[Federal Register Volume 76, Number 41 (Wednesday, March 2, 2011)]
[Rules and Regulations]
[Pages 11319-11324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4384]



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  Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / Rules 
and Regulations  

[[Page 11319]]



FEDERAL RESERVE SYSTEM

12 CFR Part 226

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


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule; official staff commentary.

-----------------------------------------------------------------------

SUMMARY: The Board is publishing a final rule to amend Regulation Z, 
which implements the Truth in Lending Act (TILA). The final rule 
implements Section 1461 of the recently enacted Dodd-Frank Wall Street 
Reform and Consumer Protection Act. Section 1461 amends TILA to provide 
a separate, higher rate threshold for determining when the Board's 
escrow requirement applies to higher-priced mortgage loans that exceed 
the maximum principal obligation eligible for purchase by Freddie Mac.

DATES: The final rule is effective on April 1, 2011, for covered loans 
for which an application is received by a creditor on or after that 
date.

FOR FURTHER INFORMATION CONTACT: Jamie Z. Goodson, Attorney, or Paul 
Mondor, Senior Attorney, 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. In addition, TILA Section 129(l)(2)(A), as added 
by HOEPA, authorizes the Board to prohibit 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. The 2008 HOEPA Final Rule

    In July of 2008, the Board adopted final rules pursuant to the 
Board's authority in Section 129(l)(2)(A). 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 lending and 
servicing practices in connection with such transactions. Among other 
things, 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).
    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 transaction's interest rate 
is set, by 1.5 or more percentage points for loans secured by a first 
lien, or by 3.5 or more percentage points for loans secured by a 
subordinate lien. See Sec.  226.35(a)(1).

C. The Dodd-Frank Act

    On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the Dodd-Frank Act) was signed into law.\1\ Section 
1461 of the Dodd-Frank Act creates TILA Section 129D.\2\ TILA Section 
129D substantially codifies the requirement in Regulation Z 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 mortgage transactions having an APR 
that exceeds the average prime offer rate for a comparable transaction 
by 1.5 or more percentage points. The Dodd-Frank Act incorporates this 
coverage test in new TILA Section 129D for loans that do not exceed the 
maximum original principal obligation for a mortgage to be eligible for 
purchase by Freddie Mac. TILA Section 129D(b)(3)(A) (to be codified at 
15 U.S.C. 1639d(b)(3)(A)).
---------------------------------------------------------------------------

    \1\ Public Law 111-203, 124 Stat. 1376.
    \2\ Public Law 111-203, Sec.  1461, 124 Stat. 1376, 2178 (to be 
codified at 15 U.S.C. 1639D).
---------------------------------------------------------------------------

    For loans with an original principal obligation that exceeds the 
applicable Freddie Mac maximum principal obligation, TILA Section 129D 
requires escrow accounts 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 obligation for a mortgage loan to be eligible for 
purchase in 2011 by Freddie Mac is $417,000 for a single-family 
property that is not located in a designated ``high-cost'' area.\3\ 
(Higher limits apply for mortgage loans secured by a property with two 
to four residential units.) Thus, if the original principal obligation 
for a mortgage loan secured by a single-family property in such an area 
is $415,000, the determination of whether the loan is

[[Page 11320]]

subject to the escrow requirement in Sec.  226.35(b)(3) would be made 
using an APR threshold of 1.5 percentage points over the applicable 
average prime offer rate; by contrast, if the original principal 
obligation is $420,000, the determination would be made using a 
threshold of 2.5 percentage points over the applicable average prime 
offer rate. Loans that are not eligible for purchase by Freddie Mac 
because their original principal obligation is too large are widely 
referred to in the mortgage market as ``jumbo'' mortgages. The term 
``jumbo'' also is used in this final rule to refer to such loans.
---------------------------------------------------------------------------

    \3\ See Freddie Mac, Bulletin No. 2010-28, 2011 Loan Limits, 
available at http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1028.pdf.
---------------------------------------------------------------------------

II. The Board's September 2010 Escrow Proposal

A. Summary of the September 2010 Escrow Proposal

    On September 24, 2010, the Board published a proposed rule in the 
Federal Register to implement TILA Section 129D(b)(3)(B), as enacted by 
Section 1461 of the Dodd-Frank Act. See 75 FR 58505 (September 2010 
Escrow Proposal). Accordingly, the Board proposed to raise the rate 
threshold for coverage by the escrow account requirement for first-
lien, higher-priced ``jumbo'' mortgage loans. Specifically, the Board 
proposed to require escrows for ``jumbo'' loans whose APR exceeds the 
average prime offer rate for a comparable transaction, as of the date 
the transaction's interest rate is set, by 2.5 or more percentage 
points. The Board did not propose to implement other provisions of the 
Dodd-Frank Act related to escrow accounts under the September 2010 
Escrow Proposal. The Board is proposing rules to implement other 
escrow-related provisions of the Dodd-Frank Act in a separate notice 
published elsewhere in today's Federal Register.

B. Overview of Comments Received

    The comment period on the September 2010 Escrow Proposal closed on 
October 25, 2010. The Board received 15 comment letters in response to 
the proposed rule, from creditors, loan originators, banking trade 
associations, and state banking regulators. No comments were received 
from consumers or consumer advocates. Commenters generally supported 
the proposed increase in the coverage threshold for the escrow 
requirement, for ``jumbo'' loans.
    Several commenters, however, requested that the Board clarify that 
only the dollar amount specified in the sixth sentence of Section 
305(a)(2) of the Federal Home Loan Mortgage Corporation Act (FHLMCA), 
12 U.S.C. 1454(a)(2), should be used in determining whether or not a 
loan is a ``jumbo'' loan. (Currently, the amount specified in that 
sentence as the maximum principal obligation for a loan secured by a 
single-family residence is $417,000.) In particular, these commenters 
stated that the higher maximum principal obligation set for ``high-
cost'' areas under Section 305(a)(2) should not be considered in 
determining whether a loan is a ``jumbo'' loan. For example, if the 
maximum principal obligation eligible for purchase by Freddie Mac in a 
particular ``high-cost'' area were $500,000 for a single-family 
residence, these commenters believe that a loan with a principal 
obligation between $417,000 and $500,000 secured by a single-family 
residence in that area should be classified as a ``jumbo'' loan subject 
to the higher rate threshold for classification as a higher-priced 
mortgage loan, even though Freddie Mac may purchase that loan.
    Other commenters recommended exemptions from the escrow requirement 
for higher-priced mortgage loans. Recommended exemptions included for: 
(1) Loans a creditor holds in portfolio; (2) loans made by community 
banks; (3) loans made in rural areas; and (4) small retail loans that 
are first-lien loans because a consumer has paid off his larger 
mortgage. Such exceptions are outside the scope of this rulemaking. The 
Board is publishing elsewhere in today's Federal Register a proposed 
rule that addresses several of those proposed exceptions.

III. Summary of the Final Rule

    This final rule revises Sec.  226.35(b)(3), as proposed, to provide 
a higher APR threshold for determining whether ``jumbo'' mortgage loans 
secured by a first lien on a consumer's principal dwelling are higher-
priced mortgage loans for which an escrow account must be established. 
As revised, the threshold for coverage of the escrow requirement for 
``jumbo'' loans is 2.5 percentage points (rather than 1.5 percentage 
points) in excess of the average prime offer rate for a comparable 
transaction, as of the date the transaction's rate is set. Raising the 
APR threshold applicable to ``jumbo'' loans eliminates the mandatory 
escrow requirement for loans with an APR above the existing threshold 
but below the new threshold. Creditors may, at their option, elect to 
continue to use the 1.5 percentage point threshold for ``jumbo'' loans. 
Section 226.35 and this final rule do not apply to open-end credit 
plans subject to Sec.  226.5b or to loans to finance the initial 
construction of a dwelling, temporary or ``bridge'' loans with a term 
of 12 months or less, or reverse mortgages. See Sec.  226.35(a)(3). 
This final rule is effective on April 1, 2011 for covered loans for 
which an application is received on or after that date, as discussed in 
detail below in Part VI of this SUPPLEMENTARY INFORMATION.

IV. Legal Authority

    The Board amends Sec.  226.35(b)(3) pursuant to its authority under 
TILA Section 105(a) to prescribe regulations to carry out the purposes 
of TILA and to provide for such requirements, adjustments, and 
exceptions as necessary or proper to effectuate the purposes of, to 
prevent circumvention of, and facilitate compliance with TILA, as 
discussed in detail below. See 15 U.S.C. 1604(a) (as revised).

V. Section-by-Section Analysis

Section 226.1 Authority, Purpose, Coverage, Organization, Enforcement 
and Liability

1(d) Organization
    Section 226.1(d) describes how Regulation Z is organized. Section 
226.1(d)(5) describes Subpart E of Regulation Z, which this interim 
final rule amends by revising Sec.  226.35(a)(1) and (b)(3)(v). Comment 
1(d)(5)-1 is revised to add a new subpart 1(d)(5)-1.iii, stating that 
this final rule is effective on April 1, 2011, for covered transactions 
for which an application is received on or after April 1, 2011.

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 revises 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 the consumer's principal dwelling, pursuant to the Dodd-Frank 
Act. As revised, the threshold for coverage of the escrow requirement 
for ``jumbo'' loans is 2.5 percentage points (rather than the 1.5 
percentage points generally applicable under Sec.  226.35(a)(1)) in 
excess of the average prime offer rate for a comparable transaction, as 
of the date the transaction's rate is set. The Board is making a 
conforming amendment to Sec.  226.35(a)(1) to reflect this exception to 
the general coverage test for higher-priced mortgage loans.

[[Page 11321]]

35(b) Rules for Higher-Priced Mortgage Loans
35(b)(3) Escrows
35(b)(3)(v) ``Jumbo'' Loans
    The Board adds a new Sec.  226.35(b)(3)(v) to implement TILA 
Section 129D(b)(3)(B), as enacted by Section 1461 of the Dodd-Frank 
Act. Section 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), such a loan is 
considered a higher-priced mortgage loan and is subject to the escrow 
requirement if its APR exceeds the average prime offer rate for a 
comparable transaction, as of the date the transaction's rate is set, 
by 1.5 or more percentage points. Pursuant to TILA Section 
129D(b)(3)(B), for a closed-end, first-lien mortgage loan whose 
original principal obligation exceeds the current maximum principal 
obligation for loans eligible for purchase by Freddie Mac, the 
applicable rate threshold is 2.5 percentage points or more above the 
average prime offer rate for a comparable transaction, as of the date 
the transaction's rate is set.
    Comment 35(b)(3)(v)-1 clarifies that adjustments to the maximum 
principal obligation that are made by the Federal Housing Finance 
Agency (FHFA) pursuant to FHLMCA Section 305(a)(2) or by other federal 
law will apply in determining whether a mortgage loan is a ``jumbo'' 
loan subject to the higher APR threshold under Sec.  226.35(b)(3)(v). 
Comment 35(b)(3)(v)-2 clarifies that the higher APR threshold applies 
solely in determining if a ``jumbo'' loan is subject to the escrow 
requirement. The determination of whether ``jumbo'' first-lien 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.
    Adjustments pursuant to FHLMCA Section 305(a)(2). TILA Section 
129D(b)(3)(B) provides that a separate, higher APR threshold applies to 
a first-lien mortgage loan that exceeds the applicable maximum 
principal obligation eligible for purchase by Freddie Mac, established 
pursuant to the sixth sentence of FHLMCA Section 305(a)(2) (the 
``general maximum principal obligation''). However, the sixth sentence 
of FHLMCA Section 305(a)(2), as revised by the Housing and Economic 
Recovery Act of 2008 (HERA), also provides that its principal 
obligation limitations are subject to other limitations in that 
paragraph.\4\ See 12 U.S.C. 1454(a)(2). Other limitations in that 
paragraph include annual adjustments based on changes in the housing 
price index maintained by FHFA and adjustments to increase the maximum 
principal obligation for loans secured by property in ``high-cost'' 
areas. See 12 U.S.C. 1454(a)(2). The plain language of the sixth 
sentence of FHLMCA Section 305(a)(2) incorporates by reference 
limitations set by other sentences in Section 305(a)(2). The Board 
believes, therefore, that adjustments made pursuant to Section 
305(a)(2) should apply in determining whether a loan is a ``jumbo'' 
loan subject to the higher APR threshold for classification as a 
higher-priced mortgage loan.
---------------------------------------------------------------------------

    \4\ Section 1124 of HERA revises Section 305(a)(2) of the 
FHLMCA. See Public Law 110-289, 122 Stat. 2654, 2692.
---------------------------------------------------------------------------

    The Board believes this is also consistent with statutory intent, 
because taking into account adjustments to the maximum principal 
obligation will ensure similar treatment of all loans eligible for 
purchase by Freddie Mac. The higher threshold for ``jumbo'' loans 
reflects the higher price typically associated with loans that are not 
eligible for purchase by Freddie Mac (or by Fannie Mae, which is 
subject to the same limit on the maximum principal obligation). Using 
the higher APR threshold for loans that are eligible for purchase by 
Freddie Mac after adjustments to the maximum principal obligation 
pursuant to FHLMCA Section 305(a)(2) would not be consistent with the 
statutory intent.
    Adjustments pursuant to other federal law. Legislation enacted by 
Congress in 2009 and 2010 provides for further adjustments to the 
maximum principal obligation eligible for purchase by Freddie Mac. In 
light of declines in home values in certain areas, Congress provided in 
that legislation that the maximum principal obligation eligible for 
purchase by Freddie Mac shall be the greater of: (1) The maximum 
principal obligation determined pursuant to FHLMCA Section 305(a)(2); 
and (2) the maximum principal obligation established for 2008 under 
Section 201 of the Economic Stimulus Act of 2008.\5\ The Board believes 
such adjustments also should apply in determining if a loan is a 
``jumbo'' loan for purposes of Sec.  226.35(b)(3)(v). The Board 
believes such adjustments are made pursuant to Section 305(a)(2), 
because they incorporate FHLMCA Section 305(a)(2) in the formula used 
to determine the maximum principal obligation eligible for purchase by 
Freddie Mac.
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    \5\ See Public Law 111-242, Sec.  146, 124 Stat. 2607, 2615 
(2010) (providing for adjustments under a continuing resolution); 
Public Law 111-88, Sec.  167, 122 Stat. 2904, 2973 (2009) (same); 
see also Public Law 110-185, Sec.  201, 122 Stat. 613, 620 (Feb. 13, 
2008) (providing for adjustments under the Economic Stimulus Act).
---------------------------------------------------------------------------

    Nevertheless, even if the adjustments made pursuant to this 
legislation are not deemed to be made pursuant to Section 305(a)(2), 
the Board believes it is appropriate to use its authority under TILA 
Section 105(a) to require consideration of such adjustments. 15 U.S.C. 
1604(a). TILA Section 105(a) authorizes the Board to provide for such 
requirements, adjustments, and exceptions for all or any class of 
transactions as in the Board's judgment are necessary or proper to 
effectuate the purposes of, to prevent circumvention or evasion of, or 
to facilitate compliance with TILA. The Board believes it is necessary 
and proper, to effectuate the purposes of TILA Section 129D(b)(3)(B), 
to make adjustments consistent with the provisions of federal law other 
than FHLMCA Section 305(a)(2) to ensure all loans eligible for purchase 
by Freddie Mac are treated similarly for purposes of the escrow 
requirements. Further, considering the additional adjustments made by 
other federal laws is consistent with the language in TILA Section 
129D(b)(3)(B), which states that the determination of whether or not a 
loan is a ``jumbo'' loan subject to a higher APR threshold shall be 
based on the maximum principal obligation ``in effect'' for Freddie Mac 
as of the date the transaction's rate is set. The maximum principal 
obligation in effect is the obligation FHFA establishes pursuant to 
both FHLMCA Section 305(a)(2) and other federal law.
    The Board also believes those adjustments are necessary and proper 
to facilitate compliance with TILA Section 129D(b)(3)(B). Considering 
only adjustments made under FHLMCA Section 305(a)(2) would require 
creditors that sell loans to Freddie Mac to use one dollar limit to 
ascertain what rate threshold to apply in determining whether a loan is 
subject to the escrow requirements and a different limit to determine 
whether they may sell loans to Freddie Mac. The same burden would apply 
for creditors that sell loans to Fannie Mae, which is subject to the 
same maximum principal obligation limits. Considering adjustments under 
both FHLMCA Section 305(a)(2) and other applicable federal law would 
facilitate compliance by eliminating that burden.

[[Page 11322]]

    For the reasons discussed above, and pursuant to its authority 
under TILA Section 105(a), the final rule provides that FHFA's 
adjustments to the general maximum principal obligation stated in 
FHLMCA Section 305(a)(2) which are made pursuant to other applicable 
federal law shall be considered in determining whether a loan is a 
``jumbo'' loan subject to Sec.  226.35(b)(3)(v). See comment 
35(b)(3)(v)-1.

VI. Effective Date of Final Rule

    The Board is changing the escrow requirement's coverage threshold 
to implement the statutory amendment made by the Dodd-Frank Act, as 
discussed above. The amendment relieves mortgage creditors of 
compliance with the escrow requirement for certain ``jumbo'' loans. 
When relief is granted from Regulation Z's escrow requirement, the 
affected loans could become subject to any state or local laws that 
prohibit mandatory escrow accounts. As a result, some creditors might 
need time to make the system changes necessary to comply with state or 
local laws. Accordingly, the Board sought comment on the amount of time 
necessary for creditors to implement the change in their systems and 
procedures.
    Almost all commenters that discussed the implementation period 
stated that the Board should allow creditors to immediately use the 
higher APR threshold for classification of a ``jumbo loan'' as a 
higher-priced mortgage loan. One banking trade association stated that 
creditors easily can adjust their systems to stop escrowing for such 
loans. Most of the commenters that addressed the effective date stated 
that compliance with the higher threshold should be optional until 
final rules are issued to implement other escrow-related requirements 
under the Dodd-Frank Act. Those commenters stated that creditors would 
prefer to adjust their training and systems to implement all escrow-
related statutory and regulatory requirements at one time. Some of 
those commenters stated that, at a minimum, compliance should be 
optional for a period of time; the recommended periods ranged between 
six months and one year. An industry trade association and a bank 
stated that the effective date for the final rule should be delayed 
until other escrow-related requirements are implemented. The industry 
trade association suggested, in the alternative, at least a six-month 
delay. The industry trade association also stated that creditors should 
not have to adjust their systems to comply with state or local laws 
prohibiting mandatory escrow accounts and again subsequently to comply 
with Board regulations.
    The Dodd-Frank Act does not provide an effective date specifically 
for rules implementing TILA Section 129D(b)(3)(B). The Riegle Community 
Development and Regulatory Improvement Act of 1994 requires that agency 
regulations that impose additional reporting, disclosure, and other 
requirements on insured depository institutions take effect on the 
first day of a calendar quarter following publication in final form. 12 
U.S.C. 4802(b). Consistent with the Riegle Community Development Act, 
this final rule is effective on April 1, 2011, for covered loans for 
which an application is received by a creditor on or after that date. 
See comment 1(d)(5)-1.iii. The Board believes that this time period 
will afford creditors sufficient time to adjust their systems to 
eliminate escrow accounts for covered loans to comply with any 
applicable state or local laws that prohibit requiring an escrow 
account or imposing other escrow requirements.
    Under this final rule, creditors can choose to continue to escrow 
for ``jumbo'' loans with an APR below the new threshold (subject to 
applicable state or local laws). This final rule does not require 
termination of any existing escrow account.

VII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the 
final 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.

VIII. Final 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. The RFA 
generally requires an agency to assess the impact a rule is expected to 
have on small entities. The RFA requires an agency either to provide a 
final regulatory flexibility analysis with a final rule or certify that 
the final rule will not have a significant economic impact on a 
substantial number of small entities. Under standards the Small 
Business Administration (SBA) sets, the threshold for an entity to be 
considered ``small'' is $175 million or less in assets for banks and 
other depository institutions and $7 million or less in revenues for 
non-bank mortgage lenders.\6\
---------------------------------------------------------------------------

    \6\ 13 CFR 121.201.
---------------------------------------------------------------------------

A. Statement of the Need for, and Objectives of, the Final 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. The Board adopted the requirement to establish an escrow 
account for higher-priced mortgage loans under 2008 HOEPA Final Rule 
pursuant to this mandate.
    The Dodd-Frank Act amended TILA to increase the threshold for 
coverage of the escrow requirement, for certain loans ineligible for 
purchase by Freddie Mac because their original principal obligation is 
too high (``jumbo'' loans), as discussed above in the SUPPLEMENTARY 
INFORMATION. This final rule implements that change by amending 
Regulation Z. These amendments are made in furtherance of the Board's 
responsibility to prescribe regulations to carry out the purposes of 
TILA. The legal basis for the final rule is in Section 105(a) of TILA. 
15 U.S.C. 1604(a).

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

    In accordance with Section 3(a) of the RFA, 5 U.S.C. 603(a), the 
Board prepared an initial regulatory flexibility analysis (IRFA) in 
connection with the proposed rule. The IRFA stated that the Board 
believed the proposed rule would not have a significant economic effect 
on a substantial number of small entities. The Board requested comment 
on the IRFA and on any costs, compliance requirements, or changes in 
operating procedures arising from the application of the proposed rule 
to small businesses.

[[Page 11323]]

    No commenter specifically addressed the Board's IRFA, but several 
commenters stated that compliance with recent statutory and regulatory 
changes to requirements for mortgage lending, including amendments to 
TILA and Regulation Z, is burdensome in the aggregate. Most commenters 
that discussed the effective date stated that creditors should be able 
to use the higher annual percentage rate threshold immediately, to 
provide relief in connection with ``jumbo'' loans that would be subject 
to the higher threshold for the escrow requirement. Those commenters 
generally recommended, however, that compliance with the final rule be 
optional until the Board implements other escrow-related requirements 
under the Dodd-Frank Act. An industry trade association and a bank 
opposed an immediate effective date for the final rule. Both commenters 
that recommended allowing creditors to use the higher threshold 
immediately and commenters that recommended delaying the effective date 
of the rule suggested that, at a minimum, the Board make compliance 
optional for a period of time. Recommended periods ranged from 6 months 
to one year.
    As discussed above in Part VI of the SUPPLEMENTARY INFORMATION, the 
Board believes that the effective date of April 1, 2011, provides 
sufficient time for creditors to adjust their training and systems to 
apply the higher APR threshold for ``jumbo'' loans. The rule is 
effective on that date for loans where the creditor receives an 
application on or after April 1, 2011. Escrow accounts typically are 
established when the loan is consummated some time after the 
application is processed and approved. Further, creditors can choose to 
continue to escrow for ``jumbo'' loans with an APR below the new 
threshold, subject to applicable state or local laws prohibiting 
mandatory escrow or imposing other escrow requirements. If a creditor 
elects not to apply the higher APR threshold to such loans, it is 
likely that few or no training or systems changes will be necessary.

C. Description and Estimate of Small Entities to Which the Final Rule 
Applies

    The final rule applies 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 are affected by this final 
rule: According to September 2010 Call Report data, approximately 8,669 
small depository institutions would be subject to the rule. 
Approximately 15,627 depository institutions in the United States filed 
Call Report data, approximately 10,993 of which had total domestic 
assets of $175 million or less and thus were considered small entities 
for purposes of the RFA. Of the 3,788 banks, 507 thrifts, 6,632 credit 
unions, and 66 branches of foreign banks that filed Call Report data 
and were considered small entities, 3,667 banks, 479 thrifts, 4,520 
credit unions, and 3 branches of foreign banks, totaling 8,669 
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, 1,303 non-
depository institutions (independent mortgage companies, subsidiaries 
of a depository institution, or affiliates of a bank holding company) 
filed HMDA reports in 2010 for 2009 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 changes to compliance requirements that the final rule makes 
are described in the SUPPLEMENTARY INFORMATION. The effect of the 
revisions to Regulation Z on small entities is minimal because the 
revisions bring about burden relief; certain mortgage loans that 
otherwise would be subject to the escrow account requirement in Sec.  
226.35(b)(3) are relieved of that requirement. To take advantage of 
that relief, some small entities will need 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.

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

    The final rule implements a specific numerical adjustment to an 
annual percentage rate (APR) threshold mandated by Section 1461 the 
Dodd-Frank Act for ``jumbo'' loans, which limits the Board's 
flexibility to establish alternative APR thresholds. The higher APR 
threshold may be used in connection with a ``jumbo'' loan, that is, a 
loan with an original principal obligation that exceeds the maximum 
principal obligation for loans eligible for purchase by Freddie Mac. As 
discussed above in Part V of the SUPPLEMENTARY INFORMATION, the Board 
believes that, under the Dodd-Frank Act, loans are ``jumbo'' loans for 
purposes of TILA Section 129D if they are ``jumbo'' loans ineligible 
for purchase by Freddie Mac because their original principal obligation 
is too high. Some commenters recommended that the Board construe 
Section 1461 of the Dodd-Frank Act narrowly to consider only the 
general maximum principal obligation for loans eligible for purchase by 
Freddie Mac, despite the fact that the maximum principal obligation is 
higher in certain high-cost areas.
    The Board is not adopting that suggested alternative. As discussed 
in greater detail in Part V of the SUPPLEMENTARY INFORMATION, the Board 
believes that the Dodd-Frank Act requires consideration of adjustments 
to the general maximum principal obligation made by the Federal Housing 
Finance Agency (FHFA) pursuant to Section 305(a)(2) of the Federal Home 
Loan Mortgage Corporation Act (FHLMCA). Further, the Board believes 
that it is necessary to consider additional adjustments FHFA makes 
pursuant to other applicable federal law to effectuate the purposes of 
and facilitate compliance with TILA, as discussed above.

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 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 is revised 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,

[[Page 11324]]

123 Stat. 1734; Pub. L. 111-203, 124 Stat. 1376.

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
2. Section 226.35 is amended by revising paragraph (a)(1) and adding 
paragraph (b)(3)(v) to read as follows:


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, 
except as provided in paragraph (b)(3)(v) of this section, 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) * * *
    (v) ``Jumbo'' loans. For purposes of this Sec.  226.35(b)(3), for a 
transaction with a principal obligation at consummation that exceeds 
the limit in effect as of the date the transaction's interest rate is 
set for the maximum principal obligation eligible for purchase by 
Freddie Mac, 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.
* * * * *

0
3. In Supplement I to Part 226:
0
A. Under Section 226.1--Authority, Purpose, Coverage, Organization, 
Enforcement and Liability, new paragraph 1(d)(5)-1.iii is added.
0
B. 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, new heading 35(b)(3)(v) ``Jumbo'' 
loans and new paragraphs 1 and 2 are added.

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Subpart A--General

Section 226.1--Authority, Purpose, Coverage, Organization, 
Enforcement and Liability

Paragraph 1(d)(5).

    1. Effective dates.
    i. * * *
    ii. * * *
    iii. The final rule revising escrow requirements under Sec.  
226.35(b)(3) published on March 2, 2011 applies to certain closed-
end extensions of consumer credit secured by the consumer's 
principal dwelling. See Sec.  226.35(a). Covered transactions for 
which an application is received by a creditor on or after April 1, 
2011 are subject to Sec.  226.35(b)(3), as revised.
* * * * *

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.
* * * * *
    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 obligation that exceeds 
the limit in effect as of the date the loan's rate is set for the 
maximum principal obligation eligible for purchase by Freddie Mac 
(``jumbo'' loans). The Federal Housing Finance Agency (FHFA) 
establishes and adjusts the maximum principal obligation pursuant to 
12 U.S.C. 1454(a)(2) and other provisions of federal law. 
Adjustments to the maximum principal obligation made by FHFA apply 
in determining whether a mortgage loan is a ``jumbo'' loan to which 
the separate coverage threshold in Sec.  226.35(b)(3)(v) applies.
    2. Escrow requirements only. Under Sec.  226.35(b)(3)(v), for 
``jumbo'' loans, the annual percentage rate threshold is 2.5 or more 
percentage points greater than the average prime offer rate. This 
threshold applies solely in determining whether a ``jumbo'' loan is 
subject to the escrow requirement of Sec.  226.35(b)(3). The 
determination of whether ``jumbo'' first-lien 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).
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, February 23, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-4384 Filed 3-1-11; 8:45 am]
BILLING CODE 6210-01-P