[Federal Register Volume 75, Number 185 (Friday, September 24, 2010)]
[Rules and Regulations]
[Pages 58470-58489]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20663]



[[Page 58469]]

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Part II





Federal Reserve System





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12 CFR Part 226



Regulation Z; Truth in Lending; Proposed Rules, Interim Rule, Final 
Rules

  Federal Register / Vol. 75 , No. 185 / Friday, September 24, 2010 / 
Rules and Regulations  

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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Docket No. R-1366]


Regulation Z; Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interim rule; request for public comment.

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SUMMARY: The Board is publishing for comment an interim rule amending 
Regulation Z, which implements the Truth in Lending Act (TILA). The 
interim rule implements certain requirements of the Mortgage Disclosure 
Improvement Act of 2008, which amended TILA. The amendments and this 
interim rule require creditors extending consumer credit secured by 
real property or a dwelling to disclose certain summary information 
about interest rates and payment changes, in a tabular format, as well 
as a statement that consumers are not guaranteed to be able to 
refinance their transactions in the future. The interest rate and 
payment summary tables replace the payment schedule previously required 
as part of the TILA disclosure for mortgage transactions. Disclosures 
for non-mortgage, closed-end consumer credit will continue to include 
the current payment schedule.

DATES: This interim rule is effective October 25, 2010. Compliance with 
its requirements is optional, however, until January 30, 2011; its 
requirements are mandatory for transactions for which an application 
for credit is received by the creditor on or after that date. Comments 
on this interim rule must be received on or before November 23, 2010.

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: Address to Jennifer J. Johnson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, 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: Paul Mondor, Senior Attorney, or 
Kathleen C. Ryan, Senior Counsel, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, Washington, 
DC 20551, at (202) 452-2412 or (202) 452-3667. For users of 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.

SUPPLEMENTARY INFORMATION:

I. Background

A. 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, and administrative 
sanction.

B. MDIA Amendments to TILA and Regulation Z

    On July 30, 2008, Congress enacted the Mortgage Disclosure 
Improvement Act of 2008 (the MDIA).\1\ The MDIA requires transaction-
specific TILA 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.\2\ 
In addition, the MDIA requires 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 
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. The Board implemented these MDIA requirements in 
final rules published May 19, 2009, and effective July 30, 2009. 74 FR 
23289, May 19, 2009 (MDIA Final Rule).
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    \1\ 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.
    \2\ To ease discussion, the description of the closed-end 
mortgage disclosure scheme includes MDIA's amendments to TILA and 
the disclosure timing requirements implemented by the Board in 2008 
through a final rule that preceded MDIA's enactment. 73 FR 44522, 
July 30, 2008 (2008 HOEPA Final Rule). The MDIA codified some of the 
2008 HOEPA Final Rule and expanded its coverage and its 
requirements. The MDIA also made these requirements effective July 
30, 2009.
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    The MDIA also requires disclosure of payment examples if the loan's 
interest rate or payments can change. Such disclosures are to be 
formatted in accordance with the results of consumer testing conducted 
by the Board. And the MDIA requires disclosure of a statement that 
there is no guarantee the consumer will be able to refinance the 
transaction in the future. Those provisions of the MDIA become 
effective on January 30, 2011, or any earlier compliance date 
established by the Board. This interim rule implements those MDIA 
provisions.

C. The Board's Review of Closed-End Credit Rules

    The Board's current review of Regulation Z was initiated in 
December 2004 with an advance notice of proposed rulemaking. 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. In May 
2009, Congress enacted the Credit Card Accountability Responsibility 
and Disclosure Act of 2009 (Credit Card Act), which amended TILA's 
provisions for open-end credit. The Board approved final rules

[[Page 58471]]

implementing the Credit Card Act in January and June 2010. 75 FR 7658, 
Feb. 22, 2010; 75 FR 37526, June 29, 2010.
    Beginning in 2007, the Board proposed revisions to the rules for 
home-secured credit in several phases. In 2007, the Board proposed 
rules for closed-end higher-priced mortgage loans secured by the 
consumer's principal dwelling, leading to the HOEPA Final Rule. On May 
7, 2009, the Board adopted the MDIA Final Rule for closed-end loans 
secured by a dwelling. On July 23, 2009, the Board issued a proposed 
rule to revise the rules for disclosures for closed-end credit secured 
by real property or a consumer's dwelling. 74 FR 43232, Aug. 26, 2009 
(2009 Closed-End Proposal). The Board also issued a proposed rule to 
revise the rules for disclosures for open-end lines of credit secured 
by a dwelling. 74 FR 43428, Aug. 26, 2009. Concurrently with this 
interim rule, the Board is publishing another proposed rule that would 
add and revise rules for rescission, reverse mortgages, and 
modifications to existing closed-end mortgage loans (2010 Closed-End 
Proposal).

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. 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 
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-shopping 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. Several of the 
model forms included in the 2009 Closed-End Proposal 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/boarddocs/meetings/2009/20090723/Full%20Macro%20CE%20Report.pdf.

II. Summary of the Interim Rule

    MDIA requires creditors to disclose examples of rates and payments, 
including the maximum rate and payment, for loans with variable rates 
or payments. MDIA also requires creditors to disclose a statement that 
consumers should not assume they can refinance their loans. The 2009 
Closed-End Proposal included provisions that would implement these MDIA 
requirements, including provisions interpreting the statute's 
requirement that creditors disclose ``examples'' of payment adjustments 
other than the maximum during the life of the loan and the ``no-
guarantee-to-refinance'' statement. Those provisions, proposed 
Sec. Sec.  226.38(c) and 226.38(f)(3), respectively, would require the 
TILA disclosure to contain certain interest rate and payment summary 
tables and the ``no-guarantee-to-refinance'' statement. See 74 FR 
43232, 43334-35 and 43337, Aug. 26, 2009. The Board does not expect to 
finalize that proposal, however, before the January 30, 2011 statutory 
effective date of the MDIA requirement to disclose examples of payment 
adjustments. Accordingly, this interim rule implements the MDIA 
requirements now, so that mortgage creditors will have the guidance 
necessary to comply with them by January 30, 2011. This interim rule 
adopts the provisions of the 2009 Closed-End Proposal requiring 
disclosure of interest rate and payment summary tables as proposed, 
except as discussed below and with minor modifications for clarity.
    Under this interim rule, creditors will be required to disclose in 
a tabular format the contract interest rate together with the 
corresponding monthly payment, including any escrows for taxes and 
property and/or mortgage insurance. Special disclosure requirements are 
imposed for adjustable-rate or step-rate loans to show the interest 
rate and payment at consummation, the maximum interest rate and payment 
at any time during the first five years after consummation, and the 
maximum interest rate and payment possible during the life of the loan. 
Additional special disclosures are required for loans with negatively-
amortizing payment options, introductory interest rates, interest-only 
payments, and balloon payments. Finally, the interim rule requires the 
disclosure of a statement that there is no guarantee the consumer will 
be able to refinance the loan with a new transaction in the future.

III. Legal Authority

A. Rulemaking Authority

    TILA Section 105(a) directs the Board to prescribe regulations to 
carry out the Act's purposes. 15 U.S.C. 1604(a). TILA also authorizes 
the Board 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. MDIA also specifically provides that the disclosures shall be 
in accordance with the Board's implementing regulations, as discussed 
above.

B. Authority To Issue Interim Rule

    The Administrative Procedures Act (APA), 5 U.S.C. 551 et seq., 
generally requires public notice before promulgation of regulations. 
See 5 U.S.C. 553(b). The 2009 Closed-End Proposal provided the public 
with notice and an opportunity to comment on the Board's proposed 
disclosure changes, including the proposed interest rate and payment 
summary tables. The Board is now adopting only that aspect of the 2009 
Closed-End Proposal. The Board therefore believes this action complies 
with the APA's public notice and opportunity to comment requirement. 
The Board is adopting the provisions concerning interest rates and 
payments as an interim rule, rather than as a final rule, because the 
Board intends to conduct additional testing of this and other 
disclosure requirements, including quantitative testing, and may revise 
these interim provisions further in light of further testing results. 
The interim rule will permit further public comment while also giving 
the provisions effect so that creditors will have the guidance they 
need and the time to implement it by January 30, 2011, as discussed 
above.

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C. Authority for October 25, 2010 Effective Date

    TILA Section 105(d) generally provides that a regulation requiring 
any disclosure that differs from the disclosures previously required 
shall have an effective date no earlier than ``that October 1 which 
follows by at least six months the date of promulgation.'' 15 U.S.C. 
1604(d). This interim rule substitutes the interest rate and payment 
summary tables for the existing payment schedule in the TILA disclosure 
requirements, effective October 25, 2010 and with compliance mandatory 
as of January 30, 2011. The new requirements will take effect, however, 
on January 30, 2011 pursuant to the MDIA, with or without this 
rulemaking. To the extent that the interim rule contains disclosure 
requirements that are already in effect on January 30, 2011 under the 
statute, TILA Section 105(d) does not apply. Moreover, the Board 
believes that the effective date mandated by the MDIA for the specific 
disclosures required under TILA Section 128(b)(2)(C) overrides the 
general provision in TILA Section 105(d).

IV. Overview of Comments Received on the Interest Rate and Payment 
Summary Tables

    The Board received over 6,000 comments on the 2009 Closed-End 
Proposal. The great majority of those, however, were from mortgage 
brokers, loan officers, and other mortgage industry representatives 
that commented exclusively on the proposed regulation of loan 
originator compensation. Those commenters who commented on proposed 
Sec.  226.38, which contained the new disclosure requirements, focused 
their comments more extensively on other provisions in the August 2009 
Closed-End Proposal, not on Sec. Sec.  226.38(c) and 226.38(f)(3). 
Consequently, the Board received little comment specifically on the 
proposed interest rate and payment summary tables, and no commenters 
addressed the proposed no guarantee to refinance statement.
    Six consumer and community groups commented jointly on the 
proposal. Regarding the interest rate and payment summary proposal, 
they expressed strong support for including a statement of the maximum 
payment. These commenters indicated that the table was flawed, however, 
as applied to negative amortization products because the resulting 
table is too different to permit comparison between amortizing and 
negatively amortizing adjustable-rate mortgages. The consumer groups 
also stated that the payments in the table should reflect estimated 
taxes and insurance regardless of whether an escrow account is required 
because the need for monthly budgeting for those obligations should be 
emphasized. These groups also criticized the manner in which the 
maximum possible payment was calculated for the sample forms included 
in the proposal.
    Mortgage creditors offered suggested revisions to the proposed 
interest rate and payment summary requirements, including a revision 
that would emphasize the fact that escrow amounts are estimated. Most 
creditors, though not all, agreed with the consumer advocates that 
estimated taxes and insurance should be included regardless of whether 
an escrow account is required. Some strongly questioned the need for 
some of the graphical details of the model forms, such as the large 
arrow pointing downward to highlight the additional amount borrowed by 
making only minimum payments on a negative amortization loan and the 
use of shading and highlighting. One bank indicated that the content of 
the table would be duplicative of the information presented in the good 
faith estimate of settlement costs and the HUD-1 settlement statement 
required under Regulation X, which implements the Real Estate 
Settlement Procedures Act (RESPA), but that the information is 
presented differently. This commenter also questioned the inclusion of 
taxes and insurance in any but the initial payment disclosed because of 
the fact that those amounts can change significantly over the life of 
the loan.
    In general, as discussed below, the Board has considered the 
comments received and is adopting the interest rate and payment summary 
table and the no-guarantee-to-refinance statement as proposed, with 
minimal modification. As stated above, the Board intends to conduct 
additional testing and will consider the comments further as part of 
the testing process. The Board is reluctant at this time, however, to 
make significant changes to the format and content of the tables 
without the benefit of such testing. To afford guidance on how to 
comply with the MDIA requirements by the January 30, 2011 statutory 
effective date, the Board is adopting these requirements substantially 
as proposed. The Board also seeks additional comment on the summary 
tables under this interim rule.

V. Section-by-Section Analysis

Section 226.17 General Disclosure Requirements

17(a) Form of Disclosures
17(a)(1)
    Comment 17(a)(1)-1 provides guidance on the general requirement 
that the TILA disclosures be clear and conspicuous. The comment 
currently states that no minimum type size is mandated for the 
disclosures. This interim rule amends the comment by adding a 
parenthetical exception to that general rule, to conform to the fact 
that new Sec.  226.18(s), discussed below, requires a minimum 10-point 
type size.

Section 226.18 Content of Disclosures

18(g) Payment Schedule
    The interim rule makes a conforming amendment to Sec.  226.18(g). 
That section imposes the current payment schedule disclosure for 
closed-end consumer credit. As discussed below, Sec.  226.18(s) 
replaces the payment schedule with the new interest rate and payment 
summary table for a transaction secured by real property or a dwelling, 
other than a transaction secured by a consumer's interest in a 
timeshare plan. Thus, Sec.  226.18(g) is amended to exclude such 
transactions from its coverage.
18(s) Interest Rate and Payment Summary for Mortgage Transactions
    This interim rule adopts a new Sec.  226.18(s), which provides 
requirements for disclosure of the contract interest rate and the 
periodic payment for most transactions secured by real property or a 
dwelling. The information required by Sec.  226.18(s)(2)-(4) must be in 
the form of a table, as provided in Sec.  226.18(s)(1), substantially 
similar to Model Clause H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix 
H. As noted above, some industry commenters on the 2009 Closed-End 
Proposal questioned the use of shading in the proposed model forms. The 
Board recognizes these commenters' concern that shading can undermine 
the forms' legibility when they are photocopied or faxed. By requiring 
that disclosures be ``substantially similar'' to the models, however, 
the Board does not intend that disclosures must include any shading 
that the models contain. Comment 18(s)-1 therefore clarifies that a 
disclosure that does not include the shading shown in a model clause 
but otherwise follows the model clause's headings and format is 
substantially similar to that model clause.
    The rules for disclosing the interest rate and periodic payments 
for an amortizing loan are provided in

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Sec. Sec.  226.18(s)(2)(i) and 226.18(s)(3). Rules for disclosing the 
interest rate and periodic payments for a loan with negative 
amortization are in Sec. Sec.  226.18(s)(2)(ii) and 226.18(s)(4). 
Special rules for disclosing balloon payments are found in Sec.  
226.18(s)(5). Additional explanations of introductory rates and 
negative amortization are required by Sec. Sec.  226.18(s)(2)(iii) and 
226.18(s)(6), respectively. Finally, Sec.  226.18(s)(7) provides 
definitions for certain terms used in Sec.  226.18(s).
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. 1638(a)(6). 
Currently, Sec.  226.18(g) implements TILA Section 128(a)(6). Under 
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.\3\
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    \3\ 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 revising 
those disclosures in this interim rule.
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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. The disclosures must reflect a discounted 
or premium initial interest rate, however, 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.''
    Effect of MDIA amendments. TILA Section 128(b)(2)(C), as 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. * * *'' 15 U.S.C. 
1638(b)(2)(C).
    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.'' TILA 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). As discussed above, the 
Board conducted the required testing and, based on the results and 
other analysis, developed the mortgage disclosures contained in the 
2009 Closed-End Proposal, including those aspects now being adopted in 
this interim rule.
The Interim Rule
    The Board is adding new Sec.  226.18(s) to implement TILA Section 
128(a)(6) and Section 128(b)(2)(C) for most closed-end transactions 
secured by real property or a dwelling.\4\ For all other closed-end 
credit transactions, Sec.  226.18(g) continues to provide the rules for 
disclosing payments. Section 226.18(s) requires 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 periodic payments 
are 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 separately itemize an 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 
payment amounts 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 are required for loans 
with negative amortization. Creditors must provide the information 
about interest rates and payments in the form of a table, and creditors 
are not permitted to include other, unrelated information in the table.
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    \4\ 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. New Sec.  226.18(t), 
discussed below, implements this aspect of Section 128(b)(2)(C).
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    Scope of Sec.  226.18(s). TILA Section 128(b)(2)(C) applies to all 
transactions secured by a dwelling, other than transactions secured by 
timeshare plans (discussed below). The Board proposed to expand the 
requirement in Section 128(b)(2)(C) to include loans secured by real 
property that do not include a dwelling and is now adopting that 
proposal. Thus, transactions secured by real property with no dwelling 
or other structure built thereon would be subject to the enhanced 
disclosures, assuming such transactions are consumer credit. Some 
creditors commented on the proposed expansion of the scope of the MDIA 
requirements, questioning its necessity. As discussed in the 2009 
Closed-End Proposal, however, 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 will 
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 also believes that 
consistent disclosure requirements for all mortgage-secured, closed-
end, consumer credit transactions, whether they include a dwelling or 
not, should ease compliance burdens for mortgage creditors.
    The Board is adopting 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

[[Page 58474]]

examples of increased interest rates and payments will help consumers 
understand the risks involved in certain loans. The Board believes that 
this adjustment is proper to ensure that consumers receive meaningful 
disclosures that facilitate their informed use of credit.
    Timeshare plans. TILA Section 128(b)(2)(G), as added by MDIA, 
excludes from the coverage of Section 128(b)(2)(C) an extension of 
credit secured by a timeshare plan. 15 U.S.C. 1638(b)(2)(G). Thus, the 
interim rule excludes these transactions from coverage of Sec.  
226.18(s).\5\ This exclusion does not affect the determination of 
whether such transactions are subject to Regulation Z and Sec.  226.18; 
if they are subject to that section, they must include the payment 
schedule under Sec.  226.18(g).
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    \5\ Credit secured by a timeshare plan is also excluded from 
MDIA's other requirements. Accordingly, the MDIA Final Rule excluded 
from the new timing, corrected disclosure, and related requirements 
a transaction ``that is secured by a consumer's interest in a 
timeshare plan described in 11 U.S.C. 101(53D).'' See Sec.  
226.19(a)(5).
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    Reverse mortgages. Section 226.18 currently applies to reverse 
mortgages. Reverse mortgages have unique features that make the 
disclosures in Sec.  226.18, including the current payment schedule 
under Sec.  226.18(g), difficult to apply and potentially confusing to 
consumers. The same is true of the new interest rate and payment 
summary tables required by this interim rule under Sec.  226.18(s). 
Simultaneously with this interim rule, the Board is proposing improved 
comprehensive disclosure requirements tailored to closed- and open-end 
reverse mortgages. When those disclosures are adopted in final form, 
the Board anticipates that it also will exclude reverse mortgages from 
the coverage of the closed-end mortgage disclosure requirements. In the 
meantime, the Board is excluding reverse mortgages from the definition 
of ``negative amortization mortgage'' under Sec.  226.18(s)(7) because 
the special interest rate and payment summary requirements for negative 
amortization mortgages, discussed below, would be especially unworkable 
for reverse mortgages and also especially likely to cause consumer 
confusion. Virtually all reverse mortgages being made in the market 
currently are, to the Board's knowledge, fixed-rate loans. 
Consequently, under the requirements discussed below, reverse mortgages 
would be disclosed under the relatively straightforward fixed-rate 
summary table requirements of Sec. Sec.  226.18(s)(2)(i) and 
226.18(s)(3).
    Fixed-rate, fixed-payment loans. TILA Section 128(b)(2)(C) applies 
by its terms only to mortgages where the rate, payment, or both may 
change after consummation. Accordingly, the Board could apply the new 
interest rate and payment summary requirements to only such mortgages 
and leave fixed-rate, fixed-payment mortgages subject to Sec.  
226.18(g). The Board believes, however, that applying Sec.  226.18(s) 
to all mortgages will simplify compliance for creditors and make 
comparing different loan products more straightforward for consumers. 
Accordingly, the interest rate and payment summary table is required 
for all transactions secured by real property or a dwelling, including 
fixed-rate, fixed-payment mortgages. The Board is adopting this 
requirement pursuant to its authority under TILA Section 105(a) to 
effectuate the purposes of TILA. 15 U.S.C. 1604(a).
    Payment schedule label. The Board proposed in the 2009 Closed-End 
Proposal to revise the label for the interest rate and payment 
information from the text set out in the statute. The Board proposed to 
replace the statutory language, ``Payment Schedule: Payments Will Vary 
Based on Interest Rate Changes,'' with ``Interest Rate and Payment 
Summary'' based on plain language principles, to make the disclosure 
more readily understandable. The Board is now adopting that proposal. 
The Board is making this adjustment pursuant to the same TILA Section 
105(a) authority, and for the same class of transactions, as discussed 
above with respect to transactions subject to Sec.  226.18(s).
    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, the most 
common answers consumers provided were that they wanted to obtain the 
lowest interest rate possible and that they wanted the loan with the 
lowest possible monthly payment. Nevertheless, 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.
    In addition, testing indicated that the current TILA payment 
schedule, which does not show the relationship between the interest 
rate and payments, is ineffective at communicating to consumers what 
could happen to their payments over time with an adjustable-rate 
mortgage. Most participants said they liked the current presentation of 
the payments because it was specific and detailed. When shown a payment 
schedule for an adjustable-rate mortgage with an introductory rate, 
however, 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 interim rule, the interest rate and payment are 
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 indicates changes in the interest rate over time. 
In addition, payment changes that are not based on adjustments to the 
interest rate are 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 an 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 will be better able to 
determine if an adjustable-rate loan will be affordable and appropriate 
for their individual circumstances.
    Definitions for Sec.  226.18(s). Section 226.18(s) uses several 
terms that are defined in Sec.  226.18(s)(7). Under Sec.  226.18(s)(7), 
the term ``adjustable-rate mortgage'' means a loan in which the annual 
percentage rate may increase after consummation. The term ``step-rate 
mortgage'' means a loan in which the interest rate will change after 
consummation, and the rates and periods in which they will apply are 
known. The term ``fixed-rate mortgage'' means a loan that is not 
adjustable-rate or step-rate. The term ``interest-only'' means that one 
or more periodic payments may be applied solely to interest and not to 
loan principal; an ``interest-only loan'' is a loan that permits 
interest-only payments. An ``amortizing loan'' is defined as a loan in 
which the regular periodic payments cannot cause the principal balance 
to increase; the term ``negative amortization'' means the regular 
periodic payments may cause the principal balance to increase; the term 
``negative amortization loan'' means a loan with a negative 
amortization feature but explicitly excludes a reverse mortgage, as 
discussed above. Finally, the term ``fully-indexed rate'' means the 
interest rate calculated using the index value and margin.

[[Page 58475]]

18(s)(1)
    Section 226.18(s)(1) requires the interest rate and payment 
information to be disclosed in the form of a table. This will 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 Sec.  226.18(s)(1), the 
table must be in a minimum 10-point font to ensure that it is clear and 
conspicuous.
    The interim rule prescribes the number of interest rates and 
payments that may be shown in the table. The number of columns and rows 
for the table required by Sec.  226.18(s) will vary depending on 
whether the loan is an amortizing loan and whether it has an adjustable 
rate. In all cases, Sec.  226.18(s)(1) provides that the tables must 
have no more than five columns across, to avoid information overload 
for consumers. Creditors may not include information in the table that 
is not required under 226.18(s), to avoid information overload. Model 
clauses are provided in Appendix H.
18(s)(2) Interest Rates
18(s)(2)(i) Amortizing Loans
    Section 226.18(s)(2)(i) requires disclosure of interest rates for 
amortizing loans. For a fixed-rate mortgage with no scheduled payment 
increases or balloon payments, the creditor discloses only one interest 
rate. Fixed-rate loans with payment increases require the creditor to 
disclose the interest rate along with each payment increase, even if 
the interest rate does not change. 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, Sec.  226.18(s)(2)(i)(A) requires 
creditors to disclose the interest rate applicable at consummation. If 
the transaction does not provide for any payment increases, only one 
interest rate is disclosed. Some fixed rate mortgages, however, have 
scheduled payment increases. In those cases the creditor must show the 
interest rate associated with such payments, even though the rate has 
not changed, as discussed under Sec.  226.18(s)(2)(i)(C) below.
Interest Rates for Adjustable-Rate Mortgages and Step-Rate Mortgages
    As discussed above, TILA Section 128(b)(2)(C) requires creditors to 
disclose examples of payment increases, including the maximum possible 
payment, for adjustable-rate mortgages and other mortgages where 
payments may vary. Under Sec.  226.18(s)(2)(i), creditors must disclose 
more than one interest rate for adjustable-rate mortgages and step-rate 
mortgages because the payments can vary.
    Interest rates at consummation. Under Sec.  226.18(s)(2)(i)(B)(1), 
the creditor must provide the interest rate at consummation and the 
period of time until the first adjustment, labeled as ``introductory 
rate and monthly payment.'' Additional explanation of discounted 
introductory rates is required by Sec.  226.18(s)(2)(iii), discussed 
below.
    Maximum during first five years. The Board proposed in the 2009 
Closed-End Proposal 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). The proposal would have required 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.
    The Board is modifying this aspect of the proposed rule. Instead of 
the maximum rate at the first scheduled adjustment, Sec.  
226.18(s)(2)(i)(B)(2) requires disclosure of the maximum possible rate 
at any time during the first five years after consummation, even if 
that is not the first adjustment, and the earliest date that rate may 
apply. The Board believes that requiring the example to reflect the 
first adjustment poses a risk that consumers would not be adequately 
warned of significant interest rate changes on a transaction where the 
first adjustment will be fairly modest under the transaction's terms. 
The limited first rate increase could be followed quickly by a much 
greater increase, which would not be disclosed under the rule as 
proposed. The Board solicits comment on whether five years is the 
appropriate period to address this concern. Consistent with the 2009 
Closed-End Proposal, the creditor must take into account any 
limitations on interest rate increases when determining the interest-
rate to be disclosed under Sec.  226.18(s)(2)(i)(B)(2). If the interest 
rate may reach the maximum possible during the loan's term within the 
first five years, the creditor should disclose the rate as the maximum 
possible interest rate, discussed below.
    Maximum possible interest rate. Section 226.18(s)(2)(i)(B)(3) 
requires creditors to disclose the maximum interest rate that could 
apply at any time, and the earliest date on which that rate could 
apply, as required by TILA Section 128(b)(2)(C). The Board is requiring 
this disclosure for step-rate mortgages as well, because the rate and 
payment may increase in such loans. As noted above, consumer advocates 
strongly supported this requirement in their comments. Consumer testing 
conducted for the Board also 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 limitations on interest rate 
increases, then the table required by proposed Sec.  226.18(s) will 
have at least three columns; if the transaction has no intermediate 
limitations on interest rates, then the table will 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 the interest-only period, the borrower must begin making 
larger payments to cover both interest accrued and principal. Section 
226.18(s)(2)(i)(C) provides that, where such a payment increase will 
not coincide with an interest rate adjustment, 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 on which 
the increase would occur. Thus, for a fixed-rate mortgage, the creditor 
shows the same interest rate twice (and the corresponding payments as 
discussed below). The Board believes this will 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 Sec.  226.18(s)(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

[[Page 58476]]

column that discloses the interest rate that will 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. Comment 18(s)(2)(i)(C)-1 provides 
clarifying examples.
18(s)(2)(ii) Negative Amortization Loans
    For negative amortization loans, for which any scheduled payment 
may cause the principal balance to increase, Sec.  226.18(s)(2)(ii) 
requires disclosure of the interest rate applicable at consummation. 
Some ARM 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 these payment 
option loans, the creditor must 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 must disclose that rate for the first and second scheduled 
payment increases, explained under the discussion of Sec.  226.18(s)(4) 
below. And the creditor must disclose that rate a third time, in the 
last column, when the loan has recast, i.e., converted to fully 
amortizing payments over the remainder of the loan's term. This 
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 rules for disclosing the interest rate on a loan with 
negative amortization are found in Sec.  226.18(s)(6), discussed below.
18(s)(2)(iii) Introductory Rate Disclosure for Amortizing Adjustable-
Rate Mortgages
    Many adjustable-rate mortgages have an introductory or ``teaser'' 
rate, set below the sum of the index and margin used for later 
adjustments. Section 226.18(s)(2)(iii) requires a special disclosure of 
any 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. In contrast, 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 is requiring an explanation of the introductory 
rate below the table itself. Section 226.18(s)(2)(iii) requires 
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 also must disclose the fully 
indexed rate that otherwise would apply at consummation. This 
disclosure must be placed in a box beneath the table, in a format 
substantially similar to Model Clause H-4(I).
    Creditors commenting on the 2009 Closed-End Proposal expressed 
concern over the requirement to disclose the fully-indexed rate at 
consummation because the value of the index at consummation may be 
unknown when disclosures are required to be delivered within three 
business days after receipt of an application under Sec.  226.19(a)(1). 
Comment 18(s)(2)(iii)(C)-1 would clarify that, for early disclosures, 
the fully-indexed rate disclosed under Sec.  226.18(s)(2)(iii)(C) may 
be based on the index in effect at the time the disclosure is provided. 
``At consummation,'' as used in Sec.  226.18(s)(2)(iii)(C), refers to 
disclosures delivered at consummation, or three business days before 
consummation pursuant to Sec.  226.19(a)(2)(ii). The comment also 
adopts guidance for cases where the contract provides for a delay in 
the implementation of changes in an index value. In such cases, the 
disclosure may reflect an index value in effect anytime during the 
contractual delay period prior to the time of the disclosure. For 
example, if the contract specifies that rate changes are based on the 
index value in effect 45 days before the change date, creditors may use 
any index value in effect during the 45 days before consummation (or 
any earlier date of disclosure) in calculating the fully-indexed rate 
to be disclosed. This guidance is similar to existing comment 17(c)(1)-
10.
18(s)(3) Payments for Amortizing Loans
18(s)(3)(i) Principal and Interest Payments
    Section 226.18(s)(3)(i) requires disclosure of the principal and 
interest payment that corresponds to each interest rate disclosed under 
Sec.  226.18(s)(2)(i). Under Sec.  226.18(s)(3)(i), if all regular 
periodic payments include principal and interest, each disclosed 
payment amount must be listed in a single row in the table with a 
description such as ``principal and interest.'' Separate rules apply to 
amortizing loans with interest-only payments under Sec.  
226.18(s)(3)(ii), discussed below.
    Regular periodic payments. Under Sec.  226.18(s)(3)(i)(A), for 
transactions where the regular periodic payment fully amortizes the 
loan, the payment amount including both principal and interest must be 
disclosed. Section 226.18(s)(3)(i)(B) requires 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. For example, a fixed-rate loan might have terms 
under which part of the scheduled payment is applied to principal for 
an initial period, thus it is not an interest-only loan disclosed under 
Sec.  226.18(s)(3)(ii). The amount of principal covered by such 
payments, however, may be insufficient to amortize the loan fully over 
its life. In such cases, a scheduled increase in the payment amount 
from such a partially amortizing payment to a fully amortizing payment 
would be required to be disclosed.
    Escrows; mortgage insurance premiums. Section 226.18(s)(3)(i)(C) 
provides that, if an escrow account will be established, the creditor 
must disclose the estimated payment amount for taxes and insurance, 
including any mortgage insurance. For transactions secured by real 
property or a dwelling, creditors no longer have the flexibility 
provided in existing Sec.  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, for consumers to 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 is included in 
the table to make it easier for consumers to identify whether there is 
an escrow account and how much of their payment applies to the escrow.
    As noted above, both consumer advocates and some industry 
commenters argued that taxes and insurance estimates should be included 
even when no escrow account is established. The Board believes there 
may be valid reasons for such an approach. For purposes of this interim 
rule, however, the Board is adopting the requirement as proposed. The 
Board is concerned that disclosures of taxes and insurance in all cases 
may leave consumers confused as to whether an escrow account is 
included with the loan or not, in the absence of a clear and effective 
notice indicating which is the

[[Page 58477]]

case. After additional testing can be conducted to determine whether 
such a notice is feasible and helpful to consumers, the Board will 
consider such an approach when it adopts the 2009 Closed-End Proposal 
as a final rule.
    Comment 18(s)(3)(i)(C)-1 clarifies the types of taxes and insurance 
that are required to be included in the estimate. The comment also 
clarifies that the estimated escrow amounts disclosed under Sec.  
226.18(s)(3)(i)(C), other than mortgage insurance premiums, do not 
affect any other disclosures, including the finance charge and annual 
percentage rate.
    Comment 18(s)(3)(i)(C)-2 provides guidance on how to determine the 
length of time for which mortgage insurance payments must be included 
in the estimate. Under the comment, 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. This guidance mirrors existing comment 18(g)-5. 
Comment 18(s)(3)(i)(C)-2 also states that periodic mortgage insurance 
payments should be included in the escrow line of the summary table 
even if they are not escrowed and even if there is no escrow account 
established for the transaction.
    Credit insurance. The Board solicited comment on whether premiums 
or other amounts for credit life insurance, debt suspension and debt 
cancellation agreements, and other similar products (``credit 
protection products'') should be included or excluded from the 
disclosure of escrows for taxes and insurance. The Board expressed 
concerns that inclusion of such amounts may cause some consumers to 
believe these products are required. Most commenters that addressed 
this question agreed with the Board's concern and favored excluding 
such amounts from the escrow amount disclosed. The Board is adopting 
the escrow disclosure requirement as proposed and is adding language to 
comment 18(s)(3)(i)(C)-1 to clarify that premiums or payments for 
credit protection products should not be included in the disclosed 
escrow amounts.
    Total periodic payments. Section 226.18(s)(3)(i)(D) requires 
disclosure of the total estimated monthly payment. The total estimated 
monthly payment is the sum of the principal and interest payments 
required under Sec.  226.18(s)(3)(i)(A) or (B), as applicable, and the 
estimated taxes and insurance payments required to be disclosed in 
Sec.  226.18(s)(3)(i)(C).
18(s)(3)(ii) Interest-Only Payments
    Like Sec.  226.18(s)(3)(i), Sec.  226.18(s)(3)(ii) requires the 
disclosure of regular periodic payments corresponding to the amortizing 
loan interest rates disclosed under Sec.  226.18(s)(2)(i). In addition, 
under Sec.  226.18(s)(3)(ii), special itemization of the payment is 
required if the loan permits the consumer to make any interest-only 
payments. Comment 18(s)(3)(ii)-1 clarifies, however, that these rules 
apply only if the loan is not also a negative amortization loan; if the 
loan is a negative amortization loan, even if it also has an interest-
only feature, payments are disclosed under the rules in Sec.  
226.18(s)(4), discussed below.
    Principal and interest payment itemization. Under Sec.  
226.18(s)(3)(ii), if any regular periodic payment amounts will include 
interest but not principal, all payments for the loan must be itemized 
into principal and interest. For a payment that includes no principal, 
Sec.  226.18(s)(3)(ii)(A) requires the creditor to 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 requires this itemization and labeling to highlight for 
consumers the impact of making interest-only payments. Without this 
emphasis, 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. Thus, 
even for later payments that will be applied to both principal and 
interest, Sec.  226.18(s)(3)(ii)(B) requires the creditor to itemize 
the payment between the two.
    Escrows and total periodic payments. Section 226.18(s)(3)(ii)(C) 
requires disclosure of an estimate of the amount of taxes and 
insurance, including mortgage insurance. Section 226.18(s)(3)(ii)(D) 
requires disclosure of the estimated total payment including principal, 
interest, and taxes and insurance. These requirements parallel the 
escrow and total payment disclosures under Sec.  226.18(s)(3)(i)(C) and 
(D). Accordingly, comment 18(s)(3)(ii)(C)-1 refers to the commentary 
under Sec.  226.18(s)(3)(i)(C), discussed above, for guidance on 
escrows.
18(s)(4) Payments for Negative Amortization Loans
    Under Sec.  226.18(s)(4), for each interest rate disclosed under 
Sec.  226.18(s)(2)(ii) for a loan with negative amortization, the 
creditor must disclose payments in two separate rows. One row of the 
table shows 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 earliest possible date and 
that the consumer makes only fully amortizing payments. The other row 
of the table shows the minimum required payment for each rate, until 
the recast point. At the recast point, the minimum payment row shows 
the fully amortizing payment. For purposes of the minimum payment row, 
creditors must assume the interest rate reaches the maximum at the 
earliest possible date and that the consumer makes only the minimum 
required payment for as long as permitted under the terms of the legal 
obligation.
    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 could cause 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.
    Consumer advocates commented that the Board's proposed sample 
disclosure for payment option adjustable-rate mortgages (``payment 
option ARMs''), proposed sample H-19(I), would not show the maximum 
possible payment for a typical payment option ARM because the sample 
assumed the transaction's lifetime maximum interest rate of 10.5% would 
be reached at the second payment, which caused the loan to recast to 
fully amortizing payments at the earliest possible time. The commenters 
noted that a payment option ARM reaches the maximum possible payment 
when it applies an intervening rate for a period, so that the onset of 
fully amortizing payments is delayed as long as possible thus 
maximizing the principal balance to which the lifetime maximum rate is 
applied after the loan recasts. The proposed sample was intended to 
illustrate the maximum payment possible under certain assumed 
transaction terms, which did not include any rate adjustment caps other 
than the lifetime cap. Thus, while it did not show the maximum possible 
payment under any payment option

[[Page 58478]]

ARM, it showed the maximum payment under the type of product it was 
intended to illustrate. This interim rule is publishing only model 
clauses, not samples, thus it entails no assumptions regarding sample 
transaction terms. In all cases, however, these rules require that 
creditors reflect all applicable terms, including rate adjustment caps, 
maximum negative amortization amounts and periods, and maximum interest 
rates.
    Minimum payment amounts. The rule requires a disclosure of the 
amount of the minimum required payment applicable for each interest 
rate required to be disclosed under Sec.  226.18(s)(2)(ii) and the date 
on which that payment becomes applicable. Section 226.18(s)(4)(i)(A) 
requires disclosure of the minimum required payment at consummation.
    Payment increases. As noted above, some payment option loans do not 
have interest rate adjustment caps, and thus the interest rate may 
reach its maximum at the first interest rate adjustment. Such loans may 
have limits, however, 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 apply only until a specific time, such 
as at the fifth year of the loan, or until the loan balance reaches a 
certain maximum.) Under Sec.  226.18(s)(4)(i)(B), 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 is 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 up to two 
additional minimum payment adjustments is required.
    Explanation of negative amortization. Under Sec.  
226.18(s)(4)(i)(C), the creditor must provide a statement that the 
minimum payment will cover only some of the accrued interest and none 
of the principal and will cause the principal balance to increase. 
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. Thus, the Board 
is adopting this required statement to ensure that consumers are 
informed about the consequences of making such minimum payments.
    Payment after recast. Section 226.18(s)(4)(ii) requires disclosure 
of the fully amortizing payment that will be required when the loan 
recasts, i.e., when minimum payments no longer are permitted and fully 
amortizing payments are required under the terms of the legal 
obligation. This payment amount must reflect the maximum possible 
interest rate that will be applicable at that time, based on the terms 
of the legal obligation, as disclosed under Sec.  226.18(s)(2)(ii)(B).
    Fully amortizing payments. Section 226.18(s)(4)(iii) requires 
disclosure in a separate row of the table of the fully amortizing 
payment, assuming that the consumer makes only fully amortizing 
payments beginning at consummation. The fully amortizing payment row 
must be completed for each interest rate required to be disclosed under 
Sec.  226.18(s)(2)(ii). 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.
18(s)(5) Balloon Payments
    Under Sec.  226.18(s)(5)(i), if a loan's terms provide for 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 226.18(s)(5)(i) provides that a payment 
is a balloon payment if it is more than twice the amount of other 
payments. Under Sec.  226.18(s)(5)(ii), if a balloon coincides with an 
interest rate adjustment or other payment increase, the balloon payment 
is disclosed in the table as that payment increase.
18(s)(6) Special Disclosures for Loans With Negative Amortization
    Statement of balance increase and other information. Section 
226.18(s)(6) requires 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 will help 
consumers understand the risks of making such minimum payments. In 
addition, to help consumers navigate the information in the table, 
Sec.  226.18(s)(6) requires a statement directly above the interest 
rate and payment summary table explaining that the loan offers payment 
options. The explanation preceding the table also must state the 
maximum possible interest rate and the smallest number of months or 
years in which the interest rate could reach its maximum.
    The creditor also must 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. Comment 18(s)(6)-1 refers 
to the commentary under Sec.  226.18(s)(3)(i)(C) for guidance on 
escrows. The comment notes that, under that guidance, mortgage 
insurance payments decline over a loan's term, and the payment amounts 
shown in the table should reflect the mortgage insurance payment that 
will be applicable at the time each disclosed periodic payment will be 
in effect. Accordingly, the disclosed mortgage insurance payment will 
be zero if it corresponds to a periodic payment that will occur after 
the creditor will be legally required to terminate mortgage insurance. 
On the other hand, because only one escrow amount is disclosed under 
Sec.  226.18(s)(6) for negative amortization loans and escrows are not 
itemized in the payment amounts, the single escrow amount disclosed 
should reflect the mortgage insurance amount that will be collected as 
of the outset of the loan's term.
18(s)(7) Definitions
    As noted above, Sec.  226.18(s)(7) provides definitions for several 
terms used in Sec.  226.18(s). Those definitions are discussed at the 
beginning of this section-by-section analysis to facilitate the 
subsequent discussion of this interim rule's requirements.
18(t) ``No-Guarantee-to-Refinance'' Statement
    The MDIA also amended Section 128(b) 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

[[Page 58479]]

payments (``MDIA refinancing warning'').\6\ 15 U.S.C. 
1638(b)(2)(C)(ii). To implement the disclosure required by the MDIA, 
the Board is adding a new Sec.  226.18(t). Section 226.18(t)(1) 
requires creditors to disclose a statement 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.
---------------------------------------------------------------------------

    \6\ 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).
---------------------------------------------------------------------------

    Although the MDIA requires this refinancing warning only for 
variable-rate transactions secured by a dwelling, the Board proposed in 
the 2009 Closed-End Proposal to expand the scope of the requirement to 
include fixed-rate transactions secured by a dwelling, as well as 
transactions secured by real property without a dwelling. The Board is 
now adopting this approach. The Board is concerned that some consumers 
may accept loan terms that could present possible payment shock 
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. Consistent with MDIA's provisions, 
however, Sec.  226.18(t) does not apply to transactions secured by 
timeshare plans.
    Section 226.18(t)(2) provides format requirements for the statement 
required by Sec.  226.18(t)(1). The statement must be made in a form 
substantially similar to Model Clause H-4(K) in Appendix H. In the 2009 
Closed-End Proposal, the Board proposed to require that the statement 
be made together with the security interest disclosure. The Board also 
proposed to modify the security interest disclosure to provide a more 
plain-language approach to the significant potential consequences of a 
creditor taking a security interest in a consumer's home. See 74 FR 
43232, 43310, Aug. 26, 2009. The Board is not adopting the proposed 
changes to the security interest disclosure at this time because that 
is not necessary to implement the MDIA amendments that take effect on 
January 30, 2011. Accordingly, the Board also is not adopting the 
requirement to link the security interest disclosure to the new 
statement that there is no guarantee a consumer will be able to 
refinance.
Appendixes G and H Open-End and Closed-End Model Forms and Clauses
    Comment App. G and H-1 discusses permissible changes to the model 
forms and clauses. It states that creditors may make certain changes to 
the format or content of the model forms without losing TILA's 
protection from liability for their use. It also indicates, however, 
that formatting changes may not be made to certain model forms and 
samples. This interim rule amends the comment to add new model clauses 
H-4(E), H-4(F), H-4(G), and H-4(H) to the list of models whose 
formatting may not be altered.
Appendix H Closed-End Model Forms and Clauses
    As noted above, the Board is adopting several model clauses to 
illustrate the new requirements under this interim rule. Model Clause 
H-4(E) illustrates the interest rate and payment summary table required 
under Sec.  226.18(s) for a fixed-rate mortgage transaction. Model 
Clause H-4(F) illustrates the table for an adjustable-rate or a step-
rate mortgage transaction. Model Clause H-4(G) illustrates the table 
for a mortgage transaction with negative amortization. Model Clause H-
4(H) illustrates the table for a fixed-rate loan with interest-only 
terms. Model Clause H-4(I) illustrates the introductory rate disclosure 
required by Sec.  226.18(s)(2)(iii) if an adjustable-rate mortgage has 
an introductory rate. Model Clause H-4(J) illustrates the balloon 
payment disclosure required by Sec.  226.18(s)(5) for a mortgage with a 
balloon payment term. Finally, Model Clause H-4(K) illustrates the no-
guarantee-to-refinance statement required by Sec.  226.18(t).

VI. 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 
interim 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 interim 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, among other things, to 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 for 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, 
see Sec.  226.25, but Regulation Z identifies only a few specific types 
of records that must be retained.\7\
---------------------------------------------------------------------------

    \7\ See comments 25(a)-3 and -4.
---------------------------------------------------------------------------

    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 1,497,362 hours for the 1,138 Federal 
Reserve-regulated institutions that are deemed to be respondents for 
the purpose of the PRA. A detailed discussion of revised burden is 
presented in the following two paragraphs. To ease the burden and cost 
of complying with Regulation Z (particularly for small entities), the

[[Page 58480]]

Board provides model forms, which are appended to the regulation.
    As discussed in the preamble, the Board is adopting changes to 
format and content requirements for disclosures for closed-end 
mortgages that are required within three days after application and 
before consummation. The interim rule will impose a one-time increase 
in the total annual burden under Regulation Z for all respondents 
regulated by the Federal Reserve by 136,560 hours, from 1,497,362 to 
1,633,922 hours. In addition, the Board estimates that the proposed 
revisions to the rules will increase the total annual burden on a 
continuing basis from 1,497,362 to 2,043,602 hours.
    The Board estimates that 1,138 respondents regulated by the Federal 
Reserve would take, on average, 120 hours (three business weeks) to 
update their systems and internal procedure manuals and to provide 
training for relevant staff to comply with the new disclosure 
requirements in Sec.  226.18(s) and (t). This one-time revision will 
increase the burden by 136,560 hours. On a continuing basis, the Board 
estimates that 1,138 respondents regulated by the Federal Reserve will 
take, on average, 40 hours a month to comply with the new disclosure 
requirements and that the new requirements will increase the ongoing 
burden from 304,756 hours to 546,240 hours. To ease the burden and cost 
of complying with the new requirements under Regulation Z the Board is 
adding several model clauses to Appendix H.
    The total estimated burden increase represents averages for all 
respondents regulated by the Federal Reserve. The Board expects that 
the amount of time required to implement the changes for a given 
institution may vary based on the size and complexity of the 
respondent. Further, the estimated burden increase does not include the 
burden of complying with other proposed and final rules the Board is 
issuing simultaneously with this interim rule.
    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 
16,200 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 
will be approximately 19,610,245 hours. The interim rule will impose a 
one-time increase in the estimated annual burden for such institutions 
by 1,944,000 hours to 21,554,245 hours. On a continuing basis, the 
interim rule will impose an increase in the estimated annual burden by 
7,776,000 to 27,386,245 hours. The above estimates represent an average 
across all respondents; the Board expects variations between 
institutions based on their size, complexity, and practices.
    Comments are invited on: (1) Whether the new 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 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 Michelle Shore, 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.

VII. Regulatory Flexibility Analysis

    In accordance with Section 4 of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 604, the Board is publishing a final regulatory 
flexibility analysis for the amendments to Regulation Z in this interim 
rule. The RFA generally requires an agency to perform an assessment of 
the impact a rule is expected to have on small entities.\8\ Under 
Section 5(b) of the RFA, however, the regulatory flexibility analysis 
otherwise required under Section 4 of the RFA is not required if an 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities and states the factual 
basis for such certification. 5 U.S.C. 605(b). The Board believes that 
this interim rule will not have a significant economic impact on a 
substantial number of small entities. The amendments to Regulation Z's 
disclosure requirements implement revisions to TILA made by MDIA. 
Creditors must comply with MDIA's requirements when they become 
effective on January 30, 2011, whether or not the Board amends 
Regulation Z to conform the regulation to the statute. The Board's 
final rule is intended to facilitate compliance by eliminating 
inconsistencies between Regulation Z's existing requirements and the 
statutory requirements imposed by the MDIA, which are effective January 
30, 2011.
---------------------------------------------------------------------------

    \8\ Under standards set by the U.S. Small Business 
Administration (SBA), an entity is considered ``small'' if it has 
$175 million or less in assets, for banks and other depository 
institutions, or $7 million or less in revenues, for non-bank 
mortgage lenders, mortgage brokers, and loan servicers. U.S. Small 
Business Administration, Table of Small Business Size Standards 
Matched to North American Industry Classification System Codes, 
available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
---------------------------------------------------------------------------

A. Statement of the Need for, and Objectives of, the Interim Rule

    Congress enacted the 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 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 also contains procedural and 
substantive protections for consumers. TILA directs the Board to 
prescribe regulations to carry out the purposes of the statute. The 
Board's Regulation Z implements TILA.
    Congress enacted the MDIA in 2008 as an amendment to TILA. The MDIA 
amended TILA's disclosure requirements for closed-end mortgage 
transactions that are secured by a consumer's dwelling. In May 2009, 
the Board revised Regulation Z to implement those requirements. The 
MDIA also amended TILA to require disclosure of examples for variable-
rate mortgage transactions of payment changes, including the maximum 
payment increase possible, and to require disclosure to ensure that 
consumers are aware that there is no guarantee they will be able to 
refinance to lower their payments in the future. As discussed in part V 
of the SUPPLEMENTARY INFORMATION, this interim rule implements those 
MDIA requirements by requiring disclosure of

[[Page 58481]]

the interest rate and payment summary and the no guarantee to refinance 
statement.

B. Summary of Issues Raised by Comments in Response to the Initial 
Regulatory Flexibility Analysis

    The initial regulatory flexibility analysis published in the 2009 
Closed-End Proposal (IRFA) related to the disclosure requirements being 
implemented by this interim rule, as well as a significant number of 
additional proposed requirements for mortgage transactions. Those 
additional requirements include the rest of the proposed changes to the 
TILA disclosure's content, timing, and format; proposed new 
requirements and changes to the format and content of disclosures given 
at application; proposed changes to the timing, content, and types of 
notices provided after consummation; and proposed new protections 
related to limits on loan originator compensation. Consequently, most 
comments to the 2009 Closed-End Proposal relating specifically to the 
IRFA addressed the overall proposal. Comments relating to specific 
burdens focused mainly on aspects of the proposal other than the 
interest rate and payment summary and the no-guarantee-to-refinance 
statement.
    A few commenters opposed certain aspects of the interest rate and 
payment summary, such as its tabular format requirement, on the grounds 
that they would be technologically challenging. The Board believes, 
however, that software likely is readily available that is capable of 
tabular formatting, especially in light of the increasing use of 
tabular disclosures under various state and federal laws. More 
importantly, the formatting requirements are essential to the interim 
rule's purposes based on consumer testing, as discussed above. Some 
small depository institutions, mortgage brokers, and their trade 
associations also suggested exempting small creditors or delaying the 
implementation of the overall proposal by substantial time periods to 
allow time for other regulatory developments to take effect.
    TILA exempts from coverage persons that do not ``regularly extend'' 
consumer credit. See TILA Section 103(f), 15 U.S.C. 1604(f) (definition 
of ``creditor''). Regulation Z implements this provision in Sec.  
226.2(a)(17). Thus, lenders with limited activity (in the case of 
mortgage lending, five or fewer loans in a year) already are exempt 
from all TILA disclosure requirements. Limited lending activity likely 
correlates to a significant extent with being a small entity. The Board 
believes, however, that an exemption from certain TILA disclosure 
requirements for small creditors that otherwise are subject to TILA and 
Regulation Z generally would undermine the purposes of TILA by limiting 
the instances where consumers would receive the benefit of the 
disclosures. This would be especially true if the exemption were 
limited to the interest rate and payment summary implemented by this 
interim rule. Consumers also could be confused by receiving disclosures 
that differ in that one respect, solely based on which creditor they 
applied to for a mortgage loan. Accordingly, the Board is not exempting 
small entities from the requirements of this interim rule.
    The Board intends to establish the implementation period for the 
new disclosures and other new TILA requirements when it publishes a 
final rule under the 2009 and 2010 Closed-End Proposals. At that time, 
the Board will take into consideration the impact on small businesses 
and the time needed for them to implement the new requirements. With 
respect to this interim rule, the Board is affording creditors the 
maximum possible time to implement the interest rate and payment 
summary and no-guarantee-to-refinance notice requirements, by making 
compliance optional until the statutory effective date of January 30, 
2011.
    The U.S. Small Business Administration Office of Advocacy 
(Advocacy) commented on the IRFA generally. Advocacy asserted that the 
Board's IRFA failed to satisfy the requirements of the RFA in two ways. 
First, Advocacy stated that the IRFA lacked adequate information about 
the economic impact of the proposal. Second, Advocacy stated that the 
Board failed to give full consideration to less burdensome alternatives 
to the proposal.
    The Board acknowledged that the overall proposal would have a 
significant economic impact on a substantial number of small entities 
but also noted that the precise costs to small entities of updating 
their systems and disclosures are difficult to identify. The Board 
noted that the impact would depend on a number of unknown factors, 
including 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. See 74 FR 43232, 
43320, Aug. 26, 2009. The Board also recognizes that the impact also 
includes the cost of legal counsel to implement new disclosure 
requirements, but that cost also is difficult to quantify. 
Nevertheless, as Advocacy recognized in its comment letter, in 
preparing an IRFA an agency may provide general, descriptive statements 
of the effects of a proposed rule if quantification is not practicable 
or reliable. 5 U.S.C. 607. Because quantification of the impact was 
impracticable, the Board believes the descriptive discussion, 
referenced above, satisfied this standard.
    Most alternatives raised by commenters specifically to reduce 
burdens related to the loan originator compensation proposal, which is 
not a part of this interim rule. The Board considered alternatives to 
the various disclosure proposals, and discussed them throughout the 
SUPPLEMENTARY INFORMATION to the 2009 Closed-End Proposal. Despite 
these discussions, Advocacy asserted that the Board did not consider 
alternatives that are specifically meant to reduce the economic impact 
on small entities. The Board stated, however, that a principal goal of 
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. See 74 FR 43232, 43234, Aug. 26, 2009. In considering 
alternatives to the 2009 Closed-End Proposal, the Board sought to 
further both of these objectives, thus all alternatives were 
specifically considered at least in part as to how they might reduce 
the economic impact on small entities.
    In proposing the specific parts of the proposal being implemented 
by this interim rule, the Board did not identify any alternatives that 
might reduce the economic impact on small entities while still 
achieving the purposes of the disclosure. As noted above, recent 
amendments to TILA require these disclosures, and extensive consumer 
testing led to the specifics of the requirements. The Board has 
concluded that the required content and format are necessary to meet 
the purposes of TILA as amended by MDIA, and it has not identified any 
less burdensome alternatives that would achieve the same purposes. 
Accordingly, the Board did not discuss any alternatives to the interest 
rate and payment summary or the no-guarantee-to-refinance statement 
requirements. As also noted above, the Board cannot quantify precisely 
the costs of complying with the requirements of this interim rule. The 
Board sought comment, however, on any costs, compliance requirements, 
or changes in operating procedures arising from the application of the 
overall

[[Page 58482]]

proposal, including the requirements implemented by this interim rule, 
to small businesses. See 74 FR 43232, 43320, Aug. 26, 2009. As noted 
above, some commenters objected to the interest rate and payment 
summary as burdensome, but they gave no specific cost information.

C. Description and Estimate of Small Entities to Which the Interim Rule 
Will Apply

    The interim rule will apply to all institutions and entities that 
engage in closed-end lending secured by real property or a dwelling. 
TILA and Regulation Z have broad applicability to individuals and 
businesses that originate even small numbers of home-secured loans. See 
Sec.  226.1(c)(1). As discussed in the IRFA, through data from Reports 
of Condition and Income (Call Reports) of depository institutions and 
certain subsidiaries of banks and bank holding companies, as well as 
data reported under the Home Mortgage Disclosure Act (HMDA), the Board 
can estimate the approximate number of small depository institutions 
and non-depository institutions that would be subject to the rules. For 
the majority of HMDA respondents that are not depository institutions, 
exact revenue information is not available.
    Based on the best information available, the Board makes the 
following estimate of small entities that will be affected by this 
interim rule: According to March 2010 Call Report data, approximately 
8,848 small depository institutions would be subject to the rule. 
Approximately 15,899 depository institutions in the United States filed 
Call Report data, approximately 11,218 of which had total domestic 
assets of $175 million or less and thus were considered small entities 
for purposes of the RFA. Of the 3,898 banks, 523 thrifts, 6,727 credit 
unions, and 70 branches of foreign banks that filed Call Report data 
and were considered small entities, 3,776 banks, 496 thrifts, 4,573 
credit unions, and 3 branches of foreign banks, totaling 8,848 
institutions, extended mortgage credit. For purposes of this Call 
Report analysis, thrifts include savings banks, savings and loan 
entities, co-operative banks and industrial banks. Further, 1,507 non-
depository institutions (independent mortgage companies, subsidiaries 
of a depository institution, or affiliates of a bank holding company) 
filed HMDA reports in 2009 for 2008 lending activities. Based on the 
small volume of lending activity reported by these institutions, most 
are likely to be small entities.

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The compliance requirements of the interim rule are described in 
part V of the SUPPLEMENTARY INFORMATION. To comply with the revised 
rules, small entities will be required to modify their procedures for 
making credit disclosures for mortgage loans. The precise costs to 
small entities of updating their systems and disclosures are difficult 
to estimate. 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, the 
scope and complexity of their mortgage products, the extent to which 
they will require outside legal counsel to develop compliant 
disclosures, and their internal costs of training personnel.

E. Steps Taken To Minimize the Economic Impact on Small Entities

    The Board generally prescribes model forms and clauses to 
facilitate compliance with its disclosure requirements under Regulation 
Z. In this interim rule, the Board is adopting model clauses to 
illustrate the interest rate and payment summary for fixed-rate 
mortgages, adjustable- or step-rate mortgages, mortgages with negative 
amortization, and mortgages with interest-only payments, as well as 
model clauses to illustrate the introductory rate disclosure, the 
balloon payment disclosure, and the no guarantee to refinance 
statement. In addition, as noted above, the Board is affording small 
creditors and other creditors the maximum possible time to implement 
this interim rule's requirements by making compliance optional until 
the statutory effective date. This regulatory flexibility analysis does 
not discuss alternatives to the interim rule because the Board is 
revising Regulation Z for the narrow purpose of carrying out its 
mandate to implement statutory amendments to TILA.

List of Subjects in 12 CFR Part 226

    Advertising, Consumer protection, Federal Reserve System, 
Mortgages, Reporting and recordkeeping requirements, Truth in lending.

Authority and Issuance

0
For the reasons set forth in the preamble, the Board amends Regulation 
Z, 12 CFR Part 226, as set forth below:

PART 226--TRUTH IN LENDING

(Regulation Z)

0
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); Pub. L. 111-24 Sec.  2, 123 Stat. 1734.

Subpart C--Closed-End Credit

0
2. Section 226.18 is amended by revising paragraph (g) introductory 
text and adding new paragraphs (s) and (t) to read as follows:


Sec.  226.18  Content of disclosures.

* * * * *
    (g) Payment schedule. Other than for a transaction that is subject 
to paragraph (s) of this section, the number, amounts, and timing of 
payments scheduled to repay the obligation.
* * * * *
    (s) Interest rate and payment summary for mortgage transactions. 
For a closed-end transaction secured by real property or a dwelling, 
other than a transaction secured by a consumer's interest in a 
timeshare plan described in 11 U.S.C. 101(53D), the creditor shall 
disclose the following information about the interest rate and 
payments:
    (1) Form of disclosures. The information in paragraphs (s)(2)-(4) 
of this section shall be in the form of a table, with no more than five 
columns, with headings and format substantially similar to Model Clause 
H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix H to this part. The table 
shall contain only the information required in paragraphs (s)(2)-(4) of 
this section, shall be placed in a prominent location, and shall be in 
a minimum 10-point font.
    (2) Interest rates--(i) Amortizing loans. (A) For a fixed-rate 
mortgage, the interest rate at consummation.
    (B) For an adjustable-rate or step-rate mortgage--
    (1) The interest rate at consummation and the period of time until 
the first interest rate adjustment may occur, labeled as the 
``introductory rate and monthly payment'';
    (2) The maximum interest rate that may apply during the first five 
years after consummation and the earliest date on which that rate may 
apply, labeled as ``maximum during first five years''; and
    (3) The maximum interest rate that may apply during the life of the 
loan and the earliest date on which that rate may apply, labeled as 
``maximum ever.''
    (C) If the loan provides for payment increases as described in 
paragraph (s)(3)(i)(B) of this section, the interest rate in effect at 
the time the first such

[[Page 58483]]

payment increase is scheduled to occur and the date on which the 
increase will occur, labeled as ``first adjustment'' if the loan is an 
adjustable-rate mortgage or, otherwise, labeled as ``first increase.''
    (ii) Negative amortization loans. For a negative amortization 
loan--
    (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'' or ``intro'';
    (B) The maximum 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 
interest rate that could apply at the time of the first payment 
increase and the date the increase is scheduled to occur; and
    (D) If a second increase in the minimum required payment may occur 
before the consumer must begin making fully amortizing payments, the 
maximum interest rate that could apply at the time of the second 
payment increase and the date the increase is scheduled to occur.
    (iii) Introductory rate disclosure for amortizing adjustable-rate 
mortgages. For an amortizing adjustable-rate mortgage, if the interest 
rate at consummation is less than the fully-indexed rate, placed in a 
box directly beneath the table required by paragraph (s)(1) of this 
section, in a format substantially similar to Model Clause H-4(I) in 
Appendix H to this part--
    (A) The interest rate that applies at consummation and the period 
of time for which it applies;
    (B) A statement that, even if market rates do not change, the 
interest rate will increase at the first adjustment and a designation 
of the place in sequence of the month or year, as applicable, of such 
rate adjustment; and
    (C) The fully-indexed rate.
    (3) Payments for amortizing loans--(i) Principal and interest 
payments. If all periodic payments will be applied to accrued interest 
and principal, for each interest rate disclosed under paragraph 
(s)(2)(i) of this section--
    (A) The corresponding periodic principal and interest payment, 
labeled as ``principal and interest;''
    (B) If the periodic payment may increase without regard to an 
interest rate adjustment, the payment that corresponds to the first 
such 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; and
    (D) The sum of the amounts disclosed under paragraphs (s)(3)(i)(A) 
and (C) of this section or (s)(3)(i)(B) and (C) of this section, as 
applicable, labeled as ``total estimated monthly payment.''
    (ii) Interest-only payments. If the loan is an interest-only loan, 
for each interest rate disclosed under paragraph (s)(2)(i) of this 
section, the corresponding periodic payment and--
    (A) If the payment will be applied to only accrued interest, the 
amount applied to interest, labeled as ``interest payment,'' and a 
statement that none of the payment is being applied to principal;
    (B) If the payment will be applied to accrued interest and 
principal, the earliest date that such payments will be required and an 
itemization of the amount applied to accrued interest and the amount 
applied to principal, labeled as ``interest payment'' and ``principal 
payment,'' respectively;
    (C) The escrow information described in paragraph (s)(3)(i)(C) of 
this section; and
    (D) The sum of all amounts required to be disclosed under 
paragraphs (s)(3)(ii)(A) and (C) of this section or (s)(3)(ii)(B) and 
(C) of this section, as applicable, labeled as ``total estimated 
monthly payment.''
    (4) Payments for negative amortization loans. For negative 
amortization loans:
    (i)(A) The minimum periodic payment required until the first 
payment increase or interest rate increase, corresponding to the 
interest rate disclosed under paragraph (s)(2)(ii)(A) of this section;
    (B) The minimum periodic payment that would be due at the first 
payment increase and the second, if any, corresponding to the interest 
rates described in paragraphs (s)(2)(ii)(C) and (D) of this section; 
and
    (C) A statement that the minimum payment pays only some interest, 
does not repay any principal, and will cause the loan amount to 
increase;
    (ii) The fully amortizing periodic payment amount at the earliest 
time when such a payment must be made, corresponding to the interest 
rate disclosed under paragraph (s)(2)(ii)(B) of this section; and
    (iii) If applicable, in addition to the payments in paragraphs 
(s)(4)(i) and (ii) of this section, for each interest rate disclosed 
under paragraph (s)(2)(ii) of this section, the amount of the fully 
amortizing periodic payment, labeled as the ``full payment option,'' 
and a statement that these payments pay all principal and all accrued 
interest.
    (5) Balloon payments. (i) Except as provided in paragraph 
(s)(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 shall be disclosed separately 
from other periodic payments disclosed in the table under this 
paragraph (s), outside the table and in a manner substantially similar 
to Model Clause H-4(J) in Appendix H to this part.
    (ii) If the balloon payment is scheduled to occur at the same time 
as another payment required to be disclosed in the table pursuant to 
paragraph (s)(3) or (s)(4) of this section, then the balloon payment 
must be disclosed in the table.
    (6) Special disclosures for loans with negative amortization. For a 
negative amortization loan, the following information, in close 
proximity to the table required in paragraph (s)(1) of this section, 
with headings, content, and format substantially similar to Model 
Clause H-4(G) in Appendix H to this part:
    (i) The maximum interest rate, the shortest period of time in which 
such interest rate could be reached, 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 begin making fully amortizing payments, assuming that the maximum 
interest rate is reached at the earliest possible time.
    (7) Definitions. For purposes of this Sec.  226.18(s):
    (i) The term ``adjustable-rate mortgage'' means a transaction 
secured by real property or a dwelling for which the annual percentage 
rate may increase after consummation.
    (ii) The term ``step-rate mortgage'' means a transaction secured by 
real property or a dwelling for which the interest rate will change 
after consummation, and the rates that will apply and the periods for 
which they will apply are known at consummation.
    (iii) The term ``fixed-rate mortgage'' means a transaction secured 
by real property or a dwelling that is not an adjustable-rate mortgage 
or a step-rate mortgage.
    (iv) The term ``interest-only'' means that, under the terms of the 
legal obligation, one or more of the periodic payments may be applied 
solely to accrued interest and not to loan

[[Page 58484]]

principal; an ``interest-only loan'' is a loan that permits interest-
only payments.
    (v) The term ``amortizing loan'' means a loan in which payment of 
the periodic payments does not result in an increase in the principal 
balance under the terms of the legal obligation; the term ``negative 
amortization'' means payment of periodic payments that will result in 
an increase in the principal balance under the terms of the legal 
obligation; the term ``negative amortization loan'' means a loan that 
permits payments resulting in negative amortization, other than a 
reverse mortgage subject to Sec.  226.33.
    (vi) The term ``fully-indexed rate'' means the interest rate 
calculated using the index value and margin at the time of 
consummation.
    (t) ``No-guarantee-to-refinance'' statement. (1) Disclosure. For a 
closed-end transaction secured by real property or a dwelling, other 
than a transaction secured by a consumer's interest in a timeshare plan 
described in 11 U.S.C. 101(53D), the creditor shall disclose a 
statement that there is no guarantee the consumer can refinance the 
transaction to lower the interest rate or periodic payments.
    (2) Format. The statement required by paragraph (t)(1) of this 
section must be in a form substantially similar to Model Clause H-4(K) 
in Appendix H to this part.

0
3. Appendix H to Part 226 is amended by:
0
A. Adding entries for H-4(E) through H-4(K) to the table of contents at 
the beginning of the appendix; and
0
B. Adding new Model Clauses H-4(E) through H-4(K) in numerical order.

Appendix H to Part 226--Closed-End Model Forms and Clauses

* * * * *
H-4(E)--Fixed-Rate Mortgage Interest Rate and Payment Summary Model 
Clause (Sec.  226.18(s))
H-4(F)--Adjustable-Rate Mortgage or Step-Rate Mortgage Interest Rate 
and Payment Summary Model Clause (Sec.  226.18(s))
H-4(G)--Mortgage with Negative Amortization Interest Rate and 
Payment Summary Model Clause (Sec.  226.18(s))
H-4(H)--Fixed-Rate Mortgage with Interest-Only Interest Rate and 
Payment Summary Model Clause (Sec.  226.18(s))
H-4(I)--Adjustable-Rate Mortgage Introductory Rate Disclosure Model 
Clause (Sec.  226.18(s)(2)(iii))
H-4(J)--Balloon Payment Disclosure Model Clause (Sec.  226.18(s)(5))
H-4(K)--No Guarantee to Refinance Statement Model Clause (Sec.  
226.18(t))
* * * * *
BILLING CODE P
[GRAPHIC] [TIFF OMITTED] TR24SE10.000


[[Page 58485]]


[GRAPHIC] [TIFF OMITTED] TR24SE10.001


[[Page 58486]]


[GRAPHIC] [TIFF OMITTED] TR24SE10.002

BILLING CODE C

H-4(I)--Introductory Rate Model Clause

[Introductory Rate Notice
You have a discounted introductory rate of -------- % that ends 
after (period).
In the (period in sequence), even if market rates do not change, 
this rate will increase to ---- %.]

H-4(J)--Balloon Payment Model Clause

[Final Balloon Payment due (date): $--------]

H-4(K)--``No-Guarantee-to-Refinance'' Statement Model Clause

    There is no guarantee that you will be able to refinance to 
lower your rate and payments.
* * * * *

0
4. In Supplement I to Part 226:
0
A. Under Section 226.17--General Disclosure Requirements, 17(a) Form of 
disclosures, Paragraph 17(a)(1), paragraph 1 is revised.
0
B. Under Section 226.18--Content of Disclosures, 18(g) Payment 
schedule, paragraph 6 is added, and an entry for 18(s) Interest rate 
and payment summary for mortgage transactions is added.
0
C. Under Appendixes G and H--Open-End and Closed-End Model Forms and 
Clauses, paragraph 1 is revised.
0
D. Under Appendix H--Closed-End Model Forms and Clauses, paragraph 7 is 
revised.
    The additions and revisions read as follows:

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart C--Closed-End Credit

* * * * *

Section 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 (except for the interest rate and 
payment summary for mortgage transactions required by Sec.  
228.18(s)), the disclosures must be legible, whether typewritten, 
handwritten, or printed by computer.
* * * * *

Section 226.18--Content of Disclosures

* * * * *
    18(g) Payment schedule.
* * * * *
    6. Mortgage transactions. Section 226.18(g) applies only to 
closed-end transactions other than transactions that are subject to 
Sec.  226.18(s). Section 226.18(s) applies to closed-end 
transactions secured by real property or a dwelling. Thus, if a 
closed-end consumer credit transaction is secured by real property 
or a dwelling, the creditor discloses an interest rate and payment 
summary table in accordance with Sec.  226.18(s) and does not 
observe the requirements of Sec.  226.18(g). On the other hand, if a 
closed-end consumer credit transaction is not secured by real 
property or a dwelling, the creditor discloses a payment schedule in 
accordance with Sec.  226.18(g) and does not observe the 
requirements of Sec.  226.18(s).
* * * * *
    18(s) Interest rate and payment summary for mortgage 
transactions.
    1. In general. Section 226.18(s) prescribes format and content 
for disclosure of interest rates and monthly (or other periodic) 
payments for mortgage loans. The information in Sec.  226.18(s)(2)-
(4) is required to be in the form of a table, except as otherwise 
provided, with headings and format substantially similar to Model 
Clause H-4(E), H-4(F), H-4(G), or H-4(H) in Appendix H to this part. 
A disclosure that does not include the shading shown in a model 
clause but otherwise follows the model clause's headings and format 
is substantially similar to that model clause. In all cases, the 
table should have no more than five vertical columns corresponding 
to applicable interest rates at various times during the loan's 
term; corresponding payments would be shown in horizontal rows. 
Certain loan types and terms are defined for purposes of Sec.  
226.18(s) in Sec.  226.18(s)(7).
    2. Amortizing loans. Loans described as amortizing in Sec. Sec.  
226.18(s)(2)(i) and 226.18(s)(3) include interest-only loans if they 
do not also permit negative amortization. (For rules relating to 
loans with balloon payments, see Sec.  226.18(s)(5)). If an 
amortizing loan is an adjustable-rate mortgage with an introductory 
rate (less than the fully-indexed rate), creditors must provide a 
special explanation of introductory rates. See Sec.  
226.18(s)(2)(iii).
    3. Negative amortization. For negative amortization loans, 
creditors must follow the rules in Sec. Sec.  226.18(s)(2)(ii) and 
226.18(s)(4) in disclosing interest rates and monthly payments. 
Loans with negative amortization also require special explanatory 
disclosures about rates and payments. See Sec.  226.18(s)(6). Loans 
with negative amortization include ``payment option'' loans, in 
which the consumer is permitted to make minimum payments that will 
cover only some of the interest accruing each month. See also 
comment 17(c)(1)-12, regarding graduated-payment adjustable-rate 
mortgages.
    18(s)(2) Interest rates.
    18(s)(2)(i) Amortizing loans.
    Paragraph 18(s)(2)(i)(A).
    1. Fixed rate loans--payment increases. Although the interest 
rate will not change after consummation for a fixed-rate loan, some 
fixed-rate loans may have periodic payments that increase after 
consummation. For example, the terms of the legal obligation may 
permit the consumer to make interest-only payments for a specified 
period such as the first five years after consummation. In such 
cases, the creditor must include the increased payment under Sec.  
226.18(s)(3)(ii)(B) in the payment row, and must show the interest 
rate in the column for that payment, even though the rate has not 
changed since consummation. See also comment 17(c)(1)-13, regarding 
growth equity mortgages.

[[Page 58487]]

    Paragraph 18(s)(2)(i)(B).
    1. Adjustable-rate mortgages and step-rate mortgages. Creditors 
must disclose more than one interest rate for adjustable-rate 
mortgages and step-rate mortgages, in accordance with Sec.  
226.18(s)(2)(i)(B). Creditors must assume that an adjustable-rate 
mortgage's interest rate will increase after consummation as rapidly 
as possible, taking into account the terms of the legal obligation.
    2. Maximum interest rate during first five years--adjustable-
rate mortgages and step-rate mortgages. The creditor must disclose 
the maximum rate that could apply during the first five years after 
consummation. If there are no interest rate caps other than the 
maximum rate required under Sec.  226.30, then the creditor should 
disclose only the rate at consummation and the maximum rate. Such a 
table would have only two columns.
    i. For an adjustable-rate mortgage, the creditor must take into 
account any interest rate caps when disclosing the maximum interest 
rate during the first five years. The creditor must also disclose 
the earliest date on which that adjustment may occur.
    ii. If the transaction is a step-rate mortgage, the creditor 
should disclose the rate that will apply after consummation. For 
example, the legal obligation may provide that the rate is 6 percent 
for the first two years following consummation, and then increases 
to 7 percent for at least the next three years. The creditor should 
disclose the maximum rate during the first five years as 7 percent 
and the date on which the rate is scheduled to increase to 7 
percent.
    3. Maximum interest rate at any time. The creditor must disclose 
the maximum rate that could apply at any time during the term of the 
loan and the earliest date on which the maximum rate could apply.
    i. For an adjustable-rate mortgage, the creditor must take into 
account any interest rate caps in disclosing the maximum interest 
rate. For example, if the legal obligation provides that at each 
annual adjustment the rate may increase by no more than 2 percentage 
points, the creditor must take this limit into account in 
determining the earliest date on which the maximum possible rate may 
be reached.
    ii. For a step-rate mortgage, the creditor should disclose the 
highest rate that could apply under the terms of the legal 
obligation and the date on which that rate will first apply.
    Paragraph 18(s)(2)(i)(C).
    1. Payment increases. For some loans, the payment may increase 
following consummation for reasons unrelated to an interest rate 
adjustment. For example, an adjustable-rate mortgage may have an 
introductory fixed-rate for the first five years following 
consummation and permit the borrower to make interest-only payments 
for the first three years. Under Sec.  226.18(s)(3)(ii)(B), the 
creditor must disclose the first payment that will be applied to 
both principal and interest. In such a case, Sec.  
226.18(s)(2)(i)(C) requires that the creditor also disclose the 
interest rate that corresponds to the first payment of principal and 
interest, even though the interest rate will not adjust at that 
time. The table would show, from left to right: The interest rate 
and payment at consummation with the payment itemized to show that 
the payment is being applied to interest only; the interest rate and 
payment when the interest-only option ends; the maximum interest 
rate and payment during the first five years; and the maximum 
possible interest rate and payment.
    18(s)(2)(ii) Negative amortization loans.
    1. Rate at consummation. In all cases the interest rate in 
effect at consummation must be disclosed, even if it will apply only 
for a short period such as one month.
    2. Rates for adjustable-rate mortgages. The creditor must assume 
that interest rates rise as quickly as possible after consummation, 
in accordance with any interest rate caps under the legal 
obligation. For adjustable-rate mortgages with no rate caps except a 
life-time maximum, creditors must assume that the interest rate 
reaches the maximum at the first adjustment. For example, assume 
that the legal obligation provides for an interest rate at 
consummation of 1.5 percent. One month after consummation, the 
interest rate adjusts and will adjust monthly thereafter, according 
to changes in the index. The consumer may make payments that cover 
only part of the interest accrued each month, until the date the 
principal balance reaches 115 percent of its original balance, or 
until the end of the fifth year after consummation, whichever comes 
first. The maximum possible rate is 10.5 percent. No other limits on 
interest rates apply. The minimum required payment adjusts each 
year, and may increase by no more than 7.5 percent over the previous 
year's payment. The creditor should disclose the following rates and 
the dates when they are scheduled to occur: A rate of 1.5 percent 
for the first month following consummation and the minimum payment; 
a rate of 10.5 percent, and the corresponding minimum payment taking 
into account the 7.5 percent limit on payment increases, at the 
beginning of the second year; and a rate of 10.5 percent and the 
corresponding minimum payment taking into account the 7.5 percent 
payment increase limit, at the beginning of the third year. The 
creditor also must disclose the rate of 10.5 percent, the fully 
amortizing payment, and the date on which the consumer must first 
make such a payment under the terms of the legal obligation.
    18(s)(2)(iii) Introductory rate disclosure for amortizing 
adjustable-rate mortgage.
    1. Introductory rate. In some adjustable-rate mortgages, 
creditors may set an initial interest rate that is lower than the 
fully-indexed rate at consummation. For amortizing loans with an 
introductory rate, creditors must disclose the information required 
in Sec.  226.18(s)(2)(iii) directly below the table.
    Paragraph 18(s)(2)(iii)(B).
    1. Place in sequence. ``Designation of the place in sequence'' 
refers to identifying the month or year, as applicable, of the 
change in the rate resulting from the expiration of an introductory 
rate by its place in the sequence of months or years, as applicable, 
of the transaction's term. For example, if a transaction has a 
discounted rate for the first three years, Sec.  
226.18(s)(2)(iii)(B) requires a statement such as, ``In the fourth 
year, even if market rates do not change, this rate will increase to 
----%.''
    Paragraph 18(s)(2)(iii)(C).
    1. Fully-indexed rate. The fully-indexed rate is defined in 
Sec.  226.18(s)(7) as the index plus the margin at consummation. For 
purposes of Sec.  226.18(s)(2)(iii)(C), ``at consummation'' refers 
to disclosures delivered at consummation, or three business days 
before consummation pursuant to Sec.  226.19(a)(2)(ii); for early 
disclosures delivered within three business days after receipt of a 
consumer's application pursuant to Sec.  226.19(a)(1), the fully-
indexed rate disclosed under Sec.  226.18(s)(2)(iii)(C) may be based 
on the index in effect at the time the disclosures are provided. The 
index in effect at consummation (or at the time of early 
disclosures) 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 rate changes are based on the index value in 
effect 45 days before the change date, creditors may use any index 
value in effect during the 45 days before consummation (or any 
earlier date of disclosure) in calculating the fully-indexed rate to 
be disclosed.
    18(s)(3) Payments for amortizing loans.
    1. Payments corresponding to interest rates. Creditors must 
disclose the periodic payment that corresponds to each interest rate 
disclosed under Sec.  226.18(s)(2)(i)(A)-(C). The corresponding 
periodic payment is the regular payment for each such interest rate, 
without regard to any final payment that differs from others because 
of the rounding of periodic payments to account for payment amounts 
including fractions of cents. Balloon payments, however, must be 
disclosed as provided in Sec.  226.18(s)(5).
    2. Principal and interest payment amounts; examples.
    i. For fixed-rate interest-only transactions, Sec.  
226.18(s)(3)(ii)(B) requires scheduled increases in the regular 
periodic payment amounts to be disclosed along with the date of the 
increase. 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 must be disclosed. Similarly, 
in a fixed-rate balloon loan, the balloon payment must be disclosed 
in accordance with Sec.  226.18(s)(5).
    ii. For adjustable-rate mortgage transactions, Sec.  
226.18(s)(3)(i)(A) requires that for each interest rate required to 
be disclosed under Sec.  226.18(s)(2)(i) (the interest rate at 
consummation, the maximum rate during the first five years, and the 
maximum possible rate) a corresponding payment amount must be 
disclosed.
    iii. The format of the payment disclosure varies depending on 
whether all regular periodic payment amounts will include principal 
and interest, and whether there will be an escrow account for taxes 
and insurance.
    Paragraph 18(s)(3)(i)(C).
    1. Taxes and insurance. An estimated payment amount for taxes 
and insurance must be disclosed if the creditor will establish an 
escrow account for such amounts. The payment amount must include 
estimated amounts for property taxes and premiums for mortgage-
related insurance required by the creditor, such as insurance 
against loss of or damage to property, or

[[Page 58488]]

against liability arising out of the ownership or use of the 
property, or insurance protecting the creditor against the 
consumer's default or other credit loss. Premiums for credit 
insurance, debt suspension and debt cancellation agreements, 
however, should not be included. Except for periodic mortgage 
insurance premiums included in the escrow payment under Sec.  
226.18(s)(3)(i)(C), amounts included in the escrow payment 
disclosure such as property taxes and homeowner's insurance 
generally are not finance charges under Sec.  226.4 and, therefore, 
do not affect other disclosures, including the finance charge and 
annual percentage rate.
    2. Mortgage insurance. Payment amounts under Sec.  
226.18(s)(3)(i) 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 amount must reflect the terms of 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, payment amounts disclosed through the 130th 
payment should reflect premium payments. If, under the legal 
obligation, the creditor will apply the amount escrowed to the two 
final insurance payments, payments disclosed through the 128th 
payment should reflect premium payments. The escrow amount reflected 
on the disclosure should include mortgage insurance premiums even if 
they are not escrowed and even if there is no escrow account 
established for the transaction.
    Paragraph 18(s)(3)(i)(D).
    1. Total monthly payment. For amortizing loans, each column 
should add up to a total estimated payment. The total estimated 
payment amount should be labeled. If periodic payments are not due 
monthly, the creditor should use the appropriate term such as 
``quarterly'' or ``annually.''
    18(s)(3)(ii) Interest-only payments.
    1. Interest-only loans that are also negative amortization 
loans. The rules in Sec.  226.18(s)(3)(ii) for disclosing payments 
on interest-only loans apply only if the loan is not also a negative 
amortization loan. If the loan is a negative amortization loan, even 
if it also has an interest-only feature, payments are disclosed 
under the rules in Sec.  226.18(s)(4).
    Paragraph 18(s)(3)(ii)(C).
    1. Escrows. See the commentary under Sec.  226.18(s)(3)(i)(C) 
for guidance on escrows for purposes of Sec.  226.18(s)(3)(ii)(C).
    18(s)(4) Payments for negative amortization loans.
    1. Table. Section 226.18(s)(1) provides that tables shall 
include only the information required in Sec.  226.18(s)(2)-(4). 
Thus, a table for a negative amortization loan must contain no more 
than two horizontal rows of payments and no more than five vertical 
columns of interest rates.
    2. Payment amounts. The payment amounts disclosed under Sec.  
226.18(s)(4) are the minimum or fully amortizing periodic payments, 
as applicable, corresponding to the interest rates disclosed under 
Sec.  226.18(s)(2)(ii). The corresponding periodic payment is the 
regular payment for each such interest rate, without regard to any 
final payment that differs from the rest because of the rounding of 
periodic payments to account for payment amounts including fractions 
of cents.
    Paragraph 18(s)(4)(i).
    1. Minimum required payments. In one row of the table, the 
creditor must disclose the minimum required payment in each column 
of the table, corresponding to each interest rate or adjustment 
required in Sec.  226.18(s)(2)(ii). The payments in this row must be 
calculated based on an assumption that the consumer makes the 
minimum required payment for as long as possible under the terms of 
the legal obligation. This row should be identified as the minimum 
payment option, and the statement required by Sec.  
226.18(s)(4)(i)(C) should be included in the heading for the row.
    Paragraph 18(s)(4)(iii).
    1. Fully amortizing payments. In one row of the table, the 
creditor must disclose the fully amortizing payment in each column 
of the table, corresponding to each interest rate required in Sec.  
226.18(s)(2)(ii). The creditor must assume, for purposes of 
calculating the amounts in this row that the consumer makes only 
fully amortizing payments starting with the first scheduled payment.
    18(s)(5) Balloon payments.
    1. General. A balloon payment is one that is more than two times 
the regular periodic payment. In a reverse mortgage transaction, the 
single payment is not considered a balloon payment. A balloon 
payment must be disclosed outside and below the table, unless the 
balloon payment coincides with an interest rate adjustment or a 
scheduled payment increase. In those cases, the balloon payment must 
be disclosed in the table.
    18(s)(6) Special disclosures for loans with negative 
amortization.
    1. Escrows. See the commentary under Sec.  226.18(s)(3)(i)(C) 
for guidance on escrows for purposes of Sec.  226.18(s)(6). Under 
that guidance, because mortgage insurance payments decline over a 
loan's term, the payment amounts shown in the table should reflect 
the mortgage insurance payment that will be applicable at the time 
each disclosed periodic payment will be in effect. Accordingly, the 
disclosed mortgage insurance payment will be zero if it corresponds 
to a periodic payment that will occur after the creditor will be 
legally required to terminate mortgage insurance. On the other hand, 
because only one escrow amount is disclosed under Sec.  226.18(s)(6) 
for negative amortization loans and escrows are not itemized in the 
payment amounts, the single escrow amount disclosed should reflect 
the mortgage insurance amount that will be collected at the outset 
of the loan's term, even though that amount will decline in the 
future and ultimately will be discontinued pursuant to the terms of 
the mortgage insurance policy.
* * * * *

Appendixes G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. 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. Creditors may make certain changes in the format or 
content of the 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, except formatting changes may not be made 
to model forms and samples in H-18, H-19, H-20, H-21, H-22, H-23, G-
2(A), G-3(A), G-4(A), G-10(A)-(E), G-17(A)-(D), G-18(A) (except as 
permitted pursuant to Sec.  226.7(b)(2)), G-18(B)-(C), G-19, G-20, 
and G-21, or to the model clauses in H-4(E), H-4(F), H-4(G), and H-
4(H). The rearrangement of the model forms and clauses may not be so 
extensive as to affect the substance, clarity, or meaningful 
sequence of the forms and clauses. Creditors making revisions with 
that effect will lose their protection from civil liability. Except 
as otherwise specifically required, acceptable changes include, for 
example:
    i. Using the first person, instead of the second person, in 
referring to the borrower.
    ii. Using ``borrower'' and ``creditor'' instead of pronouns.
    iii. Rearranging the sequences of the disclosures.
    iv. Not using bold type for headings.
    v. Incorporating certain state ``plain English'' requirements.
    vi. Deleting inapplicable disclosures by whiting out, blocking 
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out, 
leaving blanks, checking a box for applicable items, or circling 
applicable items. (This should permit use of multipurpose standard 
forms.)
    vii. Using a vertical, rather than a horizontal, format for the 
boxes in the closed-end disclosures.
* * * * *

Appendix H--Closed-End Model Forms and Clauses

* * * * *
    7. Models H-4(D) through H-4(J). These model clauses illustrate 
certain notices, statements, and other disclosures required as 
follows:
    i. Model H-4(D) illustrates the adjustment notice required under 
Sec.  226.20(c), and provides examples of payment change notices and 
annual notices of interest rate changes.
    ii. Model H-4(E) illustrates the interest rate and payment 
summary table required under Sec.  226.18(s) for a fixed-rate 
mortgage transaction.
    iii. Model H-4(F) illustrates the interest rate and payment 
summary table required under Sec.  226.18(s) for an adjustable-rate 
or a step-rate mortgage transaction.
    iv. Model H-4(G) illustrates the interest rate and payment 
summary table required under Sec.  226.18(s) for a mortgage 
transaction with negative amortization.
    v. Model H-4(H) illustrates the interest rate and payment 
summary table required under Sec.  226.18(s) for a fixed-rate, 
interest-only mortgage transaction.

[[Page 58489]]

    vi. Model H-4(I) illustrates the introductory rate disclosure 
required by Sec.  226.18(s)(2)(iii) for an adjustable-rate mortgage 
transaction with an introductory rate.
    vii. Model H-4(J) illustrates the balloon payment disclosure 
required by Sec.  226.18(s)(5) for a mortgage transaction with a 
balloon payment term.
    viii. Model H-4(K) illustrates the no-guarantee-to-refinance 
statement required by Sec.  226.18(t) for a mortgage transaction.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, August 13, 2010.

Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 2010-20663 Filed 9-23-10; 8:45 am]
BILLING CODE P