[Federal Register Volume 76, Number 41 (Wednesday, March 2, 2011)]
[Proposed Rules]
[Pages 11598-11629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-4385]
[[Page 11597]]
Vol. 76
Wednesday,
No. 41
March 2, 2011
Part III
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Part 226
Truth in Lending; Proposed Rule
Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 /
Proposed Rules
[[Page 11598]]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 226
[Regulation Z; Docket No. R-1406]
RIN No. 7100-AD 65
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
-----------------------------------------------------------------------
SUMMARY: The Board is publishing for public comment a proposed rule
that would amend Regulation Z (Truth in Lending) to implement certain
amendments to the Truth in Lending Act made by the Dodd-Frank Wall
Street Reform and Consumer Protection Act. Regulation Z currently
requires creditors to establish escrow accounts for higher-priced
mortgage loans secured by a first lien on a dwelling. The proposal
would implement statutory changes made by the Dodd-Frank Act that
lengthen the time for which a mandatory escrow account established for
a higher-priced mortgage loan must be maintained. In addition, the
proposal would implement the Act's disclosure requirements regarding
escrow accounts. The proposal also would exempt certain loans from the
statute's escrow requirement. The primary exemption would apply to
mortgage loans extended by creditors that operate predominantly in
rural or underserved areas, originate a limited number of mortgage
loans, and do not maintain escrow accounts for any mortgage loans they
service.
DATES: Comments must be received on or before May 2, 2011.
ADDRESSES: You may submit comments, identified by Docket No. R-1406 and
RIN No. 7100-AD 65, 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: Samantha Pelosi, 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
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.
On July 30, 2008, the Board published a final rule amending
Regulation Z to establish new regulatory protections for consumers in
the residential mortgage market. 73 FR 44522; July 30, 2008 (the HOEPA
Final Rule). Among other things, the HOEPA Final Rule defined a class
of higher-priced mortgage loans that are subject to additional
protections. A higher-priced mortgage loan is a transaction secured by
a consumer's principal dwelling with an annual percentage rate that
exceeds the average prime offer rate for a comparable transaction 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.
The HOEPA Final Rule included a requirement that creditors establish
escrow accounts for taxes and insurance on higher-priced mortgage loans
secured by a first lien on a principal dwelling. The escrow requirement
was effective on April 1, 2010, for loans secured by site-built homes,
and on October 1, 2010, for loans secured by manufactured housing.
On August 26, 2009, the Board published a proposed rule to amend
Regulation Z. 74 FR 43232; Aug. 26, 2009 (the 2009 Closed-End
Proposal). Among other things, the 2009 Closed-End Proposal proposed
new staff commentary to address questions that some creditors had
raised concerning the determination of the average prime offer rate
that is used to determine whether a transaction is a higher-priced
mortgage loan covered by the HOEPA Final Rule. No final action has been
taken on this proposal.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) was signed into law. Among other
provisions, Title XIV of the Dodd-Frank Act amends TILA to establish
certain requirements for escrow accounts for consumer credit
transactions secured by a first lien on a consumer's principal
dwelling. The escrow provisions of the Dodd-Frank Act are similar, but
not identical, to the provisions adopted by the Board in the HOEPA
Final Rule. Sections 1461 and 1462 of the Dodd-Frank Act create new
TILA Section 129D, which substantially codifies the Board's escrow
requirement for higher-priced mortgage loans but also adds disclosure
requirements, lengthens the period for which escrow accounts are
required, and adjusts the rate threshold for determining whether escrow
accounts are required for ``jumbo loans,'' whose principal amounts
exceed the maximum eligible for purchase by Freddie Mac. The new
section also authorizes the Board to create an exemption from the
escrow requirement for transactions originated by creditors meeting
certain prescribed criteria.
On September 24, 2010, the Board published two other proposed rules
that would affect the escrow requirement for higher-priced mortgage
loans. First, the Board proposed, among other amendments, to replace
the APR as the metric a creditor compares to the average prime offer
rate to determine whether a transaction is a higher-priced mortgage
loan. Creditors instead would use a ``transaction coverage rate'' that
would be closely comparable to the average prime offer rate and would
not
[[Page 11599]]
be disclosed to consumers. 75 FR 58539; Sept. 24, 2010 (the 2010
Mortgage Proposal). No final action has been taken on this proposal.
Second, the Board proposed to implement one of the amendments to the
TILA made by the Dodd-Frank Act. That amendment establishes a separate
threshold above the average prime offer rate for determining coverage
of the escrow requirement for ``jumbo'' loans, as discussed above. 75
FR 58505; Sept. 24, 2010 (the ``Jumbo'' Threshold Proposal).
Simultaneous with this proposal, the Board is publishing a final rule
to adopt the provisions in the ``Jumbo'' Threshold Proposal (the
``Jumbo'' Final Rule).
II. Summary of the Proposed Rule
The Board is proposing amendments to Regulation Z's escrow
requirement, in accordance with the Dodd-Frank Act. First, the proposed
rule would expand the minimum period for mandatory escrow accounts from
one to five years, and under certain circumstances longer. Second, the
proposed rule would extend the partial exemption for certain loans
secured by a condominium unit to planned unit developments and other,
similar property types that have governing associations that maintain a
master insurance policy. Third, the proposed rule would create an
exemption from the escrow requirement for any loan extended by a
creditor that makes most of its first-lien higher-priced mortgage loans
in counties designated by the Board as ``rural or underserved,'' has
annual originations of 100 or fewer first-lien mortgage loans, and does
not escrow for any mortgage transaction it services.
The Board also is proposing to establish two new disclosure
requirements relating to escrow accounts. One disclosure would be
required three business days before consummation of a mortgage
transaction for which an escrow account will be established. The Dodd-
Frank Act requires such disclosures for higher-priced mortgage loans,
for which such an escrow account is required; the Board is proposing to
require the same disclosure for all mortgage loans for which an escrow
account is established. The disclosure would explain what an escrow
account is and how it works. It would state the risk of not having an
escrow account. The disclosure would state the estimated amount of the
first year's disbursements, the amount to be paid at consummation to
fund the escrow account initially, and the amount of the consumer's
regular mortgage payments to be paid into the escrow account. Finally,
the disclosure would state that the amount of the regular escrow
payment may change in the future.
Also, pursuant to the Dodd-Frank Act, the Board is proposing a
second disclosure that would be given when a mortgage transaction is
entered into without an escrow account or when an escrow account on an
existing mortgage loan will be cancelled. The disclosure would be
required to be delivered at least three business days before
consummation or cancellation of the existing escrow account, as
applicable. This disclosure would explain what an escrow account is,
how it works, and the risk of not having an escrow account. It also
would state the potential consequences of failing to pay home-related
costs such as taxes and insurance in the absence of an escrow account.
In addition, it would state why there will be no escrow account or why
it is being cancelled, as applicable, the amount of any fee imposed for
not having an escrow account, and how the consumer can request that an
escrow account be established or left in place, along with any deadline
for such requests.
III. Consumer Testing for This Proposal
As noted above, the Dodd-Frank Act amended TILA to require new
disclosures regarding escrow accounts. Consistent with its practice
concerning disclosures required by Regulation Z, the Board conducted
consumer testing to develop the disclosures in this proposal. The Board
retained ICF Macro, a research and consulting firm that specializes in
designing and testing documents, to design and test model disclosure
forms for this proposal.
ICF Macro worked closely with the Board to conduct one round of
testing (eight interviews) on the Board's proposed disclosures
regarding escrow accounts. Interview participants were asked to review
model forms and provide their reactions, and they then were 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 were incorporated in revised model forms,
which are included in this proposal.
Key findings of the Board's consumer testing are discussed where
relevant in the section-by-section analysis below. ICF Macro prepared a
report of the results of the testing, which is available on the Board's
public Web site along at: http://www.federalreserve.gov.
IV. Section-by-Section Analysis
Section 226.2 Definitions and Rules of Construction
2(a) Definitions
2(a)(6) Business Day
The Board is proposing revisions to Sec. 226.2(a)(6) to define
``business day'' for purposes of the timing of the new disclosures for
escrow account. Currently, Sec. 226.2(a)(6) contains two definitions
of business day. Under the general definition, a business day is a day
on which the creditor's offices are open to the public for carrying on
substantially all of its business functions. See comment 2(a)(6)-1. For
some purposes, however, a more precise definition of business day
applies: All calendar days except Sundays and specified Federal legal
holidays.
TILA Section 129D(h) requires creditors to disclose certain
information regarding a mandatory escrow account at least three
business days before consummation of the transaction giving rise to
such account or in accordance with timeframes established by
regulation. The Board is proposing to revise Sec. 226.2(a)(6) and
comment 2(a)(6)-2 to apply the more precise definition of business day
for this purpose. This proposed application of the more precise
definition of business day is being made so that the same definition of
business day would be used for the three-business-day waiting period
proposed in Sec. 226.19(f)(4) as in the seven-business day waiting
period for the early disclosures and three-business-day waiting period
for the corrected disclosures in Sec. 226.19(a)(2), which should
simplify compliance. This proposal would also apply the more precise
definition of business day to the requirement in proposed Sec.
229.20(d)(4) that servicers provide disclosures regarding the
cancellation of an escrow account at least three business days before
closure of the escrow account.
Section 226.19 Certain Transactions Secured by Real Property or a
Dwelling 19(f) Escrow Accounts
Requirements of TILA Section 129D
The Board is proposing a new Sec. 226.19(f) to implement the
escrow account disclosure requirements of TILA Section 129D, as enacted
by Sections 1461 and 1462 of the Dodd-Frank Act. TILA Section 129D(a)
contains the statutory requirement that an escrow account be
established in connection with the consummation of any consumer credit
transaction secured by a first lien on a consumer's principal dwelling
(other than an open-end credit
[[Page 11600]]
plan or a reverse mortgage). Section 129D(b), however, limits that
requirement to four specified circumstances: (1) Where an escrow
account is required by federal or state law; (2) where the loan is
made, guaranteed, or insured by a state or federal agency; (3) where
the transaction's annual percentage rate exceeds the average prime
offer rate by prescribed margins; and (4) where an escrow account is
``required pursuant to regulation.'' TILA Section 129D(h) requires
certain disclosures when an escrow account mandated by TILA Section
129D(b) is established. TILA Section 129D(j) requires certain other
disclosures when an escrow account for a transaction secured by real
property is not established or is cancelled.
The Board's Proposal
For a closed-end transaction secured by a first-lien on real
property or a dwelling, proposed Sec. 226.19(f) would require the
creditor to disclose the information about escrow accounts specified in
Sec. 226.19(f)(2)(i) when an escrow account is established and
specified in Sec. 226.19(f)(2)(ii) when an escrow account is not
established in connection with the consummation. Proposed Sec.
226.19(f) would require the creditor to disclose this information in
accordance with the format requirements of Sec. 226.19(f)(1) and the
timing requirements of Sec. 226.19(f)(4). In addition, the proposal
would provide that for purposes of Sec. 226.19(f), the term ``escrow
account'' has the same meaning as under Regulation X (24 CFR
3500.17(b)), which implements the Real Estate Settlement Procedures Act
(RESPA), and is subject to any interpretations by the Department of
Housing and Urban Development (HUD). This proposed definition would
parallel existing Sec. 226.35(b)(3)(iv). Proposed comment 19(f)-1
would clarify that the term ``real property'' includes vacant and
unimproved land. It also would clarify that the term ``dwelling''
includes vacation and second homes and mobile homes, boats, and
trailers used as residences and refer to additional guidance regarding
the term provided by Sec. 226.2(a)(19) and the related commentary.
Secured by a first-lien transaction. Proposed Sec. 226.19(f) would
require disclosures for the establishment or non-establishment of an
escrow account in connection with consummation of a transaction secured
by a first lien, but not a subordinate lien. TILA Sections 129D(a) and
(b) require the establishment of an escrow account in connection with
only first-lien mortgage loans. TILA Sections 129D(h) and (j) require
disclosures when such an escrow account is established or is not
established in connection with consummation. Proposed Sec. 226.19(f)
would not require disclosures for subordinate-lien mortgages because
TILA does not require the establishment of escrow accounts for
subordinate-lien mortgages and the Board understands that creditors
rarely offer or establish escrow accounts for such mortgages.
Nevertheless, the Board seeks comment on whether this approach is
appropriate.
Disclosures for establishment of voluntary escrow accounts.
Proposed Sec. 226.19(f) would implement the TILA Section 129D(h)
disclosure requirements for the establishment of escrow accounts
mandated by TILA Section 129D(b) and also would impose disclosure
requirements for the establishment of escrow accounts that are not
mandated by TILA. Under the proposal, creditors would have to make the
same disclosures for any escrow account that will be established in
connection with the consummation of a loan secured by a first lien. The
proposed disclosure requirement would inform all consumers obtaining an
escrow account, whether mandatory or voluntary, about the function and
purpose of escrow accounts generally and the funding of their escrow
account specifically.
The proposed Sec. 226.19(f) requirement that disclosures be
provided for the establishment of both mandatory and voluntary escrow
accounts would parallel the TILA Section 129D(j) requirement that
disclosures be provided for the non-establishment or cancellation of
any type of escrow account. Conforming the types of escrow accounts
that trigger the establishment disclosures to those that trigger the
non-establishment and cancellation disclosures avoids the anomalous
result of a consumer receiving information about escrow accounts when
an escrow account is not established or is cancelled, but not when it
is established in the first place.
The Board proposes that the TILA Section 129D(h) disclosures be
provided for voluntary as well as mandatory escrow accounts pursuant to
its authority under TILA Section 105(a). It authorizes the Board to
prescribe regulations that contain classifications, differentiations,
or other provisions, and may provide for adjustments and exceptions for
any class of transactions, to effectuate the purposes of TILA and
Regulation Z, to prevent circumvention or evasion, or to facilitate
compliance. 15 U.S.C. 1604(a). One purpose of the statute is to assure
meaningful disclosure of credit terms so that the consumer will be able
to compare more readily the various credit terms available and avoid
the uninformed use of credit. 15 U.S.C. 1601(a). The Board believes
that providing disclosures to consumers that will have a voluntary
escrow account established would enable those consumers to compare the
costs of different mortgage loans available to them more easily and to
avoid the uninformed use of credit. The information provided would
allow consumers to compare the cost and fees of mortgage loans that
have and do not have an escrow account, to identify the premium that
different creditors may be charging for a mortgage loan with an escrow
account, and to understand the total obligation of the mortgage loan
that they ultimately may choose.
Real property or a dwelling. With Sec. 226.19(f), the Board covers
real property and principal dwellings as well as dwellings that are not
used as a principal residence. TILA Section 129D(h) requires certain
disclosures when an escrow account mandated by TILA Section 129D(b) is
established in connection with the consummation of a closed-end
transaction secured by a consumer's principal dwelling. TILA Section
129D(j) requires certain other disclosures when an escrow account for a
transaction secured by real property is not established or is
cancelled. Proposed Sec. 226.19(f)(2) implements TILA Section 129D(h)
regarding disclosures when an escrow account is established in
connection with consummation of a transaction secured by a consumer's
principal dwelling, but also covers other dwellings and real property
without a dwelling. In addition, proposed Sec. 226.19(f)(2) implements
TILA Section 129D(j) regarding disclosures when an escrow account is
not established in connection with consummation of a transaction
secured by real property, but also covers dwellings that would be
considered personal property under state law. The Board believes that
coverage of the same types of property under the disclosure
requirements for the establishment as well as the non-establishment of
an escrow account would promote the informed use of credit by consumers
and compliance by creditors. The disclosures for the establishment of
an escrow account likely would be just as useful to a consumer entering
into a transaction secured by a second or vacation home or vacant or
unimproved land as it would to a consumer entering into a transaction
secured by a principal dwelling. Similarly, the disclosures for the
non-establishment of an escrow
[[Page 11601]]
account should cover all dwellings, whether or not they are deemed to
be real or personal property under state law. Furthermore, the coverage
of all dwellings would eliminate the analysis that creditors would have
to undertake to determine whether and which disclosures would be
triggered when a transaction will be secured by any one of various
types of dwellings.
The Board proposes the Sec. 229.19(f) coverage of real property
and dwellings pursuant to its authority under TILA Section 105(a). 15
U.S.C. 1604(a). TILA Section 105(a) authorizes the Board to prescribe
regulations that contain classifications, differentiations, or other
provisions, and may provide for adjustments and exceptions for any
class of transactions, to effectuate the purposes of TILA and
Regulation Z, to prevent circumvention or evasion, or to facilitate
compliance. 15 U.S.C. 1604(a). One purpose of the statute is to assure
meaningful disclosure of credit terms so that the consumer will be able
to compare more readily the various credit terms available and avoid
the uninformed use of credit. 15 U.S.C. 1601(a). The class of
transactions that would be affected is transactions secured by real
property or a dwelling. As mentioned above, providing disclosures
regarding an escrow account to consumers entering into a transaction
secured by real estate or a dwelling would both educate consumers and
ease compliance burdens for creditors.
19(f)(1) Format Requirements
Proposed Sec. 226.19(f)(1) contains format requirements for the
disclosures required by Sec. 226.19(f)(2). Proposed Sec.
226.19(f)(1)(i) requires that creditors provide the Sec. 226.19(f)(2)
disclosures in a minimum 10-point font, grouped together on the front
side of a one-page document, separate from all other material, with the
headings, content, order, and format substantially similar to Model
Form H-24 (when an escrow account is established) or Model Form H-25
(when an escrow account is not established) in Appendix H. Consumer
testing has shown that the location and order in which information was
presented affected consumers' ability to locate and comprehend the
information disclosed. Proposed comment 19(f)(1)(i)-1 clarifies that
the disclosures required by Sec. 226.19(f)(2) and any optional
information permitted by Sec. 226.19(f)(3) must be grouped together on
the front side of a separate one-page document that contains no other
material. The proposed comment also clarifies that the Sec.
226.19(f)(2)(i) disclosures may not appear in the same document as the
escrow disclosures required under Sec. 226.18 or under RESPA or
Regulation X. Proposed comment 19(f)(1)(i)-2 clarifies that the notice
containing the disclosures required by Sec. 226.19(f)(2) and any
optional information permitted by Sec. 226.19(f)(3) must be in writing
in a form that the consumer may keep.
Proposed Sec. 226.19(f)(1)(ii) would require that the heading
``Information About Your Mortgage Escrow Account'' required by Sec.
226.19(f)(2)(i) or the heading ``Required Direct Payment of Property
Taxes and Insurance'' required by Sec. 226.19 (f)(2)(ii) be more
conspicuous than and precede the other disclosures. The heading would
be required to be outside the table that is required by proposed Sec.
226.19(f)(1)(iii).
Proposed Sec. 226.19(f)(1)(iii) would require the creditor to
provide the disclosures regarding the establishment of an escrow
account under Sec. 226.19(f)(2)(i) in the form of a table containing
four rows or the non-establishment of an escrow account under Sec.
226.19(f)(2)(ii) in the form of a table containing no more than seven
rows. The disclosures regarding the non-establishment of an escrow
account under Sec. 226.19(f)(2)(ii) would be in the form of a table
containing five rows when the creditor does not offer the option of
having an escrow account. In such a case, the creditor would be
required by to omit the Sec. Sec. 226.19(f)(2)(ii)(D) and (G)
disclosures from the table because they would be inapplicable. Only the
information required or permitted by Sec. 226.19(f)(2)(i) or (ii)
would be allowed to appear in the table. Proposed Sec.
226.19(f)(1)(iv) would require the creditor to present the disclosures
in the format of a question and answer in a manner substantially
similar to Model Form H-24 or H-25 in Appendix H. Consumer testing has
shown that using a tabular, question and answer format improved
participants' ability to identify and understand key information.
Proposed Sec. 226.19(f)(1)(iv) also would require the creditor to
present the disclosures appearing in the table in the order listed in
Sec. 226.19(f)(2)(i)(A)-(D) or (ii)(A)-(G), as applicable. This order
would ensure that consumers receive the disclosed information in a
logical progression.
Proposed Sec. 226.19(f)(1)(v) would require the creditor to
highlight certain disclosures because consumer testing has shown that
such emphasis allows consumers to locate and identify important
information more quickly. The Board proposes that all dollar amounts be
presented in bold font. It also proposes implementation of the
requirement in TILA Section 129D(j)(2)(B) that the notice regarding the
non-establishment of an escrow account contain a ``prominent''
statement of the consumer's responsibility for covering home-related
costs through potentially large semi-annual or annual payments by
requiring presentation of that information in bold format.
19(f)(2) Content Requirements
19(f)(2)(i) Establishment of Escrow Account
Proposed Sec. 226.19(f)(2)(i) would implement TILA Section 129D(h)
by setting forth the required content for the disclosure notice
regarding the establishment of an escrow account before the end of the
45-day period following consummation of a transaction subject to Sec.
226.19(f). The proposed 45-day period reflects the requirement in Sec.
3500.17(g)(1) of Regulation X, which implements RESPA, that the
servicer submit an initial escrow account statement to the borrow at
settlement or within 45 calendar days of settlement for escrow accounts
that are established as a condition of the loan. The Board solicits
comment on whether the 45-day period is appropriate for deeming an
account to be established in connection with consummation of a mortgage
transaction. Proposed comment 19(f)(2)(i)-2 would clarify that neither
creditors nor servicers are required to provide the Sec.
226.19(f)(2)(i) disclosures when an escrow account is established
solely in connection with the consumer's delinquency or default on the
underlying debt obligation.
Proposed Sec. 226.19(f)(2)(i) also would require the disclosures
to be made clearly and conspicuously. Proposed comment 19(f)(2)(i)-1
would clarify that, to meet the clear and conspicuous standard,
disclosures must be made in a reasonably understandable form and
readily noticeable to the consumer. Proposed Sec. 226.19(f)(2)(i) also
would require the disclosure notice to bear the heading ``Information
About Your Mortgage Escrow Account.''
19(f)(2)(i)(A) Purpose of Notice
Proposed Sec. 226.19(f)(2)(i)(A) would require a statement that
the purpose of the notice is to inform the consumer that the consumer's
mortgage with the creditor will have an escrow account. This proposed
provision would implement the requirement of TILA Section 129D(h)(1)
that the creditor disclose the fact that an escrow account will be
established.
[[Page 11602]]
19(f)(2)(i)(B) Explanation of Escrow Account
Proposed Sec. 226.19(f)(2)(i)(B) would require the creditor to
provide a statement that an escrow account is an account used to pay
home-related costs such as property taxes and insurance together with a
statement that an escrow account is sometimes called an ``impound'' or
``trust'' account. This information would be followed by a statement
that the consumer will pay into the escrow account over time and that
the creditor will take money from the account to pay costs as needed.
The Board is proposing these statements explaining an escrow account,
the other names sometimes used for an escrow account, and how an escrow
account works pursuant to its authority under TILA Section 129D(h)(6)
to prescribe regulations requiring the creditor to disclose such other
information as the Board determines necessary for the protection of the
consumer. The Board believes that informing consumers of the other
names for an escrow account would prevent consumers in Western regions
of the country from confusing an escrow account for the payment of
home-related costs such as property taxes and insurance premiums with
the escrow that is commonly used for the closing and settlement of a
credit transaction. The Board also believes that the basic information
explaining what an escrow account is and how it works provides needed
context for the other disclosures in the notice.
Proposed Sec. 226.19(f)(2)(i)(B) also would require a statement of
the estimated dollar amount that the consumer's home-related costs will
total for the first year of the mortgage. TILA Section 129D(h)(3)
requires creditors establishing an escrow account in connection with a
transaction to disclose the amount, in the initial year after
consummation, of the estimated taxes and hazard insurance. The
statement regarding the total dollar amount of the estimated home-
related costs would implement the TILA Section 129D(h)(3) requirement.
Proposed comment 19(f)(2)(i)-1 states that the creditor may comply with
the numerical content requirement of Sec. 226.19(f)(2)(i)(B) by using
the amount derived from the escrow account analysis conducted pursuant
to Regulation X.
19(f)(2)(i)(C) Risk of Not Having Escrow Account
Proposed Sec. 226.19(f)(2)(i)(C) would require a statement that,
if the consumer did not have an escrow account, the consumer would be
responsible for directly paying home-related costs through potentially
large semi-annual or annual payments. This is consistent with the
requirements of TILA Section 129D(h)(5). The Board is proposing the
statement regarding the consumer's direct responsibility, in the
absence of an escrow account, for paying home-related costs through
potentially large payments to implement TILA Section 129D(h)(5) and to
conform the disclosure with the similar disclosure required by TILA
Section 129D(j)(2)(B) regarding the non-establishment of an escrow
account.
19(f)(2)(i)(D) Funding of Escrow Account
Proposed Sec. 226.19(f)(2)(i)(D) would implement TILA Section
129D(h)(2) by requiring a statement of the dollar amount that the
consumer will be required to deposit at closing to initially fund the
escrow account. Proposed Sec. 226.19(f)(2)(i)(D) also would implement
TILA Section 129D(h)(4) by requiring a statement of the dollar amount
that the consumer's periodic mortgage payments will include for deposit
into the escrow account. In addition, proposed Sec. 226.19(f)(2)(i)(D)
would require a third statement that the amount of this escrow payment
may change in the future. The Board is proposing to require this last
statement pursuant to its authority under TILA Section 129D(h)(6) to
prescribe regulations requiring the creditor to disclose such other
information as the Board determines necessary for the protection of the
consumer. This information notifies a consumer that his or her periodic
mortgage payment could change with an increase or decrease in property
tax or hazard insurance costs. Proposed comment 19(f)(2)(i)-1 states
that the creditor may comply with the numerical content requirement of
Sec. 226.19(f)(2)(i)(D) by using the amount derived from the escrow
account analysis conducted pursuant to Regulation X.
19(f)(2)(ii) Non-Establishment of Escrow Account
Proposed Sec. 226.19(f)(2)(ii) would implement TILA Section
129D(j)(2) by setting forth the required content for the disclosure
notice regarding escrow accounts when an escrow account will not be
established before the end of the 45-day period following consummation
of a transaction subject to Sec. 226.19(f).
Proposed Sec. 226.19(f)(2)(ii) would require that the disclosures
be made clearly and conspicuously. Proposed comment 19(f)(2)(ii)-1
refers to comment 19(f)(2)(i)-1, which clarifies that, to meet the
clear and conspicuous standard, disclosures must be made in a
reasonably understandable form and readily noticeable to the consumer.
Proposed Sec. 226.19(f)(2)(ii) also would require the disclosure
notice to bear the heading ``Required Direct Payment of Property Taxes
and Insurance.''
19(f)(2)(ii)(A) Purpose of Notice
Proposed Sec. 226.19(f)(2)(ii)(A) would require a statement that
the purpose of the notice is to inform the consumer that the consumer's
mortgage with the creditor will not have an escrow account and to
explain the risk of not having an escrow account. The Board is
proposing these disclosures pursuant to the Board's authority under
TILA Section 129D(j)(2)(D) to include in the notice such other
information as the Board determines necessary for the protection of the
consumer. The Board believes that these disclosures are necessary to
draw the consumer's attention to the fact that his or her mortgage will
not have an escrow account and the implications of such absence.
19(f)(2)(ii)(B) Explanation of Escrow Account
Proposed Sec. 226.19(f)(2)(ii)(B) would require the creditor to
provide a statement that an escrow account is an account that is used
to pay home-related costs such as property taxes and insurance together
with a statement that an escrow account is sometimes called an
``impound'' or ``trust'' account. This information would be followed by
a statement that the borrower pays into the escrow account over time
and that the creditor takes money from the account to pay costs as
needed. The Board is proposing these statements explaining an escrow
account, the other names sometimes used for an escrow account, and how
an escrow account works pursuant to its authority under TILA Section
129D(h)(6) to prescribe regulations requiring the creditor to disclose
such other information as the Board determines necessary for the
protection of the consumer. The Board believes that informing consumers
of the other names for an escrow account would prevent consumers in
Western regions of the country from confusing an escrow account for the
payment of home-related costs such as property taxes and insurance
premiums with the escrow that is commonly used for the closing and
settlement of a credit transaction. The Board also believes that the
basic information explaining what an escrow account is and how it works
provides needed context for the other disclosures in the notice.
[[Page 11603]]
19(f)(2)(ii)(C) Reason Why Mortgage Will Not Have an Escrow Account
Proposed Sec. 226.19(f)(2)(ii)(C) would require a statement that
the consumer was given the option of having an escrow account but that
the consumer waived it or a statement that the creditor does not offer
the option of having an escrow account, as applicable. The Board is
proposing this disclosure pursuant to the Board's authority under TILA
Section 129D(j)(2)(D) to include in the notice such other information
as the Board determines necessary for the protection of the consumer.
This disclosure would provide the consumer with the background
information necessary to understand the disclosure required by Sec.
226.19(f)(2)(ii)(G) at the end of the notice as to whether the consumer
has an option to request the establishment of an escrow account.
19(f)(2)(ii)(D) Fee for Choosing Not To Have Escrow Account
Proposed Sec. 226.19(f)(2)(ii)(D) would implement TILA Section
129D(j)(2)(A) by requiring disclosure of any fee charged for not
establishing an escrow account. Proposed Sec. 226.19(f)(2)(ii)(D)
would require, if the consumer waives establishment of an escrow
account, a statement of the dollar amount of any fee that the consumer
will be charged for choosing not to have an escrow account, or a
statement that the consumer will not be charged a fee. If the creditor
is not establishing an escrow account because it does not offer escrow
accounts to consumers, proposed Sec. 226.19(f)(2)(ii)(D) would require
the creditor to omit this disclosure from the table.
The Board understands that creditors only charge a fee for the non-
establishment of an escrow account when the creditor usually offers and
establishes escrow accounts for all first-lien transactions, but a
particular consumer requests that an escrow account not be established
for his or her transaction. A creditor that offers and establishes
escrow accounts for all first-lien transactions typically benefits from
this practice because the funds in the escrow accounts provide interest
income to the creditor and additional capital reserves. The Board
believes that a creditor that is asked by a consumer not to engage in
its usual practice of establishing an escrow account for his or her
particular transaction may charge that consumer a fee for foregoing
such financial benefits with respect the transaction. Creditors that do
not regularly offer or establish escrow accounts do not charge
consumers for the non-establishment of an escrow account, because those
creditors are not foregoing a financial benefit. The proposal would
require creditors that do not offer escrow accounts to omit the
disclosure regarding a fee because the Board understands that those
creditors do not charge these fees and that the disclosure, therefore,
would be inapplicable. Nevertheless, the Board seeks comment on this
approach.
19(f)(2)(ii)(E) Risk of Not Having Escrow Account
Proposed Sec. 226.19(f)(2)(ii)(E) would require a statement that
the consumer will be responsible for directly paying home-related costs
through potentially large semi-annual or annual payments. TILA Section
129D(j)(2)(B) requires a clear and prominent statement that the
consumer is responsible for personally and directly paying the non-
escrowed items, in addition to paying the mortgage loan payment, in the
absence of an escrow account, and that the costs for taxes and
insurance can be substantial. Proposed Sec. 226.19(f)(2)(ii)(E) would
implement these TILA Section 129D(j)(2)(B) requirements.
19(f)(2)(ii)(F) Consequences of Failure To Pay Home-Related Costs
Proposed Sec. 226.19(f)(2)(ii)(F) would require a statement that,
if the consumer does not pay the applicable home-related costs, the
creditor could require an escrow account on the mortgage or add the
costs to the loan balance. This information would be followed by a
statement that the creditor could also require the consumer to pay for
insurance that the creditor buys on the consumer's behalf and a
statement that this insurance would likely be more expensive and
provide fewer benefits than traditional homeowner's insurance. TILA
Section 129D(j)(2)(C) requires an explanation of the consequences of
any failure to pay non-escrowed items, including the possible
requirement for the forced placement of insurance and the potentially
higher cost or reduced coverage for the consumer for such insurance.
Proposed Sec. 226.19(f)(2)(ii)(F) would implement TILA Section
129D(j)(2)(C) by providing examples of the possible consequences of a
failure to pay home-related costs, such as a decision by the creditor
to require an escrow account, to add the home-related costs to the loan
balance, or to purchase ``forced-placed'' insurance. Proposed Sec.
226.19(f)(2)(ii)(F) would require a description of ``forced-placed''
insurance, rather than use of that term, because consumer testing
showed that consumers were unfamiliar with the term and that the term
itself distracted consumers from recognizing the other possible
consequences of a failure to pay home-related costs.
19(f)(2)(ii)(G) Option To Establish Escrow Account
Proposed Sec. 226.19(f)(2)(ii)(G) would require disclosure of the
telephone number that the consumer can use to request an escrow account
and the latest date by which the consumer can make the request. The
Board is proposing this disclosure pursuant to its authority under TILA
Section 129D(j)(2)(D) to include in the notice such other information
as it determines necessary for the protection of the consumer. The
Board believes that, after considering the risks of not having an
escrow account as disclosed in the notice, a consumer who originally
waived the establishment of an escrow account may wish to set one up.
The information to contact the creditor with a request to establish an
escrow account should be readily available to such consumers in the
notice. The proposed rule would not require a creditor to obtain a
toll-free telephone number that consumers may use to request the
establishment of an escrow account. The Board proposes that a creditor
disclose the telephone number that it has obtained for consumers to
contact it regarding a variety of issues and that also may be used to
request establishment of an escrow account. If the creditor does not
offer the option of having an escrow account, proposed Sec.
226.19(f)(2)(ii)(G) would require the creditor to omit this disclosure
from the table.
The proposal does not require a creditor to disclose whether a fee
will be charged when a consumer changes his or her decision and asks
for an escrow account to be established. The Board understands that a
creditor that usually offers and establishes escrow accounts for all
first-lien transactions would not charge a consumer for changing his or
her decision. The Board seeks comment on this approach.
19(f)(3) Optional Information
Proposed Sec. 226.19(f)(3) would permit the creditor, at its
option, include the creditor's name or logo, or the consumer's name,
property address, or loan number on the disclosure notice, outside of
the table. Proposed comment 19(f)(3)-1 clarifies that Sec.
226.19(f)(3) lists the information that the creditor may, at its
option, include on the disclosure notice, outside of the table
described in Sec. 226.19(f)(1)(iii) that contains the required content
of Sec. 226.19(f)(2).
[[Page 11604]]
19(f)(4) Waiting Period for Disclosures
Proposed Sec. 226.19(f)(4) would require the creditor to provide
the disclosures regarding the establishment or the non-establishment of
an escrow account, as applicable, so that the consumer receives them no
later than three business days prior to consummation. This proposed
provision would implement the requirement of TILA Section 129D(h) for
disclosures regarding the establishment of an escrow account three
business days before consummation and the requirement of TILA Section
129D(j)(1)(A) for disclosures regarding the non-establishment of an
escrow account in a ``timely'' manner. Proposed Sec. 226.19(f)(4)
would conform the timing requirement of TILA Section 129D(j)(1)(A) to
that of TILA Section 129D(h) so that a consumer that will not have an
escrow account would have sufficient time to consider the attendant
responsibilities and risks before consummating the transaction.
Proposed comment 19(f)(4)-1 would clarify that, for purposes of
Sec. 226.19(f)(4), ``business day'' means all calendar days except for
Sundays and specified legal public holidays. The Board believes that
the definition of business day that excludes Sundays and public
holidays is more appropriate than the more general definition because
consumers should not be presumed to have received disclosures in the
mail on a day on which there is no mail delivery. Proposed comment
19(f)(4)-2 would provide guidance regarding the timing requirement with
an example that states if consummation is to occur on Thursday, June
11, the consumer must receive the disclosures on or before Monday, June
8, assuming there are no legal public holidays.
19(f)(5) Timing of Receipt
Proposed Sec. 226.19(f)(5) states that, if the disclosures are
mailed to the consumer or delivered by a means other than in person,
the consumer is considered to have received the disclosures three
business days after they are mailed or delivered. Proposed comment
19(f)(5)-1 states that, if the creditor provides the disclosures to the
consumer in person, consummation may occur any time on the third
business day following delivery. If the creditor provides the
disclosures by mail, receipt is presumed three business days after they
are placed in the mail, for purposes of determining when the three-
business-day waiting period required under Sec. 226.19(f)(4) begins.
The proposed comment also permits creditors that use electronic mail or
courier to follow this approach. Whatever method is used to provide
disclosures, creditors may rely on documentation of receipt in
determining when the waiting period begins.
19(f)(6) Consumer's Waiver of Waiting Period Before Consummation
Proposed Sec. 226.19(f)(6) would permit consumers to modify or
waive the three-business-day waiting period following receipt of the
escrow account disclosures required by Sec. 226.19(f)(2) for bona fide
personal financial emergencies. Proposed Sec. 226.19(f)(6) would
require the consumer waiving the waiting period to give the creditor a
dated, written statement that describes the emergency, specifically
modifies or waives the waiting period, and bears the signature of all
the consumers primarily liable on the legal obligation. Proposed Sec.
226.19(f)(6) would prohibit the use of printed forms to effectuate a
waiver.
Proposed comment 19(f)(6)-1 would provide additional guidance
regarding the waiver procedure. For example, the proposed comment would
clarify that a consumer may modify or waive the waiting period only
after receiving the required disclosures. It also would clarify that a
waiver is effective only if each consumer primarily liable on the legal
obligation signs a waiver statement. Where there are multiple
consumers, they may sign the same waiver statement. Proposed comment
19(f)(6)-1 would allow the consumer to include the waiver statement
that specifically waives or modifies the three-business-day waiting
period required by Sec. 226.19(f)(4) in the same document that
contains a waiver statement that specifically waives or modifies the
seven-business-day waiting period for early disclosures or the three-
business-day waiting period for corrected disclosures required by Sec.
226.19(a)(2).
Proposed comment 19(f)(5)-2 would clarify that, to qualify as a
bona fide personal financial emergency, the situation must require
disbursement of loan proceeds before the end of the waiting period.
Proposed comment 19(f)(5)-2 would further clarify that a bona fide
personal financial emergency typically, but not always, will involve
imminent loss of or harm to a dwelling or harm to the health and safety
of a natural person. It also would provide that a waiver is not
effective if the consumer's statement is inconsistent with facts known
to the creditor.
The Board proposes this waiver provision pursuant to the Board's
authority under TILA Section 105(f). 15 U.S.C. 1604(f). TILA Section
105(f) generally authorizes the Board to exempt all or any class of
transactions from coverage under TILA and Regulation Z if the Board
determines that coverage under that part does not provide a meaningful
benefit to consumers in the form of useful information or protection.
15 U.S.C. 1604(f)(1). The Board is proposing to exempt closed-end
transactions secured by a first lien on real property or a dwelling
from the three-business-day waiting period required by TILA Section
129D(h) and Sec. 226.19(f)(4) when the consumer determines that the
loan proceeds are needed before the waiting period ends to meet a bona
fide personal financial emergency. TILA Section 105(f) directs the
Board to make the determination of whether coverage of such
transactions under TILA Section 129D(h) and Sec. 226.19(f)(4) provides
a meaningful benefit to consumers in light of specific factors. 15
U.S.C. 1604(f)(2). These factors are (1) the amount of the loan and
whether the provision provides a benefit to consumers who are parties
to such transactions; (2) the extent to which the requirement
complicates, hinders, or makes more expensive the credit process for
the class of transactions; (3) the status of the borrower, including
any related financial arrangements of the borrower, the financial
sophistication of the borrower relative to the type of transaction, and
the importance to the borrower of the credit, related supporting
property, and coverage under TILA and Regulation Z; (4) whether the
loan is secured by the principal residence of the borrower; and (5)
whether the exemption would undermine the goal of consumer protection.
The Board has considered each of these factors carefully and, based
on that review, believes that the proposed exemption is appropriate.
Generally, a first-lien mortgage is the largest loan that a consumer
will obtain. The waiting period would harm consumers experiencing a
bona fide personal financial emergency because those consumers would
need access to the proceeds of their loans during that period. The
waiting period would hinder the credit process for consumers
experiencing a bona fide personal financial emergency by forcing them
to wait three business days before consummating the loan. For consumers
experiencing a bona fide personal financial emergency, the proceeds of
the mortgage loan will be extremely important in meeting other
financial obligations. Most first-lien mortgage loans are secured by
the consumer's principal dwelling. The exemption
[[Page 11605]]
would not undermine the goal of consumer protection because the
disclosure required by Sec. 226.19(f)(2) must be provided to the
consumer before the consumer may modify or waive the waiting period.
Delivery of the disclosure itself promotes the informed use of credit.
In addition, Sec. 226.19(f)(5) would require a consumer wishing to
modify or waive the waiting period to provide the creditor with a
dated, written statement that describes the emergency, specifically
modifies or waives the waiting period, and bears the consumer's
signature. The use of a printed form as the written statement would be
prohibited.
The Board's exemption authority under Section 105(f) does not apply
in the case of a mortgage referred to in Section 103(aa), which are
high-cost mortgages generally referred to as ``HOEPA loans.'' The Board
does not believe that this limitation restricts its ability to apply
the proposed waiver provision to all closed-end transactions secured by
a first lien on real property or a dwelling when the consumer is
experiencing a bona fide personal financial emergency, including HOEPA
loans. This limitation on the Board's general exemption authority is a
necessary corollary to the decision of the Congress, as reflected in
TILA Section 129(l)(1), to grant the Board more limited authority to
exempt HOEPA loans from the prohibitions applicable only to HOEPA loans
in Section 129(c) through (i) of TILA. See 15 U.S.C. 1639(l)(1). In
this case, the Board is not proposing any exemptions from the HOEPA
prohibitions. This limitation does raise a question as to whether the
Board could use its exemption authority under Section 105(f) to exempt
HOEPA loans, but not other types of mortgage loans, from other,
generally applicable TILA provisions. That question, however, is not
implicated by this proposal.
The Board proposes to apply its general exemption authority for all
first lien loans secured by real property or a dwelling where a
consumer is experiencing a bona fide personal financial emergency,
including both HOEPA and non-HOEPA loans, to permit the modification or
waiver of the pre-consummation waiting period because the waiting
period does not benefit consumers in such circumstances. It would not
be consistent with the statute or with Congressional intent to
interpret the Board's authority under Sections 105(f) in such a way
that the proposed waiver provision could apply only to mortgage loans
that are not subject to HOEPA. Reading the statute in a way that would
require HOEPA borrowers who are experiencing a bona fide personal
financial emergency to wait three business days before consummating the
transaction that will provide the needed proceeds is not a reasonable
construction of the statute.
The Board solicits comment on all aspects of this proposal,
including the cost, burden, and benefits to consumers and to industry
regarding the proposed disclosures regarding escrow accounts. The Board
also requests comment on any alternatives to the proposal that would
further the purposes of TILA and provide consumers with more useful
disclosures.
Section 226.20 Subsequent Disclosure Requirements
20(d) Cancellation of Escrow Account
Requirements of TILA Section 129D(j)
The Board is proposing a new Sec. 226.20(d) to implement the
disclosure requirements of TILA Sections 129D(j)(1)(B) and 129D(j)(2),
as enacted by Section 1462 of the Dodd-Frank Act. TILA Section
129D(j)(1)(B) requires a creditor or servicer to provide the
disclosures set forth in TILA Section 129D(j)(2) when a consumer
requests closure of an escrow account that was established in
connection with a transaction secured by real property.
The Board's Proposal
For a closed-end transaction secured by a first lien on real
property or a dwelling for which an escrow account was established and
will be cancelled, proposed Sec. 226.20(d) would require the creditor
or servicer to disclose the information about escrow accounts specified
in Sec. 226.20(d)(2). Proposed Sec. 226.20(d) would require the
creditor to disclose this information in accordance with the format
requirements of Sec. 226.20(d)(1) and the timing requirements of Sec.
226.20(d)(4). In addition, the proposal would provide that for purposes
of Sec. 226.20(d), the term ``escrow account'' and the term
``servicer'' have the same respective meanings as under Sec. Sec.
3500.17(b) and 3500.2(b) of Regulation X, which implements RESPA, and
is subject to any interpretations by HUD. These proposed definitions
would parallel existing Sec. 226.35(b)(3)(iv) and Sec. 226.36(c)(3),
respectively. Proposed comment 20(d)-1 would clarify that the term
``real property'' includes vacant and unimproved land. It also would
clarify that the term ``dwelling'' includes vacation and second homes
and mobile homes, boats, and trailers used as residences and refer to
additional guidance regarding the term provided by Sec. 226.2(a)(19)
and the related commentary.
Secured by a first-lien transaction. Proposed Sec. 226.20(d) would
require disclosures for the cancellation of an escrow account that was
established in connection with consummation of a transaction secured by
a first lien, but not a subordinate lien. TILA Sections 129D(a) and (b)
require the establishment of an escrow account in connection with only
first-lien mortgage loans. TILA Section 129D(j) requires disclosures
when such an escrow account is established and later cancelled.
Proposed Sec. 226.20(d) would not require disclosures for cancellation
of an escrow account that was established in connection with a
subordinate-lien mortgages because TILA does not require the
establishment of escrow accounts for such mortgages. In addition, the
Board understands that, in practice, creditors rarely offer or
establish escrow accounts for such mortgages and therefore, the
cancellation disclosures seldom would be triggered. Nevertheless, the
Board seeks comment on whether this approach is appropriate.
Real property or a dwelling. With Sec. 226.20(d), the Board covers
real property and dwellings. Proposed Sec. 226.20(d) implements TILA
Section 129D(j), which requires disclosures when an escrow account that
was established in connection with a transaction secured by real
property will be cancelled. But, the proposal also covers cancellation
of an escrow account that was established in connection with a
transaction secured by a dwelling that is considered to be personal
property under state law. The coverage of the proposal would parallel
the coverage of proposed Sec. 226.19(f), which would require
disclosures for the establishment or non-establishment of an escrow
account. Board believes this coverage would promote informed use of
credit by consumers and compliance by creditors. The information
disclosed when an escrow account will be cancelled likely would be just
as useful to a consumer who has a loan secured by a mobile home as it
would to a consumer who has a mortgage loan secured by a single-family
home. Similarly, the disclosures should cover all dwellings, whether or
not they are deemed personal rather than real property under state law.
Furthermore, the coverage of all dwellings would eliminate the analysis
that creditors would have to undertake to determine whether the
cancellation of the escrow account established for a loan secured by a
particular type of dwelling would trigger the disclosures.
[[Page 11606]]
The Board proposes the Sec. 229.19(f) coverage of real property
and dwellings pursuant to its authority under TILA Section 105(a). 15
U.S.C. 1604(a). TILA Section 105(a) authorizes the Board to prescribe
regulations that contain classifications, differentiations, or other
provisions, and may provide for adjustments and exceptions for any
class of transactions, to effectuate the purposes of TILA and
Regulation Z, to prevent circumvention or evasion, or to facilitate
compliance. 15 U.S.C. 1604(a). One purpose of the statute is to assure
meaningful disclosure of credit terms so that the consumer will be able
to compare more readily the various credit terms available and avoid
the uninformed use of credit. 15 U.S.C. 1601(a). The class of
transactions that would be affected is transactions secured by real
property or a dwelling. For the reasons set forth in the above
discussion regarding proposed Sec. 226.19(f), the Board believes that
coverage of transactions secured by a dwelling as well as real property
would provide promote the informed use of credit by consumers.
Creditor's or servicer's independent decision to cancel escrow
account. TILA Section 129D(j)(1)(B) requires a creditor or servicer to
provide the TILA Section 129D(j)(2) cancellation disclosures when the
consumer chooses and provides written notice the choice to close his or
her escrow account in accordance with any statute, regulation, or
contractual agreement. Proposed Sec. 226.20(d) would implement TILA
Section 129D(j)(1)(B), but also would require provision of the
cancellation disclosures when the creditor or servicer decides
independently to cancel an escrow account. The Board believes that a
consumer whose escrow account will be closed should be informed of the
risks attendant with not having an escrow account, even if the consumer
is not requesting the cancellation of the account.
The Board proposes this requirement pursuant to its authority under
TILA Section 105(a). 15 U.S.C. 1604(a) and (f). TILA Section 105(a)
authorizes the Board to prescribe regulations that contain
classifications, differentiations, or other provisions, and may provide
for adjustments and exceptions for any class of transactions, to
effectuate the purposes of TILA and Regulation Z, to prevent
circumvention or evasion, or to facilitate compliance. 15 U.S.C.
1604(a). One purpose of the statute is to assure meaningful disclosure
of credit terms so that the consumer will be able to compare more
readily the various credit terms available and avoid the uninformed use
of credit. 15 U.S.C. 1601(a). The Board believes provision of the
cancellation disclosures when creditors and servicers independently
make decisions to close escrow accounts will help consumers to avoid
the uninformed use of credit. The cancellation disclosures would
consumers of their responsibility to personally and directly pay
property taxes and insurance premiums and of the consequences for
failure to do so. Indirectly, the disclosure would inform consumers
that they would need to budget or save to meet these potentially large
obligations when due, but that the total amount of their regular
periodic mortgage payments would decrease.
20(d)(1) Format Requirements
Proposed Sec. 226.20(d)(1) contains format requirements for the
disclosures required by Sec. 226.20(d)(2). Proposed Sec.
226.20(d)(1)(i) would require that the creditor or servicer provide the
Sec. 226.20(d)(2) disclosures in a minimum 10-point font, grouped
together on the front side of a one-page document, separate from all
other material, with the headings, content, order, and format
substantially similar to Model Form H-26 in Appendix H. Consumer
testing has shown that the location and order in which information was
presented affected consumers' ability to locate and comprehend the
information disclosed. Proposed comment 20(d)(1)(i)-1 clarifies that
the disclosures required by Sec. 226.20(d)(2) and any optional
information permitted by Sec. 226.20(d)(3) must be grouped together on
the front side of a separate one-page document that contains no other
material. Proposed comment 20(d)(1)(i)-2 clarifies that the notice
containing the disclosures required by Sec. 226.20(d)(2) and any
optional information permitted by Sec. 226.20(d)(3) must be in writing
in a form that the consumer may keep.
Proposed Sec. 226.20(d)(1)(ii) would require that the heading
``Required Direct Payment of Property Taxes and Insurance'' required by
Sec. 226.20(d)(2) be more conspicuous than and precede the other
disclosures. The heading would be required to be outside of the table
that is required by proposed Sec. 226.20(d)(1)(iii).
Proposed Sec. 226.20(d)(1)(iii) would require the creditor or
servicer to provide the disclosures regarding the cancellation of an
escrow account under Sec. 226.20(d)(2) in the form of a table
containing no more than seven rows. The disclosures would be in the
form of a table containing six rows when the creditor or servicer makes
a unilateral decision to close an escrow account and does not impose a
fee for closure. In such a case, the creditor or servicer would be
required to omit the Sec. 226.20(d)(2)(iv) disclosure from the table
because it would be unnecessary. Only the information required or
permitted by Sec. 226.20(d)(2) would be permitted in the table.
Proposed Sec. 226.20(d)(1)(iv) would require the creditor or servicer
to present the disclosures in the format of a question and answer in a
manner substantially similar to Model Form H-26 in Appendix H. Consumer
testing has shown that using a tabular, question and answer format
improved participants' ability to identify and understand key
information. Proposed Sec. 226.20(d)(1)(iv) also would require the
creditor or servicer to present the disclosures appearing in the table
in the order listed in Sec. 226.20(d)(2)(i)-(vii). This order would
ensure that consumers receive the disclosed information in a logical
progression.
Proposed Sec. 226.20(d)(1)(v) would require the creditor or
servicer to highlight certain disclosures because consumer testing has
shown that such emphasis allows consumers to locate and identify
important information more quickly. The Board proposes that the dollar
amount in the disclosure required by Sec. 226.20(d)(2)(iv) be
presented in bold font. It also proposes implementation of the
requirement in TILA Section 129D(j)(2)(B) that the notice regarding the
cancellation of an escrow account contain a ``prominent'' statement of
the consumer's responsibility for covering home-related costs through
potentially large semi-annual or annual payments by requiring
presentation of that information in bold format.
20(d)(2) Content Requirements
Proposed Sec. 226.20(d)(2) would implement TILA Section 129D(j)(2)
by setting forth the required content for the disclosure notice
regarding the cancellation of an escrow account that was established in
connection with consummation of a transaction subject to Sec.
226.20(d). Proposed comment 20(d)(2)-2 would clarify that neither
creditors nor servicers are required to provide the Sec. 226.20(d)(2)
disclosures if an escrow account established solely in connection with
the consumer's delinquency or default on the underlying debt obligation
will be cancelled. Proposed comment 20(d)(2)-3 would clarify that
neither creditors nor servicers are required to provide the disclosures
when the underlying debt obligation for which an escrow account was
established is terminated, including by repayment, refinancing,
rescission, or foreclosure.
[[Page 11607]]
Proposed Sec. 226.20(d)(2) also would require that the disclosures
be made clearly and conspicuously. Proposed comment 20(d)(2)-1 would
clarify that, to meet the clear and conspicuous standard, disclosures
must be made in a reasonably understandable form and readily noticeable
to the consumer. Proposed Sec. 226.20(d)(2) also would require the
disclosure notice to bear the heading ``Required Direct Payment of
Property Taxes and Insurance.''
20(d)(2)(i) Purpose of Notice
Proposed Sec. 226.20(d)(2)(i) would require a statement that the
purpose of the notice is to inform the consumer that the escrow account
on the consumer's mortgage with the creditor or servicer is being
closed and to explain the risk of not having an escrow account. The
Board is proposing these disclosures pursuant to its authority under
TILA Section 129D(j)(2)(D) to include in the notice such other
information as it determines necessary for the protection of the
consumer. The Board believes that these disclosures are necessary to
draw the consumer's attention to the fact that the absence of an escrow
account will carry some risk.
20(d)(2)(ii) Explanation of Escrow Account
Proposed Sec. 226.20(d)(2)(ii) would require the creditor or
servicer to provide a statement that an escrow account is an account
that is used to pay home-related costs such as property taxes and
insurance together with a statement that an escrow account is sometimes
called an ``impound'' or ``trust'' account. This information would be
followed by a statement that the consumer pays into the escrow account
over time and that the creditor or servicer takes money from the
account to pay costs as needed. The Board is proposing these statements
explaining an escrow account, the other names sometimes used for an
escrow account, and how an escrow account works pursuant to its
authority under TILA Section 129D(j)(2)(D) to include in the notice
such other information as the Board determines necessary for the
protection of the consumer. The Board believes that informing consumers
of the other names for an escrow account would prevent consumers in
Western regions of the country from confusing an escrow account for the
payment of home-related costs such as property taxes and insurance
premiums with the escrow that is commonly used for the closing and
settlement of a credit transaction. The Board also believes that the
basic information explaining what an escrow account is and how it works
provides needed context for the other disclosures in the notice.
20(d)(2)(iii) Reason Why Mortgage Will Not Have an Escrow Account
Proposed Sec. 226.20(d)(2)(iii) would require a statement that the
consumer had an escrow account but, as applicable, the consumer asked
the creditor or servicer to close it or the creditor or servicer
independently decided to cancel it. The Board is proposing this
disclosure pursuant to the Board's authority under TILA Section
129D(j)(2)(D) to include in the notice such other information as the
Board determines necessary for the protection of the consumer. This
disclosure would provide the consumer with the background information
necessary to understand the disclosure required by Sec.
226.20(d)(2)(vii) at the end of the notice as to whether the consumer
has an option to keep the escrow account.
20(d)(2)(iv) Fee for Closing Escrow Account
Proposed Sec. 226.20(d)(2)(iv) would implement TILA Section
129D(j)(2)(A) by requiring disclosure of any fee charged for closing an
escrow account. Proposed Sec. 226.20(d)(2)(iv) would require, if the
consumer has asked the creditor or servicer to close the escrow
account, a statement of the dollar amount of any fee that the consumer
will be charged in connection with the closure or a statement that the
consumer will not be charged a fee. If the creditor or servicer
independently decided to cancel the escrow account, rather than
agreeing to close it pursuant to the request of the consumer, and does
not charge a fee in connection with the cancellation, proposed Sec.
226.20(d)(2)(iv) would require the creditor or servicer to omit this
disclosure from the table.
20(d)(2)(v) Risk of Not Having Escrow Account
Proposed Sec. 226.20(d)(2)(v) would require a statement that the
consumer will be responsible for directly paying home-related costs
through potentially large semi-annual or annual payments. TILA Section
129D(j)(2)(B) requires a clear and prominent statement that the
consumer is responsible for personally and directly paying the non-
escrowed items, in addition to paying the mortgage loan payment, in the
absence of an escrow account, and that the costs for taxes and
insurance can be substantial. Proposed Sec. 226.20(d)(2)(v) would
implement these TILA Section 129D(j)(2)(B) requirements.
20(d)(2)(vi) Consequences of Failure To Pay Home-Related Costs
Proposed Sec. 226.20(d)(2)(vi) would require a statement that, if
the consumer does not pay the applicable home-related costs, the
creditor or servicer could require an escrow account on the mortgage or
add the costs to the loan balance. This information would be followed
by a statement that the creditor or servicer could also require the
consumer to pay for insurance that the creditor or servicer buys on the
consumer's behalf and a statement that this insurance would likely be
more expensive and provide fewer benefits than traditional homeowner's
insurance. TILA Section 129D(j)(2)(C) requires provision of a clear
explanation of the consequences of any failure to pay non-escrowed
items, including the possible requirement for the forced placement of
insurance and the potentially higher cost or reduced coverage for the
consumer for such insurance. Proposed Sec. 226.20(d)(2)(vi) would
implement TILA Section 129D(j)(2)(C) by providing examples of the
possible consequences of a failure to pay home-related costs, such as a
decision by the creditor to require an escrow account, to add the home-
related costs to the loan balance, or to purchase ``forced-placed''
insurance. Proposed Sec. 226.20(d)(2)(vi) would require a description
of ``forced-placed'' insurance, rather than use of that term, because
consumer testing showed that consumers were unfamiliar with the term
and that the term itself distracted consumers from recognizing the
other possible consequences of a failure to pay home-related costs.
20(d)(2)(vii) Option To Keep Escrow Account
Proposed Sec. 226.20(d)(2)(vii) would require, as applicable, a
statement of the telephone number that the consumer can use to request
that the escrow account be kept open and the latest date by which the
consumer can make the request, or a statement that the creditor or
servicer does not offer the option of keeping the escrow account. The
Board is proposing this disclosure pursuant to its authority under TILA
Section 129D(j)(2)(D) to include in the notice such other information
as it determines necessary for the protection of the consumer. The
Board believes that, after considering the risks of not having an
escrow account as disclosed in the notice, a consumer who originally
requested cancellation of his or her escrow account may wish to keep
it. The information to contact the creditor or servicer with a request
to keep the escrow account should be readily
[[Page 11608]]
available to such consumers in the notice. The proposed rule would not
require a creditor to obtain a toll-free telephone number that
consumers may use to request the establishment of an escrow account.
The Board proposes that a creditor disclose the telephone number that
it has obtained for consumers to contact it regarding a variety of
issues and that also may be used request establishment of an escrow
account.
The Board is not proposing that creditors disclose whether a fee
will be charged when a consumer changes his or her decision to cancel
and requests to keep the escrow account. The Board understands that
creditors do not charge a fee in such circumstances because the
creditor has yet to expend resources in closing the escrow account. The
Board seeks comment on this approach.
20(d)(3) Optional Information
Proposed Sec. 226.20(d)(3) would permit the creditor or servicer
providing the disclosure notice, at its option, to include its name or
logo, or the consumer's name, property address, or loan number on the
disclosure notice, outside of the table. Proposed comment 20(d)(3)-1
clarifies that Sec. 226.20(d)(3) lists the information that the
creditor or servicer may, at its option, include on the disclosure
notice, outside of the table described in Sec. 226.20(d)(1)(iii) that
contains the required content of Sec. 226.20(d)(2).
20(d)(4) Waiting Period for Disclosures
Proposed Sec. 226.20(d)(4) would require the creditor or servicer
to provide the disclosures regarding the cancellation of an escrow
account so that the consumer receives them no later than three business
days prior to closure of the escrow account. This proposed provision
would implement the requirement of TILA Section 129D(j)(1)(B) for
disclosures regarding cancellation of an escrow account in a ``timely''
manner. The waiting period in proposed Sec. 226.20(d)(4) would
parallel the waiting period in proposed Sec. 226.19(f)(4) and would
serve a similar purpose of providing a consumer sufficient time to
consider the attendant responsibilities and risks of not having an
escrow account.
Proposed comment 20(d)(4)-1 would clarify that, for purposes of
Sec. 226.20(d)(4), ``business day'' means all calendar days except for
Sundays and specified legal public holidays. The Board believes that
the definition of business day that excludes Sundays and public
holidays is more appropriate than the more general definition because
consumers should not be presumed to have received disclosures in the
mail on a day on which there is no mail delivery. Proposed comment
20(d)(4)-2 would provide guidance regarding the timing requirement with
an example that states if consummation is to occur on Thursday, June
11, the consumer must receive the disclosures on or before Monday, June
8, assuming there are no legal public holidays.
20(d)(5) Timing of Receipt
Proposed Sec. 226.20(d)(5) also states that, if the disclosures
are mailed to the consumer or delivered by means other than in person,
the consumer is deemed to have received the disclosures three business
days after they are mailed or delivered. Proposed comment 20(d)(5)-1
states that, if the creditor or servicer provides the disclosures in
person, the escrow account may be closed any time on the third business
day following delivery. If the creditor or servicer provides the
disclosures by mail, receipt is presumed three business days after they
are placed in the mail, for purposes of determining when the three-
business-day waiting period required under Sec. 226.20(d)(4) begins.
The proposed comment also permits creditors or servicers that use
electronic mail or courier to follow this approach. Whatever method is
used to provide disclosures, creditors or servicers may rely on
documentation of receipt in determining when the waiting period begins.
Section 226.34 Prohibited Acts or Practices in Connection With Credit
Subject to Sec. 226.32
34(a) Prohibited Acts or Practices for Loans Subject to Sec. 226.32
34(a)(4) Repayment Ability
34(a)(4)(i) Mortgage-Related Obligations
The Board is proposing conforming amendments to Sec.
226.34(a)(4)(i) and staff comment 34(a)(4)(i)-1. Both provisions
contain cross-references to Sec. 226.35(b)(3)(i). As discussed below,
this proposal would remove and reserve Sec. 226.35(b)(3)(i) and would
preserve the substance of that provision in proposed new Sec.
226.45(b)(1). This proposal would revise the two cross-references
accordingly.
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
The Board is proposing to remove and reserve Sec. 226.35(b)(3),
which currently contains the Board's escrow requirement for higher-
priced mortgage loans. As discussed below, the escrow provisions of the
Dodd-Frank Act would be implemented under this proposal by the addition
of new Sec. 226.45(b). To prevent duplication with new proposed Sec.
226.45(b), this proposal would remove Sec. 226.35(b)(3) and its
accompanying commentary, including the special threshold for ``jumbo''
loans, as implemented by the ``Jumbo'' Final Rule in Sec.
226.35(b)(3)(v). As discussed below, however, proposed Sec.
226.45(a)(1) would preserve the ``jumbo'' threshold.
The Dodd-Frank Act also establishes new TILA provisions concerning
a consumer's ability to repay and prepayment penalties that apply to
all closed-end mortgage loans (other than loans secured by a
timeshare), not just higher-priced mortgage loans. See TILA Sections
129C(a) and 129C(c). For higher-priced mortgage loans, those two
matters currently are addressed by Sec. 226.35(b)(1) and (2). The
provisions of the Dodd-Frank Act regarding repayment ability and
prepayment penalties will be implemented through future rulemakings. To
preserve those existing protections for higher-priced mortgage loans
until such future rulemakings are completed, however, the Board is not
proposing to remove Sec. 226.35(b)(1) and (2) at this time.
Section 226.45 Escrow Requirements for Higher-Priced Mortgage Loans
45(a) Higher-Priced Mortgage Loans
45(a)(1)
Proposed Sec. 226.45(a)(1) would provide that a higher-priced
mortgage loan is a consumer credit transaction secured by the
consumer's principal dwelling that has a loan pricing benchmark that
exceeds the applicable threshold as of the date the transaction's rate
is set. This definition tracks the meaning of ``higher-priced mortgage
loan'' in current Sec. 226.35(a)(1), with two differences. First,
consistent with the 2010 Mortgage Proposal, the loan pricing benchmark
would be the transaction coverage rate rather than the annual
percentage rate. The transaction coverage rate is discussed in more
detail below. Second, the applicable thresholds would be revised to
reflect the special, separate coverage threshold for ``jumbo'' loans,
as provided by the Dodd-Frank Act.
As noted above, the Dodd-Frank Act substantially codified the
Board's escrow requirement for higher-priced mortgage loans, but with
certain differences. One of those differences is the higher threshold
above the average prime offer rate established by the Dodd-Frank Act
for determining when
[[Page 11609]]
escrow accounts are required for loans that exceed the maximum
principal balance eligible for sale to Freddie Mac. In general, the
coverage thresholds are 1.5 percentage points above the average prime
offer rate for first-lien loans and 3.5 percentage points above the
average prime offer rate for subordinate-lien loans. Under the Dodd-
Frank Act, the threshold is 2.5 percentage points above the average
prime offer rate for ``jumbo'' loans.
The ``Jumbo'' Final Rule implements this special coverage test for
``jumbo'' loans by amending Sec. 226.35(b)(3), which contains the
Board's existing escrow requirement for higher-priced mortgage loans.
This proposal would incorporate the threshold for ``jumbo'' loans
contained in Sec. 226.35(b)(3)(v) in proposed Sec. 226.45(a)(1)
because, after other provisions of the Dodd-Frank Act are implemented,
the thresholds in existing Sec. 226.35 will be necessary only to
implement the escrow account requirement and certain appraisal-related
requirements.\1\ Accordingly, this proposal would implement the
coverage test for higher-priced mortgage loans established by the Dodd-
Frank Act, including the special coverage threshold for ``jumbo''
loans, in new Sec. 226.45(a)(1).
---------------------------------------------------------------------------
\1\ Sections 1411, 1412, and 1414 of the Dodd-Frank Act create
new TILA Section 129C, which establishes requirements for all
residential mortgage loans relating to ability to repay and
prepayment penalties. As these requirements are not limited to
higher-priced mortgage loans, when implemented by rulemaking, they
will leave the scope of existing Sec. 226.35 limited to the escrow
requirement. Section 1471 of the Dodd-Frank Act also creates new
TILA Section 129H, which establishes certain new appraisal
requirements, applicable to ``higher-risk mortgages.'' New TILA
Section 129H(f) defines ``higher-risk mortgages'' identically to the
higher-priced mortgage loan definition in existing Sec.
226.35(a)(1), with the addition of the separate threshold for
``jumbo'' loans. Thus, ultimately, the scope of the requirements
applicable to ``higher-risk mortgages'' and the identically defined
``higher-priced mortgage loans'' will consist of the escrow and
appraisal requirements.
---------------------------------------------------------------------------
45(a)(2) Definitions
Proposed Sec. 226.45(a)(2) would define ``transaction coverage
rate'' and ``average prime offer rate.'' The latter definition, in
Sec. 226.45(a)(2)(ii), would be identical to the existing definition
in current Sec. 226.35(a)(2). This is consistent with the provisions
of the Dodd-Frank Act, which codify the regulation's existing
definition of ``average prime offer rate.'' See TILA Section
129D(b)(3).
The definition of ``transaction coverage rate'' is the same
definition included in the Board's 2010 Mortgage Proposal, discussed
above. Accordingly, proposed Sec. 226.45(a)(1) provides that the
transaction coverage rate, rather than the annual percentage rate, is
the metric used to determine whether a transaction is a higher-priced
mortgage loan subject to Sec. 226.45.
Under the proposal, the transaction coverage rate is a transaction-
specific rate that would be used solely for coverage determinations; it
would not be disclosed to consumers. The creditor would calculate the
transaction coverage rate based on the rules in Regulation Z for
calculation of the annual percentage rate, with one exception: The
creditor would make the calculation using a modified value for the
prepaid finance charge, as discussed below.
In the 2010 Mortgage Proposal, the Board explained the background
and rationale for the proposed transaction coverage rate. See 75 FR
58539, 58660-61; Sept. 24, 2010. Briefly, the Board recognized that the
use of the annual percentage rate as the coverage metric for the
higher-priced mortgage loan protections poses a risk of over-inclusive
coverage, which was intended to be limited to the subprime market. The
Board noted that the average prime offer rate, against which the
coverage metric is compared to determine whether a transaction is a
higher-priced mortgage loan, is based on Freddie Mac's Primary Mortgage
Market Survey[reg] (PMMS). The PMMS surveys creditors for the loan
pricing they currently offer consumers with low-risk transaction terms
and credit profiles. The data the PMMS obtains, and therefore on which
the average prime offer rate is based, are limited to contract interest
rates and points. Annual percentage rates, on the other hand, are based
on a broader set of charges, including some third-party charges such as
mortgage insurance premiums. The Board also recognized that, under the
2009 Closed-End Proposal, the annual percentage rate would be based on
a finance charge that includes most third-party fees in addition to
points, origination fees, and any other fees the creditor retains.
Thus, that proposal would expand the existing difference between fees
included in the annual percentage rate and fees included in the average
prime offer rate.
For the same reasons, the Board again is proposing to require
creditors to compare the transaction coverage rate, rather than the
annual percentage rate, to the average prime offer rate to determine
whether a transaction is covered by the protections for higher-priced
mortgage loans. The Board is making this proposal pursuant to its
authority under Section 1461(b) of the Dodd-Frank Act to ``prescribe
rules that revise, add to, or subtract from the criteria of section
129D(b) of the Truth in Lending Act if the Board determines that such
rules are in the interest of consumers and in the public interest.''
TILA Section 129D(b)(3) applies the escrow requirement to transactions
with annual percentage rates that exceed the applicable thresholds. For
the reasons discussed above, however, the Board believes that it is in
the interest of consumers and the public to revise the coverage metric
so that the protections for higher-priced mortgage loans are not
inappropriately extended to prime loans, which may result in more
limited credit availability where those protections are not warranted.
As noted above, the transaction coverage rate would be calculated
according to the rules in Regulation Z for the calculation of the
annual percentage rate, with one difference: The creditor would use a
modified value for the prepaid finance charge in making this
calculation. Under proposed Sec. 226.45(a)(2)(i), the prepaid finance
charge for purposes of calculating the transaction coverage rate would
include only prepaid finance charges that will be retained by the
creditor, a mortgage broker, or an affiliate of either. As discussed in
the 2010 Mortgage Proposal, this test would make the coverage metric
more similar to the average prime offer rate, which is based on
contract interest rates and points only. This test also would avoid any
uncertainty about what is included and would prevent creditors from
evading coverage by shifting points into other charges or to affiliated
third parties.
The Board also is proposing the same guidance in staff commentary
under proposed Sec. 226.45(a)(2) as currently exists under Sec.
226.35(a) and as was proposed in the 2010 Mortgage Proposal. Proposed
comment 45(a)(2)(i)-1 would clarify that the transaction coverage rate
is not the annual percentage rate that is disclosed to the consumer and
that it would be solely for coverage determination purposes. Proposed
comment 45(a)(2)(i)-2 would clarify that the inclusion of charges
retained by a mortgage broker would be limited to compensation that
otherwise constitutes a prepaid finance charge and would illustrate
this principle with an example. Proposed comments 45(a)(2)(ii)-1
through -4 would duplicate existing comments 35(a)(2)-1 through -4 with
no substantive change.
Proposed comment 45(a)(2)(ii)-5 would be added to direct creditors
to additional guidance on the average prime offer rate that is
available in the staff commentary under Regulation C (Home Mortgage
Disclosure) and other related authorities. This proposed
[[Page 11610]]
comment is identical to guidance the Board proposed in the 2009 Closed-
End Proposal. See 74 FR 43232, 43279; Aug. 26, 2009.
45(a)(3)
Proposed Sec. 226.45(a)(3) would provide that a ``higher-priced
mortgage loan'' does not include a transaction to finance the initial
construction of a dwelling, a temporary or ``bridge'' loan with a term
of twelve months or less, a reverse mortgage transaction, or a home
equity line of credit. This provision is identical to existing Sec.
226.35(a)(3). In addition, the Board is proposing to adopt comment
45(a)(3)-1 to clarify how Sec. 226.45 applies to cases where a
creditor that extends financing for the initial construction of a
dwelling also may permanently finance the home purchase. The proposed
comment states that the construction phase is not a higher-priced
mortgage loan, as provided in Sec. 226.45(a)(3), regardless of the
creditor's election to disclose such cases as either a single
transaction or as separate transactions, pursuant to Sec.
226.17(c)(6)(ii). This guidance would track the same guidance the Board
proposed in the 2010 Mortgage Proposal. See 75 FR 58539, 58662-63;
Sept. 24, 2010.
45(b) Escrow Accounts
45(b)(1) Requirement To Escrow for Property Taxes and Insurance
Proposed Sec. 226.45(b)(1) would provide that a creditor may not
extend a higher-priced mortgage loan secured by a first lien on a
consumer's principal dwelling unless an escrow account is established
before consummation for payment of property taxes and premiums for
mortgage-related insurance required by the creditor. This provision
parallels existing Sec. 226.35(b)(3)(i). Proposed comments 45(b)(1)-1
through -3 parallel existing comments 35(b)(3)(i)-1 through -3. In
addition, the Board is proposing comment 45(b)(1)-4 to clarify that the
requirement to establish an escrow account for a first-lien higher-
priced mortgage loan does not affect a creditor's right or obligation,
pursuant to the terms of the legal obligation or applicable law, to
offer or require an escrow account for a transaction that is not
subject to Sec. 226.45(b)(1).
Proposed Sec. 226.45(b)(1) would implement TILA Section
129D(b)(3), as added by Section 1461 of the Dodd-Frank Act. TILA
Section 129D(a) contains the general requirement that an escrow account
be established for any consumer credit transaction secured by a
consumer's principal dwelling (other than an open-end credit plan or a
reverse mortgage). Section 129D(b), however, restricts that general
requirement to four specified circumstances: (1) Where an escrow
account is required by federal or state law; (2) where the loan is
made, guaranteed, or insured by a state or federal agency; (3) where
the transaction's annual percentage rate exceeds the average prime
offer rate by prescribed amounts; and (4) where an escrow account is
``required by regulation.'' This proposal would implement only the
third of the four circumstances, pursuant to TILA Section 129D(b)(3),
because the other three either are self-effectuating or are effectuated
by other agencies' regulations. The thresholds in proposed Sec.
226.45(a)(1) for determining whether a transaction is a higher-priced
mortgage loan, discussed above, reflect the amounts over the average
prime offer rate that trigger coverage of the statutory escrow
requirement in TILA Section 129D(b)(3).
Proposed Sec. 226.45(b)(1) also would state that, for purposes of
Sec. 226.45(b), ``escrow account'' has the same meaning as under
Regulation X. This proposed provision would parallel existing Sec.
226.35(b)(3)(iv).
45(b)(2) Exemptions
45(b)(2)(i)
Proposed Sec. 226.45(b)(2)(i) would provide that escrow accounts
need not be established for loans secured by shares in a cooperative.
This provision would track existing Sec. 226.35(b)(3)(ii)(A). It also
is consistent with new TILA Section 129D(e), as added by Section 1461
of the Dodd-Frank Act.
45(b)(2)(ii)
Proposed Sec. 226.45(b)(2)(ii) would provide that insurance
premiums need not be included in escrow accounts for loans secured by
dwellings in condominiums, planned unit developments (PUDs), or similar
arrangements in which ownership requires participation in a governing
association, where the governing association has an obligation to the
dwelling owners to maintain a master policy insuring all dwellings.
This provision would parallel existing Sec. 226.35(b)(3)(ii)(B), with
respect to condominium units. It also would implement new TILA Section
129D(e), as added by Section 1461 of the Dodd-Frank Act. That provision
codifies the exemption for condominiums and also expands it to other,
similar ownership arrangements involving associations that have an
obligation to maintain a master insurance policy, such as PUDs. The
Board is proposing comment 45(b)(2)(ii)-1 to parallel existing comment
35(b)(3)(ii)(B)-1 but with conforming amendments to reflect the
expanded scope of the exemption. The Board is also proposing comment
45(b)(2)(ii)-2 to provide details about the nature of PUDs and to
clarify that the exemption is available for not only condominium and
PUD units but also any other type of property ownership arrangement
that has a governing association with an obligation to maintain a
master insurance policy.
45(b)(2)(iii)
Under TILA Section 129D(c), the Board is authorized to exempt from
the escrow requirement a creditor that (1) operates predominantly in
rural or underserved areas; (2) together with all affiliates has total
annual mortgage loan originations that do not exceed a limit set by the
Board; (3) retains its mortgage loan originations in portfolio; and (4)
meets any asset-size threshold and any other criteria the Board may
establish. Proposed Sec. 226.45(b)(2)(iii) would provide an exemption
consistent with that provision. Under proposed Sec. 226.45(b)(2)(iii),
the escrow requirement would not apply to a higher-priced mortgage loan
extended by a creditor that makes most of its first-lien higher-priced
mortgage loans in counties designated by the Board as ``rural or
underserved,'' together with its affiliates originates and services 100
or fewer first-lien mortgage loans, and together with its affiliates
does not escrow for any mortgage loan it services.
Operates Predominantly in Rural or Underserved Areas
Under proposed Sec. 226.45(b)(2)(iii)(A), to obtain the exemption,
a creditor must have made during the preceding calendar year more than
50% of its total first-lien, higher-priced mortgage loans in counties
designated by the Board as ``rural or underserved.'' Proposed comment
45(b)(2)(iii)-1 would state that the Board publishes annually a list of
counties that qualify as ``rural'' or ``underserved.'' The Board's
annual determinations would be based on the criteria set forth in
proposed Sec. 226.45(b)(2)(iv), discussed below.
``Areas.'' In determining what is a rural or underserved area, the
Board is proposing to use counties as the relevant area. The Board
believes that the county level is the most appropriate area for this
purpose, even though the sizes of counties can vary. In determining the
relevant area for consumers who are shopping for
[[Page 11611]]
mortgage loans, census tracts would be too small, while states
generally would be too large. Because a single standard nationwide
would facilitate compliance, the Board is proposing to use counties for
all geographic areas. The Board seeks comment on the appropriateness of
this approach.
``Operates predominantly.'' As noted, the proposed rule requires a
creditor to have made during the preceding calendar year more than 50%
of its total first-lien higher-priced mortgage loans in ``rural or
underserved'' counties. The Board believes that ``predominantly''
indicates a portion greater than half, hence the proposed regulatory
requirement of more than 50%. The Board proposes to implement
``operates'' consistently with the scope of the escrow requirement.
Thus, because the escrow requirement applies only to first-lien higher-
priced mortgage loans, only those loans would be counted toward this
element of the exemption. The Board solicits comment on the
appropriateness of both of these proposed interpretations.
Total Annual Mortgage Loan Originations
As noted above, the Dodd-Frank Act authorizes the Board to
establish an annual limit on loans originated in adopting any
exemption. Under proposed Sec. 226.45(b)(2)(iii)(B), to obtain the
exemption, a creditor and its affiliates together during either of the
preceding two calendar years must have originated and retained the
servicing rights to 100 or fewer loans secured by a first lien on real
property or a dwelling. The Board is also establishing three criteria
not specified in the statute: (1) A requirement that the lender retain
servicing rights in addition to originating loans; (2) the
establishment of 100 or fewer as the originations limit; and (3) the
use of either of the preceding two calendar years.
Retention of servicing rights. Proposed Sec. 226.45(b)(2)(iii)(B)
would provide that the creditor, together with any affiliates, must
have originated and retained the servicing rights to 100 or fewer
loans. As noted above, the statute does not include retention of the
servicing rights in this condition of the exemption. The Board is
proposing this adjustment to the requirement for an annual-originations
limit pursuant to its authority under TILA Section 105(a), 15 U.S.C.
1604(a), to provide for such adjustments and exceptions as are
necessary or proper to effectuate the purposes of TILA. The Board
believes that, to effectuate meaningfully the purpose of the exemption,
this test should include only those loans both made and serviced by the
creditor and its affiliates.
The Board believes the purpose of the exemption is to recognize
that maintaining escrow accounts is burdensome, and not cost-
effectively feasible, unless a servicer maintains at least a certain
minimum portfolio size. The proposed exemption thus permits creditors
that do not possess these economies of scale to continue to offer
credit to consumers, rather than leave the higher-priced mortgage loan
market, provided the other criteria for the exemption also are
satisfied. But the economies of scale needed to escrow cost-effectively
are achieved only to the extent a creditor actually services its
originations. Accordingly, the Board's proposal would base the
exemption on only originations for which the creditor (or its
affiliates) retained the servicing rights.
100 or fewer loans. TILA Section 129D(c)(2) requires the Board to
establish a limit on annual originations for purposes of the exemption.
As discussed above, in approaching this element of the exemption, the
Board seeks to limit the exemption to creditors that maintain servicing
portfolios too small to be able to escrow cost-effectively. Based on a
review of mortgage subservicers' fee schedules, the Board estimates
that, on average, the monthly cost per loan to outsource servicing
(including escrowing) is $17 for a 500-loan portfolio and $21 for a
250-loan portfolio. Data obtained from the Mortgage Bankers
Association's Quarterly Mortgage Bankers Performance Report for the
third quarter of 2008 indicate that the average monthly cost per loan
to service a portfolio in-house (including but not limited to
escrowing), for portfolios averaging 472 loans, is approximately $20;
this figure represents ongoing costs, including personnel, technology,
equipment, and similar recurring costs, but it does not include initial
set-up costs. The Board believes from the available information that
the economies of scale necessary to escrow cost-effectively, or else to
satisfy the escrow requirement by outsourcing to a sub-servicer,
generally exist when a mortgage servicer has a portfolio of at least
500 mortgage loans.
TILA Section 129D(c)(2) calls for an annual-originations limit,
however, as opposed to a portfolio-size limit. In light of the
statutory provision, to effectuate the purpose of the exemption, the
Board is proposing to set the cut-off for this element of the exemption
at 100 or fewer mortgage loans originated and serviced; an assumed
average of five years until an institution's loans are paid off would
suggest that originating (and retaining the servicing rights to) 100 or
fewer mortgages per year should correspond to servicing 500 or fewer
loans. The Board seeks comment on the validity of this assumption and
whether some other number of originations might better serve the
purpose of the exemption.
Either of the preceding two calendar years. The Board is proposing
that the test be satisfied as long as the creditor's (and its
affiliates') servicing-retained originations do not exceed 100 during
either of the preceding two calendar years. Under this two-year ``look
back,'' an institution that has been exempt would not have to begin
complying with the escrow requirement until at least one full year
after it first exceeds the threshold. Proposed comment 45(b)(2)(iii)-1
would clarify that a creditor would lose the exemption if it exceeds
the threshold for two consecutive calendar years and would illustrate
this rule with an example.
As indicated above, the Board believes the purpose of the exemption
is to permit creditors that lack the economies of scale necessary to
escrow cost-effectively to continue to offer credit to consumers,
rather than leave the higher-priced mortgage loan market, provided the
other criteria for the exemption also are satisfied. The Board
recognizes that the originations limit, if applied for only one year,
could cause operational problems when institutions first exceed the
threshold. An institution that was exempt and becomes subject to the
requirement because it first originates and services over 100 loans
could not establish escrow accounts retroactively on its existing
portfolio without the agreement of its existing customers. Such an
institution then would face the prospect of establishing escrows for
the small number of loans it makes going forward and still would not
have achieved the necessary economies of scale. The proposed two-year
coverage test should afford an institution sufficient time after first
exceeding the threshold to acquire an escrowing capacity. The Board
solicits comment on the appropriateness of this two-year coverage test.
Creditor and Affiliates Do Not Maintain Escrows
Under proposed Sec. 226.45(b)(2)(iii)(C), to obtain the exemption,
the creditor and its affiliates must not maintain an escrow account for
any mortgage loan they currently service. The Board is proposing this
provision pursuant to its authority in TILA Section 129D(c)(4) to
include in this exemption ``any other criteria the Board may
establish.'' The
[[Page 11612]]
Board believes this additional condition is necessary to effectuate the
purpose of the exemption.
If a creditor already establishes or maintains escrow accounts, it
has the capacity to escrow and therefore has no need for the exemption.
Moreover, a creditor's capacity to escrow should reflect not only its
own activities but those of any affiliate. The Board believes a
creditor's affiliate that has the capacity to escrow can enable the
creditor to meet the escrow requirement. The Board seeks comment,
however, on whether an affiliate's capacity to escrow should be
considered. Proposed comment 45(b)(2)(iii)-1 would explain that this
restriction applies only to mortgage loans serviced by the creditor and
its affiliates at the time a transaction is consummated. Thus, the
exemption still could apply even if, in the past, any of them has
established and maintained escrows for mortgage loans it no longer
services. If a creditor or an affiliate escrows for loans currently
serviced, however, they all would become ineligible for the exemption
on higher-priced mortgage loans that they make thereafter.
The Board recognizes that a creditor sometimes may hold a loan for
a short period after consummation to take the steps necessary before
transferring and assigning it to its intended investor. This period on
occasion may extend even beyond the loan's first installment due date,
especially if the first payment due date comes shortly after
consummation. The proposed rule would recognize that, in such cases, a
creditor that establishes an escrow account for the investor is not
deemed to have established an escrow account in connection with a loan
for which it retains the servicing rights. Accordingly, proposed
comment 45(b)(2)(iii)-1 also would clarify that a creditor or its
affiliate ``maintains'' an escrow account for a loan only if it
services the mortgage loan at least through the due date of the second
periodic payment under the terms of the legal obligation. The Board
seeks comment on whether the second payment due date is the appropriate
cut-off point for this purpose.
Under Sec. 226.45(b)(2)(iii)(C), as proposed, a creditor would not
be eligible for the exemption if it escrows for even a single loan. A
creditor that lacks the capacity to escrow cost-effectively and does
not maintain escrow accounts as a general matter nevertheless may
undertake to escrow for one customer, or possibly only a few customers,
as an accommodation to those customers at their request. The Board
therefore solicits comment on whether this provision instead should
allow some de minimis number of loans for which escrows are maintained
and, if so, what that number should be. For example, would a limit of
not more than five loans for which escrows are currently maintained be
appropriate?
Asset-Size Threshold Not Proposed
The Board is not proposing an asset-size threshold as a condition
of the exemption, even though TILA Section 129D(c)(4) authorizes the
Board to do so. As discussed above, the Board believes that a
creditor's ability to establish escrow accounts, and thus continue
offering higher-priced mortgage loans, depends mainly on whether the
creditor services enough mortgage loans to make escrow accounts a cost-
effective option. The annual originations test discussed above serves
as a proxy for having a small servicing portfolio. Mortgage creditors
with limited assets likely also would satisfy the annual originations
test. Nevertheless, the Board believes that a relatively large creditor
(based on asset size) might make and service only a small number of
mortgage loans. If such a creditor may cease making higher-priced
mortgage loans because it lacks the necessary economies of scale to
escrow for so few mortgage loans, the Board believes the creditor
should not be denied the exemption merely because it happens to have
substantial non-mortgage assets. Thus, the Board solicits comment on
whether such a condition should be established and, if so, what asset-
size threshold would be appropriate.
45(b)(2)(iv)
Proposed Sec. 226.45(b)(2)(iv) would set out the criteria for a
county to be designated by the Board as ``rural or underserved'' for
purposes of Sec. 226.45(b)(2)(iii)(A), discussed above. Under that
section, a creditor's originations of first-lien higher-priced mortgage
loans in all counties designated as ``rural or underserved'' during a
calendar year are measured as a percentage of the creditor's total such
originations during that calendar year to determine whether the
creditor may be eligible for the exemption during the following
calendar year. If the creditor's first-lien higher-priced mortgage loan
originations in ``rural or underserved'' counties during a calendar
year exceeds 50% of the creditor's total such originations in that
calendar year, the creditor satisfies Sec. 226.45(b)(2)(iii)(A) for
purposes of the following calendar year.
Proposed Sec. 226.45(b)(2)(iv) would establish separate criteria
for both ``rural'' and ``underserved,'' thus a county could qualify for
designation by the Board under either definition. Under proposed Sec.
226.45(b)(2)(iv)(A), a county would be designated as ``rural'' during a
calendar year if it is not in a metropolitan area or a micropolitan
area and either (1) it is not adjacent to any metropolitan or
micropolitan area; or (2) it is adjacent to a metropolitan area with
fewer than one million residents or adjacent to a micropolitan area,
and it contains no town with 2500 or more residents. Under proposed
Sec. 226.45(b)(2)(iv)(B), a county would be designated as
``underserved'' during a calendar year if no more than two creditors
extend consumer credit secured by a first lien on real property or a
dwelling five or more times in that county. These two definitions are
discussed in more detail below.
``Rural''
The Board is proposing to limit the definition of ``rural'' areas
to those areas most likely to have only limited sources of mortgage
credit. The test for ``rural'' in proposed Sec. 226.45(b)(2)(iv)(A),
described above, is based on the ``urban influence codes'' numbered 7,
10, 11, and 12, maintained by the Economic Research Service (ERS) of
the United States Department of Agriculture. The ERS devised the urban
influence codes to reflect such factors as counties' relative
population sizes, degrees of ``urbanization,'' access to larger
communities, and commuting patterns.\2\ The four codes captured in the
proposed ``rural'' definition represent the most remote rural areas,
where ready access to the resources of larger, more urban communities
and mobility are most limited. Proposed comment 45(b)(2)(iv)-1 would
state that the Board classifies a county as ``rural'' if it is
categorized under ERS urban influence code 7, 10, 11, or 12. The Board
seeks comment on all aspects of this approach to designating ``rural''
counties, including whether the definition should be broader or
narrower, as well as whether the designation should be based on
information other than the ERS urban influence codes.
---------------------------------------------------------------------------
\2\ See http://www.ers.usda.gov/briefing/Rurality/UrbanInf/.
---------------------------------------------------------------------------
``Underserved''
In determining what areas should be considered ``underserved,'' the
Board has considered the minimum number of creditors that must be
engaged in significant mortgage operations in an area for consumers to
have meaningful access to mortgage credit. The test for ``underserved''
in proposed Sec. 226.45(b)(2)(iv)(B), described above, is
[[Page 11613]]
based on the Board's judgment that, where no more than two creditors
are significantly active (measured by extending mortgage credit at
least five times in a year), the inability of one creditor to offer a
higher-priced mortgage loan would be detrimental to consumers who would
have limited credit options. Thus, proposed Sec. 226.45(b)(2)(iv)(B)
would designate a county as ``underserved'' during a calendar year if
no more than two creditors extend consumer credit secured by a first
lien on real property or a dwelling five or more times in that county.
Proposed comment 45(b)(2)(iv)-1 would state that the Board bases its
determinations of whether counties are ``rural'' for purposes of Sec.
226.45(b)(2)(iii)(A) by reference to data submitted by mortgage lenders
under the Home Mortgage Disclosure Act (HMDA).
The Board believes the purpose of the exemption is to permit
creditors that lack the economies of scale necessary to escrow cost-
effectively to continue to offer credit to consumers, rather than leave
the higher-priced mortgage loan market, if such creditors' withdrawal
would significantly limit consumers' ability to obtain mortgage credit.
In light of this rationale, the Board believes that ``underserved''
should be implemented in a way that protects consumers from losing
meaningful access to mortgage credit. The Board is proposing to do so
by designating as ``underserved'' only those areas where the withdrawal
of a creditor from the market could leave no meaningful competition for
consumers' mortgage business. The Board seeks comment on the
appropriateness of both the proposed use of two or fewer existing
competitors to delineate areas that are ``underserved'' and the
proposed use of five or more first-lien mortgage originations to
identify competitors with a significant presence in a market.
45(b)(2)(v)
Proposed Sec. 226.45(b)(2)(v) would provide that the exemption is
not available for certain transactions that, at consummation, are
subject to ``forward commitments,'' which are agreements entered into
at or before consummation of a transaction under which a purchaser is
committed to acquire the loan from the creditor after consummation.
Mortgage creditors often make loans for which they already have
obtained such a commitment from a purchaser, which may be obligated to
purchase the specific loan or to purchase loans meeting prescribed
criteria. In the latter case, if a transaction meets the criteria, it
is subject to the purchaser's forward commitment. The Board is
proposing this provision to implement TILA Section 129D(c)(3), which
requires that a creditor retain its mortgage loan originations in
portfolio to qualify for the exemption from the escrow requirement.
The Board considered requiring that a transaction be held in
portfolio as a condition of the exemption. This approach, however,
would raise operational problems. Whether a loan is held in portfolio
can be determined only after consummation, but a creditor making a
higher-priced mortgage loan must know by consummation whether it is
subject to the escrow requirement. The Board expects that a creditor
would be reluctant to make a loan it does not intend to keep in
portfolio unless it has the assurance of a committed buyer before
extending the credit. Thus, proposed Sec. 226.45(b)(2)(v) would serve
as a means of indirectly limiting the exemption to loans that are to be
held in portfolio.
The Board believes that the rationale for the exemption is not
present when a loan will be acquired pursuant to a forward commitment
by a purchaser that does not qualify for the exemption, even if the
creditor making the loan is exempt. Accordingly, under proposed Sec.
226.45(b)(2)(v), the escrow requirement would apply to a higher-priced
mortgage loan that, at consummation, is subject to a forward commitment
to be acquired by a person that is not exempt. Proposed comment
45(b)(2)(v)-1 would clarify that the transaction is not exempt, whether
the forward commitment provides for the purchase and sale of the
specific transaction or for the purchase and sale of loans with certain
criteria that the transaction meets.
The Board seeks comment on whether institutions could easily evade
the escrow requirement by making higher-priced mortgage loans without a
forward commitment in place and thereafter selling them to non-exempt
purchasers. The Board also seeks comment on how it might address this
possibility without relying on post-consummation events as part of the
test. For instance, should the Board include a provision making it a
violation of the escrow requirement to engage in a pattern or practice
of making higher-priced mortgage loans without escrows under the
exemption (with no forward commitment in place) and then selling them
within some defined period after consummation?
45(b)(3) Cancellation
Proposed Sec. 226.45(b)(3) would establish minimum durations for
escrow accounts required by Sec. 226.45(b)(1). Proposed Sec.
226.45(b)(3)(i) would implement TILA Section 129D(d)(4) by requiring
the creditor or servicer to maintain an escrow account established
pursuant to proposed Sec. 226.45(b)(1) for a minimum of five years
following consummation, unless the underlying debt obligation is
terminated earlier. Proposed Sec. 226.45(b)(3)(i) would allow, but not
require, a creditor or servicer to cancel the escrow account after five
years upon receipt of a request from the consumer. Proposed Sec.
226.45(b)(3)(ii) would implement TILA Sections 129D(d)(1)-(3) by
prohibiting the cancellation of an escrow account pursuant to a
consumer's request under proposed Sec. 226.45(b)(3)(i) unless at least
20% of the original value of the property securing the underlying debt
obligation is unencumbered and the consumer currently is not delinquent
or in default on the underlying debt obligation. Assuming the
requirements of Sec. 226.45(b)(3) were met, a creditor could, but
would not be required to, cancel consumer's escrow account pursuant to
the consumer's request, even if the consumer had been delinquent in
making mortgage payments in the past. As long as the consumer brought
his or her account current and had been making timely payments when the
request was made, the creditor could close the escrow account.
The Board's proposed provisions to implement TILA Section
129D(d)(1)-(3) are modeled after the prerequisites for borrower
cancellation of private mortgage insurance coverage under the
Homeowners Protection Act of 1998 (HPA), 12 U.S.C. 4901-4910. The Board
seeks comment on the appropriateness of those standards, in light of
the language used in TILA Section 129D(d)(1)-(3). In particular, TILA
Section 129D(d)(1) states that an escrow account mandated by TILA
Section 129D(b) must remain in existence, even if five years have
elapsed, unless and until the ``borrower has sufficient equity in the
dwelling securing the consumer credit transaction so as to no longer be
required to maintain private mortgage insurance.'' The Board seeks
comment on whether TILA Section 129D(d)(1) should be interpreted
narrowly to mean that, among consumers with escrow accounts required
pursuant to proposed Sec. 226.45(b)(1), only those that in fact have
private mortgage insurance must meet the minimum equity requirement
under the HPA as a prerequisite for cancelling their escrow accounts.
Proposed comment 45(b)(3)-1 would clarify that termination of the
underlying credit obligation could include, among other things,
repayment,
[[Page 11614]]
refinancing, rescission, and foreclosure. Proposed comment 45(b)(3)-2
would clarify that proposed Sec. 226.45(b)(3) does not affect the
right or obligation of a creditor or servicer, pursuant to the terms of
the legal obligation or applicable law, to offer or require an escrow
account after the minimum period dictated by Sec. 226.45(b)(3).
Proposed comment 45(b)(3)-3 would clarify that the term ``original
value'' in Sec. 226.45(b)(3)(ii)(A) means the lesser of the sales
price reflected in the sales contract for the property, if any, or the
appraised value of the property at the time the transaction was
consummated. This meaning of ``original value'' is adopted from Section
2(12) of the HPA. 12 U.S.C. 4901(12). The Board is cognizant of the
recent nation-wide decline of property values. The Board recognizes
that, under the proposal, a creditor or servicer may honor a consumer's
request to cancel their escrow account when the consumer has met all of
the pre-conditions of Sec. 226.45(b)(3) even when the consumer does
not have 20% equity in their home because of depressed property values
at the time. The Board believes that using some method other than the
HPA as a model for determining when a borrower has sufficient equity in
the property would prove too complicated and create uncertainty.
However, the Board solicits comment on the proposed approach.
Proposed comment 45(b)(3)-3 also would clarify that, in determining
whether 20% of the original value of the property securing the
underlying debt obligation is unencumbered, the creditor or servicer
must count any subordinate lien of which it has reason to know. The
proposed comment would further state that, if the consumer certifies in
writing that the equity in the property is unencumbered by a
subordinate lien, the creditor or servicer may rely upon the
certification in making its determination. This approach is derived
from Section 3(a)(4)(B) of the HPA, 12 U.S.C. 4902(a)(4)(B). Under that
provision, the mortgagor must certify that there is no subordinate lien
on the property as a prerequisite for cancellation of private mortgage
insurance. The Board is proposing a modified version of this approach.
Under the proposal, an escrow account could be cancelled, provided that
all liens do not exceed 80% of the property's original value. The Board
seeks comment on whether this approach is appropriate. Alternatively,
the Board solicits comment on whether subordinate-lien loans should be
disregarded when calculating the consumer's equity.
45(c)
The Board is proposing to reserve Sec. 226.45(c) for future use in
implementing Section 1471 of the Dodd-Frank Act, which creates new TILA
Section 129H to establish certain appraisal requirements applicable to
``higher-risk mortgages.''
45(d) Evasion; Open-End Credit
Proposed Sec. 226.45(d) would provide that, in connection with
credit secured by a consumer's principal dwelling that does not meet
the definition of open-end credit in Sec. 226.2(a)(20), a creditor
shall not structure a home-secured loan as an open-end plan to evade
the requirements of Sec. 226.45. This proposed provision would
parallel existing Sec. 226.35(b)(4).
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
The Board is proposing to revise staff comment App. G and H-1 to
provide guidance on permissible changes to the new model forms the
Board is proposing. Appendices G and H set forth model forms, model
clauses and sample forms that may be used to comply with the
requirements of Regulation Z. Appendix G contains model forms, model
clauses and sample forms applicable to open-end plans. Appendix H
contains model forms, model clauses and sample forms applicable to
closed-end loans. Although use of the model forms and clauses is not
required, proper use will be deemed to be in compliance with the
regulation with regard to those disclosures. As discussed above, the
Board proposes to add several model forms to Appendix H for the
disclosure requirements applicable to the establishment, non-
establishment, and cancellation of escrow accounts. The new model forms
are discussed above in the section-by-section analysis applicable to
the regulatory provisions to which the forms relate. See discussion
under Sec. Sec. 226.19(f) (establishment or non-establishment of
escrow account at consummation) and 226.20(d) (cancellation of escrow
account after consummation).
Existing comment App. G and H-1 discusses changes that may be made
to the model forms and clauses. The comment also lists the models to
which formatting changes may not be made because the disclosures must
be made in a form substantially similar to that in the models to retain
the safe harbor from liability. The Board is proposing to add Model
Forms H-24 (establishment of escrow account at consummation), H-25
(non-establishment of escrow account at consummation), and H-26
(cancellation of an escrow account after consummation) to the list of
forms to which formatting changes may not be made. As discussed in more
detail in the section-by-section analysis to proposed Sec.
226.19(f)(1), proposed Sec. 226.19(f)(1)(i) requires that creditors
provide the Sec. 226.19(f)(2) disclosures with the headings, content,
order, and format substantially similar to Model Form H-24 or H-25. As
discussed in more detail in the section-by-section analysis to proposed
Sec. 226.20(d)(1), proposed Sec. 226.20(d)(1)(i) requires that
servicers provide the Sec. 226.20(d)(2) disclosures with the headings,
content, order, and format substantially similar to Model Form H-26.
Appendix H--Closed-End Model Forms and Clauses
The Board is proposing to add three new model forms to Appendix H
for use in complying with the new disclosure requirements discussed
above. Appendix H to part 226 sets forth model forms, model clauses and
sample forms that may be used to comply with requirements of Regulation
Z for closed-end credit. Although use of the model forms and clauses
generally is not required, proper use is deemed to be in compliance
with the regulation with regard to those disclosures.
The proposed new model forms could be used by creditors to comply
with the disclosure requirements of proposed Sec. 226.19(f) regarding
the establishment or non-establishment of an escrow account and of
proposed Sec. 226.20(d) regarding the cancellation of an escrow
account established in connection with a closed-end transaction secured
by a first lien on real property or a dwelling. Accordingly, the Board
proposes to add Model Form H-24 Establishment of Escrow Account; Model
Form H-25 Non-Establishment of Escrow Account; and Model Form H-26
Cancellation of Escrow Account to illustrate the disclosures required
under proposed Sec. Sec. 226.19(f) and 226.20(d).
The Board also proposes new comment App. H-29, which would provide
guidance on how to use Model Forms H-24 through H-26. Proposed comment
App. H-29.i states that the model forms illustrate, in the tabular
format, the disclosures required by proposed Sec. Sec. 226.19(f) and
226.20(d). Proposed comment App. H-29.ii specifies that a creditor
satisfies Sec. 226.19(f)(2) if it provides the appropriate model form
(H-24 or H-25) and a servicer satisfies Sec. 226.20(d)(2) if it
provides Model Form H-26, or a substantially similar notice, which is
properly completed with the disclosures
[[Page 11615]]
required by Sec. 226.19(f)(2) or Sec. 226.20(d)(2), respectively.
Proposed comment App. H-29.iii provides that, although creditors are
not required to use a certain paper size in disclosing the rescission
notice required under Sec. Sec. 226.19(f) and 226.20(d), Model Forms
H-24 through H-26 are designed to be printed on an 8\1/2\ x 11 inch
sheet of paper. In addition, proposed comment App. H-29.iii provides
details of the formatting techniques that were used in presenting the
information in the model forms to ensure that the information is
readable.
Proposed comment App. H-29.iv states that, while the regulation
does not require creditors or servicers to use the formatting
techniques described in comment App. H-29.iii (except for the 10-point
minimum font requirement), creditors and servicers are encouraged to
consider these techniques when deciding how to disclose information in
the notice to ensure that the information is presented in a readable
format. Proposed comment App. H-29.v clarifies that creditors and
servicers may use color, shading and similar graphic techniques with
respect to the notice, so long as the notice remains substantially
similar to the model forms in Appendix H.
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 collection of information that is
required by this proposed rule is found in 12 CFR part 226. The Board
may not conduct or sponsor, and an organization is not required to
respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is [7100-0199].
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board
does not collect any information, no issue of confidentiality arises.
The respondents/recordkeepers are creditors and other entities subject
to Regulation Z.
TILA and Regulation Z are intended to ensure effective disclosure
of the costs and terms of credit to consumers. For open-end credit,
creditors are required to, among other things, disclose information
about the initial costs and terms and to provide periodic statements of
account activity, notice of changes in terms, and statements of rights
concerning billing error procedures. Regulation Z requires specific
types of disclosures for credit and charge card accounts and home
equity plans. For closed-end loans, such as mortgage and installment
loans, cost disclosures are required to be provided prior to
consummation. Special disclosures are required in connection with some
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 twenty-four
months, Sec. 226.25, but Regulation Z identifies only a few specific
types of records that must be retained.\3\
---------------------------------------------------------------------------
\3\ See comments 25(a)-3 and -4.
---------------------------------------------------------------------------
Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the state member banks and other
creditors supervised by the Federal Reserve that engage in consumer
credit activities covered by Regulation Z and, therefore, are
respondents under the PRA. Appendix I of Regulation Z defines the
Federal Reserve-regulated institutions as: State member banks, branches
and agencies of foreign banks (other than Federal branches, Federal
agencies, and insured state branches of foreign banks), commercial
lending companies owned or controlled by foreign banks, and
organizations operating under section 25 or 25A of the Federal Reserve
Act. Other Federal agencies account for the paperwork burden imposed on
the entities for which they have administrative enforcement authority.
The current total annual burden to comply with the provisions of
Regulation Z is estimated to be 1,497,362 hours for the 1,138 Federal
Reserve-regulated institutions that are deemed to be respondents for
the purposes 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
Board provides model forms, which are appended to the regulation.
As discussed in the preamble, the Board proposes the addition of
format, timing, and content requirements for the new disclosures
regarding escrow accounts for closed-end mortgages secured by a first
lien on real property or a dwelling that shall be provided three
business days before consummation or before closure of an escrow
account. The proposed rule would impose a one-time increase in the
total annual burden under Regulation Z for all respondents regulated by
the Federal Reserve by 45,520 hours, from 1,497,362 to 1,542,882 hours.
In addition, the Board estimates that, on a continuing basis, the
proposed rule would increase the total annual burden by 109,248 hours
from 1,497,362 to 1,606,610 hours.\4\
---------------------------------------------------------------------------
\4\ The burden estimate for this rulemaking does not include the
burden addressing changes to implement the following provisions
announced in separate rulemakings:
1. Closed-End Mortgages (Docket No. R-1366) (74 FR 43232);
2. Home-Equity Lines of Credit (Docket No. R-1367) (74 FR
43428); or
3. Mortgage Disclosure Improvement Act (Docket No. R-1366).
---------------------------------------------------------------------------
The Board estimates that the 1,138 respondents regulated by the
Federal Reserve would take, on average, 40 hours (one business week) to
update their systems and internal procedure manuals and to provide
training for relevant staff to comply with the new disclosure
requirements in Sec. Sec. 226.19(f) and 226.20(d). This one-time
revision will increase the burden by 45,520 hours. On a continuing
basis, the Board estimates that 1,138 respondents regulated by the
Federal Reserve will take, on average, 8 hours a month to comply with
the new disclosure requirements and that the new requirements will
increase the ongoing burden by 109,248 hours from 304,756 to 353,276
hours. To ease the burden and cost of complying with the new
requirements under Regulation Z, the Board is adding several model
forms to Appendix H.
The total estimated burden increase, as well as the estimates of
the burden increase associated with each major section of the proposed
rule as set forth below, represents averages for all respondents
regulated by the Federal Reserve. The Board expects that the amount of
time required to implement each of the proposed changes for a given
institution may vary based on the size and complexity of the
respondent.
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
[[Page 11616]]
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 would be approximately
21,813,445 hours. The proposed rule would impose a one-time increase in
the estimated annual burden for such institutions by 648,000 hours to
22,461,445 hours. On a continuing basis the proposed rule would impose
an increase in the estimated annual burden by 1,555,200 to 23,368,645
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 proposed collection of
information is necessary for the proper performance of the Board's
functions; including whether the information has practical utility; (2)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (3) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
Comments on the collection of information should be sent to Cynthia
Ayouch, Acting Federal Reserve Board Clearance Officer, Division of
Research and Statistics, Mail Stop 95-A, Board of Governors of the
Federal Reserve System, Washington, DC 20551, with copies of such
comments sent to the Office of Management and Budget, Paperwork
Reduction Project ([7100-0199]), Washington, DC 20503.
VI. Regulatory Flexibility Act
In accordance with section 3(a) of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601-612, the Board is publishing an initial regulatory
flexibility analysis for the proposed amendments to Regulation Z. The
RFA requires an agency either to provide an initial regulatory
flexibility analysis with a proposed rule or to certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. Under regulations issued by the
Small Business Administration (SBA), an entity is considered ``small''
if it has $175 million or less in assets for banks and other depository
institutions, and $7 million or less in revenues for non-bank mortgage
lenders and loan servicers.\5\
---------------------------------------------------------------------------
\5\ 13 CFR 121.201; see also SBA, 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.
---------------------------------------------------------------------------
Based on its analysis and for the reasons stated below, the Board
believes that this proposed rule will have a significant economic
impact on a substantial number of small entities. A final regulatory
flexibility analysis will be conducted after consideration of comments
received during the public comment period. The Board requests public
comment in the following areas.
A. Reasons for the Proposed Rule
Congress enacted TILA based on findings that economic stability
would be enhanced and competition among consumer credit providers would
be strengthened by the informed use of credit resulting from consumers'
awareness of the cost of credit. One of the stated purposes of TILA is
providing a meaningful disclosure of credit terms to enable consumers
to compare credit terms available in the marketplace more readily and
avoid the uninformed use of credit. 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.
Congress enacted Sections 1461 and 1462 of the Dodd-Frank Act as
amendments to TILA. As amended, TILA requires the establishment of
escrow accounts for certain transactions, provides for certain
exemptions from the requirement, establishes minimum periods for which
such required escrow accounts must be maintained, and requires certain
disclosures relating to escrow accounts. The proposed amendments to
Regulation Z would implement those requirements. These amendments are
proposed in furtherance of the Board's responsibility to prescribe
regulations to carry out the purposes of TILA, including promoting
consumers' awareness of the cost of credit and their informed use
thereof.
B. Statement of Objectives and Legal Basis
Part IV of the SUPPLEMENTARY INFORMATION contains a detailed
statement of the proposed rule's objectives and legal basis. In
summary, the proposed amendments to Regulation Z are intended (1) to
implement the definition of ``higher-priced mortgage loan'' and the
requirement that creditors establish escrow accounts for such loans, in
Sec. Sec. 226.45(a) and 226.45(b)(1); (2) to provide exemptions from
the escrow requirement for loans secured by shares in a cooperative,
for insurance premiums for loans secured by dwellings in condominiums,
planned-unit developments, and similar arrangements, and for loans made
by certain small creditors that operate predominantly in rural or
underserved areas, in Sec. 226.45(b)(2); (3) to revise the rules
setting the minimum durations for which required escrow accounts must
be maintained, in Sec. 226.45(b)(3); and (4) to require that creditors
provide consumers with certain disclosures regarding escrow accounts,
in Sec. Sec. 226.19(f) and 226.20(d). All of these proposed provisions
are pursuant to amendments to TILA adopted by the Dodd-Frank Act. The
legal basis for the proposed rule is in TILA Sections 105(a), 105(f),
and 129D. 15 U.S.C. 1604(a), 1604(f), and 1638D.
C. Description of Small Entities to Which the Proposed Rule Would Apply
The proposed regulations would apply to all institutions and
entities that engage in originating or extending home-secured credit,
as well as servicers of these loans. The Board is not aware of a
reliable source for the total number of small entities likely to be
affected by the proposal, and the credit provisions of TILA and
Regulation Z have broad applicability to individuals and businesses
that originate, extend, and service even small numbers of home-secured
credit. See Sec. 226.1(c)(1).\6\ All small entities that originate,
extend, or service closed-end loans secured by real property or a
dwelling potentially could be subject to at least some aspects of the
proposed rules.
---------------------------------------------------------------------------
\6\ Regulation Z generally applies to ``each individual or
business that offers or extends credit when four conditions are met:
(i) The credit is offered or extended to consumers; (ii) the
offering or extension of credit is done regularly, (iii) the credit
is subject to a finance charge or is payable by a written agreement
in more than four installments, and (iv) the credit is primarily for
personal, family, or household purposes.'' Sec. 226.1(c)(1).
---------------------------------------------------------------------------
The Board can, however, identify through data from Reports of
Condition and Income (``Call Reports'') approximate numbers of small
depository institutions that would be subject to the proposed rules.
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
[[Page 11617]]
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.
Certain parts of the proposed rule would also apply to mortgage
servicers. The Board is not aware, however, of a source of data for the
number of small mortgage servicers. The available data are not
sufficient for the Board realistically to estimate the number of
mortgage servicers that would be subject to the proposed rules and that
are small as defined by SBA.
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The compliance requirements of the proposed rules are described in
part III of the SUPPLEMENTARY INFORMATION. The effect of the proposed
revisions to Regulation Z on small entities is unknown. Some small
entities would be required, among other things, to implement the new
disclosures and processes for delivery thereof, as well as their
systems for determining which transactions are subject to the escrow
requirement, to comply with the revised rules. The precise costs to
small entities of updating their systems and disclosures are difficult
to predict. These costs will depend on a number of unknown factors,
including, among other things, the specifications of the current
systems used by such entities to prepare and provide disclosures and to
administer and maintain escrow accounts.
Small entities would have broader exemptions from the escrow
requirement potentially available, thus enjoying cost savings. The
proposed rule also would provide creditors with additional guidance on
the determination of the average prime offer rate for a comparable
transaction and clarification of the higher-priced mortgage loan
protections' applicability to construction-permanent financing,
accordingly lowering compliance costs for small entities.
The proposed rule would require creditors to determine whether a
loan is a higher-priced mortgage loan by comparing the loan's rate
without third-party fees (the ``transaction coverage rate'') to the
average prime offer rate. The transaction coverage rate would be
calculated using the loan's interest rate and the points and any other
origination charges the creditor keeps for itself, and thus would be
more closely comparable to the average prime offer rate. The precise
costs to small entities of updating their systems to implement this
change are difficult to predict. The proposal would reduce potential
compliance burden for all entities, including small entities, by
ensuring that prime loans are not erroneously classified as higher-
priced mortgage loans subject to the special protections for such
loans.
The Board believes that costs of the proposed rule as a whole will
have a significant economic effect on small entities, including small
mortgage creditors and servicers. The Board seeks information and
comment on any costs, compliance requirements, or changes in operating
procedures arising from the application of the proposed rules to small
businesses.
E. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
Duplicative and Conflicting Federal Rules
The Board has not identified any Federal rules that conflict with
the proposed revisions to Regulation Z.
Overlap With RESPA
Regulation X, which implements the Real Estate Settlement
Procedures Act (RESPA), includes rules governing the administration of
escrow accounts and requires certain periodic escrow analyses and
delivery of escrow account statements to consumers. See 24 CFR 3500.17.
The escrow account statements required by Regulation X must include
dollar amounts representing, among other things, the amount required
initially to fund the escrow account, the periodic payment amount
required to maintain the escrow account, and the annual amounts
estimated to be paid out of the account for items covered by the escrow
account such as taxes and insurance. These items overlap with dollar
amounts that would be required as part of the disclosures this proposed
rule would adopt. To ease compliance, the proposed rule would provide
that creditors comply with the requirement to disclose those amounts if
they use the same amounts determined in accordance with Regulation X.
F. Identification of Duplicative, Overlapping, or Conflicting State
Laws
State Equivalents to TILA and HOEPA
Many states regulate consumer credit through statutory disclosure
schemes similar to TILA. Under TILA Section 111, the proposed rules
would not preempt such state laws except to the extent they are
inconsistent with the proposal's requirements. 15 U.S.C. 1610.
The Board also is aware that many states regulate ``high-cost'' or
``high-priced'' mortgage loans under laws that resemble HOEPA. Many of
these state laws involve coverage tests that partly depend on the APR
of the transaction. The proposed rules would overlap with these laws by
requiring lenders to determine whether a loan is a higher-priced
mortgage loan by comparing the loan's transaction coverage rate to the
average prime offer rate. Such state laws would not be affected,
however, by the proposed transaction coverage rate approach to coverage
of the Board's protections for higher-priced mortgage loans.
State Laws Regulating Escrow Accounts
Some state laws deal with escrow account administration, including
laws that require the payment to consumers of interest on required
escrow accounts and laws that prohibit a creditor from requiring an
escrow account under specified circumstances. The proposed rules would
not preempt such state laws except to the extent they are inconsistent
with the proposal's requirements. Id.
The Board seeks comment regarding any state or local statutes or
regulations that would duplicate, overlap, or conflict with the
proposed rules.
G. Discussion of Significant Alternatives
The steps the Board has taken to minimize the economic impact and
compliance burden on small entities, including the factual, policy, and
legal reasons for selecting the alternatives adopted and why each one
of the other significant alternatives was not accepted, are described
above in the SUPPLEMENTARY INFORMATION. The Board has provided a
different standard for defining higher-priced mortgage loans to
correspond more accurately to mortgage market conditions and to exclude
from the definition some prime loans that might otherwise have been
classified as higher-priced. The Board believes that this standard will
decrease the economic impact of the proposed rules on small entities by
limiting their
[[Page 11618]]
compliance costs for prime loans that the Board does not intend to
cover under the higher-priced mortgage loan rules. In addition, as
noted above, the Board has proposed to provide that creditors may
comply with certain disclosure content requirements by using the same
amounts determined for purposes of overlapping RESPA disclosure
requirements. The Board expects that this approach will minimize
compliance burden on small entities by relying on another disclosure
requirement with which they already must comply.
The Board welcomes comments on any significant alternatives,
consistent with the requirements of TILA, that would minimize the
impact of the proposed rules on small entities.
List of Subjects in 12 CFR Part 226
Advertising, Consumer protection, Federal Reserve System,
Mortgages, Reporting and recordkeeping requirements, Truth in lending.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
revisions. New language is shown inside bold arrows, and language that
would be deleted is set off with bold brackets.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend Regulation Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
1. The authority citation for part 226 continues to read as
follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and
1639(l); Pub. L. 111-24 Sec. 2, 123 Stat. 1734.
Subpart A--General
2. Section 226.2 is amended by revising paragraph (a)(6) to read as
follows:
Sec. 226.2 Definitions and rules of construction.
(a) * * *
(6) Business day means a day on which the creditor's offices are
open to the public for carrying on substantially all of its business
functions. However, for purposes of rescission under Sec. Sec. 226.15
and 226.23, and for purposes of Sec. 226.19(a)(1)(ii), Sec.
226.19(a)(2), [rtrif]Sec. 226.19(f)(4), Sec. 226.20(d)(4), [ltrif]
Sec. 226.31, and Sec. 226.46(d)(4), the term means all calendar days
except Sundays and the legal public holidays specified in 5 U.S.C.
6103(a), such as New Year's Day, the Birthday of Martin Luther King,
Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
* * * * *
Subpart C--Closed-End Credit
3. Section 226.19 is amended by revising the heading and adding
paragraph (f) to read as follows:
Sec. 226.19 [lsqbb]Certain mortgage and variable-rate
transactions.[rsqbb][rtrif]Certain transactions secured by real
property or a dwelling.[ltrif]
* * * * *
[rtrif](f) Disclosures for escrow accounts. For a closed-end
transaction secured by a first lien on real property or a dwelling, the
creditor shall disclose the information about escrow accounts as
specified in paragraph (f)(2) of this section in accordance with the
format requirements in paragraph (f)(1) of this section and the timing
requirements in paragraph (f)(4) of this section. For purposes of this
Sec. 226.19(f), the term ``escrow account'' has the same meaning as
under Regulation X (24 CFR 3500.17(b)), which implements the Real
Estate Settlement Procedures Act (RESPA), and is subject to any
interpretations by the Department of Housing and Urban Development
(HUD).
(1) Format requirements--(i) General. The disclosures required by
paragraph (f)(2) of this section shall be provided in a minimum 10-
point font, grouped together on the front side of a one-page document,
separate from all other material, with the headings, content, order,
and format substantially similar to Model Form H-24 in Appendix H to
this part, if an escrow account is established, or Model Form H-25 in
Appendix H to this part, if an escrow account is not established.
(ii) Disclosure of heading. The disclosure of the heading required
by paragraph (f)(2)(i) or (ii) of this section shall be more
conspicuous than, and shall precede, the other disclosures required by
paragraph (f)(2)(i) or (ii) of this section and shall be located
outside the table, as required by paragraph (f)(1)(iii) of this
section, containing those other disclosures.
(iii) Form of disclosures; tabular format. The creditor shall
provide the disclosures required by paragraphs (f)(2)(i)(A) through (D)
or (f)(2)(ii)(A) through (G) of this section in the form of a table.
The table shall contain only the information required or permitted by
paragraphs (f)(2)(i)(A) through (D) or (f)(2)(ii)(A) through (G) of
this section, as applicable. The table containing the disclosures
required by paragraphs (f)(2)(i)(A) through (D) of this section shall
consist of four rows while the table containing the disclosures
required by paragraphs (f)(2)(ii)(A) through (G) of this section shall
consist of no more than seven rows.
(iv) Question and answer format. The creditor shall provide the
disclosures required by paragraphs (f)(2)(i)(A) through (D) or
(f)(2)(ii)(A) through (G) of this section in the format of a question
and answer and in the order listed, as applicable.
(v) Highlighting. The dollar amounts required to be disclosed in
paragraphs (f)(2)(i)(B), (f)(2)(i)(D), and (f)(2)(ii)(D) of this
section and the disclosure required by paragraph (f)(2)(ii)(E) of this
section shall appear in bold-face font.
(2) Content requirements--(i) Establishment of escrow account. If
an escrow account will be established before the end of the 45-day
period following consummation of a transaction subject to this Sec.
226.19(f), the creditor shall clearly and conspicuously disclose, under
the heading ``Information About Your Mortgage Escrow Account,'' the
following information:
(A) Purpose of notice. A statement that the notice is to inform the
consumer that the consumer's mortgage with the creditor, which shall be
identified by name, will have an escrow account.
(B) Explanation of escrow account. A statement that an escrow
account is an account that is used to pay home-related costs such as
property taxes and insurance together with a statement that an escrow
account is sometimes called an ``impound'' or ``trust'' account. A
statement that the consumer will pay into the escrow account over time
and that the creditor will take money from the account to pay costs as
needed. A statement of the estimated dollar amount that the consumer's
home-related costs will total for the first year of the mortgage.
(C) Risk of not having escrow account. A statement that, if the
consumer did not have an escrow account, the consumer would be
responsible for directly paying home-related costs through potentially
large semi-annual or annual payments.
(D) Funding of escrow account. A statement of the dollar amount
that the consumer will be required to deposit at closing to initially
fund the escrow account. A statement of the additional dollar amount
that the consumer's regular mortgage payments will include for deposit
into the escrow account. A statement that the amount of this escrow
payment may change in the future.
[[Page 11619]]
(ii) Non-establishment of escrow account. If an escrow account will
not be established before the end of the 45-day period following
consummation of a transaction subject to this Sec. 226.19(f), the
creditor shall clearly and conspicuously disclose, under the heading
``Required Direct Payment of Property Taxes and Insurance,'' the
following information:
(A) Purpose of notice. A statement that the notice is to inform the
consumer that the consumer's mortgage with the creditor, which shall be
identified by name, will not have an escrow account and to explain the
risk of not having an escrow account.
(B) Explanation of escrow account. A statement that an escrow
account is an account that is used to pay home-related costs such as
property taxes and insurance together with a statement that an escrow
account is sometimes called an ``impound'' or ``trust'' account. A
statement that the borrower pays into an escrow account over time and
that the creditor takes money from the account to pay costs as needed.
(C) Reason why mortgage will not have an escrow account. As
applicable, a statement that the consumer was given the option of
having an escrow account but the consumer told the creditor that the
consumer did not want one, or a statement that the creditor does not
offer the option of having an escrow account.
(D) Fee for choosing not to have escrow account. If the consumer
has chosen not to have an escrow account, a statement of the dollar
amount of any fee that the consumer will be charged for choosing not to
have an escrow account, or a statement that the consumer will not be
charged a fee. If the creditor does not offer the option of having an
escrow account, the creditor shall omit this disclosure from the table.
(E) Risk of not having escrow account. A statement that the
consumer will be responsible for paying home-related costs through
potentially large semi-annual or annual payments.
(F) Consequences of failure to pay home-related costs. A statement
that, if the consumer does not pay the applicable home-related costs,
the creditor could require an escrow account on the mortgage or add the
costs to the loan balance. A statement that the creditor could also
require the consumer to pay for insurance that the creditor buys on the
consumer's behalf and a statement that this insurance likely would be
more expensive and provide fewer benefits than traditional homeowner's
insurance.
(G) Option to establish escrow account. The telephone number that
the consumer can use to request an escrow account and the latest date
by which the consumer can make the request. If the creditor does not
offer the option of having an escrow account, the creditor shall omit
this disclosure from the table.
(3) Optional information. The creditor may, at its option, include
the creditor's name or logo, or the consumer's name, property address,
or loan number on the disclosure notice required by this Sec.
226.19(f), outside of the table described in Sec. 226.19(f)(1)(iii)
that contains the required content of Sec. 226.19(f)(2).
(4) Waiting period for disclosures. The creditor shall provide the
disclosures required by paragraph (f)(2) of this section so that the
consumer receives them no later than three business days before
consummation.
(5) Timing of receipt. If the disclosures required by paragraph
(f)(2) of this section are mailed to the consumer or delivered by means
other than in person, the consumer is considered to have received the
disclosures three business days after they are mailed or delivered.
(6) Consumer's waiver of waiting period before consummation. The
consumer may modify or waive the three-business-day waiting period
required by paragraph (f)(4) of this section, after receiving the
disclosures required by paragraph (f)(2) of this section, if the
consumer determines that the loan proceeds are needed before the
waiting period ends to meet a bona fide personal financial emergency.
To modify or waive a waiting period, each consumer primarily liable on
the obligation shall give the creditor a dated, written statement that
describes the emergency, specifically modifies or waives the waiting
period, and bears the consumer's signature. Printed forms for this
purpose are prohibited.[ltrif]
4. Section 226.20 is amended by adding paragraph (d) to read as
follows:
Sec. 226.20 Subsequent disclosure requirements.
* * * * *
[rtrif](d) Cancellation of escrow account. For a closed-end
transaction secured by a first lien on real property or a dwelling for
which an escrow account was established and will be cancelled, the
creditor or servicer shall disclose the information about escrow
accounts as specified in paragraph (d)(2) of this section in accordance
with the format requirements in paragraph (d)(1) of this section and
the timing requirements in paragraph (d)(4) of this section. For
purposes of this Sec. 226.20(d), the term ``escrow account'' and the
term ``servicer'' have the same respective meanings as under Sec. Sec.
3500.17(b) and 3500.2(b) of Regulation X, which implements the Real
Estate Settlement Procedures Act (RESPA), and is subject to any
interpretations by the Department of Housing and Urban Development
(HUD).
(1) Format requirements--(i) General. The disclosures required by
paragraph (d)(2) of this section shall be provided in a minimum 10-
point font, grouped together on the front side of a one-page document,
separate from all other material, with the headings, content, order,
and format substantially similar to Model Form H-26 in Appendix H to
this part.
(ii) Disclosure of heading. The disclosure of the heading required
by paragraph (d)(2) of this section shall be more conspicuous than, and
shall precede, the other disclosures required by paragraph (d)(2) of
this section and shall be located outside the table, as required by
paragraph (d)(1)(iii) of this section, containing those other
disclosures.
(iii) Form of disclosures; tabular format. The creditor or servicer
shall provide the disclosures required by paragraphs (d)(2)(i) through
(vii) of this section in the form of a table. The table shall contain
only the information required or permitted by paragraphs (d)(2)(i)
through (vii) of this section and shall consist of no more than seven
rows.
(iv) Question and answer format. The creditor or servicer shall
provide the disclosures required by paragraphs (d)(2)(i) through (vii)
of this section in the format of a question and answer and in the order
listed.
(v) Highlighting. The dollar amount required to be disclosed in
paragraph (d)(2)(iv) of this section and the disclosure required by
paragraph (d)(2)(v) of this section shall appear in bold-face font.
(2) Content requirements. If an escrow account was established in
connection with consummation of a transaction subject to this Sec.
226.20(d) and the escrow account will be cancelled, the creditor or
servicer shall clearly and conspicuously disclose, under the heading
``Required Direct Payment of Property Taxes and Insurance,'' the
following information:
(i) Purpose of notice. A statement that the notice is to inform the
consumer that the escrow account on the consumer's mortgage with the
creditor or servicer, which shall be identified by name, is being
closed and to explain the risk of not having an escrow account.
(ii) Explanation of escrow account. A statement that an escrow
account is an account that is used to pay home-related costs such as
property taxes and
[[Page 11620]]
insurance together with a statement that an escrow account is sometimes
called an ``impound'' or ``trust'' account. A statement that the
consumer pays into an escrow account over time and that the creditor or
the servicer takes money from the account to pay costs as needed.
(iii) Reason why mortgage will not have an escrow account. A
statement that the consumer had an escrow account but, as applicable,
the consumer asked to close it or the creditor or servicer
independently decided to cancel it.
(iv) Fee for closing escrow account. If the consumer has asked the
creditor or servicer to close the escrow account, a statement of the
dollar amount of any fee that the consumer will be charged in
connection with the closure, or a statement that the consumer will not
be charged a fee. If the creditor or servicer independently decided to
cancel the escrow account, rather than agreeing to close it at the
request of the consumer, and does not charge a fee in connection with
the cancellation, the creditor or servicer shall omit this disclosure
from the table.
(v) Risk of not having escrow account. A statement that the
consumer will be responsible for paying home-related costs through
potentially large semi-annual or annual payments.
(vi) Consequences of failure to pay home-related costs. A statement
that, if the consumer does not pay the applicable home-related costs,
the creditor or servicer could require an escrow account on the
mortgage or add the costs to the loan balance. A statement that the
creditor or servicer could also require the consumer to pay for
insurance that the creditor or servicer buys on the consumer's behalf
and a statement that this insurance likely would be more expensive and
provide fewer benefits than traditional homeowner's insurance.
(vii) Option to keep escrow account. As applicable, the telephone
number that the consumer can use to request that the escrow account be
kept open and the latest date by which the consumer can make the
request, or a statement that the creditor or servicer does not offer
the option of keeping the escrow account.
(3) Optional information. The creditor or servicer providing the
disclosure notice may, at its option, include its name or logo, or the
consumer's name, property address, or loan number on the disclosure
notice required by this Sec. 226.20(d), outside of the table described
in Sec. 226.20(d)(1)(iii) that contains the required content of Sec.
226.20(d)(2).
(4) Waiting period for disclosures. The creditor or servicer shall
provide the disclosures required by paragraph (d)(2) of this section so
that the consumer receives them no later than three business days
before closure of the escrow account.
(5) Timing of receipt. If the disclosures required by paragraph
(d)(2) of this section are mailed to the consumer or delivered by means
other than in person, the consumer is considered to have received the
disclosures three business days after they are mailed or
delivered.[ltrif]
Subpart E--Special Rules for Certain Home Mortgage Transactions
5. Section 226.34 is amended by revising paragraph (a)(4)(i) to
read as follows:
Sec. 226.34 Prohibited acts or practices in connection with credit
subject to Sec. 226.32.
(a) * * *
(4) * * *
(i) Mortgage-related obligations. For purposes of this paragraph
(a)(4), mortgage-related obligations are expected property taxes,
premiums for mortgage-related insurance required by the creditor as set
forth in [rtrif]Sec. 226.45(b)(1),[ltrif] [Sec. 226.35(b)(3)(i),] and
similar expenses.
* * * * *
6. Section 226.35 is amended by revising paragraph (b)(3) to read
as follows:
Sec. 226.35 Prohibited acts or practices in connection with higher-
priced mortgage loans.
* * * * *
(b) * * *
(3) [rtrif][Reserved][ltrif] [lsqbb]Escrows--(i) Failure to escrow
for property taxes and insurance. Except as provided in paragraph
(b)(3)(ii) of this section, a creditor may not extend a loan secured by
a first lien on a principal dwelling unless an escrow account is
established before consummation for payment of property taxes and
premiums for mortgage-related insurance required by the creditor, such
as insurance against loss of or damage to property, or 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.
(ii) Exemptions for loans secured by shares in a cooperative and
for certain condominium units--(A) Escrow accounts need not be
established for loans secured by shares in a cooperative; and
(B) Insurance premiums described in paragraph (b)(3)(i) of this
section need not be included in escrow accounts for loans secured by
condominium units, where the condominium association has an obligation
to the condominium unit owners to maintain a master policy insuring
condominium units.
(iii) Cancellation. A creditor or servicer may permit a consumer to
cancel the escrow account required in paragraph (b)(3)(i) of this
section only in response to a consumer's dated written request to
cancel the escrow account that is received no earlier than 365 days
after consummation.
(iv) Definition of escrow account. For purposes of this section,
``escrow account'' shall have the same meaning as in 24 CFR 3500.17(b)
as amended.[rsqbb]
* * * * *
7. Section 226.45 is added to read as follows:
[rtrif]Sec. 226.45 Escrow requirements for higher-priced mortgage
loans.
(a) Higher-priced mortgage loans--(1) For purposes of this section,
except as provided in paragraph (a)(3) of this section, a higher-priced
mortgage loan is a consumer credit transaction secured by the
consumer's principal dwelling that has a transaction coverage rate that
exceeds the average prime offer rate for a comparable transaction as of
the date the interest rate is set:
(i) By 1.5 or more percentage points for a loan secured by a first
lien on a dwelling, except as provided in paragraph (a)(1)(ii) of this
section;
(ii) By 2.5 or more percentage points for a loan secured by a first
lien on a dwelling, if the principal balance at consummation 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; or
(iii) By 3.5 or more percentage points for a loan secured by a
subordinate lien on a dwelling.
(2) Definitions--(i) ``Transaction coverage rate'' means the rate
used to determine whether a transaction is a higher-priced mortgage
loan subject to this section. The transaction coverage rate is
determined in accordance with the applicable rules of this part for the
calculation of the annual percentage rate for a closed-end transaction,
except that the prepaid finance charge for purposes of calculating the
transaction coverage rate shall include only the amount of the prepaid
finance charge that will be retained by the creditor, a mortgage
broker, or an affiliate of either.
(ii) ``Average prime offer rate'' means an annual percentage rate
that is derived from average interest rates, points, and other loan
pricing terms currently offered to consumers by a representative sample
of creditors for mortgage
[[Page 11621]]
transactions that have low-risk pricing characteristics. The Board
publishes average prime offer rates for a broad range of types of
transactions in a table updated at least weekly as well as the
methodology the Board uses to derive these rates.
(3) Notwithstanding paragraph (a)(1) of this section, the term
``higher-priced mortgage loan'' does not include a transaction to
finance the initial construction of a dwelling, a temporary or
``bridge'' loan with a term of twelve months or less, such as a loan to
purchase a new dwelling where the consumer plans to sell a current
dwelling within twelve months, a reverse-mortgage transaction subject
to Sec. 226.33, or a home equity line of credit subject to Sec.
226.5b.
(b) Escrow accounts--(1) Requirement to escrow for property taxes
and insurance. Except as provided in paragraph (b)(2) of this section,
a creditor may not extend a higher-priced mortgage loan secured by a
first lien on a consumer's principal dwelling unless an escrow account
is established before consummation for payment of property taxes and
premiums for mortgage-related insurance required by the creditor, such
as insurance against loss of or damage to property, or 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. For purposes of this Sec. 226.45(b), the term
``escrow account'' has the same meaning as under Regulation X (24 CFR
3500.17(b)), which implements the Real Estate Settlement Procedures Act
(RESPA), and is subject to any interpretations by the Department of
Housing and Urban Development (HUD).
(2) Exemptions--(i) Escrow accounts need not be established for
loans secured by shares in a cooperative.
(ii) Insurance premiums described in paragraph (b)(1) of this
section need not be included in escrow accounts for loans secured by
dwellings in condominiums, planned unit developments, or similar
arrangements in which dwelling ownership requires participation in a
governing association, where the governing association has an
obligation to the dwelling owners to maintain a master policy insuring
all dwellings.
(iii) Except as provided in paragraph (b)(2)(v) of this section,
paragraph (b)(1) of this section does not apply to a transaction if, at
the time of consummation:
(A) During the preceding calendar year, the creditor extended more
than 50% of its total first-lien higher-priced mortgage loans in
counties designated by the Board as ``rural or underserved'' under
paragraph (b)(2)(iv) of this section;
(B) During either of the preceding two calendar years, the creditor
and its affiliates together originated and retained the servicing
rights to 100 or fewer loans secured by a first lien on real property
or a dwelling; and
(C) Neither the creditor nor its affiliate maintains an escrow
account of the type described in paragraph (b)(1) of this section for
any extension of consumer credit secured by real property or a dwelling
that the creditor or its affiliate currently services.
(iv) For purposes of paragraph (b)(2)(iii)(A) of this section:
(A) A county is ``rural'' during a calendar year if it is not in a
metropolitan statistical area or a micropolitan statistical area, as
those terms are defined by the U.S. Office of Management and Budget,
and:
(1) it is not adjacent to any metropolitan area or micropolitan
area; or
(2) it is adjacent to a metropolitan area with fewer than one
million residents or adjacent to a micropolitan area, and it contains
no town with 2500 or more residents.
(B) A county is ``underserved'' during a calendar year if no more
than two creditors extend consumer credit five or more times secured by
a first lien on real property or a dwelling during the calendar year in
the county.
(v) Notwithstanding paragraph (b)(2)(iii) of this section, the
requirement to establish an escrow account in paragraph (b)(1) of this
section applies to a first-lien higher-priced mortgage loan that, at
consummation, is subject to a commitment to be acquired by a person
that does not satisfy the conditions in paragraph (b)(2)(iii) of this
section.
(3) Cancellation--(i) General. Except as provided in paragraph
(b)(3)(ii) of this section, a creditor or servicer may cancel an escrow
account required in paragraph (b)(1) of this section only upon the
earlier of:
(A) Termination of the underlying debt obligation; or
(B) Receipt no earlier than five years after consummation of a
consumer's request to cancel the escrow account.
(ii) Delayed cancellation. A creditor or servicer shall not cancel
an escrow account pursuant to a consumer's request described in
paragraph (b)(3)(i)(B) of this section unless the following conditions
are satisfied:
(A) At least 20% of the original value of the property securing the
underlying debt obligation is unencumbered; and
(B) The consumer currently is not delinquent or in default on the
underlying debt obligation.
(c) [Reserved]
(d) Evasion; open-end credit. In connection with credit secured by
a consumer's principal dwelling that does not meet the definition of
open-end credit in Sec. 226.2(a)(20), a creditor shall not structure a
home-secured loan as an open-end plan to evade the requirements of this
section.[ltrif]
8. Appendix H to part 226 is amended by:
A. Adding entries for H-24, H-25, and H-26 in the table of contents
at the beginning of the appendix; and
B. Adding new Model Forms H-24, H-25, and H-26 in numerical order.
Appendix H to Part 226--Closed-End Model Forms and Clauses
[rtrif]H-24--Establishment of Escrow Account Model Form (Sec.
226.19(f)(2)(i))
H-25--Non-Establishment of Escrow Account Model Form (Sec.
226.19(f)(2)(ii))
H-26--Cancellation of Escrow Account Model Form (Sec.
226.20(d))[ltrif]
* * * * *
[rtrif]H-24--Establishment of Escrow Account Model Form (Sec.
226.19(f)(2)(i))
BILLING CODE 6210-01-P
[[Page 11622]]
[GRAPHIC] [TIFF OMITTED] TP02MR11.003
[[Page 11623]]
[GRAPHIC] [TIFF OMITTED] TP02MR11.004
[[Page 11624]]
[GRAPHIC] [TIFF OMITTED] TP02MR11.005
[ltrif]
BILLING CODE 6210-01-C
9. In Supplement I to Part 226:
A. Under Section 226.2--Definitions and Rules of Construction, 2(a)
Definitions, 2(a)(6) Business day, paragraph 2 is revised.
B. Under Section 226.19--Certain Mortgage and Variable-Rate
Transactions, the heading is revised and 19(f) Disclosures for escrow
accounts is added.
C. Under Section 226.20--Subsequent Disclosure Requirements, new
20(d) Cancellation of escrow account is added.
D. Under Section 226.34--Prohibited Acts or Practices in Connection
with Credit Subject to Sec. 226.32, 34(a) Prohibited acts or practices
for loans subject to Sec. 226.32, 34(a)(4) Repayment
[[Page 11625]]
ability, 34(a)(4)(i) Mortgage-related obligation, paragraph 1 is
revised.
E. Under Section 226.35--Prohibited Acts or Practices in Connection
With Higher-Priced Mortgage Loans, 35(b) Rules for higher-priced
mortgage loans, the heading 35(b)(3) Escrows, the heading Paragraph
35(b)(3)(i) and paragraphs 1 through 3 thereunder, the heading
Paragraph 35(b)(3)(ii)(B) and paragraph 1 thereunder, and the heading
35(b)(3)(v) ``Jumbo'' loans and paragraphs 1 and 2 thereunder are
removed.
F. New Section 226.45--Requirements for Higher-Priced Mortgage
Loans is added.
G. Under Appendices G and H--Open-End and Closed-End Model Forms
and Clauses, paragraph 1 is revised.
H. Under Appendix H--Closed-End Model Forms and Clauses, new
paragraph 29 is added.
The revisions and additions read as follows:
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Subpart A--General
* * * * *
Section 226.2--Definitions and Rules of Construction
* * * * *
2(a) Definitions.
* * * * *
2(a)(6) Business day.
* * * * *
2. Rule for rescission, disclosures for certain mortgage
transactions, and private education loans. A more precise rule for
what is a business day (all calendar days except Sundays and the
Federal legal holidays specified in 5 U.S.C. 6103(a)) applies when
the right of rescission, the receipt of disclosures for certain
[lsqbb]dwelling-secured[rsqbb] mortgage transactions under
Sec. Sec. 226.19(a)(1)(ii), 226.19(a)(2), [rtrif]226.19(f)(4),
226.20(d)(4),[ltrif] 226.31(c), or the receipt of disclosures for
private education loans under Sec. 226.46(d)(4) is involved. Four
Federal legal holidays are identified in 5 U.S.C. 6103(a) by a
specific date: New Year's Day, January 1; Independence Day, July 4;
Veterans Day, November 11; and Christmas Day, December 25. When one
of these holidays (July 4, for example) falls on a Saturday, Federal
offices and other entities might observe the holiday on the
preceding Friday (July 3). In cases where the more precise rule
applies, the observed holiday (in the example, July 3) is a business
day.
* * * * *
Subpart C--Closed-End Credit
* * * * *
Section 226.19--[lsqbb]Certain Mortgage and Variable-Rate
Transactions[rsqbb][rtrif]Certain Transactions Secured by Real
Property or a Dwelling[ltrif]
* * * * *
[rtrif]19(f) Disclosures for escrow accounts.
1. Real property or a dwelling. The term ``real property''
includes vacant and unimproved land. The term ``dwelling'' includes
vacation and second homes and mobile homes, boats, and trailers used
as residences. See Sec. 226.2(a)(19) and related commentary for
additional guidance regarding the term ``dwelling.''
19(f)(1) Format requirements.
19(f)(1)(i) General.
1. Grouped and separate. The disclosures required by Sec.
226.19(f)(2) and any optional information permitted by Sec.
226.19(f)(3) must be grouped together on the front side of a
separate one-page document that contains no other material. The
Sec. 226.19(f)(2)(i) disclosures may not appear in the same
document as the escrow disclosures required under Sec. 226.18 or
under RESPA or Regulation X.
2. Notice must be in writing in a form that the consumer may
keep. The notice containing the disclosures required by Sec.
226.19(f)(2) and any optional information permitted by Sec.
226.19(f)(3) must be in writing in a form that the consumer may
keep. See Sec. 226.17(a).
19(f)(2) Content requirements.
1. Clear and conspicuous standard. The clear and conspicuous
standard generally requires that disclosures be in a reasonably
understandable form and readily noticeable to the consumer.
19(f)(2)(i) Establishment of escrow account.
1. Reliance on Regulation X escrow account analysis. Regulation
X, 24 CFR 3500.17(c)(2), requires the mortgage servicer to conduct
an escrow account analysis before establishing an escrow account.
Disclosures comply with the numerical content requirements of Sec.
226.19(f)(2)(i)(B) and (D) if the creditor uses the amounts derived
from the escrow account analysis to provide the total dollar amount
of estimated taxes and insurance for the initial year following
consummation, the dollar amount for the initial escrow deposit at
closing, and the additional dollar amount for escrow included in the
regular mortgage payments.
2. Escrow accounts established in connection with consumer's
delinquency or default. Neither creditors nor servicers are required
to provide the Sec. 226.19(f)(2)(i) disclosures when an escrow
account is established solely in connection with the consumer's
delinquency or default on the underlying debt obligation.
19(f)(3) Optional information.
1. Section 226.19(f)(3) lists information that the creditor may,
at its option, include on the disclosure notice outside of the table
that is required by Sec. 226.19(f)(1)(iii).
19(f)(4) Waiting period for disclosures.
1. Business day definition. For purposes of Sec. 226.19(f)(4),
``business day'' means all calendar days except Sundays and the
legal public holidays referred to in Sec. 226.2(a)(6). See comment
2(a)(6)-2.
2. Timing. The creditor must provide the disclosures required by
Sec. 226.19(f)(2) so that the consumer receives them not later than
the third business day before consummation. For example, for
consummation to occur on Thursday, June 11, the consumer must
receive the disclosures on or before Monday, June 8, assuming there
are no legal public holidays.
19(f)(5) Timing of receipt.
1. General. If the creditor delivers the disclosures required by
Sec. 226.19(f)(2) to the consumer in person, consummation may occur
any time on the third business day following the day of delivery. If
the creditor provides the disclosures required by Sec. 226.19(f)(2)
by mail, the consumer is considered to have received them three
business days after they are placed in the mail, for purposes of
determining when the three-business-day waiting period required
under Sec. 226.19(f)(4) begins. Creditors that use electronic mail
or a courier to provide disclosures may also follow this approach.
Whatever method is used to provide disclosures, creditors may rely
on documentation of receipt in determining when the three-business-
day waiting period begins.
19(f)(6) Consumer's waiver of waiting period before
consummation.
1. Procedure. A consumer may modify or waive the right to a
waiting period required by Sec. 226.19(f)(4) only after the
consumer receives the disclosures required by Sec. 226.19(f)(2).
After receiving the required disclosures, the consumer may waive or
modify the waiting period by giving the creditor a dated, written
statement that specifically waives or modifies the waiting period
and describes the bona fide personal financial emergency. A waiver
is effective only if each consumer primarily liable on the legal
obligation signs a waiver statement. Where there are multiple such
consumers, the consumers may, but need not, sign the same waiver
statement. The consumer may, but need not, include the waiver
statement that specifically waives or modifies the three-business-
day waiting period required by Sec. 226.19(f)(4) in the same
document that contains a waiver statement that specifically waives
or modifies the seven-business-day waiting period for early
disclosures or the three-business-day waiting period for corrected
disclosures required by Sec. 226.19(a)(2).
2. Bona fide personal financial emergency. To modify or waive
the waiting period required by Sec. 226.19(f)(4), there must be a
bona fide personal financial emergency that requires disbursement of
loan proceeds before the end of the waiting period. Whether there is
a bona fide personal financial emergency is determined by the facts
surrounding individual circumstances. A bona fide personal financial
emergency typically, but not always, will involve imminent loss of
or harm to a dwelling or harm to the health or safety of a natural
person. A waiver is not effective if the consumer's statement is
inconsistent with facts known to the creditor.[ltrif]
Section 226.20--Subsequent Disclosure Requirements
* * * * *
[rtrif]20(d) Cancellation of escrow account.
[[Page 11626]]
1. Real property or a dwelling. The term ``real property''
includes vacant and unimproved land. The term ``dwelling'' includes
vacation and second homes and mobile homes, boats, and trailers used
as residences. See Sec. 226.2(a)(19) and related commentary for
additional guidance regarding the term ``dwelling.''
20(d)(1) Format requirements.
20(d)(1)(i) General.
1. Grouped and separate. The disclosures required by Sec.
226.20(d)(2) and any optional information permitted by Sec.
226.20(d)(3) must be grouped together on the front side of a
separate one-page document that contains no other material.
2. Notice must be in writing in a form that the consumer may
keep. The notice containing the disclosures required by Sec.
226.20(d)(2) and any optional information permitted by Sec.
226.20(d)(3) must be in writing in a form that the consumer may
keep. See Sec. 226.17(a).
20(d)(2) Content requirements.
1. Clear and conspicuous standard. The clear and conspicuous
standard generally requires that disclosures be in a reasonably
understandable form and readily noticeable to the consumer.
2. Escrow account established in connection with consumer's
delinquency or default. Neither creditors nor servicers are required
to provide the Sec. 226.20(d)(2) disclosures when an escrow account
that was established solely in connection with the consumer's
delinquency or default on the underlying debt obligation will be
cancelled.
3. Termination of underlying debt obligation. Neither creditors
nor servicers are required to provide the Sec. 226.20(d)(2)
disclosures when the underlying debt obligation for which an escrow
account was established is terminated, including by repayment,
refinancing, rescission, and foreclosure.
20(d)(3) Optional information.
1. Section 226.20(d)(3) lists information that the creditor or
servicer may, at its option, include on the disclosure notice
outside of the table that is required by Sec. 226.20(d)(1)(iii).
20(d)(4) Waiting period for disclosures.
1. Business day definition. For purposes of Sec. 226.20(d)(4),
``business day'' means all calendar days except Sundays and the
legal public holidays referred to in Sec. 226.2(a)(6). See comment
2(a)(6)-2.
2. Timing. The creditor or servicer must provide the disclosures
required by Sec. 226.20(d)(2) so that the consumer receives them
not later than the third business day before consummation. For
example, for consummation to occur on Thursday, June 11, the
consumer must receive the disclosures on or before Monday, June 8,
assuming there are no legal public holidays.
20(d)(5) Timing of receipt.
1. General. If the creditor or servicer delivers the disclosures
required by Sec. 226.20(d)(2) to the consumer in person, the escrow
account may be closed any time on the third business day following
the date of delivery. If the creditor or servicer provides the
disclosures required by Sec. 226.20(d)(2) by mail, the consumer is
considered to have received them three business days after they are
placed in the mail, for purposes of determining when the three-
business-day waiting period required under Sec. 226.20(d)(4)
begins. Creditors and servicers that use electronic mail or a
courier to provide disclosures may also follow this approach.
Whatever method is used to provide disclosures, creditors and
servicers may rely on documentation of receipt in determining when
the three-business-day waiting period begins.[ltrif]
* * * * *
Subpart E--Special Rules for Certain Home Mortgage Transactions
* * * * *
34(a)(4)(i) Mortgage-related obligations.
1. Mortgage-related obligations. A creditor must include in its
repayment ability analysis the expected property taxes and premiums
for mortgage-related insurance required by the creditor as set forth
in [rtrif]Sec. 226.45(b)(1),[ltrif] [lsqbb]Sec.
226.35(b)(3)(i),[rsqbb] as well as similar mortgage-related
expenses. Similar mortgage-related expenses include homeowners'
association dues and condominium or cooperative fees.
* * * * *
[lsqbb]35(b)(3) Escrows.
Paragraph 35(b)(3)(i).
1. Section 226.35(b)(3) applies to principal dwellings,
including structures that are classified as personal property under
state law. For example, an escrow account must be established on a
higher-priced mortgage loan secured by a first lien on a mobile
home, boat or a trailer used as the consumer's principal dwelling.
See the commentary under Sec. Sec. 226.2(a)(19), 226.2(a)(24),
226.15 and 226.23. Section 226.35(b)(3) also applies to higher-
priced mortgage loans secured by a first lien on a condominium or a
cooperative unit if it is in fact used as principal residence.
2. Administration of escrow accounts. Section 226.35(b)(3)
requires creditors to establish before the consummation of a loan
secured by a first lien on a principal dwelling an escrow account
for payment of property taxes and premiums for mortgage-related
insurance required by creditor. Section 6 of RESPA, 12 U.S.C. 2605,
and Regulation X address how escrow accounts must be administered.
3. Optional insurance items. Section 226.35(b)(3) does not
require that escrow accounts be established for premiums for
mortgage-related insurance that the creditor does not require in
connection with the credit transaction, such as an earthquake
insurance or debt-protection insurance.
Paragraph 35(b)(3)(ii)(B).
1. Limited exception. A creditor is required to escrow for
payment of property taxes for all first lien loans secured by
condominium units regardless of whether the creditors escrows
insurance premiums for condominium unit.[rsqbb]
* * * * *
[rtrif]Section 226.45--Requirements for Higher-Priced Mortgage
Loans
45(a) Higher-priced mortgage loans.
Paragraph 45(a)(1).
1. Threshold for ``jumbo'' loans. Section 226.45(a)(1)(ii)
provides a separate threshold for determining whether a transaction
is a higher-priced mortgage loan subject to Sec. 226.45 when the
principal balance exceeds the limit in effect as of the date the
transaction's rate is set for the maximum principal obligation
eligible for purchase by Freddie Mac (a ``jumbo'' loan). The Federal
Housing Finance Agency (FHFA) establishes and adjusts the maximum
principal obligation pursuant to rules under 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. 226.45(a)(1)(ii) applies.
45(a)(2) Definitions.
Paragraph 45(a)(2)(i).
1. Transaction coverage rate. The transaction coverage rate is
calculated solely for purposes of determining whether a transaction
is subject to Sec. 226.45. The creditor is not required to disclose
the transaction coverage rate to the consumer. The creditor
determines the transaction coverage rate in the same manner as the
transaction's annual percentage rate, except that, for purposes of
calculating the transaction coverage rate and determining coverage
under Sec. 226.45, the amount of the prepaid finance charge is
modified in accordance with Sec. 226.45(a)(2)(i). Under Sec.
226.45(a)(2)(i), only the amount of the prepaid finance charge
retained by the creditor, a mortgage broker, or an affiliate of
either is included in calculating the transaction coverage rate; any
other fees or charges included in the prepaid finance charge for
purposes of calculating the annual percentage rate are disregarded.
For example, assume a transaction in which, at consummation, one
discount point is paid to the creditor, an underwriting fee is paid
to an affiliate of the creditor, an origination fee is paid to a
mortgage broker, and a mortgage insurance premium is paid to a
mortgage insurer that is not affiliated with the creditor or the
mortgage broker. For purposes of the annual percentage rate
disclosed to the consumer, all of the listed charges are included in
the prepaid finance charge; for purposes of calculating the
transaction coverage rate, however, the mortgage insurance premium
is excluded from the modified prepaid finance charge. The
transaction coverage rate that results from these special rules must
be compared to the average prime offer rate to determine whether the
transaction is subject to Sec. 226.45.
2. Inclusion of finance charges in modified prepaid finance
charge; mortgage broker charges. For purposes of the special rules
under Sec. 226.45(a)(2)(i), only charges that are included in the
prepaid finance charge to calculate the annual percentage rate are
included in the modified prepaid finance charge to calculate the
transaction coverage rate. Compensation paid by the creditor to a
mortgage broker that comes from a ``yield spread premium'' is not
included in the modified prepaid finance charge because such
compensation is not a prepaid finance charge. See comment 4(a)(3)-3.
Paragraph 45(a)(2)(ii).
1. Average prime offer rate. Average prime offer rates are
annual percentage rates
[[Page 11627]]
derived from average interest rates, points, and other loan pricing
terms currently offered to consumers by a representative sample of
creditors for mortgage transactions that have low-risk pricing
characteristics. Other pricing terms include commonly used indices,
margins, and initial fixed-rate periods for variable-rate
transactions. Relevant pricing characteristics include a consumer's
credit history and transaction characteristics such as the loan-to-
value ratio, owner-occupant status, and purpose of the transaction.
To obtain average prime offer rates, the Board uses a survey of
creditors that both meets the criteria of Sec. 226.45(a)(2)(ii) and
provides pricing terms for at least two types of variable-rate
transactions and at least two types of non-variable-rate
transactions. An example of such a survey is the Freddie Mac Primary
Mortgage Market Survey[reg].
2. Comparable transaction. A higher-priced mortgage loan is a
consumer credit transaction secured by the consumer's principal
dwelling with a transaction coverage rate that exceeds the average
prime offer rate for a comparable transaction as of the date the
interest rate is set by the specified amount. The table of average
prime offer rates published by the Board indicates how to identify
the comparable transaction.
3. Rate set. A transaction's transaction coverage rate is
compared to the average prime offer rate as of the date the
transaction's interest rate is set (or ``locked'') before
consummation. Sometimes a creditor sets the interest rate initially
and then re-sets it at a different level before consummation. The
creditor should use the last date the interest rate is set before
consummation.
4. Board table. The Board publishes on the FFIEC's Web site, in
table form, average prime offer rates for a wide variety of
transaction types. See http://www.ffiec.gov/hmda. The Board
calculates an annual percentage rate, consistent with Regulation Z
(see Sec. 226.22 and appendix J), for each transaction type for
which pricing terms are available from a survey. The Board estimates
annual percentage rates for other types of transactions for which
direct survey data are not available based on the loan pricing terms
available in the survey and other information. The Board publishes
on the FFIEC's Web site the methodology it uses to arrive at these
estimates.
5. Additional guidance on determination of average prime offer
rates. The average prime offer rate has the same meaning in Sec.
226.45 as in Regulation C, 12 CFR part 203. See 12 CFR
203.4(a)(12)(ii). Guidance on the average prime offer rate under
Sec. 226.45(a)(2)(ii), such as when a transaction's rate is set and
determination of the comparable transaction, is provided in the
staff commentary under Regulation C, the Board's A Guide to HMDA
Reporting: Getting it Right!, and the relevant ``Frequently Asked
Questions'' on Home Mortgage Disclosure Act (HMDA) compliance posted
on the FFIEC's Web site at http://www.ffiec.gov/hmda.
Paragraph 45(a)(3).
1. Construction-permanent loans. Under Sec. 226.45(a)(3), Sec.
226.45 does not apply to a transaction to finance the initial
construction of a dwelling. Section 226.45 may apply, however, to
permanent financing that replaces a construction loan, whether the
permanent financing is extended by the same or a different creditor.
When a construction loan may be permanently financed by the same
creditor, Sec. 226.17(c)(6)(ii) permits the creditor to give either
one combined disclosure for both the construction financing and the
permanent financing, or a separate set of disclosures for each of
the two phases as though they were two separate transactions. See
also comment 17(c)(6)-2. Section 226.17(c)(6)(ii) addresses only how
a creditor may elect to disclose a construction-permanent
transaction. Which disclosure option a creditor elects under Sec.
226.17(c)(6)(ii) does not affect the determination of whether the
permanent phase of the transaction is subject to Sec. 226.45.
Whether the creditor discloses the two phases as a single
transaction or as two separate transactions, a single transaction
coverage rate, reflecting the appropriate charges from both phases,
must be calculated in accordance with Sec. 226.45(a)(2)(i). The
transaction coverage rate must be compared to the average prime
offer rate for a comparable transaction to determine coverage under
Sec. 226.45. If the transaction is determined to be a higher-priced
mortgage loan, only the permanent phase is subject to the
requirements of Sec. 226.45. Thus, for example, the requirement
under Sec. 226.45(b) to establish an escrow account prior to
consummation of a higher-priced mortgage loan secured by a first
lien on a principal dwelling applies only to the permanent phase and
not to the construction phase. Accordingly, the escrow account must
be established by the time the transaction converts from the
construction phase to the permanent phase, even though the permanent
phase may have been consummated earlier, and the period for which
the escrow account must remain in place under Sec. 226.45(b)(3) is
measured from the time the conversion to the permanent phase occurs.
45(b) Escrow accounts.
45(b)(1) Requirement to escrow for property taxes and insurance.
1. Principal dwelling. Section 226.45(b)(1) applies to principal
dwellings, including structures that are classified as personal
property under state law. For example, an escrow account must be
established on a higher-priced mortgage loan secured by a first lien
on a mobile home, boat, or trailer used as the consumer's principal
dwelling. See the commentary under Sec. Sec. 226.2(a)(19),
226.2(a)(24), 226.15 and 226.23. Section 226.45(b)(1) also applies
to a higher-priced mortgage loan secured by a first lien on a
condominium or a cooperative unit if it is in fact used as the
consumer's principal dwelling. But see Sec. 226.45(b)(2) for
exemptions from the escrow requirement that may apply to such
transactions.
2. Administration of escrow accounts. Section 226.45(b)(1)
requires creditors to establish an escrow account for payment of
property taxes and premiums for mortgage-related insurance required
by the creditor before the consummation of a higher-priced mortgage
loan secured by a first lien on a principal dwelling. Section 6 of
RESPA, 12 U.S.C. 2605, and Regulation X address how escrow accounts
must be administered.
3. Optional insurance items. Section 226.45(b)(1) does not
require that an escrow account be established for premiums for
mortgage-related insurance that the creditor does not require in
connection with the credit transaction, such as earthquake insurance
or credit life insurance.
4. Transactions not subject to Sec. 226.45(b)(1). Section
226.45(b)(1) requires a creditor to establish an escrow account
before consummation of a first-lien higher-priced mortgage loan.
This requirement does not affect a creditor's right or obligation,
pursuant to the terms of the legal obligation or applicable law, to
offer or require an escrow account for a transaction that is not
subject to Sec. 226.45(b)(1).
45(b)(2) Exemptions.
Paragraph 45(b)(2)(ii).
1. Limited exception. A creditor is required to escrow for
payment of property taxes for all first-lien higher-priced mortgage
loans secured by condominium, planned unit development, or similar
dwellings or units regardless of whether the creditor escrows
insurance premiums for such dwellings or units.
2. Planned unit developments. Planned unit developments (PUDs)
are a form of property ownership often used in retirement
communities, golf communities, and similar communities made up of
homes located within a defined geographical area. PUDs usually have
a homeowners' association, or some other governing association,
analogous to a condominium association and with similar authority
and obligations. Thus, as with condominiums, PUDs often have master
insurance policies that cover all units in the PUD. Under Sec.
226.45(b)(2)(ii), if a PUD's governing association is obligated to
maintain such a master insurance policy, an escrow account required
by Sec. 226.35(b)(1) for a transaction secured by a unit in the PUD
need not include escrows for insurance. This exemption applies not
only to condominiums and PUDs but also to any other type of property
ownership arrangement that has a governing association with an
obligation to maintain a master insurance policy.
Paragraph 45(b)(2)(iii).
1. Requirements for exemption. Under Sec. 226.45(b)(2)(iii),
except as provided in Sec. 226.45(b)(2)(v), a creditor need not
establish an escrow account for taxes and insurance for a higher-
priced mortgage loan, provided the following three conditions are
satisfied when the higher-priced mortgage loan is consummated:
i. The creditor extended over 50% of its total first-lien
higher-priced mortgage loans during the preceding calendar year in
counties that are ``rural or underserved,'' as defined in Sec.
226.45(b)(2)(iv). Pursuant to that section, the Board determines
annually which counties in the United States are rural or
underserved and publishes a list of those counties to enable
creditors to determine whether they meet this condition for the
exemption. Thus, for example, if a creditor originated 90 first-lien
higher-priced mortgage loans during 2010, the creditor meets this
condition for an exemption in 2011 if at least 46 of those loans are
secured
[[Page 11628]]
by properties located in one or more counties that are on the
Board's list for 2010.
ii. The creditor and its affiliates together extended and
serviced 100 or fewer first-lien mortgage loans during either of the
preceding two calendar years. Thus, a creditor becomes ineligible
for the exemption if it exceeds the threshold for two consecutive
calendar years. For example, if a creditor extends and retains the
servicing rights to 100 first-lien mortgage loans in 2008 and then
110 in each of 2009 and 2010, the creditor must comply with Sec.
226.45(b)(1) beginning in 2011. On the other hand, if the same
creditor extended and retained the servicing rights to only 100
first-lien mortgage loans in 2010, it would remain eligible for the
exemption in 2011 notwithstanding its 110 originations in 2009,
assuming it continues to satisfy the other conditions of Sec.
226.45(b)(2)(iii).
iii. The creditor, or its affiliate, does not maintain an escrow
account for any mortgage loan being serviced by the creditor or its
affiliate at the time the transaction is consummated. Thus, the
exemption applies, provided the other conditions of Sec.
226.45(b)(2)(iii) are satisfied, even if the creditor previously
maintained escrow accounts for mortgage loans, provided it no longer
maintains any such accounts. Once a creditor or its affiliate begins
escrowing for loans currently serviced, however, the creditor and
its affiliate become ineligible for the exemption in Sec.
226.45(b)(2)(iii) on higher-priced mortgage loans they make
thereafter. Thus, as long as a creditor (or its affiliate) services
and maintains escrow accounts for any mortgage loans, the creditor
will not be eligible for the exemption for any higher-priced
mortgage loan it may make. For purposes of Sec. 226.45(b)(2)(iii),
a creditor or its affiliate ``maintains'' an escrow account only if
it services a mortgage loan for which an escrow account has been
established at least through the due date of the second periodic
payment under the terms of the legal obligation.
Paragraph 45(b)(2)(iv).
1. Requirements for ``rural or underserved'' status. A county is
considered ``rural or underserved'' for purposes of Sec.
226.45(b)(2)(iii)(A) if it satisfies either of the two tests in
Sec. 226.45(b)(2)(iv). The Board applies both tests to each county
in the United States and, if a county satisfies either test,
includes that county on the annual list of ``rural or underserved''
counties. The Board publishes on its public Web site the applicable
list for each calendar year by the end of that year. A creditor's
first-lien higher-priced mortgage loan originations in such counties
during that year are considered for purposes of whether the creditor
satisfies the condition in Sec. 226.45(b)(2)(iii)(A) and therefore
is eligible for the exemption during the following calendar year.
The Board determines whether each county is ``rural'' by reference
to the currently applicable Urban Influence Codes (UICs),
established by the United States Department of Agriculture's
Economic Research Service (USDA-ERS). Specifically, the Board
classifies a county as ``rural'' if the USDA-ERS categorizes the
county under UIC 7, 10, 11, or 12. The Board determines whether each
county is ``underserved'' by reference to data submitted by mortgage
lenders under the Home Mortgage Disclosure Act (HMDA).
Paragraph 45(b)(2)(v).
1. Forward commitments. A creditor may make a mortgage loan that
will be transferred or sold to a purchaser pursuant to an agreement
that has been entered into at or before the time the loan is
consummated. Such an agreement is sometimes known as a ``forward
commitment.'' A first-lien higher-priced mortgage loan that will be
acquired by a purchaser pursuant to a forward commitment is subject
to the requirement to establish an escrow account under Sec.
226.45(b)(1) unless the purchaser is eligible for the exemption in
Sec. 226.45(b)(2)(iii). The escrow requirement applies to any such
transaction, whether the forward commitment provides for the
purchase and sale of the specific transaction or for the purchase
and sale of loans with certain prescribed criteria that the
transaction meets. For example, assume a creditor that qualifies for
the exemption in Sec. 226.45(b)(2)(iii) makes a higher-priced
mortgage loan that meets the purchase criteria of an investor with
which the creditor has an agreement to sell such loans after
consummation. If the investor currently escrows for any mortgage
loans it services, making the investor ineligible for the exemption
in Sec. 226.45(b)(2)(iii), an escrow account must be established
for the transaction before consummation in accordance with Sec.
226.45(b)(1).
45(b)(3) Cancellation.
1. Termination of underlying debt obligation. Methods by which
an underlying debt obligation may be terminated include, among other
things, repayment, refinancing, rescission, and foreclosure.
2. Minimum durations. Section 226.45(b)(3) establishes minimum
durations for which escrow accounts established pursuant to Sec.
226.45(b)(1) must be maintained. This requirement does not affect a
creditor's right or obligation, pursuant to the terms of the legal
obligation or applicable law, to offer or require an escrow account
thereafter.
3. Twenty percent equity. The term ``original value'' in Sec.
226.45(b)(3)(ii)(A) means the lesser of the sales price reflected in
the sales contract for the property, if any, or the appraised value
of the property at the time the transaction was consummated. In
determining whether 20% of the original value of the property
securing the underlying debt obligation is unencumbered, the
creditor or servicer shall count any subordinate lien of which it
has reason to know. If the consumer certifies in writing that the
equity in the property securing the underlying debit obligation is
unencumbered by a subordinate lien, the creditor or servicer may
rely upon the certification in making its determination.[ltrif]
* * * * *
Appendices 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,
[rtrif]H-24, H-25, H-26,[ltrif]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). Creditors may modify
the heading of the second column shown in Model Clause H-4(H) to
read ``first adjustment'' or ``first increase,'' as applicable,
pursuant to Sec. 226.18(s)(2)(i)(C). 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
* * * * *
[rtrif]29. Models H-24 through H-26. Model Form H-24 contains
the disclosures for the establishment of an escrow account, Model
Form H-25 contains the disclosures for the non-establishment of an
escrow account, and Model Form H-26 contains the disclosures for the
cancellation of an escrow account established in connection with a
closed-end transaction secured by a first lien on real property or a
dwelling.
i. These model forms illustrate, in the tabular format, the
disclosures required generally by Sec. Sec. 226.19(f) and
226.20(d).
ii. A creditor satisfies Sec. 226.19(f)(2) if it provides the
appropriate model form (H-24 or H-25) and a creditor or servicer
satisfies Sec. 226.20(d)(2) if it provides Model Form H-26, or a
substantially similar notice, which is properly completed with the
disclosures required by Sec. 226.19(f)(2) or Sec. 226.20(d)(2),
respectively.
iii. Although creditors and servicers are not required to use a
certain paper size in disclosing the information under Sec. Sec.
226.19(f) and 226.20(d), Model Forms H-24 through H-26 are designed
to be printed on an 8\1/2\ x 11 inch sheet of paper. In addition,
the following formatting techniques were used in presenting the
information in the model
[[Page 11629]]
forms to ensure that the information is readable:
A. A readable font style and font size (10-point Arial font
style);
B. Sufficient spacing between lines of the text;
C. Standard spacing between words and characters. In other
words, the text was not compressed to appear smaller than 10-point
type;
D. Sufficient white space around the text of the information in
each row, by providing sufficient margins above, below and to the
sides of the text;
E. Sufficient contrast between the text and the background.
Generally, black text was used on white paper.
iv. While the regulation does not require creditors or servicers
to use the above formatting techniques in presenting information in
the tabular format (except for the 10-point minimum font
requirement), creditors and servicers are encouraged to consider
these techniques when deciding how to disclose information in the
notice to ensure that the information is presented in a readable
format.
v. Creditors and servicers may use color, shading and similar
graphic techniques with respect to the notice, so long as the notice
remains substantially similar to the model forms in Appendix
H.[ltrif]
* * * * *
By order of the Board of Governors of the Federal Reserve
System, February 23, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-4385 Filed 3-1-11; 8:45 am]
BILLING CODE 6210-01-P