[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
[[Page 58470]]
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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.
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\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).
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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\
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\7\ See comments 25(a)-3 and -4.
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Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the state member banks and other
creditors supervised by the Federal Reserve that engage in consumer
credit activities covered by Regulation Z and, therefore, are
respondents under the PRA. Appendix I of Regulation Z defines the
Federal Reserve-regulated institutions as: State member banks, branches
and agencies of foreign banks (other than federal branches, federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act. Other federal agencies account for the paperwork burden imposed on
the entities for which they have administrative enforcement authority.
The current total annual burden to comply with the provisions of
Regulation Z is estimated to be 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.
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\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.
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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))
* * * * *
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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]
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