
filing fees may be used.
3. Notary fees. In order for a notary fee to be excluded under
Sec. 226.4(e)(1), all of the following conditions must be met:
i. The document to be notarized is one used to perfect, release, or
continue a security interest.
ii. The document is required by law to be notarized.
iii. A notary is considered a public official under applicable law.
iv. The amount of the fee is set or authorized by law.
4. Non-filing insurance. The exclusion in Sec. 226.4(e)(2) is
available only if non-filing insurance is purchased. If the creditor
collects and simply retains a fee as a sort of ``self-insurance''
against non-filing, it may not be excluded from the finance charge. If
the non-filing insurance premium exceeds the amount of the fees
excludable from the finance charge under Sec. 226.4(e)(1), only the
excess is a finance charge. For example:
i. The fee for perfecting a security interest is $5.00 and the fee
for releasing the security interest is $3.00. The creditor charges
$10.00 for non-filing insurance. Only $8.00 of the $10.00 is excludable
from the finance charge.
4(f) Prohibited offsets.
1. Earnings on deposits or investments. The rule that the creditor
shall not deduct any earnings by the consumer on deposits or
investments applies whether or not the creditor has a security interest
in the property.
[rtrif]4(g) Special rule; mortgage transactions.
1. Applicability of commentary to mortgages. The staff commentary
under Sec. Sec. 226.4(a)(2) and 226.4(c) through (e) (other than that
under Sec. Sec. 226.4(c)(2), 226.4(c)(5), and 226.4(d)(2)) does not
apply to closed-end transactions secured by real property or a
dwelling. The staff commentary under Sec. Sec. 226.4(a) (other than
paragraph (2) of that section), 226.4(c)(2), 226.4(c)(5), and
226.4(d)(2), however, does apply to such transactions.
2. Third-party charges. Charges imposed by third parties are
finance charges if they fit the general definition under Sec.
226.4(a). Thus, if a third-party charge is payable directly or
indirectly by the consumer and imposed directly or indirectly by the
creditor as an incident to the extension of credit, it is a finance
charge unless it would be payable in a comparable cash transaction. For
example, appraisal and credit report fees are finance charges because
they meet the definition in Sec. 226.4(a). This test generally does
not depend on whether the creditor requires the service for which the
charge is imposed. In addition, charges imposed by closing agents
required by the creditor, whether their own or those of third parties
they retain, generally are finance charges unless otherwise excluded.
(Note that Sec. 226.4(a)(2) does not apply to closed-end transactions
secured by real property or a dwelling, pursuant to Sec. 226.4(g).)
Insurance premiums generally are finance charges, whether imposed by a
closing agent or another insurer, although premiums for property
insurance are excluded if Sec. 226.4(d)(2) is satisfied. Premiums for
credit insurance (or fees for debt cancellation or debt suspension
agreements) and premiums for lender's coverage under a title insurance
policy are finance charges because they are imposed as an incident to
the extension of credit. In contrast, premiums for owner's title
insurance coverage are not finance charges because they are not imposed
as an incident to the extension of credit.
3. Charges in comparable cash transactions. While the exclusions in
Sec. 226.4(c) through (e), other than Sec. Sec. 226.4(c)(5) and
226.4(d)(2) are inapplicable to closed-end transactions secured by real
property or a dwelling, charges in connection with such transactions
that are payable in a comparable cash transaction are not finance
charges. See comment 4(a)-1. For example, property taxes and fees or
taxes imposed to record the deed evidencing transfer from the seller to
the buyer of title to the property securing the transaction are not
finance charges because they would be paid even if no credit were
extended to finance the purchase. In contrast, fees or taxes imposed to
record the mortgage, deed of trust, or other security instrument
evidencing the creditor's security interest in the property securing
the transaction are finance charges because they would not be incurred
were it not for the extension of credit.
* * * * *
Subpart C--Closed-End Credit
Sec. 226.17--General Disclosure Requirements.
17(a) Form of Disclosures
Paragraph 17(a)(1)
1. Clear and conspicuous. This standard requires that disclosures
be in a reasonably understandable form. For example, while the
regulation requires no mathematical progression or format, the
disclosures must be presented in a way that does not obscure the
relationship of the terms to each other. In addition, although no
minimum type size is mandated, the disclosures must be legible, whether
typewritten, handwritten, or printed by computer.
[[Page 43375]]
2. Segregation of disclosures. The disclosures may be grouped
together and segregated from other information in a variety of ways.
For example, the disclosures may appear on a separate sheet of paper or
may be set off from other information on the contract or other
documents:
[][rtrif]i.[ltrif] By outlining them in a box
[][rtrif]ii.[ltrif] By bold print dividing lines
[][rtrif]iii.[ltrif] By a different color background
[][rtrif]iv.[ltrif] By a different type style
[(The general segregation requirement described in this
subparagraph does not apply to the disclosures required under
Sec. Sec. 226.19(b) and 226.20(c) although the disclosures must be
clear and conspicuous.)]
3. Location. The regulation imposes no specific location
requirements on the segregated disclosures. For example:
[][rtrif]i.[ltrif] They may appear on a disclosure
statement separate from all other material.
[][rtrif]ii.[ltrif] They may be placed on the same document
with the credit contract or other information, so long as they are
segregated from that information.
[][rtrif]iii.[ltrif] They may be shown on the front or back
of a document.
[][rtrif]iv.[ltrif] They need not begin at the top of a
page.
[][rtrif]v.[ltrif] They may be continued from one page to
another.
4. Content of segregated disclosures. Footnotes 37 and 38 contain
exceptions to the requirement that the disclosures under Sec. 226.18
be segregated from material that is not directly related to those
disclosures. Footnote 37 lists the items that may be added to the
segregated disclosures, even though not directly related to those
disclosures. Footnote 38 lists the items required under Sec. 226.18
that may be deleted from the segregated disclosures and appear
elsewhere. Any one or more of these additions or deletions may be
combined and appear either together with or separate from the
segregated disclosures. The itemization of the amount financed under
Sec. 226.18(c), however, must be separate from the other segregated
disclosures under Sec. 226.18. If a creditor chooses to include the
security interest charges required to be itemized under Sec. 226.4(e)
and Sec. 226.18(o) in the amount financed itemization, it need not
list these charges elsewhere.
5. Directly Related. [rtrif]Except in a transaction secured by real
property or a dwelling, t[ltrif][T]he segregated disclosures may, at
the creditor's option, include any information that is directly related
to those disclosures. [rtrif](See the commentary to Sec. 226.37(a)(2)
for a discussion of directly related information for transactions
secured by real property or a dwelling.)[ltrif] The following is
directly related information [rtrif]for a transaction not secured by
real property or a dwelling[ltrif]:
i. A description of a grace period after which a late payment
charge will be imposed. For example, the disclosure given under Sec.
226.18(l) may state that a late charge will apply to ``any payment
received more than 15 days after the due date.''
ii. A statement that the transaction is not secured. For example,
the creditor may add a category labelled ``unsecured'' or ``not
secured'' to the security interest disclosures given under Sec.
226.18(m).
iii. The basis for any estimates used in making disclosures. For
example, if the maturity date of a loan depends solely on the
occurrence of a future event, the creditor may indicate that the
disclosures assume that event will occur at a certain time.
iv. The conditions under which a demand feature may be exercised.
For example, in a loan subject to demand after five years, the
disclosures may state that the loan will become payable on demand in
five years.
v. An explanation of the use of pronouns or other references to the
parties to the transaction. For example, the disclosures may state,
```You' refers to the customer and `we' refers to the creditor.''
vi. Instructions to the creditor or its employees on the use of a
multiple-purpose form. For example, the disclosures may state, ``Check
box if applicable.''
vii. A statement that the borrower may pay a minimum finance charge
upon prepayment in a simple-interest transaction. For example, when
State law prohibits penalties, but would allow a minimum finance charge
in the event of prepayment, the creditor may make the Sec.
226.18(k)(1) disclosure by stating, ``You may be charged a minimum
finance charge.''
viii. A brief reference to negative amortization in variable-rate
transactions. For example, in the variable-rate disclosures, the
creditor may include a short statement such as ``Unpaid interest will
be added to principal.'' (See the commentary to Sec.
226.18(f)[(1)(iii)][rtrif](3)[ltrif].)
ix. A brief caption identifying the disclosures. For example, the
disclosures may bear a general title such as ``Federal Truth in Lending
Disclosures'' or a descriptive title such as ``Real Estate Loan
Disclosures.''
x. A statement that a due-on-sale clause or other conditions on
assumption are contained in the loan document. For example, the
disclosure given under Sec. 226.18(q) may state, ``Someone buying your
home may, subject to conditions in the due-on-sale clause contained in
the loan document, assume the remainder of the mortgage on the original
terms.''
xi. If a State or Federal law prohibits prepayment penalties and
excludes the charging of interest after prepayment from coverage as a
penalty, a statement that the borrower may have to pay interest for
some period after prepayment in full. The disclosure may state, for
example, ``If you prepay your loan on other than the regular
installment date, you may be assessed interest charges until the end of
the month.''
xii. More than one hypothetical example under Sec.
226.18(f)[(1)(iv)][rtrif](4)[ltrif] in transactions with more than one
variable-rate feature. For example, in a variable-rate transaction with
an option permitting consumers to convert to a fixed-rate transaction,
the disclosures may include an example illustrating the effects of an
increase resulting from conversion in addition to the example
illustrating an increase resulting from changes in the index.
xiii. [rtrif]Reserved.[ltrif][The disclosures set forth under
section 226.18(f)(1) for variable-rate transactions subject to section
226.18(f)(2).]
xiv. [rtrif][Reserved][ltrif][A statement whether or not a
subsequent purchase of the property securing an obligation may be
permitted to assume the remaining obligation on its original terms.]
xv. A late-payment fee disclosure under Sec. 226.18(l) on a single
payment loan.
xvi. The notice set forth in [Sec. 226.19(a)(4)][rtrif]Sec.
226.38(f)(1)[ltrif], in a closed-end transaction not subject to Sec.
226.19(a)(1)(i). In a mortgage transaction subject to Sec.
19(a)(1)(i), the creditor must disclose the notice contained in [Sec.
226.19(a)(4)][rtrif]Sec. 226.38(f)(1)[ltrif] grouped together with the
disclosures made under [Sec. 226.18. See comment 19(a)(4)-
1.][rtrif]Sec. 226.38.[ltrif]
6. Multiple-purpose forms. [rtrif]Except for transactions secured
by real property or a dwelling, t[ltrif][T]he creditor may design a
disclosure statement that can be used for more than one type of
transaction, so long as the required disclosures for individual
transactions are clear and conspicuous. (See the Commentary to
appendices G and H for a discussion of the treatment of disclosures
that do not apply to specific transactions.) Any disclosure listed in
Sec. 226.18 (except the itemization of the amount financed under Sec.
226.18(c)) may
[[Page 43376]]
be included on a standard disclosure statement even though not all of
the creditor's transactions include those features. For example, the
statement may include:
[][rtrif]i.[ltrif] The variable rate disclosure under Sec.
226.18(f).
[][rtrif]ii.[ltrif] The demand feature disclosure under
Sec. 226.18(i).
[][rtrif]iii.[ltrif] A reference to the possibility of a
security interest arising from a spreader clause, under Sec.
226.18(m).
[ The assumption policy disclosure under Sec. 226.18(q).]
[][rtrif]iv.[ltrif] The required deposit disclosure under
Sec. 226.18(r).
7. Balloon payment financing with leasing characteristics. In
certain credit sale or loan transactions, a consumer may reduce the
dollar amount of the payments to be made during the course of the
transaction by agreeing to make, at the end of the loan term, a large
final payment based on the expected residual value of the property. The
consumer may have a number of options with respect to the final
payment, including, among other things, retaining the property and
making the final payment, refinancing the final payment, or
transferring the property to the creditor in lieu of the final payment.
Such transactions may have some of the characteristics of lease
transactions subject to Regulation M, but are considered credit
transactions where the consumer assumes the indicia of ownership,
including the risks, burdens and benefits of ownership upon
consummation. These transactions are governed by the disclosure
requirements of this regulation instead of Regulation M. Creditors
should not include in the segregated Truth in Lending disclosures
additional information. Thus, disclosures should show the large final
payment in the payment schedule and should not, for example, reflect
the other options available to the consumer at maturity. [rtrif]For
extensions of credit secured by real property or a dwelling, the large
final payment in the payment schedule should be disclosed in accordance
with the requirements under section 226.38(c), as applicable.[ltrif]
Paragraph 17(a)(2).
1. When disclosures must be more conspicuous. The following rules
apply to the requirement that the terms annual percentage rate and
finance charge be shown more conspicuously:
[][rtrif]i.[ltrif] The terms must be more conspicuous only
in relation to the other required disclosures under Sec. 226.18. For
example, when the disclosures are included on the contract document,
those 2 terms need not be more conspicuous as compared to the heading
on the contract document or information required by State law.
[][rtrif]ii.[ltrif] The terms need not be more conspicuous
except as part of the finance charge and annual percentage rate
disclosures under Sec. 226.18(d) and (e), although they may, at the
creditor's option, be highlighted wherever used in the required
disclosures. For example, the terms may, but need not, be highlighted
when used in disclosing a prepayment penalty under Sec. 226.18(k) or a
required deposit under Sec. 226.18(r).
[][rtrif]iii.[ltrif] The creditor's identity under Sec.
226.18(a) may, but need not, be more prominently displayed than the
finance charge and annual percentage rate.
[][rtrif]iv.[ltrif] The terms need not be more conspicuous
than figures (including, for example, numbers, percentages, and dollar
signs)
2. Making disclosures more conspicuous. The terms finance charge
and annual percentage rate may be made more conspicuous in any way that
highlights them in relation to the other required disclosures. For
example, they may be:
[][rtrif]i.[ltrif] Capitalized when other disclosures are
printed in capital and lower case.
[][rtrif]ii.[ltrif] Printed in larger type, bold print or
different type face.
[][rtrif]iii.[ltrif] Printed in a contrasting color.
[][rtrif]iv.[ltrif] Underlined.
[][rtrif]v.[ltrif] Set off with asterisks.
17(b) Time of disclosures.
1. Consummation. As a general rule, disclosures must be made before
``consummation'' of the transaction. The disclosures [rtrif]for
transactions not secured by real property or a dwelling[ltrif] need not
be given by any particular time before consummation[, except in certain
mortgage transactions and variable-rate transactions secured by the
consumer's principal dwelling with a term greater than one year under
Sec. 226.19.][rtrif] Pre-consummation disclosures for transactions
secured by real property or a dwelling must be provided in accordance
with the timing requirements in Sec. 226.19.[ltrif] (See the
commentary to Sec. 226.2(a)(13) regarding the definition of
consummation.)
2. Converting open-end to closed-end credit. Except for home equity
plans subject to Sec. 226.5b in which the agreement provides for a
repayment phase, if an open-end credit account is converted to a
closed-end transaction under a written agreement with the consumer, the
creditor must provide a set of closed-end credit disclosures before
consummation of the closed-end transaction. ([rtrif]See the commentary
to Sec. 226.19(a) for a discussion of disclosure timing requirements
for closed-end transactions secured by real property or a
dwelling.[ltrif] See the commentary to Sec. 226.19(b) for the timing
rules for additional disclosures required upon the conversion to [a
variable-rate transaction secured by a consumer's principal dwelling
with a term greater than one year][rtrif]an adjustable-rate transaction
secured by real property or a dwelling[ltrif].) If consummation of the
closed-end transaction occurs at the same time as the consumer enters
into the open-end agreement, the closed-end credit disclosures may be
given at the time of conversion. If disclosures are delayed until
conversion and the closed-end transaction has a variable-rate feature,
disclosures should be based on the rate in effect at the time of
conversion. (See the commentary to Sec. 226.5 regarding conversion of
closed-end to open-end credit.)
3. Disclosures provided on credit contracts. Creditors must give
the required disclosures to the consumer in writing, in a form that the
consumer may keep, before consummation of the transaction. See Sec.
226.17(a)(1) and (b). Sometimes the disclosures are placed on the same
document with the credit contract. Creditors are not required to give
the consumer two separate copies of the document before consummation,
one for the consumer to keep and a second copy for the consumer to
execute. The disclosure requirement is satisfied if the creditor gives
a copy of the document containing the unexecuted credit contract and
disclosures to the consumer to read and sign; and the consumer receives
a copy to keep at the time the consumer becomes obligated. It is not
sufficient for the creditor merely to show the consumer the document
containing the disclosures before the consumer signs and becomes
obligated. The consumer must be free to take possession of and review
the document in its entirety before signing.
i. Example. To illustrate:
A. A creditor gives a consumer a multiple-copy form containing a
credit agreement and TILA disclosures. The consumer reviews and signs
the form and returns it to the creditor, who separates the copies and
gives one copy to the consumer to keep. The creditor has satisfied the
disclosure requirement.
17(c) Basis of disclosures and use of estimates.
[Paragraph ]17(c)(1)[rtrif]Legal obligation[ltrif].
1. [Legal obligation.][rtrif]General.[ltrif] The disclosures shall
reflect the credit terms to which the parties are legally bound as of
the outset of the transaction. In the case of disclosures required
under
[[Page 43377]]
Sec. 226.20(c), the disclosures shall reflect the credit terms to
which the parties are legally bound when the disclosures are provided.
The legal obligation is determined by applicable State law or other
law. [rtrif]The disclosures should be based on the assumption that the
consumer will abide by the terms of the legal obligation throughout the
term of the transaction. For example, the disclosures should be based
on the assumption that the consumer makes payments on time and in full.
In the case of an adjustable-rate mortgage described in Sec.
226.38(a)(3)(i)(A), the creditor shall make the disclosure required by
Sec. 226.38(c) based on the assumption that the interest rate
increases as fast as it can, taking into account any limitations on
increases under the legal obligation.[ltrif] (Certain transactions are
specifically addressed in this commentary. See, for example, the
discussion of buydown transactions elsewhere in the commentary to Sec.
226.17(c).)
[][rtrif]i.[ltrif] The fact that a term or contract may
later be deemed unenforceable by a court on the basis of equity or
other grounds does not, by itself, mean that disclosures based on that
term or contract did not reflect the legal obligation.
2. Modification of obligation. The legal obligation normally is
presumed to be contained in the note or contract that evidences the
agreement. But this presumption is rebutted if another agreement
between the parties legally modifies that note or contract. If the
parties informally agree to a modification of the legal obligation, the
modification should not be reflected in the disclosures unless it rises
to the level of a change in the terms of the legal obligation. For
example:
[][rtrif]i.[ltrif] If the creditor offers a preferential
rate, such as an employee preferred rate, the disclosures should
reflect the terms of the legal obligation[rtrif], subject to special
disclosure rules for transactions secured by real property or a
dwelling in Sec. 226.38(a)(3) and (c)[ltrif]. [(See the commentary to
Sec. 226.19(b) for an example of a preferred-rate transaction that is
a variable-rate transaction.)]
[][rtrif]ii.[ltrif] If the contract provides for a certain
monthly payment schedule but payments are made on a voluntary payroll
deduction plan or an informal principal-reduction agreement, the
disclosures should reflect the schedule in the contract.
[][rtrif]iii.[ltrif] If the contract provides for regular
monthly payments but the creditor informally permits the consumer to
defer payments from time to time, for instance, to take account of
holiday seasons or seasonal employment, the disclosures should reflect
the regular monthly payments.
[rtrif]3. Number of transactions. Creditors have flexibility in
handling credit extensions that may be viewed as multiple transactions.
For example:
i. When a creditor finances the credit sale of a radio and a
television on the same day, the creditor may disclose the sales as
either 1 or 2 credit sale transactions.
ii. When a creditor finances a loan along with a credit sale of
health insurance, the creditor may disclose in one of several ways: a
single credit sale transaction, a single loan transaction, or a loan
and a credit sale transaction.
iii. The separate financing of a downpayment in a credit sale
transaction may, but need not, be disclosed as 2 transactions (a credit
sale and a separate transaction for the financing of the
downpayment).[ltrif]
[3. Third-party buydown.][rtrif]17(c)(1)(i) Buydowns.
1. Third-party buydown.[ltrif] In certain transactions, a seller or
other third party may pay an amount, either to the creditor or to the
consumer, in order to reduce the consumer's payments or buy down the
interest rate for all or a portion of the credit term. For example, a
consumer and a bank agree to a mortgage with an interest rate of 15%
and level payments over 25 years. By a separate agreement, the seller
of the property agrees to subsidize the consumer's payments for the
first 2 years of the mortgage, giving the consumer an effective rate of
12% for that period.
[][rtrif]i.[ltrif] If the lower rate is reflected in the
credit contract between the consumer and the bank, the disclosures must
take the buydown into account. For example, the annual percentage rate
must be a composite rate that takes account of both the lower initial
rate and the higher subsequent rate, and if the loan is not secured by
real property or a dwelling, the payment schedule disclosures must
reflect the 2 payment levels. However, the amount paid by the seller
would not be specifically reflected in the disclosures given by the
bank, since that amount constitutes seller's points and thus is not
part of the finance charge.
[][rtrif]ii.[ltrif] If the lower rate is not reflected in
the credit contract between the consumer and the bank and the consumer
is legally bound to the 15% rate from the outset, the disclosures given
by the bank must not reflect the seller buydown in any way. For
example, the annual percentage rate and, in a transaction not secured
by real property, the payment schedule, would not take into account the
reduction in the interest rate and payment level for the first 2 years
resulting from the buydown.
[4.][rtrif]2.[ltrif] Consumer buydowns. In certain transactions,
the consumer may pay an amount to the creditor to reduce the payments
or obtain a lower interest rate on the transaction. Consumer buydowns
must be reflected in the disclosures given for that transaction. To
illustrate, in a mortgage transaction, the creditor and consumer agree
to a note specifying a 14 percent interest rate. However, in a separate
document, the consumer agrees to pay an amount to the creditor at
consummation in return for a reduction in the interest rate to 12
percent for a portion of the mortgage term. The amount paid by the
consumer may be deposited in an escrow account or may be retained by
the creditor. Depending upon the buydown plan, the consumer's
prepayment of the obligation may or may not result in a portion of the
amount being credited or refunded to the consumer. In the disclosures
given for the mortgage, the creditor must reflect the terms of the
buydown agreement. For example:
[][rtrif]i.[ltrif] The amount paid by the consumer is a
prepaid finance charge [(][rtrif],[ltrif] even if deposited in an
escrow account[)]. [rtrif](In transactions secured by real property or
a dwelling, ``finance charges'' are referred to as ``interest and
settlement charges'' under Sec. 226.38(e)(5)(ii).)[ltrif]
[][rtrif]ii.[ltrif] A composite annual percentage rate must
be calculated, taking into account both interest rates, as well as the
effect of the prepaid finance charge.
[][rtrif]iii.[ltrif] The payment schedule must reflect the
multiple payment levels resulting from a buydown[rtrif], in a
transaction not secured by real property or a dwelling[ltrif].
[rtrif]3. Lender buydown.[ltrif] The rules regarding consumer
buydowns do not apply to transactions known as ``lender buydowns.'' In
lender buydowns. a creditor pays an amount (either into an account or
to the party to whom the obligation is sold) to reduce the consumer's
payments or interest rate for all or a portion of the credit term.
Typically, these transactions are structured as a buydown of the
interest rate during an initial period of the transaction with a higher
than usual rate for the remainder of the term. The disclosures for
lender buydowns should be based on the terms of the legal obligation
between the consumer and the creditor. See comment [17(c)(1)-
3][rtrif]17(c)(1)(i)-1[ltrif] for the analogous rules concerning third-
party buydowns.
[[Page 43378]]
[5.][rtrif]4.[ltrif] Split buydowns. In certain transactions, a
third party (such as a seller) and a consumer both pay an amount to the
creditor to reduce the interest rate. The creditor must include the
portion paid by the consumer in the finance charge and disclose the
corresponding multiple payment levels and composite annual percentage
rate. The portion paid by the third party and the corresponding
reduction in interest rate, however, should not be reflected in the
disclosures unless the lower rate is reflected in the credit contract.
See the discussion on third-party and consumer buydown transactions
[elsewhere in the commentary to Sec. 226.17(c)][rtrif]in comments
17(c)(1)(i)-1 and 17(c)(1)(i)-2, respectively[ltrif].
[rtrif]17(c)(1)(ii) Wrap-around financing.[ltrif]
[6. Wraparound financing.][rtrif]1. General.[ltrif] Wrap-around
transactions, usually loans, involve the creditor's wrapping the
outstanding balance on an existing loan and advancing additional funds
to the consumer. The pre-existing loan, which is wrapped, may be to the
same consumer or to a different consumer. In either case, the consumer
makes a single payment to the new creditor, whom makes the payments on
the pre-existing loan to the original creditor. Wrap-around loans or
sales are considered new single-advance transactions, with an amount
financed equaling the sum of the new funds advanced by the wrap
creditor and the remaining principal owed to the original creditor on
the pre-existing loan. In disclosing the itemization of the amount
financed, the creditor may use a label such as ``the amount that will
be paid to creditor X'' to describe the remaining principal balance on
the pre-existing loan. This approach to Truth in Lending calculations
has no effect on calculations required by other statutes, such as State
usury laws.
[7.][rtrif]2.[ltrif] Wrap-around financing with balloon payments.
For wrap-around transactions involving a large final payment of the new
funds before the maturity of the pre-existing loan, the amount financed
is the sum of the new funds and the remaining principal on the pre-
existing loan. The disclosures should be based on the shorter term of
the wrap loan, with a large final payment of both the new funds and the
total remaining principal on the pre-existing loan (although only the
wrap loan will actually be paid off at that time).
[rtrif]17(c)(1)(iii) Variable- or adjustable-rate
transactions.[ltrif]
[8.][rtrif]1.[ltrif] Basis of disclosures [in variable-rate
transactions]. The disclosures for a variable-[rtrif]or adjustable-
[ltrif] rate transaction must be given for the full term of the
transaction and must be based on the terms in effect at the time of
consummation. Creditors [rtrif]generally[ltrif] should base the
disclosures only on the initial rate and should not assume that this
rate will increase [rtrif](except as provided in Sec. 226.38(c) for
transactions secured by real property or a dwelling)[ltrif]. For
example, in a [rtrif]a variable- or adjustable-rate[ltrif] loan with an
initial [rtrif]interest[ltrif] rate of 10 percent and a 5 percentage
points rate cap, creditors should base the disclosures on the initial
rate and should not assume that the rate will increase 5 percentage
points. However, in a variable-rate transaction with a seller buydown
that is reflected in the credit contract, a consumer buydown, or a
discounted or premium rate, disclosures should be a composite rate
based on the rate in effect during the initial period and the rate that
is the basis of the variable-rate feature for the remainder of the
term. (See the commentary to section 226.17(c)[rtrif](1)[ltrif] for a
discussion of buydown, discounted, and premium transactions and the
commentary to section 226.19(a)(2) for a discussion of [the]
redisclosure in [certain mortgage transactions with a variable-rate]
[rtrif]transactions secured by real property or a dwelling with an
adjustable-rate[ltrif] feature.
[9.][rtrif]2.[ltrif] Use of estimates in variable-[rtrif]or
adjustable-[ltrif]rate transactions. The variable- [rtrif]or
adjustable-[ltrif] rate feature does not, by itself, make the
disclosures estimates.
[10.][rtrif]3.[ltrif] Discounted and premium variable-[rtrif]or
adjustable-[ltrif]rate transactions. In some variable-[rtrif]or
adjustable-[ltrif]rate transactions, creditors may set an initial
interest rate that is not determined by the index or formula used to
make later interest rate adjustments. Typically, this initial rate
charged to consumers is lower than the rate would be if it were
calculated using the index or formula. However, in some cases the
initial rate may be higher. In a discounted transaction, for example, a
creditor may calculate interest rates according to a formula using the
six-month Treasury bill rate plus a 2 percent margin. If the Treasury
bill rate at consummation is 10 percent, the creditor may forgo the 2
percent spread and charge only 10 percent for a limited time, instead
of setting an initial rate of 12 percent.
i. When creditors use an initial interest rate that is not
calculated using the index or formula for later rate adjustments, the
disclosures should reflect a composite annual percentage rate based on
the initial rate for as long as it is charged and, for the remainder of
the term, the rate that would have been applied using the index or
formula at the time of consummation. The interest rate at consummation
need not be used if a contract provides for a delay in the
implementation of changes in an index value. For example, if the
contract specifies that interest rate changes are based on the index
value in effect 45 days before the [rtrif]interest rate[ltrif] change
date, creditors may use any index value in effect during the 45[rtrif]-
[ltrif]day period before consummation in calculating a composite annual
percentage rate.
ii. The effect of the multiple rates must also be reflected in the
calculation and disclosure of the finance charge, total of payments,
and payment schedule. [rtrif](In transactions secured by real property
or a dwelling, creditors disclose the ``interest and settlement
charges'' rather than the ``finance charge'' and the ``payment
summary'' rather than the ``payment schedule.'' See Sec. 226.38(c) and
(e)(5).[ltrif]
iii. If a loan contains a rate or payment cap that would prevent
the initial rate or payment, at the time of the first adjustment, from
changing to the rate determined by the index or formula at
consummation, the effect of that rate or payment cap should be
reflected in the disclosures.
iv. Because these transactions involve irregular payment amounts,
an annual percentage rate tolerance of \14\; of 1 percent applies, in
accordance with Sec. 226.22(a)(3).
v. Examples of discounted [variable][rtrif]adjustable[ltrif]-rate
transactions [rtrif]secured by real property or a dwelling[ltrif]
include:
A. A 30-year loan for $100,000 with no prepaid [finance
charges][rtrif]interest and settlement charges[ltrif] and rates
determined by the Treasury bill rate plus 2 percent. Rate and payment
adjustments are made annually. Although the Treasury bill rate at the
time of consummation is 10 percent, the creditor sets the interest rate
for one year at 9 percent, instead of 12 percent according to the
formula. The disclosures should reflect a composite annual percentage
rate of 11.63 percent based on 9 percent for one year and 12 percent
for 29 years. [Reflecting those two rate levels, the payment schedule
should show 12 payments of $804.62 and 348 payments of $1,025.31.] The
[finance charge][rtrif]interest and settlement charges[ltrif] should be
$266,463.32 and the total of payments $366,463.32.
B. Same loan as above, except with a 2 percent rate cap on periodic
adjustments. The disclosures should reflect a composite annual
percentage
[[Page 43379]]
rate of 11.53 percent based on 9 percent for the first year, 11 percent
for the second year, and 12 percent for the remaining 28 years.
[Reflecting those three rate levels, the payment schedule should show
12 payments of $804.62, 12 payments of $950,09, and 336 payments of
$365,234.76.] The [finance charge][rtrif]interest and settlement
charges[ltrif] should be $265,234.76 and the total of payments should
be $365,234.76.
C. Same loan as above, except with a 7\1/2\; percent cap on payment
adjustments. The disclosures should reflect a composite annual
percentage rate of 11.64 percent, based on 9 percent for one year and
12 percent for 29 years. [Because of the payment cap, five levels of
payments should be reflected.] The [finance charge][rtrif]interest and
settlement charges[ltrif] should be $277,040.60, and the total of
payments $377,040.60.
vi. A loan in which the initial interest rate is set according to
the index or formula used for later adjustments but is not set at the
value of the index or formula at consummation is not a discounted or
premium variable-[rtrif]or adjustable-[ltrif]rate loan. For example, if
a creditor commits to an initial rate based on the formula on a date
prior to consummation, but the index has moved during the period
between that time and consummation, a creditor should base its
disclosures on the initial rate.
[11. Examples of variable-rate transactions.] [rtrif]4. General. In
general, v[ltrif][V]ariable-rate transactions include:
[][rtrif]i.[ltrif] Renewable balloon-payment instruments
[rtrif]with a fixed interest rate[ltrif] where the creditor is both
unconditionally obligated to renew the balloon-payment loan at the
consumer's option (or is obligated to renew subject to conditions
within the consumer's control) and has the option of increasing the
interest rate at the time of renewal. [rtrif](However, a transaction
secured by real property or a dwelling with a balloon payment and a
fixed interest rate must be disclosed as a fixed-rate transaction under
Sec. 226.38(a)(3) whether or not the transaction is renewable.)[ltrif]
Disclosures must be based on the payment amortization (unless the
specified term of the obligation with renewals is shorter) and on the
rate in effect at the time of consummation of the transaction.
(Examples of conditions within a consumer's control include
requirements that a consumer be current in payments or continue to
reside in the mortgaged property. In contrast, setting a limit on the
rate at which the creditor would be obligated to renew or reserving the
right to change the credit standards at the time of renewal are
examples of conditions outside a consumer's control.) If, however, a
creditor is not obligated to renew as described above, disclosures must
be based on the term of the balloon-payment loan. Disclosures also must
be based on the term of the balloon-payment loan in balloon-payment
instruments in which the legal obligation provides that the loan will
be renewed by a ``refinancing'' of the obligation, as that term is
defined by Sec. 226.20(a). If it cannot be determined from the legal
obligation that the loan will be renewed by a ``refinancing,''
disclosures must be based either on the term of the balloon-payment
loan or on the payment amortization, depending on whether the creditor
is unconditionally obligated to renew the loan as described above.
(This discussion does not apply to construction loans subject to Sec.
226.17(c)(6).)
[ ``Shared-equity'' or ``shared-appreciation'' mortgages
that have a fixed rate of interest and an appreciation share based on
the consumer's equity in the mortgaged property, in a transaction not
secured by real property or a dwelling. The appreciation share is
payable in a lump sum at a specified time. Disclosures must be based on
the fixed interest rate. (As discussed in the commentary to Sec.
226.2, other types of shared-equity arrangements are not considered
``credit'' and are not subject to Regulation Z.)]
[][rtrif]ii.[ltrif] Preferred-rate loans where the terms of
the legal obligation provide that the initial underlying rate is fixed
but will increase upon the occurrence of some event, such as an
employee leaving the employ of the creditor, and the note reflects the
preferred rate. The disclosures are to be based on the preferred rate.
[ Graduated-payment mortgages and step-rate transactions
without a variable-rate feature are not considered variable-rate
transactions. ``Shared-equity'' or ``shared-appreciation'' mortgages
are not considered variable-rate transactions.]
[][rtrif]iii.[ltrif] ``Price level adjusted mortgages'' or
other indexed mortgages that have a fixed rate of interest but provide
for periodic adjustments to payments and the loan balance to reflect
changes in an index measuring prices or inflation. Disclosures are to
be based on the fixed interest rate.
[rtrif]5. Not variable- or adjustable-rate transactions. Graduated-
payment mortgages and step-rate transactions without a variable-rate
feature are not considered variable- or adjustable-rate
transactions.[ltrif]
[12.][rtrif] 6.[ltrif] Graduated-payment adjustable-rate mortgage.
Graduated payment adjustable rate mortgages involve both [a
variable][rtrif]an adjustable[ltrif] interest rate and scheduled
[variations][rtrif]adjustments[ltrif] in payment amounts during the
loan term. For example, under these plans, a series of graduated
payments may be scheduled before rate adjustments affect payment
amounts, or the initial scheduled payment may remain constant for a set
period before rate adjustments affect the payment amount. In any case,
the initial payment amount may be insufficient to cover the scheduled
interest, causing negative amortization from the outset of the
transaction. In these transactions, the disclosures should treat these
features as follows:
[][rtrif]i.[ltrif] The finance charge includes the amount
of negative amortization based on the assumption that the rate in
effect at consummation remains unchanged.
[][rtrif]ii.[ltrif] The amount financed does not include
the amount of negative amortization.
[][rtrif]iii.[ltrif] As in any variable- [rtrif]or
adjustable-[ltrif] rate transaction, the annual percentage rate is
based on the terms in effect at consummation.
[ The schedule of payments discloses the amount of any
scheduled initial payments followed by an adjusted level of payments
based on the initial interest rate. Since some mortgage plans contain
limits on the amount of the payment adjustment, the payment schedule in
a transaction not secured by real property or a dwelling, or payment
summary, in a transaction secured by real property or a dwelling may
require several different levels of payments, even with the assumption
that the original interest rate does not increase.]
[13.][rtrif]7.[ltrif] Growth-equity mortgages. [rtrif]Growth-equity
mortgages, a[ltrif][A]lso referred to as payment-escalated mortgages,
[these mortgage plans involve] scheduled payment increases to
prematurely amortize the loan. The initial payment amount is determined
as for a long-term loan with a fixed interest rate. Payment increases
are scheduled periodically, based on changes in an index. The larger
payments result in accelerated amortization of the loan. In disclosing
these mortgage plans, creditors [may either--
Estimate][rtrif]must estimate[ltrif] the amount of payment
increases, based on the best information reasonably available[, or
Disclose by analogy to the variable-rate disclosures in
section 226.18(f)(1)]. (This discussion does not apply to growth-equity
mortgages in which the
[[Page 43380]]
amount of payment increases can be accurately determined at the time of
disclosure. For these mortgages, [as for graduated-payment mortgages,]
disclosures should reflect the scheduled increases in payments.)
[14. Reverse mortgages.][rtrif]17(c)(1)(iv) Repayment upon
occurrence of future event.[ltrif]
[rtrif]1. General.[ltrif] Reverse mortgages, also known as reverse
annuity or home equity conversion mortgages, typically involve the
disbursement of monthly advances to the consumer for a fixed period or
until the occurrence of an event such as the consumer's death.
Repayment of the loan (generally a single payment of principal and
accrued interest) may be required to be made at the end of the
disbursements or, for example, upon the death of the consumer.
[rtrif](However, a reverse mortgage is covered by Sec. 226.33 only if
the consumer's death is one of the conditions of repayment, as provided
under Sec. 226.33(a).)[ltrif] In disclosing these transactions,
creditors must apply the following rules, as applicable:
[][rtrif]i.[ltrif] If the reverse mortgage has a specified
period for disbursements but repayment is due only upon the occurrence
of a future event such as the death of the consumer, the creditor must
assume that disbursements will be made until they are scheduled to end.
The creditor must assume repayment will occur when disbursements end
(or within a period following the final disbursement which is not
longer than the regular interval between disbursements). This
assumption should be used even though repayment may occur before or
after the disbursements are scheduled to end. In such cases, the
creditor may include a statement such as ``The disclosures assume that
you will repay the loan at the time our payments to you end. As
provided in your agreement, your repayment may be required at a
different time.''
[][rtrif]ii.[ltrif] If the reverse mortgage has neither a
specified period for disbursements nor a specified repayment date and
these terms will be determined solely by reference to future events
including the consumer's death, the creditor may assume that the
disbursements will end upon the consumer's death (estimated by using
actuarial tables, for example) and that repayment will be required at
the same time (or within a period following the date of the final
disbursement which is not longer than the regular interval for
disbursements). Alternatively, the creditor may base the disclosures
upon another future event it estimates will be most likely to occur
first. (If terms will be determined by reference to future events which
do not include the consumer's death, the creditor must base the
disclosures upon the occur[rtrif]r[ltrif]ence of the event estimated to
be most likely to occur first.)
[][rtrif]iii.[ltrif] In making the disclosures, the
creditor must assume that all disbursements and accrued interest will
be paid by the consumer. For example, if the note has a nonrecourse
provision providing that the consumer is not obligated for an amount
greater than the value of the house, the creditor must nonetheless
assume that the full amount to be disbursed will be repaid. In this
case, however, the creditor may include a statement such as ``The
disclosures assume full repayment of the amount advanced plus accrued
interest, although the amount you may be required to pay is limited by
your agreement.''
[][rtrif]iv.[ltrif] Some reverse mortgages provide that
some or all of the appreciation in the value of the property will be
shared between the consumer and the creditor. [Such loans are
considered variable-rate mortgages, as described in comment 17(c)(1)-
11, and the appreciation feature must be disclosed in accordance with
Sec. 226.18(f)(1). If the reverse mortgage has a variable interest
rate, is written for a term greater than one year, and is secured by
the consumer's principal dwelling, the shared appreciation feature must
be described under Sec. 226.19(b)(2)(vii).][rtrif]If the reverse
mortgage has an adjustable interest rate and is secured by real
property or a dwelling, the creditor must disclose the shared-equity or
shared-appreciation feature as required by Sec. Sec. 226.19(b)(3)(iii)
and 226.38(d)(2)(iii).[ltrif]
[15. Morris Plan transactions. When a deposit account is created
for the sole purpose of accumulating payments and then is applied to
satisfy entirely the consumer's obligation in the transaction, each
deposit made into the account is considered the same as a payment on a
loan for purposes of making disclosures.
16. Number of transactions. Creditors have flexibility in handling
credit extensions that may be viewed as multiple transactions. For
example:
When a creditor finances the credit sale of a radio and a
television on the same day, the creditor may disclose the sales as
either 1 or 2 credit sale transactions.
When a creditor finances a loan along with a credit sale
of health insurance, the creditor may disclose in one of several ways:
a single credit sale transaction, a single loan transaction, or a loan
and a credit sale transaction.
The separate financing of a downpayment in a credit sale
transaction may, but need not, be disclosed as 2 transactions (a credit
sale and a separate transaction for the financing of the downpayment).]
[17. Special rules for tax refund anticipation
loans.][rtrif]17(c)(1)(v) Tax refund-anticipation loan.[ltrif]
[rtrif]1. General.[ltrif] Tax refund loans, also known as refund
anticipation loans (RALs), are transactions in which a creditor will
lend up to the amount of a consumer's expected tax refund. RAL
agreements typically require repayment upon demand, but also may
provide that repayment is required when the refund is made. The
agreements also typically provide that if the amount of the refund is
less than the payment due, the consumer must pay the difference.
Repayment often is made by a preauthorized offset to a consumer's
account held with the creditor when the refund has been deposited by
electronic transfer. Creditors may charge fees for RALs in addition to
fees for filing the consumer's tax return electronically. In RAL
transactions subject to the regulation the following special rules
apply:
[][rtrif]i.[ltrif] If, under the terms of the legal
obligation, repayment of the loan is required when the refund is
received by the consumer (such as by deposit into the consumer's
account), the disclosures should be based on the creditor's estimate of
the time the refund will be delivered even if the loan also contains a
demand clause. The practice of a creditor to demand repayment upon
delivery of refunds does not determine whether the legal obligation
requires that repayment be made at that time; this determination must
be made according to applicable State or other law. (See comment
17(c)(5)-1 for the rules regarding disclosures if the loan is payable
solely on demand or is payable either on demand or on an alternate
maturity date.)
[][rtrif]ii.[ltrif] If the consumer is required to repay
more than the amount borrowed, the difference is a finance charge
unless excluded under Sec. 226.4. In addition, to the extent that any
fees charged in connection with the loan (such as for filing the tax
return electronically) exceed those fees for a comparable cash
transaction (that is, filing the tax return electronically without a
loan), the difference must be included in the finance charge.
[18.][rtrif]17(c)(1)(vi)[ltrif] Pawn transactions.
[rtrif]1. General.[ltrif] When, in connection with an extension of
credit, a consumer pledges or sells an item to a pawnbroker
[[Page 43381]]
creditor in return for a sum of money and retains the right to redeem
the item for a greater sum (the redemption price) within a specified
period of time, disclosures are required. In addition to other
disclosure requirements that may be applicable under Sec. 226.18, for
purposes of pawn transactions:
i. The amount financed is the initial sum paid to the consumer. The
pawnbroker creditor need not provide a separate itemization of the
amount financed if that entire amount is paid directly to the consumer
and the disclosed description of the amount financed is ``the amount of
cash given directly to you'' or a similar phrase.
ii. The finance charge is the difference between the initial sum
paid to the consumer and the redemption price plus any other finance
charges paid in connection with the transaction. (See Sec. 226.4.)
iii. The term of the transaction, for calculating the annual
percentage rate, is the period of time agreed to by the pawnbroker
creditor and the consumer. The term of the transaction does not include
a grace period (including any statutory grace period) after the agreed
redemption date.
Paragraph 17(c)(2)(i).
1. Basis for estimates. Disclosures may be estimated when the exact
information is unknown at the time disclosures are made[rtrif], except
that creditors may not provide estimated disclosures in disclosures
required by Sec. 226.19(a)(2)(ii) and (iii)[ltrif]. Information is
unknown if it is not reasonably available to the creditor at the time
the disclosures are made. The ``reasonably available'' standard
requires that the creditor, acting in good faith, exercise due
diligence in obtaining information. For example, the creditor must at a
minimum utilize generally accepted calculation tools, but need not
invest in the most sophisticated computer program to make a particular
type of calculation. The creditor normally may rely on the
representations of other parties in obtaining information. For example,
the creditor might look to the consumer for the time of consummation,
to insurance companies for the cost of insurance, or to realtors for
taxes and escrow fees. The creditor may utilize estimates in making
disclosures even though the creditor knows that more precise
information will be available by the point of consummation. However,
new disclosures may be required under Sec. 226.17(f) or Sec. 226.19.
2. Labelling estimates. Estimates must be designated as such in the
segregated disclosures[rtrif], except that creditors may not provide
estimated disclosures in the disclosures required by Sec.
226.19(a)(2)(ii) and (iii)[ltrif]. Even though other disclosures are
based on the same assumption on which a specific estimated disclosure
was based, the creditor has some flexibility in labelling the
estimates. Generally, only the particular disclosure for which the
exact information is unknown is labelled as an estimate. However, when
several disclosures are affected because of the unknown information,
the creditor has the option of labelling either every affected
disclosure or only the disclosure primarily affected. For example, when
the finance charge is unknown because the date of consummation is
unknown, the creditor must label the finance charge as an estimate and
may also label as estimates the total of payments and the payment
schedule. When many [rtrif]numerical[ltrif] disclosures are estimates,
the creditor may use a general statement, such as ``all numerical
disclosures except the late payment disclosure are estimates,'' as a
method to label those disclosures as estimates.
3. Simple-interest transactions. If consumers do not make timely
payments in a simple-interest transaction, some of the amounts
calculated for Truth in Lending disclosures will differ from amounts
that consumers will actually pay over the term of the transaction.
Creditors may label disclosures as estimates in these
transactions[.][rtrif]except as otherwise provided by Sec.
226.19(a)(2). (See the commentary on Sec. 226.19(a)(2) for a
discussion of circumstances where creditors may not disclose estimates
for transactions secured by real property or a dwelling.)[ltrif] For
example, because the finance charge and total of payments may be larger
than disclosed if consumers make late payments, creditors may label the
finance charge and total of payments as estimates. On the other hand,
creditors may choose not to label disclosures as estimates[rtrif]. In
all cases, creditors[ltrif] [and] may base [all] disclosures on the
assumption that payments will be made on time [rtrif]and in the amounts
required by the terms of the legal obligation,[ltrif] disregarding any
possible [inaccuracies][rtrif]differences[ltrif] resulting from
consumers' payment patterns.
Paragraph 17(c)(2)(ii)
1. Per diem interest. This paragraph applies to any numerical
amount (such as the finance charge, annual percentage rate, or payment
amount) that is affected by the amount of the per-diem interest charge
that will be collected at consummation. If the amount of per-diem
interest used in preparing the disclosures for consummation is based on
the information known to the creditor at the time the disclosure
document is prepared, the disclosures are considered accurate under
this rule, and affected disclosures are also considered accurate, even
if the disclosures are not labeled as estimates. For example, if the
amount of per-diem interest used to prepare disclosures is less than
the amount of per-diem interest charged at consummation, and as a
result the finance charge is understated by $200, the disclosed finance
charge is considered accurate even though the understatement is not
within the $100 tolerance of Sec. 226.18(d)(1), and the finance charge
was not labeled as an estimate. In this example, if in addition to the
understatement related to the per-diem interest, a $90 fee is
incorrectly omitted from the finance charge, causing it to be
understated by a total of $290, the finance charge is considered
accurate because the $90 fee is within the tolerance in Sec.
226.18(d)(1).
Paragraph 17(c)(3)
1. Minor variations. Section 226.17(c)(3) allows creditors to
disregard certain factors in calculating and making disclosures. For
example:
[][rtrif]i.[ltrif] Creditors may ignore the effects of
collecting payments in whole cents. Because payments cannot be
collected in fractional cents, it is often difficult to amortize
exactly an obligation with equal payments; the amount of the last
payment may require adjustment to account for the rounding of the other
payments to whole cents.
[][rtrif]ii.[ltrif] Creditors may base their disclosures on
calculation tools that assume that all months have an equal number of
days, even if their practice is to take account of the variations in
months for purposes of collecting interest. For example, a creditor may
use a calculation tool based on a 360-day year, when it in fact
collects interest by applying a factor of 1/365 of the annual rate to
365 days. This rule does not, however, authorize creditors to ignore,
for disclosure purposes, the effects of applying 1/360 of an annual
rate to 365 days.
2. Use of special rules. A creditor may utilize the special rules
in Sec. 226.17(c)(3) for purposes of calculating and making all
disclosures for a transaction or may, at its option, use the special
rules for some disclosures and not others.
Paragraph 17(c)(4).
1. Payment schedule irregularities. When one or more payments in a
transaction differ from the others because of a long or short first
period, the variations may be ignored in disclosing the payment
schedule,
[[Page 43382]]
finance charge, annual percentage rate, and other terms. For example:
[][rtrif]i.[ltrif] A 36-month auto loan might be
consummated on June 8 with payments due on July 1 and the first of each
succeeding month. The creditor may base its calculations on a payment
schedule that assumes 36 equal intervals and 36 equal installment
payments, even though a precise computation would produce slightly
different amounts because of the shorter first period.
[][rtrif]ii.[ltrif] By contrast, in the same example, if
the first payment were not scheduled until August 1, the irregular
first period would exceed the limits in Sec. 226.17(c)(4); the
creditor could not use the special rule and could not ignore the extra
days in the first period in calculating its disclosures.
2. Measuring odd periods. In determining whether a transaction may
take advantage of the rule in Sec. 226.17(c)(4), the creditor must
measure the variation against a regular period. For purposes of that
rule:
[][rtrif]i.[ltrif] The first period is the period from the
date on which the finance charge begins to be earned to the date of the
first payment.
[][rtrif]ii.[ltrif] The term is the period from the date on
which the finance charge begins to be earned to the date of the final
payment.
[][rtrif]iii.[ltrif] The regular period is the most common
interval between payments in the transaction.
In transactions involving regular periods that are monthly,
semimonthly or multiples of a month, the length of the irregular and
regular periods may be calculated on the basis of either the actual
number of days or an assumed 30-day month. In other transactions, the
length of the periods is based on the actual number of days.
3. Use of special rules. A creditor may utilize the special rules
in Sec. 226.17(c)(4) for purposes of calculating and making some
disclosures but may elect not to do so for all of the disclosures. For
example, the variations may be ignored in calculating and disclosing
the annual percentage rate but taken into account in calculating and
disclosing the finance charge and payment schedule.
4. Relation to prepaid finance charges. Prepaid finance charges,
including ``odd-days'' or ``per-diem'' interest, paid prior to or at
closing may not be treated as the first payment on a loan. Thus,
creditors may not disregard an irregularity in disclosing such finance
charges.
Paragraph 17(c)(5).
1. Demand disclosures. Disclosures for demand obligations are based
on an assumed 1-year term, unless an alternate maturity date is stated
in the legal obligation. Whether an alternate maturity date is stated
in the legal obligation is determined by applicable law. An alternate
maturity date is not inferred from an informal principal reduction
agreement or a similar understanding between the parties. However, when
the note itself specifies a principal reduction schedule (for example,
``payable on demand or $2,000 plus interest quarterly''), an alternate
maturity is stated and the disclosures must reflect that date.
[rtrif]See Sec. Sec. 226.19(b)(2)(ii)(D) and 226.38(d)(2)(iv) and
associated commentary to determine how to disclose a demand feature for
a transaction secured by real property or a dwelling.[ltrif]
2. Future event as maturity date. An obligation whose maturity date
is determined solely by a future event, as for example, a loan payable
only on the sale of property, is not a demand obligation. Because no
demand feature is contained in the obligation, demand disclosures under
Sec. 226.18(i) are inapplicable. The disclosures should be based on
the creditor's estimate of the time at which the specified event will
occur, and [rtrif]in a transaction not secured by real property or a
dwelling[ltrif] may indicate the basis for the creditor's estimate, as
noted in the commentary to Sec. 226.17(a).
3. Demand after stated period. Most demand transactions contain a
demand feature that may be exercised at any point during the term, but
[certain transactions][rtrif]a transaction may[ltrif] convert to demand
status only after a fixed period. [For example, in States prohibiting
due-on-sale clauses, the Federal National Mortgage Association (FNMA)
requires mortgages that it purchases to include a call option rider
that may be exercised after 7 years. These mortgages are generally
written as long-term obligations, but contain a demand feature that may
be exercised only within a 30-day period at 7 years.] The disclosures
for [these transactions][rtrif]a transaction that converts to demand
status after a fixed period[ltrif] should be based upon the legally
agreed-upon maturity date. Thus, [rtrif]for example,[ltrif] if a
mortgage containing [the 7-year FNMA call option] [rtrif]a call option
the creditor may exercise during the first 30 days of the eighth year
after loan origination[ltrif] is written as a 20-year obligation, the
disclosures should be based on the 20-year term, with the demand
feature disclosed under [Sec. 226.18(i)][rtrif] Sec.
226.38(d)(2)(iv)[ltrif].
4. Balloon mortgages. Balloon payment mortgages, with payments
based on a long-term amortization schedule and a large final payment
due after a shorter term, are not demand obligations unless a demand
feature is specifically contained in the contract. For example, a
mortgage with a term of 5 years and a payment
[schedule][rtrif]summary[ltrif] based on 20 years would not be treated
as a mortgage with a demand feature, in the absence of any contractual
demand provisions. [In this type of mortgage, disclosures should be
based on the 5-year term.][rtrif](See Sec. 226.38(c)(3) for
requirements for interest rate and payment summary disclosures for
balloon payment mortgages.)[ltrif]
Paragraph 17(c)(6).
1. Series of advances. Section 226.17(c)(6)(i) deals with a series
of advances under an agreement to extend credit up to a certain amount.
A creditor may treat all of the advances as a single transaction or
disclose each advance as a separate transaction. If these advances are
treated as 1 transaction and the timing and amounts of advances are
unknown, creditors must make disclosures based on estimates, as
provided in Sec. 226.17(c)(2). If the advances are disclosed
separately, disclosures must be provided before each advance occurs,
with the disclosures for the first advance provided by consummation.
2. Construction loans. Section 226.17(c)(6)(ii) provides a flexible
rule for disclosure of construction loans that may be permanently
financed. These transactions have 2 distinct phases, similar to 2
separate transactions. The construction loan may be for initial
construction or subsequent construction, such as rehabilitation or
remodelling. The construction period usually involves several
disbursements of funds at times and in amounts that are unknown at the
beginning of that period, with the consumer paying only accrued
interest until construction is completed. Unless the obligation is paid
at that time, the loan then converts to permanent financing in which
the loan amount is amortized just as in a standard mortgage
transaction. Section 226.17(c)(6)(ii) permits the creditor to give
either one combined disclosure for both the construction financing and
the permanent financing, or a separate set of disclosures for the 2
phases. This rule is available whether the consumer is initially
obligated to accept construction financing only or is obligated to
accept both construction and permanent financing from the outset. If
the consumer is obligated on both phases and the creditor chooses to
give 2 sets of disclosures, both sets must be given to the consumer
initially, because both
[[Page 43383]]
transactions would be consummated at that time. (Appendix D provides a
method of calculating the annual percentage rate and other disclosures
for construction loans, which may be used, at the creditor's option, in
disclosing construction financing.)
3. Multiple-advance construction loans. Section 226.17(c)(6)(i) and
(ii) are not mutually exclusive. For example, in a transaction that
finances the construction of a dwelling that may be permanently
financed by the same creditor, the construction phase may consist of a
series of advances under an agreement to extend credit up to a certain
amount. In these cases, the creditor may disclose the construction
phase as either 1 or more than 1 transaction and also disclose the
permanent financing as a separate transaction.
4. Residential mortgage transaction. See the commentary to Sec.
226.2(a)(24) for a discussion of the effect of Sec. 226.17(c)(6) on
the definition of a residential mortgage transaction.
5. Allocation of points. When a creditor utilizes the special rule
in Sec. 226.17(c)(6) to disclose credit extensions as multiple
transactions, buyers points or similar amounts imposed on the consumer
must be allocated for purposes of calculating disclosures. While such
amounts should not be taken into account more than once in making
calculations, they may be allocated between the transactions in any
manner the creditor chooses. For example, if a construction-permanent
loan is subject to 5 points imposed on the consumer and the creditor
chooses to disclose the 2 phases separately, the 5 points may be
allocated entirely to the construction loan, entirely to the permanent
loan, or divided in any manner between the two. However, the entire 5
points may not be applied twice, that is, to both the construction and
the permanent phases.
17(d) Multiple creditors; multiple consumers.
1. Multiple creditors. If a credit transaction involves more than
one creditor:
[][rtrif]i.[ltrif] The creditors must choose which of them
will make the disclosures.
[][rtrif]ii.[ltrif] A single, complete set of disclosures
must be provided, rather than partial disclosures from several
creditors.
[][rtrif]iii.[ltrif] All disclosures for the transaction
must be given, even if the disclosing creditor would not otherwise have
been obligated to make a particular disclosure. For example, if one of
the creditors is the seller, the total sale price disclosure under
Sec. 226.18(j) must be made, even though the disclosing creditor is
not the seller.
2. Multiple consumers. When two consumers are joint obligors with
primary liability on an obligation, the disclosures may be given to
either one of them. If one consumer is merely a surety or guarantor,
the disclosures must be given to the principal debtor. In rescindable
transactions, however, separate disclosures must be given to each
consumer who has the right to rescind under Sec. 226.23, although the
disclosures required under Sec. 226.19(b) need only be provided to the
consumer who expresses an interest in a variable-rate loan program.
17(e) Effect of subsequent events.
1. Events causing inaccuracies. Inaccuracies in disclosures are not
violations if attributable to events occurring after the disclosures
are made. [For example, when the consumer fails to fulfill a prior
commitment to keep the collateral insured and the creditor then
provides the coverage and charges the consumer for it, such a change
does not make the original disclosures inaccurate.] The creditor may,
however, be required to make new disclosures under Sec. 226.17(f) or
Sec. 226.19 if the events occurred between disclosure and consummation
or under Sec. 226.20 if the events occurred after consummation.[rtrif]
For example, when the consumer fails to fulfill a prior commitment to
keep the collateral insured and the creditor then provides the coverage
and charges the consumer for it, such a change does not make the
original disclosures inaccurate. However, the creditor would be
required to provide the notice required under Sec. 226.20(e).[ltrif]
17(f) Early disclosures.
1. Change in rate or other terms. Redisclosure is required for
changes that occur between the time disclosures are made and
consummation if the annual percentage rate in the consummated
transaction exceeds the limits prescribed in this section, even if the
[initial][rtrif]prior[ltrif] disclosures would be considered accurate
under the tolerances in Sec. 226.18(d) or [rtrif]Sec. [ltrif]
226.22(a). To illustrate:
i. [General.][rtrif]Non-mortgage loan.[ltrif] A. If disclosures are
made in a regular transaction [rtrif]not secured by real property or a
dwelling[ltrif] on July 1, the transaction is consummated on July 15,
and the actual annual percentage rate varies by more than \1/8\ of 1
percentage point from the disclosed annual percentage rate, the
creditor must either redisclose the changed terms or furnish a complete
set of new disclosures before consummation. Redisclosure is required
even if the disclosures made on July 1 are based on estimates and
marked as such.
B. In a regular transaction [rtrif]not secured by real property or
a dwelling[ltrif], if early disclosures are marked as estimates and the
disclosed annual percentage rate is within \1/8\ of 1 percentage point
of the rate at consummation, the creditor need not redisclose the
changed terms (including the annual percentage rate).
[ii. Nonmortgage loan.][rtrif]C.[ltrif] If disclosures [rtrif]for a
transaction not secured by real property or a dwelling[ltrif] are made
on July 1, the transaction is consummated on July 15, and the finance
charge increased by $35 but the disclosed annual percentage rate is
within the permitted tolerance, the creditor must at least redisclose
the changed terms that were not marked as estimates. (See Sec.
226.18(d)(2) of this part.)
[iii.][rtrif]ii.[ltrif] Mortgage loan. At the time [TILA
disclosures][rtrif]the disclosures required by Sec.
226.19(a)(2)(ii)[ltrif] are prepared in July, the loan closing is
scheduled for July 31 and the creditor does not plan to collect per-
diem interest at consummation. Consummation actually occurs on August
5, and per-diem interest for the remainder of August is collected as a
prepaid finance charge. [Assuming there were no other changes requiring
redisclosure, t][rtrif]T[ltrif]he creditor may rely on the disclosures
prepared in July that were accurate when they were prepared. However,
if the creditor prepares new disclosures in August that will be
provided at consummation, the new disclosures must take into account
the amount of the per-diem interest known to the creditor at that time.
2. Variable [rtrif]or adjustable[ltrif] rate. The addition of a
variable [rtrif]or adjustable[ltrif] rate feature to the credit terms,
after early disclosures are given, requires new disclosures.
[rtrif](See Sec. 226.19(a)(2) to determine when new disclosures are
required for transactions secured by real property or a
dwelling.[ltrif]
3. Content of new disclosures. [rtrif]Subject to Sec. 226.19(a),
i[ltrif][I]f redisclosure is required [rtrif]in a transaction not
secured by real property or a dwelling[ltrif], the creditor has the
option of either providing a complete set of new disclosures, or
providing disclosures of only the terms that vary from those originally
disclosed. [rtrif]If the creditor chooses to provide a complete set of
new disclosures, the creditor may but need not highlight the new terms,
provided that the disclosures comply with the format requirements of
Sec. 226.17(a). If the creditor chooses to disclose only the new
terms, all the new
[[Page 43384]]
terms must be disclosed. For example, a different annual percentage
rate will almost always produce a different finance charge, and often a
new schedule of payments; all of these changes would have to be
disclosed. If, in addition, unrelated terms such as the amount financed
or prepayment penalty vary from those originally disclosed, the
accurate terms must be disclosed. However, no new disclosures are
required if the only differences involve estimates other than the
annual percentage rate, and no variable rate feature has been added
(see comment 17(f)-2). If a transaction is secured by real property or
a dwelling, the creditor must provide a complete set of new disclosures
in all cases, however.[ltrif] (See the commentary to Sec.
226.19(a)(2).)
4. Special rules. [In mortgage transactions subject to Sec.
226.19, the creditor must redisclose if, between the delivery of the
required early disclosures and consummation, the annual percentage rate
changes by more than a stated tolerance.][rtrif]Special disclosure
timing and content requirements apply under Sec. 226.19(a)(2) to
disclosures provided before consummation for mortgage transactions
secured by real property or a dwelling.[ltrif] When subsequent events
occur after consummation, new disclosures are required only if there is
a refinancing or an assumption within the meaning of Sec. 226.20.
Paragraph 17(f)(2).
1. Irregular transactions. For purposes of this paragraph, a
transaction is deemed to be ``irregular'' according to the definition
in footnote 46 of Sec. 226.22(a)(3).
17(g) Mail or telephone orders--delay in disclosures.
1. Conditions for use. When the creditor receives a mail or
telephone request for credit[rtrif], except for extensions of credit
covered by sections 226.19(a) and 226.19(b),[ltrif] the creditor may
delay making the disclosures until the first payment is due if the
following conditions are met:
[][rtrif]i.[ltrif] The credit request is initiated without
face-to-face or direct telephone solicitation. (Creditors may, however,
use the special rule when credit requests are solicited by mail.)
[][rtrif]ii.[ltrif] The creditor has supplied the specified
credit information about its credit terms either to the individual
consumer or to the public generally. That information may be
distributed through advertisements, catalogs, brochures, special
mailers, or similar means.
2. Insurance. The location requirements for the insurance
disclosures under Sec. 226.18(n) permit them to appear apart from the
other disclosures. Therefore, a creditor may mail an insurance
authorization to the consumer and then prepare the other disclosures to
reflect whether or not the authorization is completed by the consumer.
Creditors may also disclose the insurance cost on a unit-cost basis, if
the transaction meets the requirements of Sec. 226.17(g).
17(h) Series of sales--delay in disclosures.
1. Applicability. The creditor may delay the disclosures for
individual credit sales in a series of such sales until the first
payment is due on the current sale, assuming the 2 conditions in this
paragraph are met. If those conditions are not met, the general timing
rules in [Sec. 266.17(b)] [rtrif]Sec. 226.17(b)[ltrif] apply.
2. Basis of disclosures. Creditors structuring disclosures for a
series of sales under Sec. 226.17(h) may compute the total sale price
as either:
[][rtrif]i.[ltrif] The cash price for the sale plus that
portion of the finance charge and other charges applicable to that
sale; or
[][rtrif]ii.[ltrif] The cash price for the sale, other
charges applicable to the sale, and the total finance charge and
outstanding principal.
17(i) Interim student credit extensions.
1. Definition. Student credit plans involve extensions of credit
for education purposes where the repayment amount and schedule are not
known at the time credit is advanced. These plans include loans made
under any student credit plan, whether government or private, where the
repayment period does not begin immediately. (Certain student credit
plans that meet this definition are exempt from Regulation Z. See Sec.
226.3(f).) Creditors in interim student credit extensions need not
disclose the terms set forth in this paragraph at the time the credit
is actually extended but must make complete disclosures at the time the
creditor and consumer agree upon the repayment schedule for the total
obligation. At that time, a new set of disclosures must be made of all
applicable items under Sec. 226.18.
2. Basis of disclosures. The disclosures given at the time of
execution of the interim note should reflect two annual percentage
rates, one for the interim period and one for the repayment period. The
use of Sec. 226.17(i) in making disclosures does not, by itself, make
those disclosures estimates. Any portion of the finance charge, such as
statutory interest, that is attributable to the interim period and is
paid by the student (either as a prepaid finance charge, periodically
during the interim period, in one payment at the end of the interim
period, or capitalized at the beginning of the repayment period) must
be reflected in the interim annual percentage rate. Interest subsidies,
such as payments made by either a State or the Federal government on an
interim loan, must be excluded in computing the annual percentage rate
on the interim obligation, when the consumer has no contingent
liability for payment of those amounts. Any finance charges that are
paid separately by the student at the outset or withheld from the
proceeds of the loan are prepaid finance charges. An example of this
type of charge is the loan guarantee fee. The sum of the prepaid
finance charges is deducted from the loan proceeds to determine the
amount financed and included in the calculation of the finance charge.
3. Consolidation. Consolidation of the interim student credit
extensions through a renewal note with a set repayment schedule is
treated as a new transaction with disclosures made as they would be for
a refinancing. Any unearned portion of the finance charge must be
reflected in the new finance charge and annual percentage rate, and is
not added to the new amount financed. In itemizing the amount financed
under Sec. 226.18(c), the creditor may combine the principal balances
remaining on the interim extensions at the time of consolidation and
categorize them as the amount paid on the consumer's account.
4. Approved student credit forms. See the commentary to appendix H
regarding disclosure forms approved for use in certain student credit
programs.
Sec. 226.18--Content of Disclosures.
1. As applicable. [rtrif]i.[ltrif] The disclosures required by this
section need be made only as applicable. Any disclosure not relevant to
a particular transaction may be eliminated entirely. For example:
[][rtrif]A.[ltrif] In a loan transaction, the creditor may
delete disclosure of the total sale price.
[][rtrif]B.[ltrif] In a credit sale requiring disclosure of
the total sale price under Sec. 226.18(j), the creditor may delete any
reference to a downpayment where no downpayment is involved.
[rtrif]ii.[ltrif] Where the amounts of several numerical
disclosures are the same, the ``as applicable'' language also permits
creditors to combine the terms, so long as it is done in a clear and
conspicuous manner. For example:
[][rtrif]A.[ltrif] In a transaction in which the amount
financed equals the total of payments, the creditor may disclose
``amount financed/total of payments,''
[[Page 43385]]
together with descriptive language, followed by a single amount.
[][rtrif]B.[ltrif] However, if the terms are separated on
the disclosure statement and separate space is provided for each
amount, both disclosures must be completed, even though the same amount
is entered in each space.
2. Format. See the commentary to Sec. 226.17 and appendix H for a
discussion of the format to be used in making these disclosures, as
well as acceptable modifications.
18(a) Creditor.
1. Identification of creditor. The creditor making the disclosures
must be identified. [This disclosure may, at the creditor's option,
appear apart from the other disclosures.] Use of the creditor's name is
sufficient, but the creditor may also include an address and/or
telephone number. In transactions with multiple creditors, any one of
them may make the disclosures; the one doing so must be identified.
18(b) Amount financed.
1. Disclosure required. The net amount of credit extended must be
disclosed using the term amount financed and a descriptive explanation
similar to the phrase in the regulation.
2. Rebates and loan premiums. In a loan transaction, the creditor
may offer a premium in the form of cash or merchandise to prospective
borrowers. Similarly, in a credit sale transaction, a seller's or
manufacturer's rebate may be offered to prospective purchasers of the
creditor's goods or services. [rtrif]Such premiums and rebates must be
reflected in accordance with the terms of the legal obligation between
the parties. See Sec. 226.17(c)(1) and its commentary. Thus, if the
creditor is legally obligated to provide the premium or rebate to the
consumer as part of the credit transaction, the disclosures should
reflect its value in the manner and at the time the creditor is
obligated to provide it.[ltrif] [At the creditor's option, these
amounts may be either reflected in the Truth in Lending disclosures or
disregarded in the disclosures. If the creditor chooses to reflect them
in the Sec. 226.18 disclosures, rather than disregard them, they may
be taken into account in any manner as part of those disclosures.]
Paragraph 18(b)(1).
1. Downpayments. A downpayment is defined in Sec. 226.2(a)(18) to
include, at the creditor's option, certain deferred downpayments or
pick-up payments. A deferred downpayment that meets the criteria set
forth in the definition may be treated as part of the downpayment, at
the creditor's option.
[][rtrif]i.[ltrif] Deferred downpayments that are not
treated as part of the downpayment (either because they do not meet the
definition or because the creditor simply chooses not to treat them as
downpayments) are included in the amount financed.
[][rtrif]ii.[ltrif] Deferred downpayments that are treated
as part of the downpayment are not part of the amount financed under
Sec. 226.18(b)(1).
Paragraph 18(b)(2).
1. Adding other amounts. Fees or other charges that are not part of
the finance charge and that are financed rather than paid separately at
consummation of the transaction are included in the amount financed.
Typical examples are [real estate settlement charges and] premiums for
voluntary credit life and disability insurance excluded from the
finance charge under Sec. 226.4. This paragraph does not include any
amounts already accounted for under Sec. 226.18(b)(1), such as taxes,
tag and title fees, or the costs of accessories or service policies
that the creditor includes in the cash price.
Paragraph 18(b)(3).
1. Prepaid finance charges. [rtrif]i.[ltrif] Prepaid finance
charges that are paid separately in cash or by check should be deducted
under Sec. 226.18(b)(3) in calculating the amount financed. To
illustrate[ A][rtrif], a[ltrif] consumer applies for a loan of
$2,500 with a $40 loan fee. The face amount of the note is $2,500 and
the consumer pays the loan fee separately by cash or check at closing.
The principal loan amount for purposes of Sec. 226.18(b)(1) is $2,500
and $40 should be deducted under Sec. 226.18(b(3), thereby yielding an
amount financed of $2,460.
[rtrif]ii.[ltrif] In some instances, as when loan fees are financed
by the creditor, finance charges are incorporated in the face amount of
the note. Creditors have the option, when the charges are not add-on or
discount charges, of determining a principal loan amount under Sec.
226.18(b)(1) that either includes or does not include the amount of the
finance charges. (Thus the principal loan amount may, but need not, be
determined to equal the face amount of the note.) When the finance
charges are included in the principal loan amount, they should be
deducted as prepaid finance charges under Sec. 226.18(b)(3). When the
finance charges are not included in the principal loan amount, they
should not be deducted under Sec. 226.18(b)(3). The following examples
illustrate the application of Sec. 226.18(b) to this type of
transaction. Each example assumes a loan request of $2,500 with a loan
fee of $40; the creditor assesses the loan fee by increasing the face
amount of the note to $2,540.
[][rtrif]A.[ltrif] If the creditor determines the principal
loan amount under Sec. 226.18(b)(1) to be $2,540, it has included the
loan fee in the principal loan amount and should deduct $40 as a
prepaid finance charge under Sec. 226.18(b)(3), thereby obtaining an
amount financed of $2,500.
[][rtrif]B.[ltrif] If the creditor determines the principal
loan amount under Sec. 226.18(b)(1) to be $2,500, it has not included
the loan fee in the principal loan amount and should not deduct any
amount under Sec. 226.18(b)(3), thereby obtaining an amount financed
of $2,500.
[rtrif]iii.[ltrif] The same rules apply when the creditor does not
increase the face amount of the note by the amount of the charge but
collects the charge by withholding it from the amount advanced to the
consumer. To illustrate, the following examples assume a loan request
of $2,500 with a loan fee of $40; the creditor prepares a note for
$2,500 and advances $2,460 to the consumer.
[][rtrif]A.[ltrif] If the creditor determines the principal
loan amount under Sec. 226.18(b)(1) to be $2,500, it has included the
loan fee in the principal loan amount and should deduct $40 as a
prepaid finance charge under Sec. 226.18(b)(3), thereby obtaining an
amount financed of $2,460.
[][rtrif]B.[ltrif] If the creditor determines the principal
loan amount under Sec. 226.18(b)(1) to be $2,460, it has not included
the loan fee in the principal loan amount and should not deduct any
amount under Sec. 226.18(b)(3), thereby obtaining an amount financed
of $2,460.
[rtrif]iv.[ltrif] Thus in the examples where the creditor derives
the net amount of credit by determining a principal loan amount that
does not include the amount of the finance charge, no subtraction is
appropriate. Creditors should note, however, that although the charges
are not subtracted as prepaid finance charges in those examples, they
are nonetheless finance charges and must be treated as such.
2. Add-on or discount charges. All finance charges must be deducted
from the amount of credit in calculating the amount financed. If the
principal loan amount reflects finance charges that meet the definition
of a prepaid finance charge in Sec. 226.2, those charges are included
in the Sec. 226.18(b)(1) amount and deducted under Sec. 226.18(b)(3).
However, if the principal loan amount includes finance charges that do
not meet the definition of a prepaid finance charge, the Sec.
226.18(b)(1) amount must exclude those finance charges. The following
examples illustrate the application of Sec. 226.18(b) to these types
of transactions. Each example assumes a loan request of $1000 for 1
year, subject
[[Page 43386]]
to a 6 percent precomputed interest rate, with a $10 loan fee paid
separately at consummation.
[][rtrif]i.[ltrif] The creditor assesses add-on interest of
$60 which is added to the $1000 in loan proceeds for an obligation with
a face amount of $1060. The principal for purposes of Sec.
226.18(b)(1) is $1000, no amounts are added under Sec. 226.18(b)(2),
and the $10 loan fee is a prepaid finance charge to be deducted under
Sec. 226.18(b)(3). The amount financed is $990.
[][rtrif]ii.[ltrif] The creditor assesses discount interest
of $60 and distributes $940 to the consumer, who is liable for an
obligation with a face amount of $1000. The principal under Sec.
226.18(b)(1) is $940, which results in an amount financed of $930,
after deduction of the $10 prepaid finance charge under Sec.
226.18(b)(3).
[][rtrif]iii.[ltrif] The creditor assesses $60 in discount
interest by increasing the face amount of the obligation to $1060, with
the consumer receiving $1000. The principal under Sec. 226.18(b)(1) is
thus $1000 and the amount financed $990, after deducting the $10
prepaid finance charge under Sec. 226.18(b)(3).
18(c) Itemization of amount financed.
1. Disclosure required. [rtrif]i.[ltrif] The creditor has 2
alternatives in complying with Sec. 226.18(c):
[][rtrif]A.[ltrif] The creditor may inform the consumer, on
the segregated disclosures, that a written itemization of the amount
financed will be provided on request, furnishing the itemization only
if the customer in fact requests it.
[][rtrif]B.[ltrif] The creditor may provide an itemization
as a matter of course, without notifying the consumer of the right to
receive it or waiting for a request.
[rtrif]ii.[ltrif] Whether given as a matter of course or only on
request, the itemization must be provided at the same time as the other
disclosures required by Sec. 226.18, although separate from those
disclosures.
2. Additional information. Section 226.18(c) establishes only a
minimum standard for the material to be included in the itemization of
the amount financed. Creditors have considerable flexibility in
revising or supplementing the information listed in Sec. 226.18(c) and
shown in model form H-3, although no changes are required. The creditor
may, for example, do one or more of the following:
i. Include amounts that reflect payments not part of the amount
financed. For example, [escrow items and] certain insurance premiums
may be included, [rtrif]even though they are neither part of the amount
financed nor prepaid finance charges.[ltrif] [as discussed in the
commentary to Sec. 226.18(g).]
ii. Organize the categories in any order. For example, the creditor
may rearrange the terms in a mathematical progression that depicts the
arithmetic relationship of the terms.
iii. Add categories. For example, in a credit sale, the creditor
may include the cash price and the downpayment. If the credit sale
involves a trade-in of the consumer's car and an existing lien on that
car exceeds the value of the trade-in amount, the creditor may disclose
the consumer's trade-in value, the creditor's payoff of the existing
lien, and the resulting additional amount financed.
iv. Further itemize each category. For example, the amount paid
directly to the consumer may be subdivided into the amount given by
check and the amount credited to the consumer's savings account.
v. Label categories with different language from that shown in
Sec. 226.18(c). For example, an amount paid on the consumer's account
may be revised to specifically identify the account as ``your auto loan
with us.''
vi. Delete, leave blank, mark ``N/A,'' or otherwise
[rtrif]note[ltrif] [not] inapplicable categories in the itemization.
For example, in a credit sale with no prepaid finance charges or
amounts paid to others, the amount financed may consist of only the
cash price less downpayment. In this case, the itemization may be
composed of only a single category and all other categories may be
eliminated.
3. Amounts appropriate to more than one category. When an amount
may appropriately be placed in any of several categories and the
creditor does not wish to revise the categories shown in Sec.
226.18(c), the creditor has considerable flexibility in determining
where to show the amount. For example[:] [rtrif],[ltrif]
[][I][rtrif]i[ltrif] n a credit sale, the portion of the
purchase price being financed by the creditor may be viewed as either
an amount paid to the consumer or an amount paid on the consumer's
account.
[4. RESPA transactions. The Real Estate Settlement Procedures Act
(RESPA) requires creditors to provide a good faith estimate of closing
costs and a settlement statement listing the amounts paid by the
consumer. Transactions subject to RESPA are exempt from the
requirements of Sec. 226.18(c) if the creditor complies with RESPA's
requirements for a good faith estimate and settlement statement. The
itemization of the amount financed need not be given, even though the
content and timing of the good faith estimate and settlement statement
under RESPA differ from the requirements of Sec. Sec. 226.18(c) and
226.19(a)(2). If a creditor chooses to substitute RESPA's settlement
statement for the itemization when redisclosure is required under Sec.
226.19(a)(2), the statement must be delivered to the consumer at or
prior to consummation. The disclosures required by Sec. Sec. 226.18(c)
and 226.19(a)(2) may appear on the same page or on the same document as
the good faith estimate or the settlement statement, so long as the
requirements of Sec. 226.17(a) are met.]
Paragraph 18(c)(1)(i).
1. Amounts paid to consumer. This encompasses funds given to the
consumer in the form of cash or a check, including joint proceeds
checks, as well as funds placed in an asset account. It may include
money in an interest-bearing account even if that amount is considered
a required deposit under Sec. 226.18(r). For example, in a transaction
with total loan proceeds of $500, the consumer receives a check for
$300 and $200 is required by the creditor to be put into an interest-
bearing account. Whether or not the $200 is a required deposit, it is
part of the amount financed. At the creditor's option, it may be broken
out and labeled in the itemization of the amount financed.
Paragraph 18(c)(1)(ii).
1. Amounts credited to consumer's account. The term consumer's
account refers to an account in the nature of a debt with that
creditor. It may include, for example, an unpaid balance on a prior
loan, a credit sale balance or other amounts owing to that creditor. It
does not include asset accounts of the consumer such as savings or
checking accounts.
Paragraph 18(c)(1)(iii).
1. Amounts paid to others. This includes, for example, tag and
title fees; amounts paid to insurance companies for insurance premiums;
security interest fees, and amounts paid to credit bureaus, appraisers
or public officials. When several types of insurance premiums are
financed, they may, at the creditor's option, be combined and listed in
one sum, labeled ``insurance'' or similar term. This includes, but is
not limited to, different types of insurance premiums paid to one
company and different types of insurance premiums paid to different
companies. Except for insurance companies and other categories noted in
footnote 41, third parties must be identified by name.
2. Charges added to amounts paid to others. A sum is sometimes
added to the amount of a fee charged to a consumer for a service
provided by a third party (such as for an extended warranty or a
[[Page 43387]]
service contract) that is payable in the same amount in comparable cash
and credit transactions. In the credit transaction, the amount is
retained by the creditor. Given the flexibility permitted in meeting
the requirements of the amount financed itemization (see the commentary
to Sec. 226.18(c)), the creditor in such cases may reflect that the
creditor has retained a portion of the amount paid to others. For
example, the creditor could add to the category ``amount paid to
others'' language such as ``(we may be retaining a portion of this
amount).''
Paragraph 18(c)(1)(iv).
1. Prepaid finance charge. Prepaid finance charges that are
deducted under Sec. 226.18(b)(3) must be disclosed under this section.
The prepaid finance charges must be shown as a total amount but may, at
the creditor's option, also be further itemized and described. All
amounts must be reflected in this total, even if portions of the
prepaid finance charge are also reflected elsewhere. For example, if at
consummation the creditor collects interim interest of $30 and a credit
report fee of $10, a total prepaid finance charge of $40 must be shown.
At the creditor's option, the credit report fee paid to a third party
may also be shown elsewhere as an amount included in Sec.
226.18(c)(1)(iii). The creditor may also further describe the 2
components of the prepaid finance charge, although no itemization of
this element is required by Sec. 226.18(c)(1)(iv).
[2. Prepaid mortgage insurance premiums. RESPA requires creditors
to give consumers a settlement statement disclosing the costs
associated with mortgage loan transactions. Included on the settlement
statement are mortgage insurance premiums collected at settlement,
which are prepaid finance charges. In calculating the total amount of
prepaid finance charges, creditors should use the amount for mortgage
insurance listed on the line for mortgage insurance on the settlement
statement (line 1002 on HUD-1 or HUD 1-A), without adjustment, even if
the actual amount collected at settlement may vary because of RESPA's
escrow accounting rules. Figures for mortgage insurance disclosed in
conformance with RESPA shall be deemed to be accurate for purposes of
Regulation Z.]
18(d) Finance charge.
1. Disclosure required. The creditor must disclose the finance
charge as a dollar amount, using the term ``finance charge,'' and must
include a brief description similar to that in Sec. 226.18(d). The
creditor may, but need not, further modify the descriptor for variable
rate transactions with a phrase such as ``which is subject to change.''
The finance charge must be shown on the disclosures only as a total
amount; the elements of the finance charge must not be itemized in the
segregated disclosures, although the regulation does not prohibit their
itemization elsewhere.
[2. [Reserved]]
[18(d)(2) Other Credit]
[1][rtrif]2[ltrif]. Tolerance. When a finance-charge error results
in a misstatement of the amount financed, or some other dollar amount
for which the regulation provides no specific tolerance, the misstated
disclosure does not violate the act or the regulation if the finance-
charge error is within the permissible tolerance in this paragraph.
18(e) Annual percentage rate.
1. Disclosure required. The creditor must disclose the cost of the
credit as an annual rate, using the term ``annual percentage rate,''
plus a brief descriptive phrase comparable to that used in Sec.
226.18(e). For variable rate transactions, the descriptor may be
further modified with a phrase such as ``which is subject to change.''
Under Sec. 226.17(a), the terms ``annual percentage rate'' and
``finance charge'' must be more conspicuous than the other required
disclosures.
2. Exception. [Footnote 42][rtrif]Section 226.18(e)[ltrif] provides
an exception for certain transactions in which no annual percentage
rate disclosure is required.
18(f) Variable rate.
1. Coverage. The requirements of Sec. 226.18(f) apply to [all]
transactions [rtrif]not secured by real property or a dwelling[ltrif]
in which the terms of the legal obligation allow the creditor to
increase the rate [originally disclosed to the consumer. It
includes][rtrif]charged when the transaction is consummated. Increases
in rate include[ltrif] not only increases in the interest rate but also
increases in other components, such as the rate of required credit life
insurance. [The provisions, however, do not apply to][rtrif]However,
increases in rate do not include[ltrif] increases resulting from
delinquency (including late payment), default, assumption, acceleration
or transfer of the collateral [rtrif], because creditors may assume
that consumers abide by the terms of the legal obligation. See comment
17(c)(1)-1.[ltrif] [Section 226.18(f)(1) applies to variable-rate
transactions that are not secured by the consumer's principal dwelling
and to those that are secured by the principal dwelling but have a term
of one year or less. Section 226.18(f)(2) applies to variable-rate
transactions that are secured by the consumer's principal dwelling and
have a term greater than one year. Moreover, transactions subject to
section 226.18(f)(2) are subject to the special early-disclosure
requirements of section 226.19(b). (However, ``shared-equity'' or
``shared-appreciation'' mortgages are subject to the disclosure
requirements of section 226.18(f)(1) and not to the requirements of
sections 226.18(f)(2) and 226.19(b) regardless of the general coverage
of those sections.) Creditors are permitted under footnote 43 to
substitute in any variable-rate transaction the disclosures required
under Section 226.19(b) for those disclosures ordinarily required under
Section 226.18(f)(1). Creditors who provide variable-rate disclosures
under section 226.19(b) must comply with all of the requirements of
that section, including the timing of disclosures, and must also
provide the disclosures required under section 226.18(f)(2). Creditors
utilizing footnote 43 may, but need not, also provide disclosures
pursuant to section 226.20(c). (Substitution of disclosures under
section 226.18(f)(1) in transactions subject to section 226.19(b) is
not permitted under the footnote.)]
[Paragraph 18(f)(1).]
[1.][rtrif]2.[ltrif] Terms used in disclosure. In describing the
variable rate feature, the creditor need not use any prescribed
terminology. For example, limitations and hypothetical examples may be
described in terms of interest rates rather than annual percentage
rates. The model forms in appendix H provide examples of ways in which
the variable rate disclosures may be made.
[2.][rtrif]3.[ltrif] Conversion feature. In variable-rate
transactions with an option permitting consumers to convert to a fixed-
rate transaction, the conversion option is a variable-rate feature that
must be disclosed. In making disclosures under Sec. 226.18(f)[(1)],
creditors should disclose the fact that the rate may increase upon
conversion; identify the index or formula used to set the fixed rate;
and state any limitations on and effects of an increase resulting from
conversion that differ from other variable-rate features. Because Sec.
226.18(f)[(1)(iv)][rtrif](4)[ltrif] requires only one hypothetical
example (such as an example of the effect on payments resulting from
changes in the index), a second hypothetical example need not be given.
Paragraph 18(f)(1)[(i)].
1. Circumstances. The circumstances under which the rate may
increase include identification of any index to which the rate is tied,
as well as any conditions or events on which the increase is
contingent.
i. When no specific index is used, any identifiable factors used to
determine
[[Page 43388]]
whether to increase the rate must be disclosed.
ii. When the increase in the rate is purely discretionary, the fact
that any increase is within the creditor's discretion must be
disclosed.
iii. When the index is internally defined (for example, by that
creditor's prime rate), the creditor may comply with this requirement
by either a brief description of that index or a statement that any
increase is in the discretion of the creditor. An externally defined
index, however, must be identified.
Paragraph 18(f)[(1)(ii)][rtrif](2)[ltrif].
1. Limitations. This includes any maximum imposed on the amount of
an increase in the rate at any time, as well as any maximum on the
total increase over the life of the transaction. When there are no
limitations, the creditor may, but need not, disclose that fact.
Limitations do not include legal limits in the nature of usury or rate
ceilings under State or Federal statutes or regulations. (See Sec.
226.30 for the rule requiring that a maximum interest rate be included
in certain variable-rate transactions.)
Paragraph 18(f)[(1)(iii)][rtrif](3)[ltrif].
1. Effects. Disclosure of the effect of an increase refers to an
increase in the number or amount of payments or an increase in the
final payment. In addition, the creditor may make a brief reference to
negative amortization that may result from a rate increase. (See the
commentary to Sec. 226.17(a)(1) regarding directly related
information.) If the effect cannot be determined, the creditor must
provide a statement of the possible effects. For example, if the
exercise of the variable-rate feature may result in either more or
larger payments, both possibilities must be noted.
Paragraph 18(f)[(1)(iv)][rtrif](4)[ltrif].
1. Hypothetical example. The example may, at the creditor's option
appear apart from the other disclosures. The creditor may provide
either a standard example that illustrates the terms and conditions of
that type of credit offered by that creditor or an example that
directly reflects the terms and conditions of the particular
transaction. In transactions with more than one variable-rate feature,
only one hypothetical example need be provided. (See the commentary to
Sec. 226.17(a)(1) regarding disclosure of more than one hypothetical
example as directly related information.)
2. Hypothetical example not required. The creditor need not provide
a hypothetical example in the following transactions with a variable-
rate feature:
i. Demand obligations with no alternate maturity date.
ii. Interim student credit extensions.
iii. Multiple-advance construction loans disclosed pursuant to
appendix D, Part I.
[Paragraph 18(f)(2).
1. Disclosure required. In variable-rate transactions that have a
term greater than one year and are secured by the consumer's principal
dwelling, the creditor must give special early disclosures under
section 226.19(b) in addition to the later disclosures required under
section 226.18(f)(2). The disclosures under section 226.18(f)(2) must
state that the transaction has a variable-rate feature and that
variable-rate disclosures have been provided earlier. (See the
commentary to section 226.17(a)(1) regarding the disclosure of certain
directly related information in addition to the variable-rate
disclosures required under section 226.18(f)(2).)]
18(g) Payment schedule.
1. Amounts included in repayment schedule. The repayment schedule
should reflect all components of the finance charge, not merely the
portion attributable to interest. A prepaid finance charge, however,
should not be shown in the repayment schedule as a separate payment.
The payments may include amounts beyond the amount financed and finance
charge. For example, the disclosed payments may, at the creditor's
option, reflect certain insurance premiums where the premiums are not
part of either the amount financed or the finance charge, as well as
real estate escrow amounts such as taxes added to the payment in
mortgage transactions.
2. Deferred downpayments. As discussed in the commentary to Sec.
226.2(a)(18), deferred downpayments or pick-up payments that meet the
conditions set forth in the definition of downpayment may be treated as
part of the downpayment. Even if treated as a downpayment, that amount
may nevertheless be disclosed as part of the payment schedule, at the
creditor's option.
3. Total number of payments. [rtrif]Except for transactions secured
by real property or a dwelling, i[ltrif][I]n disclosing the number of
payments for transactions with more than one payment level, creditors
may but need not disclose as a single figure the total number of
payments for all levels. For example, in a transaction calling for 108
payments of $350, 240 payments of $335, and 12 payments of $330, the
creditors need not state that there will be a total of 360 payments.
[rtrif]For transactions secured by real property or a dwelling,
creditors must disclose as a single figure the total number of payments
for all levels. See Sec. 226.38(e)(5)(i).[ltrif]
4. Timing of payments. i. General rule. Section 226.18(g) requires
creditors to disclose the timing of payments. To meet this requirement,
creditors may list all of the payment due dates. They also have the
option of specifying the ``period of payments'' scheduled to repay the
obligation. As a general rule, creditors that choose this option must
disclose the payment intervals or frequency, such as ``monthly'' or
``bi-weekly,'' and the calendar date that the beginning payment is due.
For example, a creditor may disclose that payments are due ``monthly
beginning on July 1, 1998.'' This information, when combined with the
number of payments, is necessary to define the repayment period and
enable a consumer to determine all of the payment due dates.
ii. Exception. In a limited number of circumstances, the beginning-
payment date is unknown and difficult to determine at the time
disclosures are made. For example, a consumer may become obligated on a
credit contract that contemplates the delayed disbursement of funds
based on a contingent event, such as the completion of home repairs.
Disclosures may also accompany loan checks that are sent by mail, in
which case the initial disbursement and repayment dates are solely
within the consumer's control. In such cases, if the beginning-payment
date is unknown the creditor may use an estimated date and label the
disclosure as an estimate pursuant to Sec. 226.17(c). Alternatively,
the disclosure may refer to the occurrence of a particular event, for
example, by disclosing that the beginning payment is due ``30 days
after the first loan disbursement.'' This information also may be
included with an estimated date to explain the basis for the creditor's
estimate. See comment 17(a)(1)-5(iii).
5. Mortgage insurance. The payment schedule should reflect the
consumer's mortgage insurance payments until the date on which the
creditor must automatically terminate coverage under applicable law,
even though the consumer may have a right to request that the insurance
be cancelled earlier. The payment schedule must reflect the legal
obligation, as determined by applicable State or other law. For
example, assume that under applicable law, mortgage insurance must
terminate after the 130th scheduled monthly payment, and the creditor
collects at closing and places in escrow two months of premiums. If,
under the legal obligation, the creditor will include mortgage
insurance premiums in 130 payments and refund the escrowed payments
when the insurance is terminated, the payment schedule
[[Page 43389]]
should reflect 130 premium payments. If, under the legal obligation,
the creditor will apply the amount escrowed to the two final insurance
payments, the payment schedule should reflect 128 monthly premium
payments. (For assumptions in calculating a payment schedule that
includes mortgage insurance that must be automatically terminated, see
comments [17(c)(1)-8 and 17(c)(1)-10][rtrif]17(c)(1)(iii)-1 and
17(c)(1)(iii)-3[ltrif].)
[Paragraph ]18(h) Total of payments.
1. Disclosure required. The total of payments must be disclosed
using that term, along with a descriptive phrase similar to the one in
the regulation. The descriptive explanation may be revised to reflect a
variable rate feature with a brief phrase such as ``based on the
current annual percentage rate which may change.''
2. Calculation of total of payments. The total of payments is the
sum of the payments disclosed under Sec. 226.18(g). For example, if
the creditor disclosed a deferred portion of the downpayment as part of
the payment schedule, that payment must be reflected in the total
disclosed under this paragraph.
3. Exception. [Footnote 44][rtrif]Section 226.18(h)[ltrif] permits
creditors to omit disclosure of the total of payments in single-payment
transactions. This exception does not apply to a transaction calling
for a single payment of principal combined with periodic payments of
interest.
4. Demand obligations. In demand obligations with no alternate
maturity date, the creditor may omit disclosure of payment amounts
under Sec. 226.18(g)(1). In those transactions, the creditor need not
disclose the total of payments.
[Paragraph] 18(i) Demand feature.
1. Disclosure requirements. The disclosure requirements of this
provision apply not only to transactions payable on demand from the
outset, but also to transactions that are not payable on demand at the
time of consummation but convert to a demand status after a stated
period. In demand obligations in which the disclosures are based on an
assumed maturity of 1 year under Sec. 226.17(c)(5), that fact must
also be stated. Appendix H contains model clauses that may be used in
making this disclosure.
2. Covered demand features. The type of demand feature triggering
the disclosures required by section 226.18(i)[rtrif], or section
226.38(d)(2)(iv) for transactions secured by real property or a
dwelling, [ltrif]includes only those demand features contemplated by
the parties as part of the legal obligation. For example, [this
provision][rtrif]section 226.18(i), or section 226.38(d)(2)(iv) for
transactions secured by real property or a dwelling,[ltrif] do[es] not
apply to transactions that convert to a demand status as a result of
the consumer's default. A due-on-sale clause is not considered a demand
feature. A creditor may, but need not, treat its contractual right to
demand payment of a loan made to its executive officers as a demand
feature to the extent that the contractual right is required by
Regulation O (12 CFR 215.5) or other federal law.
3. Relationship to payment schedule disclosures. As provided in
section 226.18(g)(1), [rtrif]or section 226.38(c) for transactions
secured by real property or a dwelling,[ltrif] in demand obligations
with no alternate maturity date, the creditor need only disclose the
due dates or payment periods of any scheduled interest payments for the
first year. If the demand obligation states an alternate maturity,
however, the disclosed payment schedule must reflect that stated term;
the special rule in section 226.18(g)(1)[rtrif], or section 226.38(c)
for transactions secured by real property or a dwelling,[ltrif] is not
available.
[Paragraph ]18(j) Total sale price.
1. Disclosure required. In a credit sale transaction, the total
sale price must be disclosed using that term, along with a descriptive
explanation similar to the one in the regulation. For variable rate
transactions, the descriptive phrase may, at the creditor's option, be
modified to reflect the variable rate feature. For example, the
descriptor may read: ``The total cost of your purchase on credit, which
is subject to change, including your downpayment of * * *.'' The
reference to a downpayment may be eliminated in transactions calling
for no downpayment.
2. Calculation of total sale price. The figure to be disclosed is
the sum of the cash price, other charges added under Sec.
226.18(b)(2), and the finance charge disclosed under Sec. 226.18(d).
3. Effect of existing liens. When a credit sale transaction
involves property that is being used as a trade-in (an automobile, for
example) and that has a lien exceeding the value of the trade-in, the
total sale price is affected by the amount of any cash provided. (See
comment 2(a)(18)-3.) To illustrate, assume a consumer finances the
purchase of an automobile with a cash price of $20,000. Another vehicle
used as a trade-in has a value of $8,000 but has an existing lien of
$10,000, leaving a $2,000 deficit that the consumer must finance.
i. If the consumer pays $1,500 in cash, the creditor may apply the
cash first to the lien, leaving a $500 deficit, and reflect a
downpayment of $0. The total sale price would include the $20,000 cash
price, an additional $500 financed under Sec. 226.18(b)(2), and the
amount of the finance charge. Alternatively, the creditor may reflect a
downpayment of $1,500 and finance the $2,000 deficit. In that case, the
total sale price would include the sum of the $20,000 cash price, the
$2,000 lien payoff amount as an additional amount financed, and the
amount of the finance charge.
ii. If the consumer pays $3,000 in cash, the creditor may apply the
cash first to extinguish the lien and reflect the remainder as a
downpayment of $1,000. The total sale price would reflect the $20,000
cash price and the amount of the finance charge. (The cash payment
extinguishes the trade-in deficit and no charges are added under Sec.
226.18(b)(2).) Alternatively, the creditor may elect to reflect a
downpayment of $3,000 and finance the $2,000 deficit. In that case, the
total sale price would include the sum of the $20,000 cash price, the
$2,000 lien payoff amount as an additional amount financed, and the
amount of the finance charge.
[Paragraph ]18(k) Prepayment.
1. Disclosure required. The creditor must give a definitive
statement of whether or not a penalty will be imposed or a rebate will
be given.
[][rtrif]iii.[ltrif] The fact that no penalty will be
imposed may not simply be inferred from the absence of a penalty
disclosure; the creditor must indicate that prepayment will not result
in a penalty.
[][rtrif]ii.[ltrif] If a penalty or refund is possible for
one type of prepayment, even though not for all, a positive disclosure
is required. This applies to any type of prepayment, whether voluntary
or involuntary as in the case of prepayments resulting from
acceleration.
[][rtrif]iii.[ltrif] Any difference in rebate or penalty
policy, depending on whether prepayment is voluntary or not, must not
be disclosed with the segregated disclosures.
2. Rebate-penalty disclosure. A single transaction may involve both
a precomputed finance charge and a finance charge computed by
application of a rate to the unpaid balance (for example, mortgages
with mortgage-guarantee insurance). In these cases, disclosures about
both prepayment rebates and penalties are required. Sample form H-15 in
appendix H illustrates a mortgage transaction in which both rebate and
penalty disclosures are necessary.
[[Page 43390]]
3. Prepaid finance charge. The existence of a prepaid finance
charge in a transaction does not, by itself, require a disclosure under
Sec. 226.18(k). A prepaid finance charge is not considered a penalty
under Sec. 226.18(k)(1), nor does it require a disclosure under Sec.
226.18(k)(2). At its option, however, a creditor may consider a prepaid
finance charge to be under Sec. 226.18(k)(2). If a disclosure is made
under Sec. 226.18(k)(2) with respect to a prepaid finance charge or
other finance charge, the creditor may further identify that finance
charge. For example, the disclosure may state that the borrower ``will
not be entitled to a refund of the prepaid finance charge'' or some
other term that describes the finance charge.
Paragraph 18(k)(1).
1. Penalty. [This][rtrif]Section 226.18(k)(1)[ltrif] applies only
to those transactions in which the interest calculation takes account
of all scheduled reductions in principal, as well as transactions in
which interest calculations are made daily. The term penalty as used
here encompasses only those charges that are assessed strictly because
of the prepayment in full of a simple-interest obligation, as an
addition to all other amounts. Items which are penalties include, for
example:
[ Interest charges for any period after prepayment in full
is made.][rtrif]i. Charges determined by treating the loan balance as
outstanding for a period after prepayment in full and applying the
interest rate to such ``balance.''[ltrif] (See the commentary to Sec.
226.17(a)(1) regarding disclosure of [interest][rtrif]such[ltrif]
charges assessed for periods after prepayment in full as directly
related information[rtrif], for transactions not secured by real
property or a dwelling[ltrif].)
[][rtrif]ii.[ltrif] A minimum finance charge in a simple-
interest transaction. (See the commentary to Sec. 226.17(a)(1)
regarding the disclosure of a minimum finance charge as directly
related information.) Items which are not penalties include, for
example[:][rtrif],[ltrif]
[ L][rtrif]l[ltrif]oan guarantee fees[rtrif].[ltrif]
[ Interim interest on a student loan.]
Paragraph 18(k)(2).
1. Rebate of finance charge. This applies to any finance charges
that do not take account of each reduction in the principal balance of
an obligation. This category includes, for example:
[][rtrif]i.[ltrif] Precomputed finance charges such as add-
on charges.
[][rtrif]ii.[ltrif] Charges that take account of some but
not all reductions in principal, such as mortgage guarantee insurance
assessed on the basis of an annual declining balance, when the
principal is reduced on a monthly basis.
[rtrif]2.[ltrif] Methodology of computing. No description of the
method of computing earned or unearned finance charges is required or
permitted as part of the segregated disclosures under this section.
[Paragraph ]18(l) Late payment.
1. Definition. This paragraph requires a disclosure only if charges
are added to individual delinquent installments by a creditor who
otherwise considers the transaction ongoing on its original terms. Late
payment charges do not include:
[][rtrif]i.[ltrif] The right of acceleration.
[][rtrif]ii.[ltrif] Fees imposed for actual collection
costs, such as repossession charges or attorney's fees.
[][rtrif]iii.[ltrif] Deferral and extension charges.
[][rtrif]iv.[ltrif] The continued accrual of simple
interest at the contract rate after the payment due date. However, an
increase in the interest rate is a late payment charge to the extent of
the increase.
2. Content of disclosure. Many State laws authorize the calculation
of late charges on the basis of either a percentage or a specified
dollar amount, and permit imposition of the lesser or greater of the 2
charges. The disclosure made under Sec. 226.18(l) may reflect this
alternative. For example, stating that the charge in the event of a
late payment is 5% of the late amount, not to exceed $5.00, is
sufficient. Many creditors also permit a grace period during which no
late charge will be assessed; this fact may be disclosed as directly
related information. (See the commentary to Sec. 226.17(a).)
[Paragraph ]18(m) Security interest.
1. Purchase money transactions. When the collateral is the item
purchased as part of, or with the proceeds of, the credit transaction,
section 226.18(m) requires only a general identification such as ``the
property purchased in this transaction.'' However, the creditor may
identify the property by item or type instead of identifying it more
generally with a phrase such as ``the property purchased in this
transaction.'' For example, a creditor may identify collateral as ``a
motor vehicle,'' or as ``the property purchased in this transaction.''
Any transaction in which the credit is being used to purchase the
collateral is considered a purchase money transaction and the
abbreviated identification may be used, whether the obligation is
treated as a loan or a credit sale.
2. Nonpurchase money transactions. In nonpurchase money
transactions, the property subject to the security interest must be
identified by item or type. This disclosure is satisfied by a general
disclosure of the category of property subject to the security
interest, such as ``motor vehicles,'' ``securities,'' ``certain
household items,'' or ``household goods.'' (Creditors should be aware,
however, that the Federal credit practices rules, as well as some State
laws, prohibit certain security interests in household goods.) At the
creditor's option, however, a more precise identification of the
property or goods may be provided.
3. Mixed collateral. In some transactions in which the credit is
used to purchase the collateral, the creditor may also take other
property of the consumer as security. In those cases, a combined
disclosure must be provided, consisting of an identification of the
purchase money collateral consistent with comment 18(m)-1 and a
specific identification of the other collateral consistent with comment
18(m)-2.
4. After-acquired property. An after-acquired property clause is
not a security interest to be disclosed under Sec. 226.18(m).
5. Spreader clause. The fact that collateral for pre-existing
credit with the institution is being used to secure the present
obligation constitutes a security interest and must be disclosed. (Such
security interests may be known as ``spreader'' or ``dragnet'' clauses,
or as ``cross-collateralization'' clauses.) A specific identification
of that collateral is unnecessary but a reminder of the interest
arising from the prior indebtedness is required. The disclosure may be
made by using language such as ``collateral securing other loans with
us may also secure this loan.'' At the creditor's option, a more
specific description of the property involved may be given.
6. Terms used in disclosure. No specified terminology is required
in disclosing a security interest. Although the disclosure may, at the
creditor's option, use the term security interest, the creditor may
designate its interest by using, for example, pledge, lien, or
mortgage.
7. Collateral from third party. In certain transactions, the
consumer's obligation may be secured by collateral belonging to a third
party. For example, a loan to a student may be secured by an interest
in the property of the student's parents. In such cases, the security
interest is taken in connection with the transaction and must be
disclosed, even though the property encumbered is owned by someone
other than the consumer.
[[Page 43391]]
18(n) Insurance[rtrif],[ltrif] [and] debt cancellation [rtrif], and
debt suspension[ltrif].
1. Location. This disclosure may, at the creditor's option, appear
apart from the other disclosures. It may appear with any other
information, including the amount financed itemization, any information
prescribed by State law, or other supplementary material. When this
information is disclosed with the other segregated disclosures,
however, no additional explanatory material may be included.
2. Debt cancellation [rtrif]and debt suspension[ltrif]. Creditors
may use the model credit-insurance disclosures only if the debt-
cancellation [rtrif]or debt suspension[ltrif] coverage constitutes
insurance under State law. Otherwise, they may provide a parallel
disclosure that refers to debt-cancellation [rtrif]or debt
suspension[ltrif] coverage.
[Paragraph ]18(o) Certain security interest charges.
1. Format. No special format is required for these disclosures;
under Sec. 226.4(e), taxes and fees paid to government officials with
respect to a security interest may be aggregated, or may be broken down
by individual charge. For example, the disclosure could be labeled
``filing fees and taxes'' and all funds disbursed for such purposes may
be aggregated in a single disclosure. This disclosure may appear, at
the creditor's option, apart from the other required disclosures. The
inclusion of this information on a statement required under the Real
Estate Settlement Procedures Act is sufficient disclosure for purposes
of Truth in Lending.
[Paragraph ]18(p) Contract reference.
1. Content. Creditors may substitute, for the phrase ``appropriate
contract document,'' a reference to specific transaction documents in
which the additional information is found, such as ``promissory note''
or ``retail installment sale contract.'' A creditor may, at its option,
delete inapplicable items in the contract reference, as for example
when the contract documents contain no information regarding the right
of acceleration.
[18(q) Assumption policy
1. Policy statement. In many mortgages, the creditor cannot
determine, at the time disclosure must be made, whether a loan may be
assumable at a future date on its original terms. For example, the
assumption clause commonly used in mortgages sold to the Federal
National Mortgage Association and the Federal Home Loan Mortgage
Corporation conditions an assumption on a variety of factors such as
the creditworthiness of the subsequent borrower, the potential for
impairment of the lender's security, and execution of an assumption
agreement by the subsequent borrower. In cases where uncertainty exists
as to the future assumability of a mortgage, the disclosure under Sec.
226.18(q) should reflect that fact. In making disclosures in such
cases, the creditor may use phrases such as ``subject to conditions,''
``under certain circumstances,'' or ``depending on future conditions.''
The creditor may provide a brief reference to more specific criteria
such as a due-on-sale clause, although a complete explanation of all
conditions is not appropriate. For example, the disclosure may state,
``Someone buying your home may be allowed to assume the mortgage on its
original terms, subject to certain conditions, such as payment of an
assumption fee.'' See comment 17(a)(1)-5 for an example of a reference
to a due-on-sale clause.
2. Original terms. The phrase original terms for purposes of Sec.
226.18(q) does not preclude the imposition of an assumption fee, but a
modification of the basic credit agreement, such as a change in the
contract interest rate, represents different terms.]
[Paragraph ]18(r) Required deposit.
1. Disclosure required. The creditor must inform the consumer of
the existence of a required deposit. (Appendix H provides a model
clause that may be used in making that disclosure.) [Footnote 45
describes three][rtrif]Sec. 226.18(r)(1) and (2) describe two[ltrif]
types of deposits that need not be considered required deposits. Use of
the phrase ``need not'' permits creditors to include the disclosure
even in cases where there is doubt as to whether the deposit
constitutes a required deposit.
[2. Pledged-account mortgages. In these transactions, a consumer
pledges as collateral funds that the consumer deposits in an account
held by the creditor. The creditor withdraws sums from that account to
supplement the consumer's periodic payments. Creditors may treat these
pledged accounts as required deposits or they may treat them as
consumer buydowns in accordance with the commentary to section
226.17(c)(1).]
3. Escrow accounts. The escrow exception in [footnote
45][rtrif]Sec. 226.18(r)(1)[ltrif] applies, for example, to accounts
for such items as maintenance fees, repairs, or improvements, whether
in a realty or a nonrealty transaction. (See the commentary to section
226.17(c)(1) regarding the use of escrow accounts in consumer buydown
transactions.)
4. Interest-bearing accounts. When a deposit earns at least 5
percent interest per year, no disclosure is required under Sec.
226.18(r). This exception applies whether the deposit is held by the
creditor or by a third party.
5. [Morris Plan transactions][rtrif]Deposits applied solely to pay
obligation[ltrif]. A deposit [under a Morris Plan, in
which][rtrif]to[ltrif] a deposit account [is] created for the sole
purpose of accumulating payments and [this is] applied to satisfy
entirely the consumer's obligation in the transaction[,] is not a
required deposit.
[6.] Examples of amounts excluded. The following are among the
types of deposits that need not be treated as required deposits:
[][rtrif]i.[ltrif] Requirement that a borrower be a
customer or a member even if that involves a fee or a minimum balance.
[][rtrif]ii.[ltrif] Required property insurance escrow on a
mobile home transaction.
[][rtrif]iii.[ltrif] Refund of interest when the obligation
is paid in full.
[][rtrif]iv.[ltrif] Deposits that are immediately available
to the consumer.
[][rtrif]v.[ltrif] Funds deposited with the creditor to be
disbursed (for example, for construction) before the loan proceeds are
advanced.
[][rtrif]vi.[ltrif] Escrow of condominium fees.
[][rtrif]vii.[ltrif] Escrow of loan proceeds to be released
when the repairs are completed.
Sec. 226.19--Certain Mortgage and Variable-Rate Transactions.
[rtrif]19 Coverage.
1. General. Section 226.19 applies to transactions secured by real
property or a dwelling, other than home equity lines of credit subject
to Sec. 226.5b. Creditors must make the disclosures required by Sec.
226.19 even if the transaction is not subject to the Real Estate
Settlement Procedures Act (RESPA), 12 U.S.C. 2602 et seq., and its
implementing Regulation X, 24 CFR 3500.1 et seq., administered by the
Department of Housing and Urban Development (HUD). For example,
disclosures are required for construction loans that are not covered by
RESPA or Regulation X because they are not considered ``federally
related mortgage loans.'' See 12 U.S.C. 2602(1); 15 CFR 3500.2(b).
However, Sec. 226.19 only applies to transactions that are offered or
extended to a consumer primarily for personal, family, or household
purposes, even if the transactions are secured by real property or a
dwelling. TILA and Regulation Z do not apply to transactions that are
primarily for business, commercial, or agricultural purposes. See 15
U.S.C. 1603(1); Sec. 226.3(a)(2). See also Sec. 226.2(a)(12) and
(b)(2). Section 226.19(a)(4) contains special disclosure
[[Page 43392]]
timing requirements for mortgage transactions secured by a consumer's
interest in a timeshare plan described in 11 U.S.C. 101(53(D)).[ltrif]
19(a)(1)(i) Time of disclosure.
[1. Coverage. This section requires early disclosure of credit
terms in mortgage transactions that are secured by a consumer's
dwelling (other than home equity lines of credit subject to Sec.
226.5b or mortgage transactions secured by an interest in a timeshare
plan) that are also subject to the Real Estate Settlement Procedures
Act (RESPA) and its implementing Regulation X, administered by the
Department of Housing and Urban Development (HUD). To be covered by
Sec. 226.19, a transaction must be a Federally related mortgage loan
under RESPA. ``Federally related mortgage loan'' is defined under RESPA
(12 U.S.C. 2602) and Regulation X (24 CFR 3500.2), and is subject to
any interpretations by HUD.]
[2.][rtrif]1.[ltrif] Timing and use of estimates. The disclosures
required by Sec. 226.19(a)(1)(i) must be delivered or mailed not later
than three business days after the creditor receives the consumer's
written application. The general definition of ``business day'' in
Sec. 226.2(a)(6)--a day on which the creditor's offices are open to
the public for substantially all of its business functions--is used for
purposes of Sec. 226.19(a)(1)(i). See comment 2(a)(6)-1. This general
definition is consistent with the definition of ``business day'' in
HUD's Regulation X--a day on which the creditor's offices are open to
the public for carrying on substantially all of its business functions.
See 24 CFR 3500.2. Accordingly, the three-business-day period in Sec.
226.19(a)(1)(i) for making early disclosures coincides with the time
period within which creditors [subject to RESPA] must provide good
faith estimates of settlement costs [rtrif]for transactions subject to
RESPA[ltrif]. If the creditor does not know the precise credit terms,
the creditor must base the disclosures [rtrif]required by Sec.
226.19(a)(1)(i)[ltrif] on the best information reasonably available and
indicate that the disclosures are estimates under Sec. 226.17(c)(2).
If many of the disclosures are estimates, the creditor may include a
statement to that effect (such as ``all numerical disclosures [except
the late-payment disclosure] are estimates'') instead of separately
labelling each estimate. In the alternative, the creditor may label as
an estimate only the items primarily affected by unknown information.
(See the commentary to Sec. 226.17(c)(2).) The creditor may provide
explanatory material concerning the estimates and the contingencies
that may affect the actual terms, in accordance with the commentary to
Sec. 226.17(a)(1)[.][rtrif]and Sec. 226.37. The disclosures required
by Sec. 226.19(a)(2) may not contain estimates, however, with limited
exceptions. See the commentary on Sec. 226.19(a)(2) for a discussion
of limitations on estimates in disclosures made under that
subsection.[ltrif]
[3.][rtrif]2.[ltrif] Written application. Creditors may rely on
RESPA and Regulation X (including any interpretations issued by HUD) in
deciding whether a ``written application'' has been received. In
general, Regulation X defines an ``application'' to mean the submission
of a borrower's financial information in anticipation of a credit
decision relating to a [F][rtrif]f[ltrif]ederally related mortgage
loan. See 24 CFR 3500.2(b). [rtrif]Creditors may rely on RESPA and
Regulation X even for a transaction not subject to RESPA.[ltrif] An
application is received when it reaches the creditor in any of the ways
applications are normally transmitted--by mail, hand delivery, or
through an intermediary agent or broker. (See [comment 19(b)-
3][rtrif]the commentary on Sec. 19(d)(3)[ltrif] for guidance in
determining whether or not the transaction involves an intermediary
agent or broker.) If an application reaches the creditor through an
intermediary agent or broker, the application is received when it
reaches the creditor, rather than when it reaches the agent or broker.
[4.][rtrif]3.[ltrif] Denied or withdrawn application. The creditor
may determine within the three-business-day period that the application
will not or cannot be approved on the terms requested, as, for example,
when a consumer applies for a type or amount of credit that the
creditor does not offer, or the consumer's application cannot be
approved for some other reason. In that case, or if the consumer
withdraws the application within the three-business-day waiting period,
the creditor need not make the disclosures under this section. If the
creditor fails to provide early disclosures and the transaction is
later consummated on the original terms, the creditor will be in
violation of this provision. If, however, the consumer amends the
application because of the creditor's unwillingness to approve it on
its original terms, no violation occurs for not providing disclosures
based on the original terms. But the amended application is a new
application subject to Sec. 226.19(a)(1)(i).
[5.][rtrif]4.[ltrif] Itemization of amount financed. In many
mortgage transactions [rtrif]subject to RESPA[ltrif], the itemization
of the amount financed required by [Sec. 226.18(c)][rtrif]Sec.
226.38(j)[ltrif] will contain items, such as origination fees or
points, that also must be disclosed as part of the good faith estimates
of settlement costs required under RESPA. Creditors furnishing the
RESPA good faith estimates need not give consumers any itemization of
the amount financed[rtrif], whether or not a transaction is subject to
RESPA[ltrif].
19(a)(1)(ii) Imposition of fees.
1. Timing of fees. The consumer must receive the disclosures
required by this section before paying or incurring any fee imposed by
a creditor or other person in connection with the consumer's
application for a mortgage transaction that is subject to Sec.
226.19(a)(1)(i), except as provided in Sec. 226.19(a)(1)(iii). If the
creditor delivers the disclosures to the consumer in person, a fee may
be imposed anytime after delivery. If the creditor places the
disclosures in the mail, the creditor may impose a fee after the
consumer receives the disclosures or, in all cases, after midnight [on
the third business day] following [rtrif] the third business day
after[ltrif] mailing of the disclosures. [rtrif]Creditors that use
electronic mail or a courier to provide disclosures may also follow
this approach. Whatever method is used to provide disclosures,
creditors may rely on documentation of receipt in determining when a
fee may be imposed.[ltrif] For purposes of Sec. 226.19(a)(1)(ii), the
term ``business day'' means all calendar days except Sundays and legal
public holidays referred to in Sec. 226.2(a)(6). See
[C][rtrif]c[ltrif]omment 2(a)(6)-2. For example, assuming that there
are no intervening legal public holidays, a creditor that receives the
consumer's written application on Monday and mails the early mortgage
loan disclosure on Tuesday may impose a fee on the consumer [after
midnight on Friday][rtrif]on Saturday[ltrif].
19(a)(2) Waiting period(s) required
1. Business day definition. For purposes of Sec. 226.19(a)(2),
``business day'' means all calendar days except Sundays and the legal
public holidays referred to in Sec. 226.2(a)(6). See comment 2(a)(6)-
2.
2. Consummation after [both][rtrif]all [ltrif] waiting periods
expire. Consummation may not occur until both the seven-business-day
waiting period and the three-business-day waiting
period[rtrif](s)[ltrif] have expired. For example, assume a creditor
delivers the early disclosures to the consumer in person or places them
in the mail on Monday, June 1, and the creditor then delivers
[corrected][rtrif]new[ltrif] disclosures in person to the consumer on
Wednesday, June 3. Although Saturday,
[[Page 43393]]
June 6 is the third business day after the consumer received the
[corrected][rtrif]new[ltrif] disclosures, consummation may not occur
before Tuesday, June 9, the seventh business day following delivery or
mailing of the early disclosures.
19(a)(2)(i) Seven-business-day waiting period.
1. Timing. The disclosures required by Sec. 226.19(a)(1)(i) must
be delivered or placed in the mail no later than the seventh business
day before consummation. The seven-business-day waiting period begins
when the creditor delivers the early disclosures or places them in the
mail, not when the consumer receives or is deemed to have received the
early disclosures. For example, if a creditor delivers the early
disclosures to the consumer in person or places them in the mail on
Monday, June 1, consummation may occur on or after Tuesday, June 9, the
seventh business day following delivery or mailing of the early
disclosures.
[rtrif]19(a)(2)(ii) Three-business-day waiting period.
1. New disclosures in all cases. The creditor must provide new
disclosures under Sec. 226.38 so that the consumer receives them not
later than the third business day before consummation, even if the new
disclosures are identical to the early disclosures provided under Sec.
226.19(a)(1)(i).
2. Content of disclosures. Disclosures made under Sec.
226.19(a)(2)(ii) must contain each of the applicable disclosures
required by Sec. 226.38.
3. Estimates. Section 226.19(a)(2)(ii) provides that only the
disclosures required by Sec. Sec. 226.38(c)(3)(i)(C),
226.38(c)(3)(ii)(C), 226.38(c)(6)(i), and 226.38(e)(5)(i) may be
estimated disclosures. Because estimated amounts of escrowed taxes and
insurance premiums and mortgage insurance premiums disclosed (as
applicable) under Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C),
and 226.38(c)(6)(i) are components of the total periodic payments
disclosure required by Sec. Sec. 226.38(c)(3)(i)(D) and
226.38(c)(3)(ii)(D) and the total payments disclosure required by Sec.
226.38(e)(5)(i), those disclosures are estimated disclosures. (A total
payments disclosure is not required for loans with a negative
amortization feature subject to Sec. 226.38(c)(6).) Creditors may
estimate components of the total periodic payments disclosures required
by Sec. Sec. 226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C) and
226.38(c)(6)(i) and the total payment disclosure required by Sec.
226.38(e)(5)(i) only to the extent the estimated escrowed amounts and
mortgage insurance premiums affect those disclosures.
4. Timing. The creditor must provide final disclosures so that the
consumer receives them not later than the third business day before
consummation. For example, for consummation to occur on Thursday, June
11, the consumer must receive the disclosures on or before Monday, June
8.[ltrif]
ALTERNATIVE 1--PARAGRAPH 19(a)(2)(iii)
[rtrif]19(a)(2)(iii) Corrected disclosures.
1. Conditions for corrected disclosures. A disclosed annual
percentage rate is accurate for purposes of Sec. 226.19(a)(2)(iii) if
the disclosure is accurate under Sec. 226.19(a)(2)(iv). If a change
occurs that does not render the annual percentage rate inaccurate, the
creditor must disclose the changed terms before consummation,
consistent with Sec. 226.17(f).
2. Content of corrected disclosures. Disclosures made under Sec.
226.19(a)(2)(iii) must contain each of the applicable disclosures
required by Sec. 226.38.
3. Estimates. In disclosures provided under Sec.
226.19(a)(2)(iii), only the disclosures required by Sec. Sec.
226.38(c)(3)(i)(C), 226.38(c)(3)(ii)(C), 226.38(c)(6)(i) and
226.38(e)(5)(i) may be estimates. See comment 19(a)(2)(ii)-3 for a
discussion of which of the disclosures required under Sec. 226.38
creditors may estimate.
4. Timing. The creditor