[Federal Register Volume 75, Number 185 (Friday, September 24, 2010)]
[Proposed Rules]
[Pages 58505-58508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20665]



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

[[Page 58505]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Docket No. R-1392]
RIN No. AD 7100-AD54


Regulation Z; Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board is publishing for comment a proposed rule to amend 
Regulation Z, which implements the Truth in Lending Act (TILA). The 
proposed rule would implement Section 1461 of the recently enacted 
Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1461 
amends TILA to provide a separate, higher threshold for determining 
coverage of the Board's escrow requirement applicable to higher-priced 
mortgage loans, for loans that exceed the maximum principal balance 
eligible for sale to Freddie Mac.

DATES: Comments on this proposed rule must be received on or before 
October 25, 2010.

ADDRESSES: You may submit comments, identified by Docket No. R-1392 and 
RIN No. AD 7100-AD54, 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.
    In 1994, Congress amended TILA by enacting the Home Ownership and 
Equity Protection Act (HOEPA). The HOEPA amendments created special 
substantive protections for consumers obtaining mortgage loans with 
annual percentage rates (APRs) or total points and fees exceeding 
prescribed thresholds. The Board adopted final rules implementing the 
HOEPA amendments to TILA in 1995. 60 FR 15463, Mar. 24, 1995. In 
addition, TILA Section 129(l)(2)(A), as added by HOEPA, directed the 
Board to adopt regulations prohibiting acts and practices the Board 
finds to be unfair and deceptive in connection with mortgage loans. 15 
U.S.C. 1639(l)(2)(A).

B. 2008 HOEPA Final Rule

    In July of 2008, the Board adopted final rules under the Board's 
authority pursuant to TILA Section 129(l)(2)(A) to prohibit unfair and 
deceptive acts and practices in connection with mortgage loans. 73 FR 
44522, July 30, 2008 (2008 HOEPA Final Rule). The 2008 HOEPA Final Rule 
defined a class of ``higher-priced mortgage loans'' and prohibited 
certain unfair or deceptive lending and servicing practices in 
connection with such transactions. The Board also approved revisions to 
advertising rules for both closed-end and open-end home-secured loans 
to ensure that advertisements contain accurate and balanced information 
and do not contain misleading or deceptive representations. Finally, 
the 2008 HOEPA Final Rule required creditors to provide consumers with 
transaction-specific disclosures early enough to use while shopping for 
a mortgage.
    Under the 2008 HOEPA Final Rule, a higher-priced mortgage loan is a 
consumer credit transaction secured by the consumer's principal 
dwelling with an APR that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set by 1.5 
or more percentage points for loans secured by a first lien on a 
dwelling, or by 3.5 or more percentage points for loans secured by a 
subordinate lien on a dwelling. See Sec.  226.35(a)(1). For such loans, 
the Board prohibited creditors from extending credit based on the value 
of the consumer's collateral without regard to the consumer's ability 
to repay the obligation. See Sec.  226.35(b)(1). The Board also placed 
restrictions on the inclusion of prepayment penalty provisions in 
higher-priced mortgage loans. See Sec.  226.35(b)(2). Finally, the 
Board prohibited extending a higher-priced mortgage loan secured by a 
first lien unless an escrow account is established before consummation 
for payment of property taxes and premiums for mortgage-related 
insurance required by the creditor. See Sec.  226.35(b)(3).

C. The Reform Act

    On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Reform Act) was signed into law.\1\ Section 1461 of 
the Reform Act creates TILA Section 129D.\2\ TILA Section 129D 
substantially codifies the requirement that escrow accounts for taxes 
and insurance be established for first-lien higher-priced mortgage 
loans, adopted by the Board as part of the 2008 HOEPA Final Rule. As 
discussed above, the 2008 HOEPA Final Rule imposed the escrow 
requirement on first-lien transactions having an APR that exceeds the 
average prime offer rate for a comparable transaction by 1.5 or more 
percentage points. The Reform Act

[[Page 58506]]

incorporates this coverage test in new TILA Section 129D, but only for 
loans that do not exceed the current, maximum original principal 
obligation for mortgages eligible for purchase by Freddie Mac. TILA 
Section 129D(b)(3)(A) (to be codified at 15 U.S.C. 1639D(b)(3)(A)).
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    \1\ Public Law 111-203, 124 Stat. 1376.
    \2\ Public Law 111-203, Sec.  1461, 124 Stat. 1376, 2178-81 (to 
be codified at 15 U.S.C. 1639D).
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    For loans that exceed the Freddie Mac maximum principal balance, 
TILA Section 129D provides that the escrow requirement applies only if 
the APR exceeds the applicable average prime offer rate by 2.5 or more 
percentage points. TILA Section 129D(b)(3)(B) (to be codified at 15 
U.S.C. 1639D(b)(3)(B)). The current maximum principal balance for a 
mortgage loan to be eligible for purchase by Freddie Mac (or Fannie 
Mae, which uses the same loan-size limit), assuming a single-family 
property that is not located in any of various designated ``high-cost'' 
areas, is $417,000.\3\ Thus, for example, under TILA Section 
129D(b)(3), if a single-family mortgage loan's original principal 
balance is $415,000, the determination of whether it is subject to the 
escrow requirement in Sec.  226.35(b)(3) is made using a threshold of 
1.5 percentage points over the average prime offer rate; if the 
principal balance is $420,000, on the other hand, the determination is 
made using a threshold of 2.5 percentage points over the average prime 
offer rate. Loans that are not eligible for purchase by Freddie Mac or 
Fannie Mae because their loan sizes are too great are widely referred 
to in the mortgage market as ``jumbo'' mortgages. Hence, the term 
``jumbo'' is used in this proposed rule to refer to such loans.
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    \3\ See http://www.freddiemac.com/sell/selbultn/limit.htm.
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II. Summary of the Proposed Rule

    In the 2008 HOEPA Final Rule, the Board defined a class of higher-
priced mortgage loans and applied special consumer protections to those 
loans. One of these protections is a requirement to establish an escrow 
account for first-lien higher-priced mortgage loans. Higher-priced 
mortgage loans are loans for which the APR exceeds the ``average prime 
offer rate'' for a comparable transaction as of the date the loan's 
interest rate is set, by 1.50 percentage points for first-lien loans 
and 3.50 percentage points for subordinate-lien loans.
    This proposed rule would implement TILA Section 129D(b)(3)(B), as 
enacted by Section 1461 of the Reform Act, discussed above. Section 
129D(b)(3)(B) provides a different, higher threshold for the escrow 
requirement for first-lien, ``jumbo'' loans. For such loans, under this 
proposal, escrows would be mandatory if the loan's APR exceeds the 
average prime offer rate for a comparable transaction as of the date 
the loan's interest rate is set by 2.5 or more percentage points. The 
Reform Act makes several other changes to TILA, including the escrow 
requirement, that would not be implemented by this proposed rule. The 
Board expects to propose rules to implement the other TILA provisions 
in the Reform Act at a later date.

III. Section-by-Section Analysis

Section 226.35 Prohibited Acts or Practices in Connection With Higher-
Priced Mortgage Loans

35(a) Higher-Priced Mortgage Loans
35(a)(1)
    As discussed below, the Board is proposing to revise Sec.  
226.35(b)(3) to provide a higher threshold for determining whether 
escrow accounts must be established for certain closed-end mortgage 
loans secured by a first lien on a consumer's principal dwelling, 
pursuant to the Reform Act. Under the proposed provision, the threshold 
for coverage of the escrow requirement for such loans would be 2.5 
percentage points, rather than the 1.5 percentage points stated in 
Sec.  226.35(a)(1), in excess of the average prime offer rate. The 
Board is proposing a conforming amendment to Sec.  226.35(a)(1) to 
reflect this exception to the general coverage test for higher-priced 
mortgage loans.
35(b) Rules for Higher-Priced Mortgage Loans
35(b)(3) Escrows
35(b)(3)(v) ``Jumbo'' Loans
    The Board is proposing a new Sec.  226.35(b)(3)(v) to implement 
TILA Section 129D(b)(3)(B), as enacted by Section 1461 of the Reform 
Act, discussed above. Proposed Sec.  226.35(b)(3)(v) provides a higher 
threshold for determining whether escrow accounts must be established 
for certain closed-end mortgage loans secured by a first lien on a 
consumer's principal dwelling. Currently, under Sec.  226.35(a)(1), a 
first-lien loan is considered a higher-priced mortgage loan and is 
subject to the escrow requirement if its APR exceeds the average prime 
offer rate by 1.5 or more percentage points. Pursuant to TILA Section 
129D(b)(3)(B), for a closed-end, first-lien loan whose original 
principal amount exceeds the current maximum loan balance for loans 
eligible for sale to Freddie Mac as of the date the transaction's rate 
is set, the applicable threshold is 2.5, rather than 1.5, percentage 
points.
    Accordingly, proposed Sec.  226.35(b)(3)(v) would provide that for 
such ``jumbo'' loans the applicable threshold under Sec.  226.35(a)(1) 
is 2.5 or more percentage points greater than the average prime offer 
rate. Proposed staff comment 35(b)(3)(v)-1 would clarify that this 
higher threshold applies solely to whether a ``jumbo'' loan is subject 
to the escrow requirement. The determination of whether ``jumbo'' loans 
are subject to the other protections in Sec.  226.35, such as the 
ability to repay requirements under Sec.  226.35(b)(1) and the 
restrictions on prepayment penalties under Sec.  226.35(b)(2), would 
continue to be based on the 1.5 percentage point threshold.
    The Board is proposing this amendment to Sec.  226.35(b)(3) 
pursuant to its authority under TILA Section 105(a) to prescribe 
regulations to carry out the purposes of TILA. 15 U.S.C. 1604(a). 
Section 105(a) authorizes the Board to implement TILA's statutory 
provisions through regulations. New TILA Section 129D is such a 
statutory provision.

IV. Effective Date of Final Rule

    The Board is proposing this change in the escrow requirement's 
coverage threshold to implement the statutory amendment made by the 
Reform Act, as discussed above. The amendment relieves mortgage 
creditors of compliance with the escrow requirement for certain 
``jumbo'' loans. Allowing creditors to use the new coverage threshold 
immediately upon publication of the final rule would expedite the 
regulatory relief that Congress intended. On the other hand, creditors 
will require some time to adapt their systems and procedures to take 
advantage of the higher threshold. The Board is aware that, when relief 
is granted from Regulation Z's escrow requirement, in some states the 
affected loans may become subject to state laws that prohibit mandatory 
escrow accounts, and creditors may need time to make the system changes 
necessary to comply with state or local law. The Board therefore 
solicits comment on the appropriate implementation period for a final 
rule adopting this proposal. The Board expects to issue a final rule 
within a short time after considering the public comments. Thus, the 
Board seeks comment on whether a final rule that is effective 
immediately upon publication would afford creditors sufficient time to 
implement the change in their systems and procedures. If not, what 
amount of additional time would be appropriate?

[[Page 58507]]

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). The rule contains no collections of 
information under the PRA. See 44 U.S.C. 3502(3). Accordingly, there is 
no paperwork burden associated with the rule.

VI. Initial Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 603(a), the Board is publishing an initial regulatory 
flexibility analysis for the proposed amendments to Regulation Z. The 
RFA requires an agency either to provide an initial regulatory 
flexibility analysis with a proposed rule or to certify that the 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. Under regulations issued by the 
Small Business Administration, an entity is considered ``small'' if it 
has $175 million or less in assets for banks and other depository 
institutions; and $7 million or less in revenues for non-bank mortgage 
lenders.\4\
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    \4\ 13 CFR 121.201.
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    Based on its analysis and for the reasons stated below, the Board 
believes that this proposed rule would not have a significant economic 
impact on a substantial number of small entities. Nevertheless, the 
Board is publishing an initial regulatory flexibility analysis and 
requesting public comment in the following areas. A final regulatory 
flexibility analysis will be conducted after consideration of comments 
received during the public comment period if the Board determines that 
the rule will have a significant economic impact on a substantial 
number of small entities.

A. Reasons for the Proposed Rule

    Congress enacted TILA based on findings that economic stability 
would be enhanced and competition among consumer credit providers would 
be strengthened by the informed use of credit resulting from consumers' 
awareness of the cost of credit. Congress enacted HOEPA in 1994 as an 
amendment to TILA. TILA is implemented by the Board's Regulation Z. 
HOEPA imposed additional substantive protections on certain high-cost 
mortgage transactions. HOEPA also charged the Board with prohibiting 
acts or practices in connection with mortgage loans that are unfair, 
deceptive, or designed to evade the purposes of HOEPA, and acts or 
practices in connection with refinancing of mortgage loans that are 
associated with abusive lending or are otherwise not in the interest of 
borrowers. As noted above, the Board adopted the 2008 HOEPA Final Rule 
pursuant to this mandate.
    The Reform Act amended TILA to include the higher threshold for 
coverage of the escrow requirement, as discussed above. This proposed 
rule would implement that change by amending Regulation Z. These 
amendments are proposed in furtherance of the Board's responsibility to 
prescribe regulations to carry out the purposes of TILA.

B. Statement of Objectives and Legal Basis

    The SUPPLEMENTARY INFORMATION contains this information. In 
summary, the proposed amendments to Regulation Z are designed to 
implement the amendment to the coverage test for the escrow requirement 
enacted by Congress as part of the Reform Act. The legal basis for the 
proposed rule is in Section 105(a) of TILA. 15 U.S.C. 1604(a).

C. Description and Estimate of Small Entities to Which the Proposed 
Rule Would Apply

    The proposed rule would apply to all institutions and entities that 
engage in closed-end lending secured by a consumer's principal 
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). Using data from Reports of Condition and Income 
(Call Reports) of depository institutions and certain subsidiaries of 
banks and bank holding companies and data reported under the Home 
Mortgage Disclosure Act (HMDA), the Board can estimate the approximate 
number of small entities that would be subject to the rules. For the 
majority of HMDA respondents that are not depository institutions, 
however, exact revenue information is not available.
    Based on the best information available, the Board makes the 
following estimate of small entities that would be affected by this 
proposed 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. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The changes to compliance requirements that the proposed rule would 
make are described in part III of the SUPPLEMENTARY INFORMATION. The 
effect of the proposed revisions to Regulation Z on small entities is 
minimal because the revisions would bring about burden relief; certain 
mortgage loans that otherwise would be subject to the escrow account 
requirement in Sec.  226.35(b)(3) would be relieved of that 
requirement. Some small entities would be required to modify their 
home-secured credit origination processes once, to implement the 
revised coverage test. The precise costs to small entities of updating 
their systems are difficult to predict. These costs will depend on a 
number of unknown factors, including, among other things, the 
specifications of the current systems used by such entities to 
originate mortgage loans and test them for ``higher-priced mortgage 
loan'' coverage. The Board seeks information and comment on any costs, 
compliance requirements, or changes in operating procedures arising 
from the application of the proposed rule to small businesses.

E. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules

    The Board has not identified any federal rules that duplicate, 
overlap with, or conflict with the proposed revisions to Regulation Z. 
The Board seeks comment on the existence of any such federal laws or 
regulations.

F. Discussion of Significant Alternatives

    The Board believes that no alternatives to the proposed rule are 
available for consideration. As

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discussed above, the effect of the proposed rule consists primarily of 
burden relief, thus alternatives that might minimize the impact on 
small entities are unlikely to exist. Moreover, the proposed rule would 
implement a specific, numerical adjustment that is mandated by the 
statute, which limits the Board's flexibility with respect to 
alternatives. The Board nevertheless welcomes comments on any 
significant alternatives, consistent with the requirements of TILA, 
that would minimize the impact of the proposed rule on small entities.

List of Subjects in 12 CFR Part 226

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

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation Z, 12 CFR part 226, as follows:

PART 226--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 226 continues to read as 
follows:

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and 
1639(l); Pub. L. 111-24 Sec.  2, 123 Stat. 1734.

    2. Section 226.35 is amended by revising paragraph (a)(1) and 
adding paragraph (b)(3)(v) to read as follows:

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *


Sec.  226.35  Prohibited acts or practices in connection with higher-
priced mortgage loans.

    (a) Higher-priced mortgage loans--(1) For purposes of this 
section,[rtrif] except as provided in paragraph (b)(3)(v) of this 
section,[ltrif] a higher-priced mortgage loan is a consumer credit 
transaction secured by the consumer's principal dwelling with an annual 
percentage rate that exceeds the average prime offer rate for a 
comparable transaction as of the date the interest rate is set by 1.5 
or more percentage points for loans secured by a first lien on a 
dwelling, or by 3.5 or more percentage points for loans secured by a 
subordinate lien on a dwelling.
* * * * *
    (b) * * *
    (3) * * *
    [rtrif](v) ``Jumbo'' loans. For purposes of this Sec.  
226.35(b)(3), for a transaction with a principal balance at 
consummation that exceeds the maximum principal obligation in effect as 
of the date the transaction's interest rate is set for such a 
transaction to be eligible for purchase by Freddie Mac pursuant to 
Section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act, 12 
U.S.C. 1454(a)(2), the coverage threshold set forth in paragraph (a)(1) 
of this section for loans secured by a first lien on a dwelling shall 
be 2.5 or more percentage points greater than the applicable average 
prime offer rate.[ltrif]
* * * * *
    3. In Supplement I to Part 226, under Section 226.35--Prohibited 
Acts or Practices in Connection With Higher-Priced Mortgage Loans, 
35(b) Rules for higher-priced mortgage loans, 35(b)(3) Escrows, add an 
entry for 35(b)(3)(v) ``Jumbo'' loans to read as follows:

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *
    Section 226.35--Prohibited Acts or Practices in Connection With 
Higher-Priced Mortgage Loans
* * * * *
    35(b) Rules for higher-priced mortgage loans.
* * * * *
    35(b)(3) Escrows.
* * * * *
    [rtrif]35(b)(3)(v) ``Jumbo'' loans.
    1. Special threshold for ``jumbo'' loans. For purposes of the 
escrow requirement in Sec.  226.35(b)(3) only, the coverage 
threshold stated in Sec.  226.35(a)(1) for first-lien loans (1.5 or 
more percentage points greater than the average prime offer rate) 
does not apply to a loan with a principal balance that exceeds the 
current maximum loan amount for loans eligible to be purchased by 
Freddie Mac as of the date the transaction's rate is set. Under 
Sec.  226.35(b)(3)(v), for such loans (``jumbo'' loans), the 
threshold is 2.5 or more percentage points greater than the average 
prime offer rate. This higher threshold applies solely to whether a 
``jumbo'' loan is subject to the escrow requirement of Sec.  
226.35(b)(3). The determination of whether ``jumbo'' loans are 
subject to the other protections in Sec.  226.35, such as the 
ability to repay requirements under Sec.  226.35(b)(1) and the 
restrictions on prepayment penalties under Sec.  226.35(b)(2), is 
based on the 1.5 percentage point threshold stated in Sec.  
226.35(a)(1).[ltrif]
* * * * *

    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. 2010-20665 Filed 9-23-10; 8:45 am]
BILLING CODE 6210-01-P