[Federal Register Volume 76, Number 41 (Wednesday, March 2, 2011)]
[Proposed Rules]
[Pages 11597-11629]
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





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12 CFR Part 226



Truth in Lending; Proposed Rule

Federal Register / Vol. 76, No. 41 / Wednesday, March 2, 2011 / 
Proposed Rules

[[Page 11598]]


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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.

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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

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[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