[Federal Register Volume 76, Number 141 (Friday, July 22, 2011)]
[Rules and Regulations]
[Pages 44226-44244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-18676]



[[Page 44225]]

Vol. 76

Friday,

No. 141

July 22, 2011

Part V





Bureau of Consumer Financial Protection





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12 CFR Part 1004





Alternative Mortgage Transaction Parity (Regulation D); Interim Final 
Rule

  Federal Register / Vol. 76 , No. 141 / Friday, July 22, 2011 / Rules 
and Regulations  

[[Page 44226]]


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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1004

[Docket No. CFPB-2011-0004]
RIN 3170-AA04


Alternative Mortgage Transaction Parity (Regulation D)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Interim final rule with request for public comment.

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SUMMARY: The Bureau of Consumer Financial Protection (CFPB) is 
publishing for public comment an interim final rule establishing 
Regulation D (Alternative Mortgage Transaction Parity) pursuant to the 
Alternative Mortgage Transaction Parity Act (AMTPA) and the Truth in 
Lending Act. The interim final rule is necessary to avoid a regulatory 
gap created by the amendments to AMTPA in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (Dodd-Frank Act). Without an interim 
final rule that takes immediate effect, state housing creditors would 
no longer be able to make variable rate mortgage loans and other 
alternative mortgage transactions pursuant to AMTPA in states that 
prohibit such transactions, thus denying consumers access to that form 
of credit. Until July 22, 2012, the interim final rule applies only to 
state housing creditors seeking to invoke federal preemption of state 
law under AMTPA. The interim final rule will be in place as a temporary 
measure pending the CFPB's completion of a notice-and-comment 
rulemaking to promulgate permanent rules, including rules governing 
alternative mortgage transactions made by federally chartered housing 
creditors. The CFPB seeks public comment in anticipation of that 
process.

DATES: This interim final rule is effective July 22, 2011.
    Mandatory compliance date: Compliance with Sec.  1004.4 of this 
interim final rule is optional until July 22, 2012 for federal housing 
creditors and for state housing creditors that are not relying on 
preemption of state law under Sec.  1004.3. On July 22, 2012, 
compliance with Sec.  1004.4 is mandatory for all creditors, except as 
provided in Sec.  1004.4(d).
    Comments: Comments must be received on or before September 22, 
2011.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2011-
0004, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail or Hand Delivery/Courier in Lieu of Mail: Monica 
Jackson, Office of the Executive Secretary, Consumer Financial 
Protection Bureau, 1801 L Street, NW., Washington, DC 20036.
    All submissions must include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. In general, 
all comments received will be posted without change to http://www.regulations.gov. In addition, comments will be available for public 
inspection and copying at 1801 L Street, NW., Washington, DC 20036, on 
official business days between the hours of 10 a.m. and 5 p.m. Eastern 
Time. You can make an appointment to inspect the documents by 
telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or social 
security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1801 L 
Street, NW., Washington, DC 20036, (202) 435-7275.

SUPPLEMENTARY INFORMATION:

I. Overview

    The Bureau of Consumer Financial Protection (CFPB) is publishing 
for public comment this interim final rule implementing amendments to 
the Alternative Mortgage Transaction Parity Act (AMTPA) \1\ made by the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act).\2\ AMTPA authorizes state-licensed or -chartered housing 
creditors (state housing creditors) \3\ to make alternative mortgage 
transactions in compliance with federal rather than state law, in order 
to establish parity and competitive equality between state and federal 
lenders. Effective July 21, 2011, the Dodd-Frank Act amended AMTPA to 
transfer rule-writing authority to the CFPB and to narrow the scope of 
federal preemption. After July 21, the Dodd-Frank Act provides that 
state housing creditors may only make alternative mortgage transactions 
under AMTPA if they comply with rules issued by the CFPB, even though 
the Dodd-Frank Act does not vest the CFPB with authority to issue such 
rules before that date. Accordingly, CFPB interim rules are needed 
immediately in order to avoid a suspension in the operation of AMTPA, 
which would prevent state housing creditors from making variable rate 
loans and other alternative mortgage transactions in states where such 
loans are otherwise prohibited by state law.
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    \1\ 12 U.S.C. 3801 et seq.
    \2\ Public Law 111-203, 124 Stat. 1376 (2010) (hereinafter 
``Pub. L. 111-203'').
    \3\ Under 12 U.S.C. 3802(2), the term ``housing creditor'' 
means: (1) A depository institution as defined in 12 U.S.C. 1735f-7 
note; (2) a lender approved by the Secretary of Housing and Urban 
Development for participation in any mortgage insurance program 
under the National Housing Act; (3) a person who regularly makes 
loans, credit sales, or advances secured by an interest in 
residential real property, dwellings, cooperatives or residential 
manufactured homes; and (4) any transferee of a person in the other 
three categories.
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    The CFPB does not believe that Congress intended its amendments to 
AMTPA to create a regulatory gap that would interrupt access to credit. 
As discussed below in Section IV, the CFPB finds that there is good 
cause to issue this interim final rule without notice and comment and 
effective immediately in order to avoid the risk of disrupting mortgage 
markets, placing state housing creditors at an inappropriate 
competitive disadvantage, and reducing consumers' access to credit. In 
particular, the CFPB is concerned that failure to issue an interim 
final rule addressing the modification of existing AMTPA loans could 
create uncertainty and discourage such modifications. In advance of 
issuing this interim final rule, the CFPB issued a public bulletin 
alerting state chartered and licensed lenders and other interested 
parties that: (1) the Dodd-Frank Act amendments to AMTPA take effect on 
July 21, 2011; and (2) the amendments affect what laws apply to 
mortgage loans issued by state chartered or licensed lenders after that 
date by narrowing the statutory definition of ``alternative mortgage 
transaction'' and the scope of preemption under AMTPA.\4\ In addition, 
the CFPB reached out to state and federal regulators, trade 
associations, and consumer advocates to urge planning for an orderly 
transition process. The CFPB will continue its outreach and 
consultations while it engages in a notice-and-comment rulemaking to 
more fully effectuate the Dodd-Frank Act amendments. The CFPB is 
committed to beginning the notice-and-comment rulemaking process as 
soon as possible after the comment period closes on the interim final 
rule.
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    \4\ Available at http://www.consumerfinance.gov/wp-content/uploads/2011/06/Amendments-to-the-Alternative-Mortgage-Transaction-Parity-Act.pdf.

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[[Page 44227]]

II. Summary of the Interim Final Rule

    The interim final rule applies to an alternative mortgage 
transaction if the creditor received an application for that 
transaction on or after July 22, 2011. If the creditor received the 
application before July 22, 2011, the alternative mortgage transaction 
is generally grandfathered and remains subject to the AMTPA provisions 
and regulations in effect at the time of application. Thus, a 
consistent set of requirements will apply from application to 
completion of an alternative mortgage transaction. The rule also 
clarifies that modifications, renewals, or extensions of alternative 
mortgage transactions do not result in a loss of AMTPA preemption. This 
clarification is intended to facilitate the modification of loans for 
distressed borrowers. However, refinancings are treated as new 
transactions that must independently meet the requirements for 
preemption in effect at the time of refinancing.
    Consistent with the Dodd-Frank Act amendments to AMTPA, the interim 
final rule's definition of ``alternative mortgage transaction'' is 
limited to transactions in which the interest rate or finance charge 
may be adjusted or renegotiated. As a result, previously preempted 
state consumer protection laws will apply to fixed-rate mortgage loans 
with interest-only payment periods or negative amortization features, 
fixed-rate balloon loans where the lender does not make a commitment to 
renew the loan, and certain other fixed-rate products that previously 
qualified as alternative mortgage transactions but no longer qualify 
because of the Dodd-Frank Act amendments.
    The interim final rule also implements the Dodd-Frank Act's 
amendment to the scope of preemption under AMTPA. Specifically, the 
rule provides that state laws are preempted only to the extent that 
they restrict the ability of a state housing creditor to adjust or 
renegotiate an interest rate or finance charge with respect to an 
alternative mortgage transaction or the ability of a state housing 
creditor to change the amount of interest or finance charges included 
in a payment as a result of the adjustment or renegotiation of the rate 
or charge. In addition, the interim final rule provides that general 
state laws regulating loan features or charges that are not integral to 
alternative mortgage transactions are no longer preempted. Accordingly, 
state law mortgage disclosure requirements and restrictions on late 
fees, rate increases as a result of late payment, prepayment penalties, 
interest-only payment periods, and negative amortization are no longer 
preempted under AMTPA with respect to alternative mortgage 
transactions. Furthermore, state laws prohibiting unfair or deceptive 
acts and practices generally are not subject to preemption under AMTPA.
    The interim final rule also provides standards governing 
alternative mortgage transactions made by state housing creditors 
pursuant to AMTPA. The rule generally requires that adjustable rate 
mortgages utilize a publicly available index that is beyond the 
creditor's control. In the alternative, a closed-end mortgage may use a 
formula or schedule identifying the amount and timing of interest rate 
increases. Renegotiable rate mortgages (also called renewable balloon-
payment mortgages) must include a written commitment by the lender to 
renew the loan, subject to certain limitations. In addition, state 
housing creditors (like all other creditors) must comply with certain 
federal underwriting requirements.
    Initially, these standards are applicable only to state housing 
creditors seeking to invoke preemption of certain state laws under 
AMTPA. However, because AMTPA is designed to promote parity between 
federal and state creditors, the Dodd-Frank Act amendments effectively 
require the CFPB to engage in a two-part rulemaking that: (1) 
Establishes standards for origination of alternative mortgage 
transactions by federally chartered housing creditors (federal housing 
creditors) under sources of law other than AMTPA; and then (2) 
designates such standards as applicable to state housing creditors that 
make alternative mortgage transactions under AMTPA. The interim final 
rule therefore relies on the Truth in Lending Act (TILA) \5\ to 
establish the minimum federal standards for alternative mortgage 
transactions.
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    \5\ 15 U.S.C. 1601, et seq.
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    The CFPB has provided a one-year extended compliance period (until 
July 21, 2012) and a temporary safe harbor for federal housing 
creditors and for state housing creditors that do not seek to invoke 
AMTPA preemption so that these lenders may continue to originate 
variable rate mortgages and other alternative mortgage transactions in 
accordance with other sources of law. However, the CFPB expects that 
its notice-and-comment rulemaking process to more fully implement the 
Dodd-Frank Act amendments will focus on the origination of alternative 
mortgage transactions across the broader marketplace, and seeks comment 
in anticipation of that rulemaking.

III. Background

A. AMTPA

    AMTPA was enacted by Congress in 1982 to stimulate consumer access 
to credit and increase parity between state and federal creditors 
during an era of unusually high interest rates. In Senate hearings held 
in 1981, mortgage bankers testified that laws in 26 states either 
barred state housing creditors from originating alternative mortgage 
loans or imposed significantly greater restrictions on such loans than 
those that applied to federal housing creditors operating under federal 
regulations.\6\ As the first section of the Act explained:

    \6\ Testimony cited in 67 FR 60542, 60543 (Sept. 26, 2002).
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    It is the purpose of [AMTPA] to eliminate the discriminatory 
impact that [federal regulations authorizing federally chartered 
depository institutions to make, purchase, and enforce alternative 
mortgage transactions] have upon nonfederally chartered housing 
creditors and provide them with parity with federally chartered 
institutions by authorizing all housing creditors to make, purchase, 
and enforce alternative mortgage transactions so long as the 
transactions are in conformity with the regulations issued by the 
Federal agencies.\7\
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    \7\ 12 U.S.C. 3801(b).

    Accordingly, except in states that opted out of the preemption 
regime within three years after enactment,\8\ AMTPA generally 
authorized state housing creditors to make, purchase, and enforce 
alternative mortgage transactions ``notwithstanding any State 
constitution, law, or regulation.'' \9\ However, this statutory 
preemption applied only to the extent that state housing creditors made 
alternative mortgage transactions in accordance with the regulations 
governing similar federal housing creditors. Specifically, AMTPA 
provided that state-chartered banks were to comply with regulations 
issued by the OCC for national banks. Similarly, state-chartered credit 
unions were to comply with regulations issued by the NCUA for Federal 
credit unions, while all other state housing creditors were to comply 
with regulations issued by the Federal Home Loan Bank Board (FHLBB) 
(the predecessor of the OTS).\10\ Furthermore, rather than creating 
separate authority for the OCC, NCUA,

[[Page 44228]]

and FHLBB/OTS to issue regulations governing alternative mortgage 
transactions under AMTPA itself, AMTPA specifically stated that, in 
order to receive preemption, state housing creditors must comply with 
regulations issued by these agencies under other statutory 
authority.\11\
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    \8\ 12 U.S.C. 3804. Six states exercised their opt-out authority 
in whole or in part: Arizona, Maine, Massachusetts, New York, South 
Carolina, and Wisconsin. See, e.g., Grant S. Nelson & Dale A. 
Whitman, Real Estate Finance Law Sec.  11.4 (4th ed. 2001).
    \9\ 12 U.S.C. 3803(c).
    \10\ 12 U.S.C. 3803(a).
    \11\ Id.
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    Thus, AMTPA established a sort of ``piggybacking'' regime under 
which state housing creditors could choose to comply with federal 
regulations applicable to their federally chartered counterparts if 
state law would otherwise prohibit or restrict a particular mortgage 
transaction. The OCC, NCUA, and FHLBB/OTS were directed to designate 
which of their regulations issued under other statutory authority 
applied in place of state law to the state housing creditors within 
their respective jurisdictions.\12\
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    \12\ AMTPA also directed these agencies to determine whether any 
of their existing regulations were ``inappropriate'' to apply to 
state housing creditors or needed to be conformed for use by such 
lenders. Garn-St Germain Depository Institutions Act of 1982, Public 
Law 97-320, Sec.  807(b), 96 Stat. 1469 (Oct. 15, 1982) (codified at 
12 U.S.C. 3801 note). No guidance was provided as to standards for 
appropriateness.
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    The NCUA designated all of its regulations concerning mortgage 
lending as applicable to state credit unions conducting alternative 
mortgage transactions,\13\ while the OCC and the FHLBB/OTS each 
designated a narrower set of regulations that addressed the origination 
of alternative mortgage loans specifically. The OCC regulations applied 
to ``adjustable-rate mortgage loans'' as defined by that agency,\14\ 
while the FHLBB/OTS rules applied to a broader range of alternative 
mortgage transactions as defined under AMTPA.\15\ Although the OCC and 
OTS rules differed regarding the scope of transactions subject to AMTPA 
and the extent of preemption, they overlapped significantly with regard 
to the substantive standards applicable to alternative mortgage 
transactions.
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    \13\ 47 FR 54,424 (Dec. 3, 1982).
    \14\ 47 FR 55,911 (Dec. 14, 1982).
    \15\ 47 FR 51,732 (Nov. 17, 1982); see also 48 FR 23,032 (May 
23, 1983) (explaining that the earlier rulemaking was designed to 
apply federal standards regarding adjustments to rate, payment, 
balance, and term, and regarding disclosure, but not general safety 
and soundness requirements such as loan-to-value ratios).
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B. The Dodd-Frank Act

    The Dodd-Frank Act was enacted on July 21, 2010, in response to 
widespread disruption in mortgage markets and the larger economy. A 
significant focus of the statute was the enhancement of consumer 
protections regarding mortgage lending practices that contributed to 
the crisis. In addition to consolidating in the CFPB certain consumer 
financial protection authorities that had previously been spread across 
seven different federal agencies, the Dodd-Frank Act amends existing 
federal consumer financial laws and establishes new standards that 
phase in over time concerning a wide range of mortgage lending 
practices, including compensation for mortgage originators, assessments 
of consumers' ability to repay, and mortgage servicing.
    The Dodd-Frank Act makes three significant amendments with regard 
to AMTPA, all of which are effective on the designated transfer date 
(July 21, 2011).\16\ First, Section 1083 of the Dodd-Frank Act narrows 
the definition of ``alternative mortgage transactions'' that are 
eligible for preemption of state law under AMTPA. The revised 
definition in 12 U.S.C. 3802(1) continues to include loans ``in which 
the interest rate or finance charge may be adjusted or renegotiated,'' 
but deletes additional language that specifically included within the 
prior definition: (1) Fixed-rate mortgage loans in which the debt 
matures before the end of the loan's amortization schedule (a type of 
balloon loan); and (2) mortgage loans ``involving any similar type of 
rate, method of determining return, term, repayment, or other variation 
not common to traditional fixed rate, fixed term transactions,'' 
including but not limited to shared equity and shared appreciation 
transactions.
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    \16\ 75 FR 57252 (Sept. 20, 2010).
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    The result of this amendment is that AMTPA no longer preempts some 
state laws governing these types of loans, although they may be 
preempted by other statutes for some creditors. For example, prior to 
the Dodd-Frank Act, a fixed-rate mortgage loan with an interest-only 
payment period would have met the definition of an ``alternative 
mortgage transaction'' because it involved a payment variation ``not 
common to traditional fixed rate, fixed term transactions.'' If a state 
housing creditor made such an alternative mortgage in compliance with 
the applicable federal regulations, AMTPA preempted any conflicting 
state law, thereby permitting the housing creditor to offer and 
complete the transaction. Under the Dodd-Frank Act, however, only loans 
``in which the interest rate or finance charge may be adjusted or 
renegotiated'' are eligible for AMTPA preemption. Because a fixed-rate 
mortgage loan with an interest-only payment period does not meet this 
definition, AMTPA will not preempt state laws governing such products 
as of July 22, 2011.
    Second, Section 1083 narrows the types of state laws that are 
preempted under AMTPA. 12 U.S.C. 3803(c) originally provided that a 
state housing creditor could make alternative mortgage transactions 
``notwithstanding any State constitution, law, or regulation.'' Section 
1083 amended that language to provide that, after July 21, 2011, a 
state housing creditor may make such transactions ``notwithstanding any 
State constitution, law, or regulation that prohibits an alternative 
mortgage transaction.'' \17\ Section 1083 further amended AMTPA to 
provide that ``a State constitution, law, or regulation that prohibits 
an alternative mortgage transaction does not include any State 
constitution, law, or regulation that regulates mortgage transactions 
generally, including any restriction on prepayment penalties or late 
charges.'' \18\ Thus, if a state law prohibited certain conduct with 
respect to both alternative mortgage transactions and other mortgage 
transactions, that law generally would not be preempted with respect to 
alternative mortgage transactions.
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    \17\ Public Law 111-203, Sec.  1083(a)(2)(B) (emphasis added).
    \18\ Id. (emphasis added).
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    Third, Sections 1061 and 1083 of the Dodd-Frank Act transferred, 
among other things, rule-writing authority under AMTPA from the OCC, 
NCUA, and OTS to the CFPB.\19\ In doing so, Congress replicated AMTPA's 
original ``piggybacking'' scheme. Accordingly, after July 21, 2011, 
alternative mortgage transactions made by state housing creditors must 
comply with regulations issued by the CFPB for ``federally chartered 
housing creditors under provisions of law other than [12 U.S.C. 
3803].'' \20\ The rulemaking required under Section 1083 therefore 
effectively requires two components: one establishing standards for 
federal housing creditors to follow in originating alternative mortgage 
transactions under other federal consumer financial laws administered 
by the CFPB; and the other designating those standards as applicable to 
state housing creditors that seek to invoke federal preemption under 
AMTPA.

[[Page 44229]]

Accordingly, the regulations required by Section 1083 impact the 
mortgage market as a whole, not just a subset of state lenders.\21\
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    \19\ Public Law 111-203, Sec.  1061 (transferring, among other 
things, the ``consumer financial protection functions'' of the 
federal prudential regulators to the CFPB as of the designated 
transfer date); see also Sec.  1002(14) (defining ``Federal consumer 
financial law'' to include the ``enumerated consumer laws''); id. 
Sec.  1002(12) (defining ``enumerated consumer laws'' to include 
AMTPA and TILA); id. Sec.  1083 (amending 12 U.S.C. 3803).
    \20\ Public Law 111-203, Sec.  1083(a)(2)(A)(iv).
    \21\ However, as discussed above, federal housing creditors and 
any state housing creditors that do not seek AMTPA preemption are 
not required to comply with the CFPB's regulations until July 22, 
2012. Furthermore, Sec.  1004.4(d) of the interim final rule 
provides that these creditors may continue to make variable rate 
mortgages and other alternative mortgage transactions consistent 
with other applicable provisions of law.
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    As a general matter, the amendments to AMTPA do not affect 
transactions entered into on or before July 21, 2011.\22\ After July 
21, however, AMTPA will preempt state laws that prohibit new 
alternative mortgage transactions only if: (1) Such transactions meet 
the revised definition of ``alternative mortgage transaction;'' (2) the 
state law in questions falls within the narrowed scope of AMTPA 
preemption; and (3) the creditor complies with regulations issued by 
the CFPB.\23\ Thus, in order for AMTPA to continue facilitating access 
to credit in states in which alternative mortgage transactions are 
prohibited by state law, the CFPB must issue regulations governing such 
transactions. Despite this requirement, however, the Dodd-Frank Act did 
not vest the CFPB with authority to issue such regulations until after 
July 21, 2011.\24\ Accordingly, absent adoption of this interim final 
rule on July 22, 2011, state housing creditors could no longer invoke 
AMTPA preemption because there would be no CFPB regulations governing 
alternative mortgage transactions.
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    \22\ Public Law 111-203, Sec.  1083(a)(2)(A)(i). As discussed 
below with respect to Sec.  1004.1, an alternative mortgage 
transaction is made for purposes of this interim final rule on the 
date the creditor receives the application. Thus, the amended AMTPA 
preemption standards do not apply to an alternative mortgage 
transaction if the application was received on or before July 21, 
2011, even if the transaction is completed after that date.
    \23\ Public Law 111-203, Sec.  1083(a)(2)(A)(iv).
    \24\ Public Law 111-203, Sec.  1061 (transferring, among other 
things, the ``consumer financial protection functions'' of the 
federal prudential regulators to the CFPB as of the designated 
transfer date); Sec.  1083(b) (transferring AMTPA authority to the 
CFPB on the designated transfer date); see also id. Sec.  
1083(a)(2)(C) (directing the CFPB to issue AMTPA regulations ``after 
the designated transfer date'').
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IV. Legal Authority

A. Rulemaking Authority

    The CFPB is issuing this interim final rule pursuant to its 
authority under AMTPA, TILA, and the Dodd-Frank Act. Effective July 21, 
2011, Section 1061 of the Dodd-Frank Act transfers to the CFPB the 
``consumer financial protection functions'' previously vested in 
certain other federal agencies. The term ``consumer financial 
protection function'' is defined to include ``all authority to 
prescribe rules or issue orders or guidelines pursuant to any Federal 
consumer financial law, including performing appropriate functions to 
promulgate and review such rules, orders, and guidelines.'' \25\ AMTPA 
and TILA are Federal consumer financial laws.\26\ Accordingly, 
effective July 21, 2011, the authority of the OCC, NCUA, and OTS to 
issue regulations pursuant to AMTPA and the authority of the Board of 
Governors of the Federal Reserve System (Federal Reserve Board) to 
issue regulations pursuant to TILA transfer to the CFPB.\27\
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    \25\ Public Law 111-203, Sec.  1061(a)(1). Effective on the 
designated transfer date, the CFPB is also granted ``all powers and 
duties'' vested in each of the federal agencies, relating to the 
consumer financial protection functions, on the day before the 
designated transfer date.
    \26\ Public Law 111-203, Sec.  1002(14) (defining ``Federal 
consumer financial law'' to include the ``enumerated consumer 
laws''); id. Sec.  1002(12) (defining ``enumerated consumer laws'' 
to include AMTPA and TILA).
    \27\ Section 1066 of the Dodd-Frank Act grants the Secretary of 
the Treasury interim authority to perform certain functions of the 
CFPB. Pursuant to that authority, Treasury is publishing this 
interim final rule on behalf of the CFPB.
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    Section 1083 of the Dodd-Frank Act directs the CFPB to issue 
regulations implementing the amended AMTPA ``after the designated 
transfer date.'' \28\ Specifically, the CFPB is directed to: (1) Review 
the regulations identified by the OCC and NCUA pursuant to AMTPA; (2) 
determine whether those regulations are fair, not deceptive, and 
otherwise meet the objectives of title X of the Dodd-Frank Act;\29\ and 
(3) promulgate regulations governing alternative mortgage transactions 
that are eligible for AMTPA preemption.\30\ In addition, AMTPA provides 
that the statutory definition of ``alternative mortgage transaction'' 
in 12 U.S.C. 3802(1) is to be further ``described and defined by 
applicable regulation.'' \31\
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    \28\ Public Law 111-203, Sec.  1083(a)(2)(C) (creating a new 12 
U.S.C. 3803(d)).
    \29\ As discussed below with respect to Sec.  1004.4, the CFPB 
believes that it is consistent with the intent and purpose of 
Section 1083 to interpret the requirement that the CFPB determine 
whether the OCC and NCUA regulations are unfair or deceptive as 
requiring the CFPB to determine whether those regulations are 
effective in preventing unfair or deceptive acts or practices. In 
addition, the CFPB believes that it is appropriate to consider the 
OTS regulations governing alternative mortgage transactions when 
making this determination.
    \30\ Id.
    \31\ Furthermore, 12 U.S.C. 3801 note, which was enacted as part 
of AMTPA in 1982, directs the OCC, NCUA, and FHLBB to identify, 
describe, and publish existing regulations that should or should not 
apply to alternative mortgage transactions and to make any necessary 
changes to address alternative mortgage transactions. See Public Law 
97-320 (1982). The Dodd-Frank Act does not remove this authority, 
which transfers to the CFPB pursuant to Section 1061 of the Dodd-
Frank Act.
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    As amended, AMTPA states that, in order to receive preemption, 
state housing creditors must comply with regulations issued by the CFPB 
with respect to federally chartered housing creditors ``under 
provisions of law other than this section [12 U.S.C. 3803].'' \32\ As 
noted above, the Federal Reserve Board's rulemaking authority pursuant 
to TILA transferred to the CFPB under Section 1061 on the designated 
transfer date. Accordingly, in addition to its authority under AMTPA, 
the CFPB is using its rulemaking authority under TILA to issue this 
interim final rule.
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    \32\ Public Law 111-203, Sec.  1083(a)(2)(A)(iv) (emphasis 
added).
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    As amended by the Dodd-Frank Act, TILA directs the CFPB to 
``prescribe regulations to carry out the purposes of [TILA].''\33\ In 
addition, the CFPB is generally authorized to issue regulations that 
contain such classifications, differentiations, or other provisions, or 
that provide for such adjustments and exceptions for any class of 
transactions, that in the CFPB's judgment are necessary or proper to 
effectuate the purpose of TILA, facilitate compliance with TILA, or 
prevent circumvention or evasion of TILA.\34\ In the past, the Federal 
Reserve Board has used this TILA authority to issue extensive rules 
that promote the informed use of credit by mandating disclosures and 
substantively regulating certain practices regarding mortgages and home 
equity lines of credit.\35\ The CFPB also has the authority under TILA 
(as amended by Section 1405(a) of the Dodd-Frank Act) to issue 
regulations that it ``finds to be * * * necessary or proper to ensure 
that responsible, affordable mortgage credit remains available to 
consumers in a manner consistent with'' Sections 129B and 129C of TILA, 
which are new sections added by the Dodd-Frank Act to regulate various 
mortgage originator practices and the evaluation of borrowers' ability 
to repay their mortgages.\36\
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    \33\ Id. Sec.  1100A(2); 15 U.S.C. 1604(a).
    \34\ Id.
    \35\ See Regulation Z, 12 CFR Part 226.
    \36\ Public Law 111-203, Sec.  1405(a); see also 15 U.S.C. 
1639b, 1639c.
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B. Authority To Issue an Interim Final Rule Without Prior Notice and 
Comment

    The Administrative Procedure Act (APA) \37\ generally requires 
public notice and an opportunity to comment before promulgation of 
substantive regulations.\38\ It also generally requires that a final 
regulation be published not less than 30 days prior to its effective

[[Page 44230]]

date.\39\ However, the APA provides an exception to notice-and-comment 
procedures where an agency for good cause finds that such procedures 
are impracticable, unnecessary, or contrary to the public interest.\40\ 
The APA also provides a good cause exception to the effective date 
requirement.\41\ The CFPB finds that there is good cause to conclude 
that providing notice and opportunity for comment would be 
impracticable and contrary to the public interest under these 
circumstances. The CFPB also finds that there is good cause to issue 
this rule effective immediately; however, the CFPB is making compliance 
with the requirements in Sec.  1004.4 optional for certain creditors 
until July 22, 2012.
---------------------------------------------------------------------------

    \37\ 5 U.S.C. 551 et seq.
    \38\ 5 U.S.C. 553(b), (c).
    \39\ 5 U.S.C. 553(d).
    \40\ 5 U.S.C. 553(b)(B).
    \41\ 5 U.S.C. 553(d)(3).
---------------------------------------------------------------------------

    The CFPB's findings are based on the following factors. As 
discussed above, beginning on July 22, 2011, state housing creditors 
may only make new alternative mortgage transactions pursuant to AMTPA 
if they comply with regulations issued by the CFPB. However, the CFPB 
was unable to issue a notice of proposed rulemaking under AMTPA or TILA 
prior to July 21, 2011, because rule-writing authority under each of 
those statutes was vested in other agencies and did not transfer to the 
CFPB until that date. As a result, the CFPB finds that it would have 
been impracticable to engage in notice-and-comment rulemaking prior to 
July 21, 2011.
    Furthermore, the CFPB's failure to issue an interim final rule 
without advance notice and comment that is effective immediately would 
be contrary to the public interest. Without CFPB rules in place by July 
22, 2011, a regulatory gap would occur, in which state housing 
creditors would not be able to continue issuing variable rate and other 
alternative mortgage loans pursuant to AMTPA in states that prohibit 
such transactions, thus denying consumers access to that form of 
credit.\42\ In addition, the CFPB is concerned that failure to issue an 
interim final rule addressing the modification of existing AMTPA loans 
could create uncertainty and discourage such modifications.
---------------------------------------------------------------------------

    \42\ The CFPB notes that the amendments to AMTPA and this 
interim final rule do not affect preemption of state law under other 
statutes.
---------------------------------------------------------------------------

    Although originations of variable rate alternative mortgage loans 
have slowed significantly in recent years, they still constitute 
approximately 12 percent of mortgage originations and are experiencing 
modest growth.\43\ In addition, while balloon mortgage loans represent 
a very small percentage of total originations, they can be important 
products in certain markets served by rural and community banks. Absent 
this interim final rule, state housing creditors would no longer be 
able to offer--and consumers would no longer be able to obtain--these 
products to the extent they are inconsistent with state law.
---------------------------------------------------------------------------

    \43\ Federal Reserve Bank of New York, Current Issues in 
Economics and Finance (Dec. 2010); Inside Mortgage Finance data; see 
also Tara Siegel Bernard, Borrowers Wade Back Into Adjustable-Rate 
Mortgages, N.Y. Times, June 21, 2011 (available at http://bucks.blogs.nytimes.com/2011/06/21/borrowers-wade-back-into-adjustable-rate-mortgages/).
---------------------------------------------------------------------------

    Furthermore, as discussed below with respect to Sec.  1004.1, this 
interim final rule clarifies that modifying an alternative mortgage 
transaction made on or before July 21, 2011 does not result in a loss 
of AMTPA preemption. Without this guidance, state lenders would likely 
reduce the availability of modifications for fear of losing AMTPA 
preemption.
    No current data sources track the amount of lending activity that 
would be impermissible but for AMTPA preemption. However, even with 
regard to basic variable rate mortgages, the CFPB's initial research 
indicates that a significant number of states impose restrictions on 
the size, frequency, or timing of interest rate and payment adjustments 
and renegotiations.\44\ Similarly, several states impose substantive 
restrictions on the ability of housing creditors to offer mortgage 
loans with a balloon payment feature.\45\

[[Page 44231]]

In some cases, these state law requirements are stricter than--or 
materially different from--the restrictions on federal housing 
creditors that state housing creditors were entitled to follow until 
July 22, 2011.
---------------------------------------------------------------------------

    \44\ See, e.g., Cal. Civ. Code Sec.  1916.5 (2004) (requiring 
certain provisions for any variable rate loan, including caps on 
interest rate increases and a promise that the rate of interest 
shall change no more than twice a year); Sec.  1916.7 (1981) 
(requiring certain provisions for adjustable-rate mortgages, 
including minimum term and amortization periods, limitations on 
changes in interest and monthly payments, limitations on which 
indices lenders may use to determine interest rate changes, and 
requirements relating to extending the loan under certain 
circumstances); Sec.  1916.8 (1980) (defining a renegotiable rate 
mortgage loan as a loan issued for a term of three, four, or five 
years, automatically renewable at equal intervals, repayable in 
equal monthly installments of principal and interest, in an amount 
at least sufficient to amortize the loan over the remaining term of 
the mortgage, and setting requirements for interest rate changes and 
disclosures); Sec.  1920 (1997) (providing requirements for any 
mortgage instrument, including standards for the adjustment of 
interest rates and monthly payments); Cal. Fin. Code Sec.  7504 
(1984) (allowing an association to adjust the interest rate, 
payment, balance, or term-to-maturity on any loan secured by real 
property as authorized by the loan contract; requiring that such 
adjustments be subject to certain limitations including loan term 
limits, loan-to-value ratios, and interest rate indices, and 
allowing loans to be fully amortized, partially amortized, 
nonamortized, a reverse annuity mortgage, or an open end line of 
credit loan); Ga. Code Sec.  7-6A-5 (2004) (subjecting high-cost 
home loans to certain limitations, including balloon payments and 
interest rate increases, and requiring creditors to allow the 
borrower to modify, renew, extend, or amend the loan at no cost); 
Ind. Code Sec.  28-15-11-14 (1997) (setting requirements for 
adjustable mortgage loans, including limitations on adjustments to 
the principal loan balance, interest rate adjustments, and fees); 
Kan. Stat. Sec.  16-207 (1999) (setting interest rate limitations on 
any loan, including all first mortgage loans and contracts for deed 
to real estate); Ky. Rev. Stat. Sec.  360.150 (1984) (subjecting all 
adjustable rate mortgages to certain provisions, including 
limitations on interest rate changes and installment payments and 
disclosures); La. Rev. Stat. Sec.  9:3504 (2004) (authorizing 
adjustable rate mortgages on certain terms relating to interest rate 
indices, the frequency of interest rate adjustments, and installment 
adjustments, and exempting certain types of adjustable rate 
mortgages from the applications of laws on usury and interest upon 
interest); N.J. Stat. Sec.  46:10B-40 (2008) (providing for a 
mandatory three-year extension period during which the interest rate 
on an introductory rate mortgage shall not increase for certain 
eligible borrowers who do not have sufficient monthly income to pay 
monthly payments that will apply after the interest rate resets); 
N.M. Stat. 56-1-16 (1983) (setting requirements for mobile home 
loans, including that adjustments in the rate shall be tied to a 
specific index, limitations on frequency and amount of rate 
adjustments, and allowance of changes in installment payments due to 
rate adjustments); 41 Pa. Stat. Sec.  301 (2008) (setting caps on 
interest rates and limitations on frequency and amount of rate 
adjustments for residential mortgages); Tex. Fin. Code Sec.  347.102 
(1997) (authorizing interest rate adjustments provided that the 
lender ties the rate changes to an approved index according to the 
statute). This footnote is included for illustrative purposes and 
does not constitute a determination by the CFPB that specific state 
laws are or are not preempted by the interim final rule.
    \45\ See, e.g., Cal. Bus. & Prof. Sec.  10244.1 (1973) 
(restricting payments greater than twice the amount of the smallest 
installment for loans with a term of six years or less); Colo. Rev. 
Stat. Sec.  5-3.5-102 (2003) (restricting payments greater than 
twice the average of earlier regularly scheduled payments unless 
such balloon payment becomes due and payable not less than 120 
months after the date of execution of the loan); DC Code Sec.  26-
1152.13 (2002) (restricting scheduled payment more than twice as 
large as the average of earlier scheduled monthly payments unless 
the balloon payment becomes due and payable not less than 7 years 
after the date of the loan closing); Ga. Code, Sec.  7-6A-5(2) 
(2002) (prohibiting scheduled payments more than twice as large as 
earlier payments in certain high cost home loans); Ill. Admin. Code 
tit. 38, Sec.  1050.1272 (2005) (restricting certain balloon 
payments unless such balloon payment becomes due and payable at 
least 15 years after the loan's origination); Ind. Code Sec.  24-9-
4-3 (2005) (restricting payments greater than twice the average of 
earlier regularly scheduled payments for certain high cost loans 
unless such balloon payment becomes due and payable not less than 
120 months after the date of execution of the loan); Ky. Rev. Stat. 
Ann. Sec.  360.100 (2010) (restricting payments greater than twice 
the amount of the smallest installment for certain high cost loans); 
N.C. Gen. Stat. Sec.  24-1.1A (1973) (restricting certain affiliates 
from providing balloon payments on home loans in excess of six 
months); 7 Pa. Cons. Stat. Ann. Sec.  6020-155 (1995) (prohibiting 
balloon loans for financing the purchase of an owner occupied one or 
two family residential property); Tex. Fin. Code Ann. Sec.  343.202 
(2006) (restricting scheduled payments more than twice as large as 
earlier payments in certain high cost home loans unless the balloon 
payment becomes due not less than 60 months after the date of the 
loan); W. Va. Code Sec.  46A-4-110a (1996) (prohibiting balloon 
payments unless preempted by federal law). This footnote is included 
for illustrative purposes and does not constitute a determination by 
the CFPB that specific state laws are or are not preempted by the 
interim final rule.
---------------------------------------------------------------------------

    A curtailment in variable and adjustable rate loans would be 
harmful to consumers for whom these products can serve an important 
purpose. For example, they can result in lower interest rates for 
borrowers who plan to sell their homes or refinance within a few years 
or are otherwise able and willing to assume associated interest rate 
risk. These products may also enable some creditworthy consumers who 
otherwise could not qualify for a fixed-rate loan to obtain a mortgage 
loan. Furthermore, as noted above, balloon-payment mortgage loans can 
be an important product in certain markets.
    For these reasons, the CFPB finds that the failure to adopt an 
interim final rule would create a risk of substantially disrupting 
mortgage markets, placing state housing creditors at an inappropriate 
competitive disadvantage, and reducing access to credit for consumers. 
For many consumers and state lenders, the resulting curtailment of 
alternative mortgages would be sudden, unexpected, and disruptive. This 
outcome would conflict not only with the purpose of AMTPA but also with 
a fundamental purpose of the Dodd-Frank Act, which is to ``ensur[e] 
that all consumers have access to markets for consumer financial 
products and services and that [such markets] are fair, transparent, 
and competitive.'' \46\ The CFPB does not believe that Congress 
intended such a result and finds good cause to issue the interim final 
rule without notice-and-comment procedures and effective immediately as 
a temporary measure pending the completion of a notice-and-comment 
rulemaking proceeding.
---------------------------------------------------------------------------

    \46\ Public Law 111-203 Sec.  1021(a).
---------------------------------------------------------------------------

    In order to mitigate disruptions resulting from the implementation 
of the amendments to AMTPA, the CFPB issued a public bulletin in 
advance of this interim final rule alerting state chartered and 
licensed lenders and other interested parties that: (1) The Dodd-Frank 
Act amendments to AMTPA take effect on July 21, 2011; and (2) the 
amendments affect what laws apply to mortgage loans issued by state 
chartered or licensed lenders after that date by narrowing the 
statutory definition of ``alternative mortgage transaction'' and the 
scope of preemption under AMTPA.\47\ In addition, the CFPB reached out 
to state and federal regulators, trade associations, and consumer 
advocates to urge planning for an orderly transition. The CFPB will 
continue its outreach and consultations while it engages in a notice-
and-comment rulemaking to more fully effectuate the Dodd-Frank Act 
amendments. The CFPB is committed to beginning the notice-and-comment 
rulemaking process as soon as possible after the comment period closes 
on the interim final rule.
---------------------------------------------------------------------------

    \47\ Available at http://www.consumerfinance.gov/wp-content/uploads/2011/06/Amendments-to-the-Alternative-Mortgage-Transaction-Parity-Act.pdf.
---------------------------------------------------------------------------

V. Request for Comment

    Requests for comment on the interim final rule and related matters 
are listed in the section-by-section analysis below. In anticipation of 
its upcoming notice-and-comment rulemaking proceeding, the CFPB also 
seeks comment on a wide range of issues relating to AMTPA, state 
regulation of alternative mortgage transactions, and regulations that 
have previously been designated by the OCC, NCUA, and OTS/FHLBB as 
applicable to state housing creditors when conducting alternative 
mortgage transactions.

State Housing Creditors' Reliance on AMTPA

    1. What categories of mortgage loans were being made in reliance on 
AMTPA preemption prior to the Dodd-Frank Act (for example, adjustable 
rate mortgages, reverse mortgages, balloon loans)? What was the volume 
of these types of mortgage loans? Were these types of loans more 
prevalent in particular geographic markets (such as rural areas)? If 
so, which geographic markets? What types of entities made these loans?
    2. To what extent did AMTPA preemption enable state housing 
creditors to make such loans? Do any state laws prohibit state housing 
creditors from making such loans? If so, please describe the background 
and purpose of the law and its effect on the state housing creditors' 
ability to make the type of loan.
    3. What categories of mortgage loans are currently being made in 
reliance on AMTPA preemption under the interim final rule? What is the 
volume of these types of mortgage loans? Are these types of loans more 
prevalent in particular geographic locations? If so, which geographic 
markets? What types of entities are making these loans?
    4. How many balloon loans are community and rural banks originating 
today to hold in portfolio? Please describe the terms of the balloon 
loans, including whether a written or oral commitment is made to renew 
the loan at expiration.
    5. What role is AMTPA playing with respect to loan modifications 
and refinancings?

State Laws Regulating Alternative Mortgage Transactions

    1. How are states currently regulating alternative mortgage 
transactions? Which state laws currently prohibit or restrict such 
transactions and how do they do so? How burdensome are any 
restrictions? Are these restrictions applicable to mortgage 
transactions generally?
    2. How do state laws that regulate alternative mortgage 
transactions help protect consumers?
    3. How have state mortgage laws changed since AMTPA was enacted, 
and what are the reasons for those changes?

Federal Fegulation of Alternative Mortgage Transactions

    1. Should the requirements set forth in Sec.  1004.4(a) through (c) 
of this interim final rule be retained? Are any modifications or 
additional requirements needed? To what extent do the requirements in 
Sec.  1004.4(a) through (c) promote parity between federal and state 
housing creditors? To what extent do these requirements affect the cost 
of credit, consumers' access to credit, and consumer protection? To 
what extent do these requirements affect the burden on lenders?
    2. In this interim final rule, the CFPB has used its authority 
under TILA to establish standards for alternative mortgage 
transactions. The CFPB solicits comment on whether it should utilize 
other authorities for establishing such standards in a permanent final 
rule.

VI. Section-by-Section Analysis

Section 1004.1 Authority, Purpose, Scope

    This section addresses the authority, purpose, and scope of the new 
Part 1004, which the CFPB is issuing to implement AMTPA, as amended by 
Section 1083 of the Dodd-Frank Act.
(a) Authority
    Section 1004.1(a) explains that Part 1004 implements AMTPA as 
amended by Section 1083 of the Dodd-Frank Act, pursuant to the 
rulemaking authority transferred to the CFPB from various transferor 
agencies under Section 1061

[[Page 44232]]

of the Dodd-Frank Act. This section also explains that Sec.  1004.4 is 
issued based on the CFPB's authority under TILA.
(b) Purpose
    Consistent with AMTPA, TILA, and the Dodd-Frank Act, Sec.  
1004.1(b) states that the purpose of Part 1004 is to balance: (1) 
Access to responsible credit and enhanced parity between state and 
federal housing creditors regarding the making, purchase, and 
enforcement of alternative mortgage transactions, with (2) consumer 
protection and the interests of the states in regulating mortgage 
transactions generally. The purpose of AMTPA (as defined in 12 U.S.C. 
3801) is to provide parity between federal and state housing creditors 
``by authorizing all housing creditors to make, purchase, and enforce 
alternative mortgage transactions so long as the transactions are in 
conformity with the regulations issued by the Federal agencies.'' 
However, as described above, the level of parity provided by AMTPA has 
been modified by the Dodd-Frank Act's amendments to the definition of 
``alternative mortgage transaction'' and the scope of preemption under 
AMTPA, which narrow the range of transactions eligible for AMTPA 
preemption and restore the effect of certain state mortgage laws. 
Section 1004.1(b) reflects this modification as well as the CFPB's use 
of its consumer protection authority under TILA.
(c) Scope
    Section 1004.1(c) states that Part 1004 applies to an alternative 
mortgage transaction if the creditor received an application for that 
transaction on or after July 22, 2011. This section further states that 
Part 1004 does not apply to a transaction if the creditor received the 
application for that transaction before July 22, 2011.
    Section 1083(c) of the Dodd-Frank Act provides that its amendments 
to AMTPA do not affect ``any transaction covered by the Alternative 
Mortgage Transaction Parity Act of 1982 (12 U.S.C. 3801 et seq.) and 
entered into on or before the designated transfer date.'' Accordingly, 
the CFPB must determine when a transaction is ``entered into'' for 
purposes of determining which preemption standards and rules--pre-Dodd-
Frank Act amendments or post-Dodd-Frank Act amendments--are applicable. 
Rather than a single event, a mortgage transaction is a series of steps 
progressing from application to consummation to servicing. Each of 
these steps is subject to a variety of state and federal consumer 
protection statutes, many of which govern activities that occur prior 
to consummation (such as disclosure and underwriting). In order to 
establish a workable regulatory regime, there must be a readily 
identifiable date and a single set of rules to govern the entire 
transaction. In light of these considerations, the CFPB has interpreted 
an ``alternative mortgage transaction'' as being ``entered into'' on 
the date the application is received by the creditor. This 
interpretation seeks to ensure that the entire transaction is governed 
by a consistent set of rules. For example, if an application for a 
mortgage transaction is received on July 21, 2011, but is not completed 
on August 21, 2011, AMTPA preemption is determined under the regime in 
effect prior to the Dodd-Frank Act amendments. However, if the 
application is received on July 22, 2011, AMTPA preemption is 
determined under the regime established by the Dodd-Frank Act 
amendments and this interim final rule.
    Comment 1(c)-1 clarifies that, if an application for a transaction 
is received by a creditor prior to July 22, 2011, whether 12 U.S.C. 
3803(c) preempts state law with respect to that transaction depends on 
whether: (1) The transaction was an alternative mortgage transaction as 
defined by the version of 12 U.S.C. 3802(1) in effect at the time of 
application; and (2) the state housing creditor complied with 
applicable federal regulations issued by the OCC, NCUA, or OTS/FHLBB in 
effect at the time of application.
    Comment 1(c)-2 clarifies that, if 12 U.S.C. 3803(c) or this interim 
final rule (as applicable) preempted state law at the time an 
application was received, certain subsequent actions with respect to 
that transaction are entitled to the same degree of preemption. This 
comment applies regardless of whether the application was received 
before, on, or after July 22, 2011. First, if state law was preempted 
at the time of application, state law is also preempted with respect to 
the subsequent consummation, completion, purchase, or enforcement of 
the transaction by a state housing creditor. This interpretation is 
consistent with 12 U.S.C. 3801(b) and 3803(a), which address state 
housing creditors' ability to ``make, purchase, or enforce'' 
alternative mortgage transactions.
    Second, if state law was preempted at the time of application, 
state law is also preempted with respect to the subsequent 
modification, renewal, or extension of the transaction. The CFPB 
interprets such activity as constituting a continuation of the same 
``transaction'' for purposes of AMTPA. For instance, if a distressed 
borrower with a variable rate mortgage loan that is currently subject 
to preemption under AMTPA would be able to avoid foreclosure through a 
modification, the CFPB believes that AMTPA should continue to preempt 
state law that would otherwise prohibit the modification. However, if 
state law was preempted at the time of application and the transaction 
is later satisfied and replaced by another transaction (such as through 
a refinancing), the second transaction must independently meet the 
requirements for preemption in effect at the time the second 
transaction is made under 12 U.S.C. 3803(c) or this interim final rule 
(as applicable).
    This interpretation is generally similar to the statutory language 
that governed the transition period with regard to states that decided 
to opt-out of the statutory preemption regime when AMTPA was first 
enacted.\48\ However, the interim final rule treats refinancings 
differently than modifications, extensions, and renewals because, as 
provided in 12 CFR 226.20, a refinancing constitutes a new transaction 
that satisfies and replaces an existing obligation. Under these 
circumstances, the CFPB believes that the new transaction should be 
evaluated independently with respect to AMTPA preemption. The CFPB 
seeks comment on these interpretations, particularly as to what types 
of modifications might otherwise be prohibited under state law and 
whether additional protections are needed with respect to 
modifications.
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 3804(a)(2) (providing that ``any renewal, 
extension, refinancing, or other modification of an alternative 
mortgage transaction that was entered into during the preemption 
period'' would also be afforded AMTPA preemption).
---------------------------------------------------------------------------

Section 1004.2 Definitions

(a) Alternative Mortgage Transaction
    The interim final rule defines ``alternative mortgage transaction'' 
to include a loan, credit sale, or account: (1) That is secured by an 
interest in a residential structure that contains one to four units, 
whether or not the structure is attached to real property, including an 
individual condominium unit, cooperative unit, mobile home, and 
trailer, if it is used as a residence; (2) that is made primarily for 
personal, family, or household purposes; and (3) in which the interest 
rate or finance charge may be adjusted or renegotiated.
    Comment 2(a)-1 clarifies that home equity lines of credit and 
subordinate lien mortgages are alternative mortgage transactions as 
long as they meet the definition in Sec.  1004.2(a). Comment 2(a)-

[[Page 44233]]

2, discussed in more detail below, provides specific examples of 
transactions that are alternative mortgage transactions, while comment 
2(a)-3 provides examples of transactions that are not alternative 
mortgage transactions.
    The first element of the definition of alternative mortgage 
transaction is derived from AMTPA as well as the definition of a 
``dwelling'' in 12 CFR 226.2(a)(19). The second element of the 
definition requires that an alternative mortgage transaction involve an 
extension of consumer credit. AMTPA's findings indicate that Congress 
was concerned with the availability of housing credit to consumers.\49\ 
In addition, AMTPA applies to transactions secured by residential real 
property or a dwelling (including stock allocated to a dwelling in a 
residential cooperative housing corporation or a residential 
manufactured home). While some consumers may use their residence as 
security for credit for non-consumer purposes (such as to finance a 
business), AMTPA's use of the terms ``residential'' property and 
``dwelling'' indicate that it is intended to apply to alternative 
mortgage transactions involving consumer credit. In addition, requiring 
alternative mortgage transactions to be consumer credit aligns the 
AMTPA regulations with the CFPB's general scope of authority under 
TILA, which also serves as authority for this interim final rule. 
However, the CFPB seeks comment on this issue.
---------------------------------------------------------------------------

    \49\ See 12 U.S.C. 3801(a)(1) (finding that ``increasingly 
volatile and dynamic changes in interest rates have seriously 
impaired the ability of housing creditors to provide consumers with 
fixed-term, fixed-rate credit secured by interests in real property, 
cooperative housing, manufactured homes, and other dwellings'' 
(emphasis added)).
---------------------------------------------------------------------------

    The third element of the definition requires that the interest rate 
or finance charge for the transaction may be adjusted or renegotiated. 
As described above, Section 1083 narrows AMTPA's definition of an 
``alternative mortgage transaction'' so that it refers only to loans 
and credit sales ``in which the interest rate or finance charge may be 
adjusted or renegotiated, [as] described and defined by applicable 
regulation.'' As noted above, Section 1083 deletes language that 
specifically included within the definition of alternative mortgage 
transaction: (1) Fixed-rate balloon loans ``which implicitly permit[] 
rate adjustments'' because the debt matures before the end of the 
loan's amortization schedule; and (2) mortgage loans ``involving any 
similar type of rate, method of determining return, term, repayment, or 
other variation not common to traditional fixed rate, fixed term 
transactions,'' including but not limited to shared equity and shared 
appreciation transactions.
    The interim final rule construes the amendment to exclude only 
those mortgages that do not involve an adjustable or renegotiable rate 
or finance charge. For example, a fixed-rate loan that permits the 
consumer to make interest-only payments for a period of time does not 
involve an adjustment to or renegotiation of the interest rate or 
finance charge. Previously, such transactions were considered 
alternative mortgage transactions under the third prong of the original 
AMTPA definition since an interest-only feature was ``not common to 
traditional fixed rate, fixed term transactions.'' \50\ Under the 
interim final rule, however, such transactions are no longer 
alternative mortgage transactions. Yet transactions that are 
specifically mentioned in the second and third prongs of the original 
AMTPA definition, such as shared-equity/shared-appreciation 
transactions and renewable balloon-payment transactions (which involve 
renegotiation of or adjustments to the rate or finance charge), do 
continue to be alternative mortgage transactions under the interim 
final rule. Furthermore, under the interim final rule, a mortgage with 
both an adjustable or renegotiable rate or finance charge and one or 
more other ``nontraditional'' features continues to be an ``alternative 
mortgage transaction.'' (However, as discussed below with respect to 
Sec.  1004.3, the scope of AMTPA preemption has also been narrowed such 
that alternative mortgage transactions with certain nontraditional 
features like interest-only payments or negative amortization are 
subject to greater state regulation under the amended statute.)
---------------------------------------------------------------------------

    \50\ See OTS Letter P-2003-9 (Dec. 2, 2003).
---------------------------------------------------------------------------

    The CFPB recognizes that the amendments to AMTPA's definition could 
be interpreted differently. Specifically, by eliminating references to 
balloon payment loans and shared-equity/shared-appreciation mortgages, 
the amendment could be interpreted as excluding all such transactions 
from the definition of an alternative mortgage transaction. In 
addition, the amendment removed a provision that defined alternative 
mortgage transactions as loans with variations to the rate, method of 
determining return, term, repayment, or other variations not common to 
traditional fixed-rate, fixed-term transactions. However, rather than 
attempting to identify each and every type of loan that could 
potentially fall under the deleted portions of the definition, the CFPB 
believes that, for purposes of this interim final rule, the best 
approach is to focus on whether particular types of transactions fit 
within the remaining statutory definition.
    As discussed further below, the Dodd-Frank Act's amendments to both 
the definition of ``alternative mortgage transaction'' and to the scope 
of preemption under AMTPA are subject to different interpretations and 
are interrelated. The CFPB seeks public comment about how best to 
effectuate congressional intent through implementing regulations that 
will protect consumers, promote parity, and be readily understandable 
and applicable by creditors, supervising agencies, and others. The CFPB 
also requests comment on whether any specific types of mortgages should 
be excluded from the definition of an alternative mortgage transaction.
    Mortgages with adjustable rates or finance charges. Comment 2(a)-2 
provides specific examples of transactions that are alternative 
mortgage transactions.\51\ Examples of alternative mortgage 
transactions include transactions in which the interest rate changes in 
accordance with changes to an index and transactions in which the 
interest rate may be increased or decreased after a specified period of 
time or under specified circumstances. For example, the definition 
includes loans in which the interest rate or finance charge may be 
adjusted after a period of time as specified and defined by the 
contract, for instance to provide a ``timely payment discount rate'' 
upon an anniversary of loan origination to borrowers who have made 
timely payments for a specified period of time.\52\ (However, as 
discussed below with respect to Sec.  1004.3, generally applicable 
state laws governing late charges, including increases in the interest 
rate due to default, are no longer preempted by AMTPA.)
---------------------------------------------------------------------------

    \51\ These examples are consistent with the definition of an 
``adjustable rate mortgage loan'' in AMTPA, 12 U.S.C. 3806(d)(2), as 
one in which the loan agreement permits the creditor to adjust the 
rate of interest from time to time. While the definition of 
``adjustable rate mortgage loan'' applies to a section of AMTPA that 
requires adjustable rate mortgages to have maximum interest rates 
(rather than to the preemption provisions), it sheds light on the 
types of loans contemplated by AMTPA as having adjustable rates.
    \52\ See OTS Letter P-2003-9 (Dec. 2, 2003); OTS Letter P-96-13 
(Nov. 27, 1996).
---------------------------------------------------------------------------

    The definition of ``alternative mortgage transaction'' in Sec.  
1004.2(a) includes ``variable rate transactions'' as defined under 
Regulation Z for purposes of providing disclosures under 12 CFR

[[Page 44234]]

226.19(b).\53\ The definition is also similar to the OCC's definition 
of ``adjustable rate mortgage'' under its AMTPA regulations.\54\
---------------------------------------------------------------------------

    \53\ As discussed below, Regulation Z also treats renewable 
balloon payment loans as variable rate transactions. See 12 CFR 
226.17 comment 17(b)-11.
    \54\ See 12 CFR 34.20, 34.24 (authorizing state chartered banks 
to make ``adjustable rate mortgages,'' defined generally to include 
secured extensions of credit ``where the lender, pursuant to an 
agreement with the borrower, may adjust the rate of interest from 
time to time'').
---------------------------------------------------------------------------

    With regard to shared appreciation and shared equity features in 
particular, although the Dodd-Frank Act amendments to AMTPA deleted the 
specific language referencing shared appreciation and shared equity 
mortgages, loans with these features continue to fall within the 
remaining definition of ``alternative mortgage transaction'' because 
they are mortgage transactions in which a finance charge is adjustable. 
Indeed, the CFPB notes that Regulation Z currently categorizes shared-
equity/shared appreciation mortgages as variable-rate transactions.\55\ 
Accordingly, consistent with that interpretation, the interim final 
rule includes such mortgages within the definition of alternative 
mortgage transaction.
---------------------------------------------------------------------------

    \55\ See 12 CFR 226 comment 17(c)(1)-11.
---------------------------------------------------------------------------

    The CFPB seeks comment on whether the products discussed above 
should be considered alternative mortgage transactions and what other 
products in the current market have adjustable rates or finance 
charges. The CFPB in particular seeks comment on whether treating a 
mortgage that permits a rate adjustment upon default as an alternative 
mortgage transaction is an appropriate approach in light of the Dodd-
Frank Act amendments that specifically preserve states' authority to 
regulate late charges.
    Mortgages with renegotiable rates or finance charges. The statute 
does not define what types of loans provide for the ``renegotiat[ion]'' 
of the interest rate or finance charge. The CFPB does not believe that 
Congress intended this language to apply to every transaction in which 
the interest rate or finance charge might theoretically be 
renegotiated. Such an interpretation could encompass almost any 
mortgage transaction. Instead, the CFPB believes it is appropriate to 
consider historical regulations and interpretations issued by the FHLBB 
and by the Federal Reserve Board under Regulation Z, both of which 
suggest that ``renegotiable rate mortgages'' were commonly understood 
at the time that AMTPA was enacted to include a subset of fixed-rate 
balloon loans involving renewable short-term notes secured by long-term 
mortgages, where the creditor made a commitment to renew the notes but 
reserved discretion to adjust the interest rate at renewal.\56\
---------------------------------------------------------------------------

    \56\ See, e.g., 45 FR 24,108 (Apr. 9, 1980). The FHLBB initially 
provided very detailed rules regarding renegotiable rate mortgages, 
which were subsumed into regulations on adjustable rate mortgages at 
46 FR 24,148 (Apr. 30, 1981). The Federal Reserve also has moved 
from a narrower definition of ``renegotiable rate mortgages'' to a 
broader category of ``renewable'' balloon loans. Compare 66 
Fed.Res.Bull. 830 (Oct. 1980) (defining ``renegotiable rate 
mortgages'' to include fixed-rate balloon loan mortgages for which 
the lender was obliged to renew the loan upon expiration of the loan 
on the same credit terms except for a change in the interest rate, 
and interpreting Regulation Z to permit lenders to disclose such 
mortgages either as a variable-rate obligation under 12 CFR 
226.8(b)(8) or as a balloon-payment obligation under 12 CFR 
226.8(b)(3)), with 56 FR 13751, 13754 (Apr. 4, 1991) (dropping the 
term ``renegotiable rate mortgage'' in favor of a more generic 
category of renewable loans with balloon payments, where the 
creditor is either unconditionally obligated to renew the loan or 
obligated to renew subject only to conditions within the consumer's 
control, and requiring that such loans be disclosed as long-term 
variable rate loans rather than as short-term balloon loans).
---------------------------------------------------------------------------

    This commitment to renew distinguishes renegotiable/renewable loans 
from a broader and more generic category of balloon loans that was 
included in AMTPA's original definition of ``alternative mortgage 
transaction,'' but was then removed from the definition by the Dodd-
Frank Act amendments. That language referred to loans ``involving a 
fixed rate, but which implicitly permit[] rate adjustments by having 
the debt mature at the end of an interval shorter than the term of the 
amortization schedule,'' without reference or regard to renewal 
commitments.\57\
---------------------------------------------------------------------------

    \57\ 12 U.S.C. 3802(1)(B).
---------------------------------------------------------------------------

    As discussed above, the fact that Section 1083 deleted the 
reference to balloon loans while retaining the reference to loans for 
which the interest rate or finance charge may be renegotiated creates 
significant ambiguity as to how balloon loans should be treated under 
AMTPA as amended. However, based on available information, it is 
unclear to what the phrase ``renegotiable rate'' in the amended AMTPA 
definition refers, if not to balloon loans where there is a commitment 
to renew the loan but the rate is subject to renegotiation.
    For these reasons, the CFPB believes that, for purposes of this 
interim final rule, it is appropriate to construe the category of 
renegotiable rate loans to include fixed-rate balloon loans in which 
the lender has committed to renew the loan. For example, the interim 
final rule provides that, if a loan has, for instance, a 30-year 
amortization period but a balloon payment is due at the end of five 
years, the product is an ``alternative mortgage transaction'' for 
purposes of AMTPA if the creditor commits to renew the mortgage.\58\ 
The CFPB notes that the requirement of a lender commitment to renew can 
help protect borrowers from the heightened default risk associated with 
balloon payments.\59\ Furthermore, as discussed below with respect to 
Sec.  1004.4(b), this commitment must be made in writing in order for 
the transaction to receive AMTPA preemption.
---------------------------------------------------------------------------

    \58\ This approach is also consistent with the OCC's regulations 
applicable to AMTPA loans, which define ``adjustable rate 
mortgages'' to exclude ``fixed-rate extensions of credit that are 
payable at the end of a term that, when added to any terms for which 
the bank has promised to renew the loan, is shorter than the term of 
the amortization schedule.'' 12 CFR 34.20. Thus, if the bank 
promises to renew the loan for the term of the amortization 
schedule, the loan fell within the OCC's definition of ``adjustable 
rate mortgage.''
    \59\ See, e.g., Roberto G. Quercia, Michael A. Stegman & Walter 
Davis, The impact of predatory loan terms on subprime foreclosures: 
The special case of prepayment penalties and balloon payments, 18 
Housing Pol'y Debate 311 (2007) (finding that first-lien subprime 
refinance mortgage loans with balloon payments in general were 50% 
more likely to go into foreclosure than other loans, holding other 
factors constant).
---------------------------------------------------------------------------

    The CFPB seeks comment on all aspects of this issue, including 
comment on what products, if any, should be considered renegotiable 
rate loans, how commitments to renew are typically structured, and 
whether further clarity or protections may be appropriate for these 
mortgage products.
    Adjustable or renegotiable rate loans with additional 
nontraditional features. As noted above, the interim final rule defines 
``alternative mortgage transaction'' by focusing on the language of the 
amended statutory definition--in other words, whether the loan has an 
adjustable or renegotiable rate or finance charge. It is unclear 
whether the deletion of AMTPA's language recognizing other 
nontraditional loan features such as negative amortization or interest-
only payment periods was intended to exclude adjustable rate or 
renegotiable rate loans that also contain such features from AMTPA 
preemption. For purposes of the interim final rule, the CFPB has 
concluded that such loans should not be excluded, for several reasons.
    First, a broader exclusion based on the absence of statutory text 
would create a number of practical difficulties. The definitions 
removed from AMTPA mention two specific loan types--balloon loans and 
shared-equity/shared-appreciation loans--which can, in certain 
circumstances, be loans with adjustable or renegotiable rates or

[[Page 44235]]

finance charges, as discussed above. While this amendment could be 
interpreted as having been intended to exclude these products from 
AMTPA coverage entirely, there is no specific language in the amended 
statute that provides guidance as to why such products would no longer 
be considered loans with adjustable or renegotiable rates or finance 
charges, regardless of the other aspects of the loan. In addition, the 
definitions removed by the Dodd-Frank Act amendments were quite broad 
and vague and overlap substantially with the other definitions.\60\ 
Accordingly, interpreting the amendments to exclude from AMTPA coverage 
any transactions described in the removed definitions could undermine 
the remaining definition.
---------------------------------------------------------------------------

    \60\ See 12 U.S.C. 3802(1)(C) (referring to loans ``involving 
any similar type of rate, method of determining return, term, 
repayment, or other variation not common to traditional fixed rate, 
fixed term transactions, including without limitation, transactions 
that involve the sharing of equity or appreciation'') (emphasis 
added).
---------------------------------------------------------------------------

    Second, where unusual circumstances require publication of an 
interim rule to take immediate effect without advance notice and 
opportunity for comment, the CFPB believes that it is appropriate to 
minimize market disruption while the CFPB's notice-and-comment 
rulemaking is under way. Thus, it is appropriate to interpret the 
remaining definition of ``alternative mortgage transaction'' broadly.
    The CFPB also believes it is particularly important to consider the 
interaction between the Dodd-Frank Act's definitional changes 
(implemented in Sec.  1004.2) and changes to the scope of preemption 
(implemented in Sec.  1004.3). Under the definition adopted in the 
interim final rule, fixed-rate products involving negative 
amortization, interest-only periods, or graduated payment features do 
not meet the definition of ``alternative mortgage transaction'' because 
they are not loans with adjustable or renegotiable rates or finance 
charges. Therefore, these types of loans are not eligible for federal 
preemption under AMTPA and instead are subject to applicable state law.
    In contrast, loans containing the same features that also have 
adjustable or renegotiable rates or finance charges would continue to 
qualify as ``alternative mortgage transactions'' under the definition 
in Sec.  1004.2(a). However, state law is preempted with respect to 
such loans only to the extent provided in Sec.  1004.3 (and only if the 
transaction also complies with the requirements in Sec.  1004.4(a) 
through (c), as applicable). Thus, to the extent that a state has 
enacted a law regulating, for example, negative amortization or 
interest-only features, AMTPA would not preempt application of that law 
to an alternative mortgage transaction.
    In addition, although the alternative mortgage transaction 
definition includes loans in which the contract permits the creditor to 
adjust the interest rate or finance charge upon default, applicable 
state laws governing late charges are not preempted under Sec.  1004.3. 
Accordingly, like the statute, the two parts of the interim final rule 
work in conjunction with each other to provide for more consistent 
application of state law across similar mortgage products.
    The CFPB seeks comment not just about the specific definitional 
changes but also how those changes relate to the new scope of 
preemption as further discussed below.
(b) Creditor
    The term ``creditor'' is defined to have the same meaning as under 
Regulation Z, 12 CFR 226.2. This reflects the fact that Sec.  1004.4 of 
the interim final rule applies broadly to all ``creditors'' as defined 
under and pursuant to TILA and Regulation Z when such creditors are 
engaged in the making of alternative mortgage transactions. Comment 
2(b)-1 clarifies that, under Regulation Z, the term ``creditor'' 
includes federally and state-chartered banks, thrifts, and credit 
unions, as well as non-depository institutions (such as state-licensed 
lenders). The comment also references the Official Staff Commentary to 
Regulation Z for additional guidance on the definition of the term 
``creditor.''
(c) Housing Creditor
    The definition of ``housing creditor'' generally mirrors the 
statutory language to include a depository institution as defined in 12 
U.S.C. 1735f-7 note; a lender approved by the Secretary of Housing and 
Urban Development for participation in any mortgage insurance program 
under the National Housing Act; other persons who regularly make loans, 
credit sales, or advances secured by an interest in a residential 
structure that contains one to four units, whether or not that 
structure is attached to real property, including an individual 
condominium unit, cooperative unit, mobile home, and trailer, if it is 
used as a residence; and any transferee of a person in the other three 
categories.
(d) State
    The term ``State'' is defined as a state of the United States, the 
District of Columbia, and U.S. territories and possessions, including 
Puerto Rico, the Virgin Islands, the Northern Mariana Islands, American 
Samoa, and Guam. This is generally consistent with the federal 
prudential agencies' regulations as well as the definition of ``State'' 
in various other federal consumer financial regulations.\61\
---------------------------------------------------------------------------

    \61\ See, e.g., 12 CFR 561.50; 12 CFR 563f.2; 12 CFR 700.2.
---------------------------------------------------------------------------

(e) State Law
    Consistent with 12 U.S.C. 3803, the term ``State law'' is defined 
as a State constitution, statute, or regulation or any provision 
thereof.

Section 1004.3 Preemption of State law.

    Section 1004.3 provides that a state housing creditor may make, 
purchase, and enforce alternative mortgage transactions in accordance 
with the requirements of Sec.  1004.4(a) through (c) (as applicable), 
notwithstanding any provision of State law that restricts the ability 
of the housing creditor to adjust or renegotiate an interest rate or 
finance charge with respect to the transaction or to change the amount 
of interest or finance charges included in a regular periodic payment 
as a result of such an adjustment or renegotiation. This regulation 
generally tracks the language and structure of 12 U.S.C. 3803, as 
amended by the Dodd-Frank Act. However, in order to implement the 
purposes of the Dodd-Frank Act's amendments to AMTPA, Sec.  1004.3 
interprets and clarifies the amended preemption standard in 12 U.S.C. 
3803(c) in several respects.
    As an initial matter, the amendments to 12 U.S.C. 3803(c) narrowed 
the scope of preemption to apply only to state laws that ``prohibit[] 
an alternative mortgage transaction.'' \62\ Although it is unclear from 
the statutory text what types of state laws prohibit alternative 
mortgage transactions for purposes of AMTPA, the amendments to 12 
U.S.C. 3803(c) clarify that an alternative mortgage transaction is not 
prohibited by a state law that ``regulates mortgage transactions 
generally, including any restriction on prepayment penalties or late 
charges.'' \63\
---------------------------------------------------------------------------

    \62\ Public Law 111-203, Sec.  1083(a)(2)(B) (emphasis added).
    \63\ Id.
---------------------------------------------------------------------------

    Neither AMTPA nor the Dodd-Frank Act specifically define the term 
``prohibit.'' However, that term is generally understood to mean forbid 
by law or to otherwise prevent or hinder an activity.\64\ Furthermore, 
the purpose of

[[Page 44236]]

AMTPA remains providing state housing creditors ``with parity with 
federally chartered institutions by authorizing all housing creditors 
to make, purchase, and enforce alternative mortgage transactions so 
long as the transactions are in conformity with [federal] regulations. 
* * * '' \65\ This purpose would be thwarted if AMTPA were interpreted 
not to preempt state laws imposing restrictions on state housing 
creditors' ability to adjust interest rates and finance charges where 
such restrictions do not apply to federal housing creditors, as the 
ability to make such adjustments is integral to alternative mortgage 
transactions. Accordingly, because 12 U.S.C. 3802(1) defines an 
alternative mortgage transaction as a transaction ``in which the 
interest rate or finance charge may be adjusted or renegotiated,'' the 
interim final rule construes ``prohibit'' to include not only state 
laws banning the making, purchase, or enforcement of alternative 
mortgage transactions, but also state laws that restrict or hinder the 
adjustment or renegotiation of an interest rate or finance charge. For 
example, as explained in comment 2, state laws are preempted to the 
extent that they restrict the circumstances under which a rate may be 
adjusted, the method by which a rate may be adjusted, or the amount of 
a rate adjustment.
---------------------------------------------------------------------------

    \64\ See, e.g., Webster's New World Dictionary 1075 (3d College 
ed. 1991) (``1 to refuse to permit; forbid by law or by an order 2 
to prevent; hinder''); Black's Law Dictionary 1331 (9th ed. 2009) 
(``Prohibit, vb. 1. To forbid by law. 2. To prevent or hinder.'').
    \65\ 12 U.S.C. 3801(b).
---------------------------------------------------------------------------

    Similarly, Sec.  1004.3 provides that state laws are preempted with 
respect to alternative mortgage transactions to the extent that they 
restrict the ability of a state housing creditor to change the amount 
of a payment to include increased interest or finance charges as a 
result of the adjustment or renegotiation of an interest rate or 
finance charge. The CFPB believes that such changes to payment amounts 
are also integral to alternative mortgage transactions. Indeed, if 
housing creditors were not permitted to increase the payment amount to 
account for an increase in the interest rate, the transaction could 
negatively amortize, which would be harmful to some consumers.\66\
---------------------------------------------------------------------------

    \66\ However, as explained in comment 2, other state law 
restrictions on changes to payments are not preempted by Sec.  
1004.3.
---------------------------------------------------------------------------

    Comment 1 clarifies that, regardless of whether a state law applies 
solely to alternative mortgage transactions or applies to both 
alternative mortgage transactions and other mortgage or consumer credit 
transactions, that law is preempted by Sec.  1004.3 to the extent that 
it restricts the ability of a state housing creditor to adjust or 
renegotiate an interest rate or finance charge with respect to an 
alternative mortgage transaction or to adjust payments as a result of 
such an adjustment or renegotiation. Thus, the preemption regime under 
Sec.  1004.3 is not tied to whether a state law by its terms applies 
solely to alternative mortgage transactions.
    Although the amendments to 12 U.S.C. 3803(c) indicate that state 
laws that regulate mortgage transactions generally are not preempted, 
the CFPB believes that narrowly focusing on whether a state law is by 
its terms general or specific would undermine the key determination of 
whether a state law prohibits an alternative mortgage transaction's 
adjustment or renegotiation of an interest rate or finance charge or 
changes to payments as a result of the adjustment or renegotiation. For 
example, applying preemption to any state law that specifically 
addresses alternative mortgage transactions would preempt state laws 
that do not prohibit alternative mortgage transactions because they do 
not forbid, prevent, or hinder the ability of the state housing 
creditor to make such transactions (such as a state law requiring that 
certain disclosures be provided regarding alternative mortgage 
transactions). Furthermore, this approach would shield from preemption 
state laws that might be couched in general terms but effectively 
prohibit an alternative mortgage transaction (for example, a law 
prohibiting increases in an interest rate based on increases in an 
index). Finally, focusing solely on whether a state law is specific to 
alternative mortgage transactions or more general in its terms could 
lead to anomalous results if, for example, one state prohibited certain 
conduct in a statute that specifically applied to alternative mortgage 
transactions while another state prohibited the same conduct in a 
statute that applied generally to all mortgage transactions. For these 
reasons, the CFPB believes that it would be inconsistent with the goals 
of the Dodd-Frank Act amendments to make AMTPA preemption 
determinations based solely on whether a state law was specific or 
general by its terms.
    Comment 2 also clarifies that state law restrictions on shared 
equity or shared appreciation transactions in which the creditor and 
the consumer share some or all of the appreciation in the value of the 
property are preempted by Sec.  1004.3. As discussed above, such 
transactions are alternative mortgage transactions under Sec.  
1004.2(a). However, the CFPB solicits comment on whether additional 
protections are needed with respect to these types of transactions. The 
CFPB also solicits comment on the volume of these transactions.
    In addition, comment 2 clarifies that state law underwriting 
requirements are preempted by Sec.  1004.3 to the extent that they 
effectively restrict the adjustment or renegotiation of interest rates 
or finance charges or changes in payments as a result of such 
adjustments or renegotiations. For example, if a state law requires 
housing creditors to underwrite based on the maximum contractual rate, 
that particular provision of the law is preempted by Sec.  1004.3 with 
respect to alternative mortgage transactions, regardless of whether the 
provision applies solely to alternative mortgage transactions or to 
both alternative mortgage transactions and other mortgage or consumer 
credit transactions. In contrast, state underwriting requirements of 
general applicability that do not impact the adjustment or 
renegotiation of interest rates or finance charges or changes in 
payments as a result of such adjustments or renegotiations are not 
preempted. (However, as discussed below, Sec.  1004.4(c) requires state 
housing creditors that invoke AMTPA preemption to comply Regulation Z's 
underwriting requirements for high-cost and higher-cost mortgages.)
    In contrast, comment 3 provides examples of state laws that are not 
preempted by Sec.  1004.3 because they do not restrict the ability of 
the housing creditor to adjust or renegotiate an interest rate or 
finance charge or to change the amount of a payment as a result of such 
an adjustment or renegotiation. In particular, the comment states that, 
consistent with the amended 12 U.S.C. 3803(c), state law restrictions 
on prepayment penalties and late charges are not preempted by Sec.  
1004.3 regardless of whether the restriction applies solely to 
alternative mortgage transactions or to both alternative mortgage 
transactions and other mortgage or consumer credit transactions. Such a 
restriction does not prohibit or hinder a feature integral to an 
alternative mortgage transaction. The comment further clarifies that an 
increase in an interest rate or finance charge as a result of a late 
payment is a late charge for purposes of Sec.  1004.3. Therefore, a 
state law that prohibits state housing creditors from increasing a 
consumer's interest rate as a result of a late payment is not preempted 
by Sec.  1004.3.
    In addition, comment 3 clarifies that state law restrictions on 
transactions in which one or more of the regular periodic payments may 
result in an

[[Page 44237]]

increase in the principal balance (a negative amortization feature) or 
may be applied solely to accrued interest and not to loan principal (an 
interest-only feature) are not preempted by Sec.  1004.3. The comment 
also clarifies that state law disclosure requirements are not preempted 
by Sec.  1004.3 regardless of whether the law applies specifically to 
alternative mortgage transactions because disclosure requirements do 
not prohibit a state housing creditor from adjusting or renegotiating 
an interest rate or finance charge or making a corresponding change to 
a payment. Finally, the CFPB notes that, as a general matter, state 
laws prohibiting unfair or deceptive acts or practices are not 
preempted under 12 U.S.C. 3803(c) or this interim final rule.
    The CFPB seeks comment on all aspects of Sec.  1004.3(b) and on 
whether particular state laws should or should not be subject to AMTPA 
preemption. The CFPB notes, however, that nothing in this interim final 
rule affects the preemption of state law under provisions of federal 
law other than AMTPA.

Section 1004.4 Requirements for Alternative Mortgage Transactions

    Section 1083 of the Dodd-Frank Act requires the CFPB to promulgate 
its own regulations governing alternative mortgage transactions after 
the designated transfer date. The CFPB is also required to review and 
determine whether the regulations governing alternative mortgage 
transactions designated by the OCC and NCUA pursuant to AMTPA are 
``fair, not deceptive, and consistent with the purposes of [title X of 
the Dodd-Frank Act].'' \67\ The CFPB believes that it is consistent 
with the intent and purpose of Section 1083 to interpret this provision 
as requiring the CFPB to determine whether the OCC and NCUA regulations 
are effective in preventing unfair or deceptive practices. In addition, 
although this provision does not require the CFPB to review OTS AMTPA 
regulations, the CFPB believes that it is appropriate to do so in order 
to predict potential impacts on the marketplace.
---------------------------------------------------------------------------

    \67\ Public Law 111-203, Sec.  1083(b).
---------------------------------------------------------------------------

    Accordingly, the CFPB has completed an initial review of the 
regulations designated by the OCC, NCUA, and OTS as well as agency 
interpretive guidance, available court decisions, and secondary 
sources. Based on this review, the CFPB has made a preliminary 
determination that certain of those regulations are necessary to 
prevent unfairness and deception and are consistent with the purposes 
of title X of the Dodd-Frank Act. The CFPB has adopted those 
regulations in modified form in Sec.  1004.4(a) and (b) of the interim 
final rule. However, the CFPB believes that additional research, 
consultation, and comment are needed before adoption of a permanent 
final rule. The CFPB therefore seeks comment on whether the 
requirements in Sec.  1004.4 are sufficient to prevent unfair or 
deceptive acts or practices, whether modifications to those 
requirements are appropriate, and whether additional protections are 
needed.
    As discussed above, the CFPB is issuing Sec.  1004.4 pursuant to 
its authority under TILA, which applies to all ``creditors'' as defined 
by Regulation Z. Thus, Sec.  1004.4 applies to all federal and state 
housing creditors that make alternative mortgage transactions. However, 
because there has not yet been an opportunity for notice and comment on 
the requirements in Sec.  1004.4(a) through (c), the CFPB has delayed 
mandatory compliance with Sec.  1004.4 until July 21, 2012 for federal 
housing creditors and for state housing creditors that are not relying 
on preemption of state law under Sec.  1004.3. Accordingly, only state 
housing creditors that choose to seek AMTPA preemption under Sec.  
1004.3 are required to comply with Sec.  1004.4 before July 22, 
2012.\68\
---------------------------------------------------------------------------

    \68\ As discussed below, however, nothing in Part 1004 alters 
the obligation of all creditors to continue to comply with the 
requirements of Regulation Z that are incorporated by reference in 
Sec.  1004.4 (specifically, 12 CFR 226.5b, 12 CFR 226.32, 12 CFR 
226.34, and 12 CFR 226.35, as applicable).
---------------------------------------------------------------------------

    The CFPB's interim final rule is designed to protect consumers and 
preserve access to credit and federal-state parity while also providing 
an orderly transition period while the notice-and-comment rulemaking 
process occurs. Because the OCC, NCUA, and OTS AMTPA rules vary 
significantly in substance and scope and because the CFPB's rules must 
account for the Dodd-Frank Act amendments to AMTPA, the CFPB has 
concluded that it would not be practicable or appropriate to simply 
replicate the three pre-existing sets of regulations in the CFPB's 
interim final rule. However, the CFPB has adopted standards and 
language that are comparable to central elements of those regulations 
where it was consistent with the Dodd-Frank Act and otherwise 
appropriate to do so.
    The CFPB did consider simply requiring state housing creditors to 
comply with all requirements of federal law in order to receive AMTPA 
preemption. However, because state housing creditors are already 
required to comply with TILA and other applicable provisions of federal 
law that fall within the CFPB's authority, such an approach would be 
redundant and unnecessary and could cause confusion regarding the scope 
of preemption under Sec.  1004.3. Instead, as discussed below, that 
CFPB has designated specific provisions of Regulation Z in Sec.  
1004.4.
    The CFPB notes that AMTPA provides an opportunity to cure 
violations of federal alternative mortgage transaction regulations that 
may be helpful to state housing creditors as they make adjustments 
necessary to comply with the interim final rule. Specifically, 12 
U.S.C. 3803(b) provides that, where a state housing creditor has failed 
to comply with the alternative mortgage transaction regulations for 
federally chartered housing creditors, an alternative mortgage 
transaction will nonetheless be deemed to be made in accordance with 
the applicable regulation if: ``(1) The transaction is in substantial 
compliance with the regulation; and (2) within sixty days of 
discovering any error the housing creditor corrects such error, 
including making appropriate adjustments, if any, to the account.''
(a) Adjustable rate mortgages.
    Section 1004.4(a) of the interim final rule provides standards by 
which creditors making alternative mortgage transactions with 
adjustable rates or finance charges may increase the interest rate or 
finance charge. To rely on AMTPA's preemption provision, creditors 
making alternative mortgage transactions that are open-end home equity 
lines of credit subject to the Regulation Z requirements in 12 CFR 
226.5b must comply with Sec.  226.5b's requirement that changes in the 
annual percentage rate be made according to a publicly available index 
that is not subject to the creditor's control.
    For closed-end alternative mortgage transactions involving an 
adjustable rate or finance charge, the interim final rule provides that 
adjustments must be made based on either: (1) an index outside the 
creditor's control to which changes in the interest rate are tied; or 
(2) a formula or schedule identifying the amount by which the interest 
rate or finance charge may increase and the times at which, or 
circumstances under which, a change may be made. The content of these 
rules is similar to the OCC and OTS regulations for national banks and 
federal thrifts, respectively, that were previously designated as 
applicable to

[[Page 44238]]

state housing creditors under AMTPA.\69\ Pursuant to its authority 
under Section 1405(a) of the Dodd-Frank Act (15 U.S.C. 1639b(e)(1)), 
the CFPB finds that the adoption of the standards in Sec.  1004.4(a) as 
part of this interim final rule is necessary and proper to ensure that 
responsible, affordable mortgage credit remains available to consumers. 
Nevertheless, the CFPB seeks comment on whether additional or different 
requirements are more appropriate to protect consumers and promote 
parity between federal and state housing creditors.
---------------------------------------------------------------------------

    \69\ 12 CFR 34.20-25; 12 CFR 560.220.
---------------------------------------------------------------------------

    Comment 4(a)-1 clarifies that a creditor may use any measure of 
index values that meets the requirements in Sec.  1004.4(a)(2)(i). For 
example, the index may be either single values as of a specific date or 
an average of values calculated over a specified period.
    Comment 4(a)-2 clarifies that an index is not beyond the creditor's 
control if the index is the creditor's own prime rate or cost of funds. 
A creditor is permitted to use a published prime rate, such as the 
prime rate published in the Wall Street Journal.\70\ The CFPB notes 
that, in other contexts, the Federal Reserve Board has concluded that a 
creditor's use of ``rate floors'' (in other words, minimum values below 
which the interest rate will not fall regardless of the index value) 
constituted control over the operation of an index.\71\ Although the 
CFPB has not adopted that interpretation in this interim final rule, it 
seeks comment on whether it is appropriate to do so in a permanent 
final regulation implementing the amendments to AMTPA.
---------------------------------------------------------------------------

    \70\ See 12 CFR 226.5b comment 5b(f)(1)-1.
    \71\ See 12 CFR 226.55(b)(2) comment 55(b)(2)-2.
---------------------------------------------------------------------------

    Comment 4(a)-3 clarifies that a publicly available index need not 
be published in a newspaper, but it must be one the consumer can 
independently obtain (by telephone, for example) and use to verify the 
annual percentage rate applied to the alternative mortgage 
transaction.\72\
---------------------------------------------------------------------------

    \72\ See 12 CFR 226.5b comment 5b(f)(1)-2
---------------------------------------------------------------------------

(b) Renegotiable rates for balloon-payment mortgages.
    Renegotiable rates and renewable balloon-payment mortgages were not 
specifically discussed in the mortgage rules previously designated as 
applicable to state housing creditors under AMTPA by the OCC, NCUA, and 
OTS. However, pursuant to its authority under Section 1405(a) of the 
Dodd-Frank Act (15 U.S.C. 1639b(e)(1)), the CFPB finds that adoption of 
the standards in Sec.  1004.4(b) as part of this interim final rule is 
necessary and proper to ensure that responsible, affordable mortgage 
credit remains available to consumers.
    As discussed above, a renewable balloon-payment mortgage is 
generally a transaction in which payments are based on an amortization 
period and a large final payment is due after a shorter term, but the 
borrower has the option to renew the transaction at specified intervals 
throughout the amortization period at the interest rate offered by the 
creditor at the time of renewal.\73\ To rely on AMTPA's preemption 
provision, creditors making such transactions must provide a written 
commitment to renew the transaction at specified intervals throughout 
the amortization period. Under the terms of the written commitment, the 
creditor may negotiate an increase or decrease in the interest rate at 
renewal.
---------------------------------------------------------------------------

    \73\ See 12 CFR 226.17 comment 17(b)-11.
---------------------------------------------------------------------------

    The CFPB believes that a written commitment is necessary to ensure 
that balloon-payment mortgages made under AMTPA are provided 
responsibly. However, the CFPB also believes that, based on safety and 
soundness and other considerations, creditors should not be required to 
renew the loan in certain limited circumstances. Accordingly, the CFPB 
has adopted exceptions to the renewal requirement based on the 
exceptions in 12 CFR 226.5b(f)(2), which permit a creditor to terminate 
a home-equity line of credit and demand payment of the outstanding 
balance. The CFPB has modified the Sec.  226.5b(f)(2) exceptions to 
ensure that a creditor generally cannot decline to renew a balloon-
payment loan under Sec.  1004.4(b) unless there has been a material 
change in circumstance.
    Therefore, Sec.  1004.4(b) provides that the creditor is not 
required to renew the transaction if: (1) Any action or inaction by the 
consumer materially and adversely affects the creditor's security for 
the transaction or any right of the creditor in such security; (2) 
there is a material failure by the consumer to meet the repayment terms 
of the transaction; (3) there is fraud or a willful or knowing material 
misrepresentation by the consumer in connection with the transaction; 
or (4) Federal law dealing with credit extended by a depository 
institution to its executive officers specifically requires that as a 
condition of the extension the credit shall become due and payable on 
demand, provided that the creditor includes such a provision in the 
initial agreement.
    The CFPB seeks comment on whether the written commitment 
requirement and the exceptions in Sec.  1004.4(b) are appropriate to 
protect consumers, promote access to responsible credit, and enhance 
parity between federal and state housing creditors.
(c) Requirements for High-Cost and Higher-Priced Mortgage Loans
    Section 1004.4(c) provides that, if an alternative mortgage 
transaction is a ``high-cost'' loan subject to 12 CFR 226.32, the 
creditor must comply with 12 CFR 226.32 and 12 CFR 226.34. In addition, 
if an alternative mortgage transaction is a ``higher-priced mortgage 
loan'' subject to 12 CFR 226.35, the creditor must comply with 12 CFR 
226.35. These provisions of Regulation Z contain underwriting 
requirements and restrictions on loan terms for certain types of loans 
with higher costs. Because the interim final rule preempts some state 
underwriting requirements, the CFPB believes it is appropriate to 
require creditors to comply with these provisions in order to obtain 
that preemption.\74\ Pursuant to its authority under Section 1405(a) of 
the Dodd-Frank Act (15 U.S.C. 1639b(e)(1)), the CFPB finds that the 
adoption of Sec.  1004.4(c) as part of this interim final rule is 
necessary and proper to ensure that responsible, affordable mortgage 
credit remains available to consumers.
---------------------------------------------------------------------------

    \74\ Because 12 CFR 226.32, 12 CFR 226.34, and 12 CFR 226.35 
already apply to all creditors, all creditors must continue to 
comply with those provisions, regardless of whether they seek AMTPA 
preemption.
---------------------------------------------------------------------------

    Comment 1004.3(c)-1 clarifies that creditors must comply with the 
restrictions on prepayment penalties in Regulation Z, if applicable. 
However, as discussed above, creditors are not exempt under AMTPA and 
Sec.  1004.3 from state laws regarding prepayment penalties. Thus, with 
respect to prepayment penalties, creditors must comply with both 
Regulation Z and with state law unless another basis for preemption 
exists (such as because the state law is inconsistent with Regulation 
Z).\75\ For example, if a loan is a higher-priced mortgage loan under 
12 CFR 226.35, it may not have a prepayment penalty unless the penalty 
expires within two years after consummation.\76\ However, if a state 
law prohibited prepayment penalties unless the penalty expires within 
one year, that state law would not be preempted by AMTPA (or by 
Regulation Z).
---------------------------------------------------------------------------

    \75\ See 12 CFR 226.28.
    \76\ 12 CFR 226.35(b)(2)(ii)(A).
---------------------------------------------------------------------------

    The CFPB seeks comment on the inclusion of these requirements in 
Sec.  1004.4(c) and on whether additional underwriting requirements are 
warranted. In particular, the CFPB requests comment on whether, once 
the

[[Page 44239]]

regulations implementing the ability-to-pay requirements in TILA 
Section 129C (15 U.S.C. 1639c) are finalized, all or part of those 
regulations should be incorporated into Sec.  1004.4(c).
(d) Other Applicable Law
    Because Sec.  1004.4 applies to all creditors on July 22, 2012, the 
interim final rule provides Sec.  1004.4(d) as an alternative to 
compliance with Sec.  1004.4(a) through (c) for creditors that do not 
seek preemption under Sec.  1004.3. Specifically, Sec.  1004.4(d) 
permits a housing creditor that is not making an alternative mortgage 
transaction pursuant to Sec.  1004.3 to make that transaction 
consistent with applicable state or federal law other than Sec.  
1004.4. Thus, for example, a state housing creditor that does not 
invoke AMTPA preemption can make an alternative mortgage transaction 
consistent with applicable state law as well as applicable federal law 
other than Sec.  1004.4. Similarly, a federally chartered housing 
creditor can make an alternative mortgage transaction consistent with 
federal law other than Sec.  1004.4 (including any requirements imposed 
by the chartering agency and the requirements for high-cost and higher-
priced mortgage loans found in 12 CFR 226.32, 12 CFR 226.34, and 12 CFR 
226.35) as well as any applicable state law.
    Particularly in view of the fact that this interim final rule is 
being published without notice and comment, the CFPB believes that this 
provision is necessary and appropriate to enable housing creditors that 
are not using AMTPA preemption to make alternative mortgage 
transactions to continue making such transactions in accordance with 
applicable federal or state standards. The CFPB believes that this 
interim final rule strikes an appropriate short-term balance that will 
promote greater parity between federal and state housing creditors, 
continued access to credit on currently-available terms, and consumer 
protection while reflecting the narrowed scope of AMTPA preemption 
under the Dodd-Frank Act. The CFPB seeks comment on both the short-term 
impacts of this provision and on potential long-term standards under 
Sec.  1004.4 that would apply to all creditors or a defined subset of 
creditors. In addition, the CFPB seeks comment on whether it should 
utilize sources of statutory authority other than TILA to issue 
regulations governing alternative mortgage transactions.
    Comment 4(d)-1 clarifies that Sec.  1004.4(d) does not exempt 
housing creditors that do not seek preemption under Sec.  1004.3 from 
complying with provisions of federal law that are incorporated by 
reference in Sec.  1004.4. Specifically, nothing in Sec.  1004.4(d) 
exempts a housing creditor from complying with 12 CFR 226.5b, 226.32, 
226.34, or 226.35.
(e) Reductions in interest rate or finance charge.
    Section 1004.4(e) of the interim final rule provides that a 
creditor may always decrease the interest rate or finance charge on an 
alternative mortgage transaction without violating Sec.  1004.4. The 
OCC regulations that are designated as applicable to state housing 
creditors contain a similar provision, and the CFPB believes it is 
appropriate to replicate that provision here because interest rate and 
finance charge reductions are beneficial to consumers.

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires each 
agency to consider the potential impact of its regulations on small 
entities including small businesses, small governmental units, and 
small not-for-profit organizations.\77\ The RFA generally requires an 
agency to conduct an initial regulatory flexibility analysis (IRFA) and 
a final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements, unless the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities. The CFPB is subject to certain 
additional procedures under the RFA involving the convening of a panel 
to consult with small business representatives regarding any rule for 
which an IRFA is required.
---------------------------------------------------------------------------

    \77\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    The RFA requirements do not apply in cases in which an agency finds 
good cause to issue an interim final rule without a notice of proposed 
rulemaking.\78\ As discussed above in Section IV, the CFPB has made 
such a finding. Moreover, the CFPB believes that any delay in the 
issuance of the interim final rule would be contrary to the interests 
of small businesses, since the ability of small state housing creditors 
to make alternative mortgage transactions under AMTPA would be 
suspended while the CFPB assessed impacts and completed any other 
applicable requirements. The CFPB notes that the interim final rule is 
specifically designed to reduce the amount of disruption from 
implementation of the statutory amendments by adopting requirements 
that are generally consistent with the existing regulations issued by 
the federal prudential agencies to the extent permitted under the Dodd-
Frank Act amendments to AMTPA and by providing a delayed mandatory 
compliance date and safe harbor for small federally chartered and state 
chartered lenders that are not making loans under AMTPA but may be 
affected by the broader long-term rulemaking.
---------------------------------------------------------------------------

    \78\ 5 U.S.C. 553(b)(B); 5 U.S.C. 605(b); 62 FR 23,538 (April 
30, 1997); 66 FR 37,752 (July 19, 2001); 64 FR 3,865 (Jan. 26, 
1999).
---------------------------------------------------------------------------

    The CFPB takes its responsibilities under the Regulatory 
Flexibility Act seriously and is in the process of refining its long-
term policies, procedures, and methodologies for conducting impact 
analyses as required by the statute. The CFPB expects to apply these 
enhanced processes when complying with all applicable requirements as 
part of its future notice-and-comment rulemaking under AMTPA. In 
advance of issuing this interim final rule, the CFPB issued a public 
bulletin alerting state chartered and licensed lenders and other 
interested parties that: (1) the Dodd-Frank Act amendments to AMTPA 
take effect on July 21, 2011; and (2) the amendments affect what laws 
apply to mortgage loans issued by state chartered or licensed lenders 
after that date by narrowing the statutory definition of ``alternative 
mortgage transaction'' and the scope of preemption under AMTPA.\79\ The 
CFPB has also conducted outreach with trade associations, state and 
federal regulators, and consumer advocates to call attention to the 
Dodd-Frank Act's amendments to AMTPA and to urge planning for an 
orderly transition period.
---------------------------------------------------------------------------

    \79\ Available at http://www.consumerfinance.gov/wp-content/uploads/2011/06/Amendments-to-the-Alternative-Mortgage-Transaction-Parity-Act.pdf.
---------------------------------------------------------------------------

    Because limited information exists concerning AMTPA activity, the 
CFPB requests comment and data regarding the amount of activity under 
the statute prior to the Dodd-Frank Act amendments, the impact of the 
OCC, NCUA, and OTS regulations, and the impact of the statutory 
amendments and the interim final rule. All of these topics will help 
the CFPB in assessing the potential economic impacts on small lenders 
as it prepares to propose a permanent final rule.

VIII. Paperwork Reduction Act

    The CFPB has determined that this interim final rule does not 
impose any new recordkeeping or reporting

[[Page 44240]]

requirements on state housing creditors, states, or members of the 
public that would be collections of information requiring approval 
under 44 U.S.C. 3501, et seq.

IX. Dodd-Frank Act Section 1022(b)(2)

    The CFPB has conducted an analysis of benefits, costs, and impacts 
of this interim final rule and consulted with the prudential 
regulators, the Federal Trade Commission, and the Department of Housing 
and Urban Development.\80\ In preparing a notice of proposed rulemaking 
following the issuance of this interim final rule, the CFPB plans to 
perform additional analysis and engage in further consultations 
consistent with Section 1022(b)(2).\81\
---------------------------------------------------------------------------

    \80\ The President's July 11, 2011, Executive Order 13579 
entitled ``Regulation and Independent Regulatory Agencies,'' asks 
the independent agencies to follow the cost-saving, burden-reducing 
principles in Executive Order 13563; harmonization and 
simplification of rules; flexible approaches that reduce costs; and 
scientific integrity. In the spirit of Executive Order 13563, the 
CFPB has consulted with the Office of Management and Budget 
regarding this interim final rule, including with respect to the 
CFPB's methodologies and analysis regarding the potential benefits, 
costs, and impacts of the rule.
    \81\ Section 1022(b)(2)(A) calls for consideration of the 
potential benefits and costs of regulation to consumers and 
industry, including the potential reduction of access by consumers 
to consumer financial products or services; the impact of proposed 
rules on depository institutions and credit unions with $10 billion 
or less in total assets as described in Section 1026 of the Dodd-
Frank Act; and the impact on consumers in rural areas. The CFPB is 
in the process of further developing its long-term policies and 
procedures in this area and evaluating potential methodologies for 
conducting impact analyses as required by the statute.
---------------------------------------------------------------------------

    In the absence of the interim final rule, the provisions of the 
Dodd-Frank Act would, by themselves, impact portions of the mortgage 
market. As discussed previously, the Dodd-Frank Act requires state 
housing creditors to comply with CFPB regulations in order to invoke 
AMTPA preemption for alternative mortgage transactions entered into 
after July 21, 2011. Accordingly, if the CFPB did not adopt regulations 
that took immediate effect on July 22, AMTPA preemption would cease to 
apply and the affected state housing creditors would be subject to 
applicable state law. In states where alternative mortgage transactions 
are prohibited, state housing creditors who were affected would no 
longer be able to make--and consumers would no longer be able to 
obtain--those forms of credit. Furthermore, in states where alternative 
mortgage transactions are regulated but not prohibited, affected state 
housing creditors would either choose to cease making such transactions 
in order to avoid the cost of compliance or have to incur those costs. 
In the absence of an interim final rule, consumers would receive the 
benefits of the application of state consumer protection laws while 
losing the benefits of a countervailing federal consumer protection 
rule under AMTPA and most likely experiencing an increase in the cost 
and/or a reduction in the availability of credit.\82\
---------------------------------------------------------------------------

    \82\ The sudden change in the nature of the regulatory 
environment and the short term market disruptions that would ensue 
in the absence of the interim final rule would lead to additional 
costs as well.
---------------------------------------------------------------------------

    The benefits, costs, and impacts of the interim final rule can be 
measured against this baseline scenario which assumes that the Dodd-
Frank Act amendments have taken effect and preemption is not in force 
since no interim rule exists. Relative to this scenario, the interim 
final rule allows preemption of certain state laws and provides federal 
consumer protection standards governing certain terms in alternative 
mortgage transactions as a condition required before federal preemption 
is triggered. Importantly, the interim final rule also allows creditors 
not seeking to invoke federal preemption under AMTPA to continue making 
alternative mortgage transactions under other sources of federal law or 
relevant state laws, as applicable. Furthermore, while compliance with 
this interim final rule is mandatory for state housing creditors that 
choose to invoke federal preemption under AMTPA, compliance with the 
requirements for alternative mortgage transactions in Sec.  1004.4 of 
this rule is optional for other creditors until July 22, 2012. In 
addition, after July 22, 2012, creditors who are not seeking AMTPA 
preemption may comply with other applicable law rather than the 
requirements of this interim final rule.
    As a result, any potential benefits and costs from the interim 
final rule are limited to alternative mortgage transactions, issued by 
state housing creditors, that would not be permissible under applicable 
state law but for AMTPA's preemption of state restrictions or 
requirements or where the lender chooses to issue the mortgage under 
AMTPA preemption. Lenders choosing to make such mortgages using AMTPA 
preemption will incur the cost of complying with the requirements of 
the interim final rule. On the other hand, to the extent that making 
alternative mortgage transactions that would otherwise be prohibited or 
regulated by state law is profitable to lenders, they will benefit from 
the ability to make these loans under the interim final rule and from 
any cost savings from avoiding the preempted state requirements. 
Consumers will benefit from the provisions of the interim final rule 
and any increased availability or lowered price for credit at the cost 
of decreased consumer protections from state regulation.\83\
---------------------------------------------------------------------------

    \83\ Intangible effects, such as the increase in state autonomy 
inherent in reducing the scope of preemption, are beyond the scope 
of the current discussion.
---------------------------------------------------------------------------

    The CFPB notes that the interim final rule does not apply to 
mortgage transactions that the Dodd-Frank Act has excluded from the 
statutory definition of ``alternative mortgage transaction,'' as 
discussed above. For these loans, state housing creditors can no longer 
invoke AMTPA preemption and therefore the costs and benefits just 
described are not relevant. Such mortgages include fixed-rate mortgage 
loans with interest-only payment periods or negative amortization 
features, fixed-rate balloon loans where the lender does not make a 
commitment to renew the loan, and certain other products that 
previously fit within the statutory definition.
    In order to estimate the potential costs and benefits of the 
interim final rule, the CFPB has examined various data sources and 
consulted with industry and consumer representatives, market 
participants, and other regulators. To date, the CFPB has found no 
comprehensive data from either regulatory or private sources to 
determine the number, value, location, or type of originator of 
mortgages originated specifically using AMTPA preemption. Available 
data indicate that variable rate mortgages comprised approximately 12 
percent of mortgage originations in the first quarter of 2011. However, 
this figure overstates the percentage of transactions made by state 
housing creditors under AMTPA preemption because it includes 
transactions made by federally chartered housing creditors, 
transactions made by state housing creditors under some other form of 
preemption or state parity law, and transactions made by state housing 
creditors under state law. Still, with a significant number of states 
imposing restrictions on the size, frequency, or timing of interest 
rate and payment adjustments and renegotiations, the CFPB expects there 
are some markets where the volume of mortgages made using AMTPA 
preemption may be significant. The CFPB seeks comment on available 
sources of information to better evaluate the potential benefits and 
costs of AMTPA implementing rules.

[[Page 44241]]

A. Potential Benefits and Costs to Consumers and Covered Persons, 
Including any Potential Reduction of Access by Consumers to Consumer 
Financial Products or Services

    As described above, the interim final rule specifies requirements 
for mortgages made using AMTPA preemption, including loans with 
variable or adjustable rates, shared equity or shared appreciation 
loans, and fixed-rate balloon loans where the creditor commits to 
renewing the loan. These include requirements for the index used for 
adjustable rate mortgages, certain loan terms regarding renewal 
commitments for balloon mortgages, and underwriting requirements for 
high-cost and higher-priced mortgage loans.\84\ The potential benefits 
and costs from these provisions to consumers and covered entities are 
discussed below.
---------------------------------------------------------------------------

    \84\ The interim final rule does not require these creditors to 
report to the CFPB the number of loans made under AMTPA.
---------------------------------------------------------------------------

    For home equity lines of credit opened by state housing creditors 
using AMTPA preemption, the interim final rule mandates that an 
adjustable rate be based on a publicly available index that is beyond 
the creditor's control. For closed-end mortgages, a state housing 
creditor must either comply with this requirement or use a formula or 
schedule identifying the amount and timing of interest rate increases. 
The CFPB does not have specific information suggesting that creditors 
are originating mortgages where the interest rate is tied to an 
internal index. Based on discussions with the other regulators and 
industry groups, the CFPB understands that at most a few creditors use 
internal indices and that precluding their use in AMTPA loans would 
have a negligible impact on the mortgage markets.
    To the limited extent some creditors might seek to offer ARMs based 
on an index within the creditors' control, the interim final rule 
benefits consumers by shielding them from rate increases within the 
unilateral control of the creditor that are not market-based. At the 
same time, the index requirements could increase the costs for 
creditors who wish to offer loans based on a prohibited internal index: 
These creditors may incur increased operational costs in tracking such 
an external index and increased costs of funding relative to using an 
internal index. They therefore may raise the price of certain loans or 
be unwilling to offer loans to some borrowers. However, the aggregate 
costs from these provisions are likely to be minimal since the costs of 
compliance for any affected individual lender are likely to be small, 
and these rules likely apply to only a limited number of mortgages. On 
the other hand, creditors making loans using AMTPA preemption will 
benefit to the extent that they are able to originate loans that would 
otherwise be preempted by state law and do not have to incur certain 
costs related to complying with the preempted state law. The specific 
cost reductions would depend on the regulations in the particular 
state. For creditors choosing to issue loans using AMTPA preemption, 
these benefits are assumed to exceed the costs.
    The interim final rule also specifies that, in order to qualify for 
preemption, balloon payment mortgages with renegotiable rates must 
include a written commitment by the lender to renew the loan, subject 
to certain limitations. As discussed in Section III of this Federal 
Register notice, this requirement of a written commitment stems 
primarily from changes to the definition of ``alternative mortgage 
transaction'' made by Congress under the Dodd-Frank Act. The 
requirement for a written commitment will benefit some consumers by 
reducing the risk of default arising from a borrower's inability to 
satisfy the balloon payment or to refinance the loan at the end of the 
loan term. Conversely, for state housing creditors that, by virtue of 
AMTPA preemption, offer or wish to offer fixed-rate balloon mortgages 
with only unwritten (oral or implied) commitments to renew or with no 
such commitments, the implementation of this standard is likely to 
increase operational costs, such as revising administrative systems and 
procedures, including contract forms, in order to conform to the 
interim final rule. The commitment to renew will also impose costs on 
creditors as they assume additional risk. On the other hand, creditors 
making loans using AMTPA preemption will benefit to the extent that 
they are able to originate loans that would otherwise be prohibited by 
state law and by not having to incur certain costs related to complying 
with the preempted state law. The specific cost reductions would depend 
on the regulations in the particular state. For creditors choosing to 
issue such balloon loans using AMTPA preemption, these benefits are 
assumed to exceed the costs, and on net consumers should see greater 
credit availability at the cost of any decreased consumer protections 
provided by the preempted state regulations. Any effects of these 
provisions are likely to be greatest in markets, if any, where such 
balloon products are prevalent and where consumers have few 
alternatives to such products. The CFPB seeks comment regarding the 
size of, and current practices within, this market segment.
    The interim final rule also requires that ``high-cost'' or 
``higher-priced'' alternative mortgage transactions made using AMTPA 
preemption comply with the corresponding underwriting requirements and 
restrictions on loan terms contained in Regulation Z. For loan terms in 
these mortgages that are not preempted under AMTPA, such as terms 
related to prepayment penalties, the interim final rule imposes no 
additional costs or benefits since creditors are required to meet the 
federal standards even in the absence of the interim final rule and the 
state requirements remain in place. For loan terms that are preempted 
under AMTPA, creditors may save from not having to comply with the 
preempted state requirements. The potential costs and benefits for 
consumers depend on the specific provisions that are preempted.

B. The Impact of the Interim Final Rule on Depository Institutions and 
Credit Unions With $10 Billion or Less in Total Assets as Described in 
Section 1026 and the Impact on Consumers in Rural Areas

    During 2010, roughly 1,500 state chartered credit unions with $10 
billion or less in assets as described in Section 1026 of the Dodd-
Frank Act made adjustable rate or balloon mortgages. In aggregate that 
year, these credit unions issued roughly 240,000 adjustable rate 
mortgages and another 30,000 balloon/hybrid loans. Together, these 
amount to just under 50 percent of the mortgages (by number) originated 
by these credit unions in 2010. To the extent that all or some of these 
loans were originated using AMTPA preemption, the benefits and costs 
described above would apply to these types of loans as issued by state 
chartered credit unions. The CFPB seeks additional information to 
specify more precisely the benefits or costs for these credit unions.
    Similar issuance figures are not available for other depository 
institutions with $10 billion or less in assets as described in Section 
1026. The closest available data for banks only detail the value of 
outstanding fixed rate and adjustable rate mortgages but not the value 
of originations broken out into these categories. As of the end of 
2010, approximately 25 percent of the outstanding amount of mortgages 
held by state chartered banks with total assets under $10 billion, and 
secured by

[[Page 44242]]

1-4 family dwellings, was in adjustable rate loans. Applying that 
percentage to preliminary data from the most recently available data 
collected under the Home Mortgage Disclosure Act results in an 
estimated 340,000 adjustable rate mortgages made in 2009. As the 25 
percent figure is likely an overestimate, the result should be viewed 
as an upper bound. Were all of these loans made using AMTPA preemption, 
they would incur the costs and benefits described for these products. 
The CFPB seeks additional information to specify more precisely the 
monetary costs or benefits for these institutions.
    Further, only a fraction of the loans just described were likely 
made using AMTPA preemption. Many states have parity or wild card laws 
that allow designated lenders (most often depository institutions and/
or credit unions chartered in those states) the option to follow 
mortgage regulations applicable to federally chartered lenders or other 
types of institutions operating in the same jurisdiction. Firms that 
operate under wild card laws face no added costs under the interim 
final rule because they do not need to rely on AMTPA preemption. In 
addition, in states that opted out of AMTPA in whole or in part,\85\ 
the interim final rule will impose no additional costs or benefits to 
the extent of the opt out.
---------------------------------------------------------------------------

    \85\ 12 U.S.C. 3804. Six states exercised their opt-out 
authority in whole or in part: Arizona, Maine, Massachusetts, New 
York, South Carolina, and Wisconsin. See, e.g., Grant S. Nelson & 
Dale A. Whitman, Real Estate Finance Law Sec.  11.4 (4th ed. 2001).
---------------------------------------------------------------------------

    Still, it is possible that for particular lenders or markets, AMTPA 
preemption is an important driver of market outcomes. As discussed 
above, balloon mortgage loans without a written commitment to renew may 
represent a significant product in certain rural markets served by 
credit unions and community banks or by non-depository issuers who may 
not be able to avail themselves of wild card laws. The specific 
provisions of the interim final rule offering preemption for only those 
loans with written commitments, while imposing some costs, should 
benefit lenders and consumers in those specific markets by allowing 
such mortgages under AMTPA preemption. The CFPB is continuing to 
research this question and seeks comment on these issues.

C. Consultation

    The CFPB has consulted with the prudential regulators, the Federal 
Trade Commission, and the Department of Housing and Urban Development 
regarding the substance of the interim final rule, including whether 
the rule was consistent with prudential, market, or systemic objectives 
administered by those agencies. The CFPB will engage in further 
consultations during the notice-and-comment rulemaking process.

List of Subjects in 12 CFR Chapter X

    Banks, banking, consumer protection, credit unions, mortgages, 
national banks, truth in lending.

Authority and Issuance

    For the reasons set forth in the preamble and under the authority 
of Public Law 111-203, the CFPB establishes Chapter X in Title 12 of 
the Code of Federal Regulations, consisting of parts 1000 through 1099, 
to read as follows:

CHAPTER X--BUREAU OF CONSUMER FINANCIAL PROTECTION

0
1. Add part 1004 to read as follows:

PART 1004--ALTERNATIVE MORTGAGE TRANSACTION PARITY (REGULATION D)

Sec.
1004.1 Authority, purpose, and scope
1004.2 Definitions
1004.3 Preemption of State law
1004.4 Requirements for alternative mortgage transactions
Appendix A to Part 1004--Official Commentary on Regulation D

    Authority: 12 U.S.C. 3802, 3803; 15 U.S.C. 1604, 1639b; Pub. L. 
No. 111-203, 124 Stat. 1376.


Sec.  1004.1--Authority,  purpose, and scope.

    (a) Authority. This regulation, known as Regulation D, is issued by 
the Bureau of Consumer Financial Protection to implement the 
Alternative Mortgage Transaction Parity Act, 12 U.S.C. 3801 et seq., as 
amended by title X, Section 1083 of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376). Section 
1004.4 is issued pursuant to the Alternative Mortgage Transaction 
Parity Act (as amended) and the Truth in Lending Act, 15 U.S.C. 1601 et 
seq.
    (b) Purpose. Consistent with the Alternative Mortgage Transaction 
Parity Act, the Truth in Lending Act, and the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, the purpose of this regulation is 
to balance access to responsible credit and enhanced parity between 
State and federal housing creditors regarding the making, purchase, and 
enforcement of alternative mortgage transactions with consumer 
protection and the interests of the States in regulating mortgage 
transactions generally.
    (c) Scope. This regulation applies to an alternative mortgage 
transaction if the creditor received an application for that 
transaction on or after July 22, 2011. This regulation does not apply 
to a transaction if the creditor received the application for that 
transaction before July 22, 2011.


Sec.  1004.2  Definitions.

    For purposes of this part:
    Alternative mortgage transaction means a loan, credit sale, or 
account:
    (1) That is secured by an interest in a residential structure that 
contains one to four units, whether or not that structure is attached 
to real property, including an individual condominium unit, cooperative 
unit, mobile home, or trailer, if it is used as a residence;
    (2) That is made primarily for personal, family, or household 
purposes; and
    (3) In which the interest rate or finance charge may be adjusted or 
renegotiated.
    Creditor shall have the same meaning as in 12 CFR 226.2.
    Housing creditor means:
    (1) A depository institution, as defined in section 501(a)(2) of 
the Depository Institutions Deregulation and Monetary Control Act of 
1980;
    (2) A lender approved by the Secretary of Housing and Urban 
Development for participation in any mortgage insurance program under 
the National Housing Act;
    (3) Any person who regularly makes loans, credit sales, or advances 
on an account secured by an interest in a residential structure that 
contains one to four units, whether or not the structure is attached to 
real property, including an individual condominium unit, cooperative 
unit, mobile home, or trailer, if it is used as a residence; and
    (4) Any transferee of a party listed in paragraph (c)(1), (2), or 
(3) of this section.
    State means any State of the United States of America, the District 
of Columbia, Puerto Rico, the Virgin Islands, the Northern Mariana 
Islands, American Samoa, Guam, and any other territory or possession of 
the United States.
    State law means a State constitution, statute, or regulation or any 
provision thereof.


Sec.  1004.3  Preemption of State law.

    Pursuant to 12 U.S.C. 3803, a State-chartered or -licensed housing 
creditor may make, purchase, and enforce alternative mortgage 
transactions in accordance with Sec.  1004.4(a) through (c) of this 
part (as applicable), notwithstanding any provision of State law that 
restricts the ability of the housing creditor to adjust or renegotiate 
an interest rate or finance charge with

[[Page 44243]]

respect to the transaction or to change the amount of interest or 
finance charges included in a regular periodic payment as a result of 
such an adjustment or renegotiation.


Sec.  1004.4  Requirements for alternative mortgage transactions.

    (a) Mortgages with adjustable rates or finance charges and home 
equity lines of credit. A creditor that makes an alternative mortgage 
transaction with an adjustable rate or finance charge may only increase 
the interest rate or finance charge as follows:
    (1) If the transaction is subject to 12 CFR 226.5b, the creditor 
must comply with 12 CFR 226.5b(f)(1).
    (2) For all other transactions, the creditor must use either:
    (i) An index to which changes in the interest rate are tied that is 
readily available to and verifiable by the borrower and beyond the 
control of the creditor; or
    (ii) A formula or schedule identifying the amount that the interest 
rate or finance charge may increase and the times at which, or 
circumstances under which, a change may be made.
    (b) Renegotiable rates for renewable balloon-payment mortgages. A 
creditor that makes an alternative mortgage transaction with payments 
based on an amortization period and a large final payment due after a 
shorter term may negotiate an increase or decrease in the interest rate 
when the transaction is renewed only if the creditor makes a written 
commitment to renew the transaction at specified intervals throughout 
the amortization period. However, the creditor is not required to renew 
the transaction if:
    (1) Any action or inaction by the consumer materially and adversely 
affects the creditor's security for the transaction or any right of the 
creditor in such security;
    (2) There is a material failure by the consumer to meet the 
repayment terms of the transaction;
    (3) There is fraud or a willful or knowing material 
misrepresentation by the consumer in connection with the transaction; 
or
    (4) Federal law dealing with credit extended by a depository 
institution to its executive officers specifically requires that as a 
condition of the extension the credit shall become due and payable on 
demand, provided that the creditor includes such a provision in the 
initial agreement.
    (c) Requirements for high-cost and higher-priced mortgage loans. 
(1) If an alternative mortgage transaction is subject to 12 CFR 226.32, 
the creditor must comply with 12 CFR 226.32 and 12 CFR 226.34.
    (2) If an alternative mortgage transaction is subject to 12 CFR 
226.35, the creditor must comply with 12 CFR 226.35.
    (d) Other applicable law. Notwithstanding paragraphs (a) through 
(c) of this section, a housing creditor that is not making an 
alternative mortgage transaction pursuant to Sec.  1004.3 of this part 
may make that transaction consistent with applicable State or Federal 
law other than this section.
    (e) Reductions in interest rate or finance charge. Nothing in this 
section prohibits a creditor from decreasing the interest rate or 
finance charge on an alternative mortgage transaction.

Appendix A to Part 1004--Official Commentary on Regulation D

Sec.  1004.1 Authority, Purpose, and Scope

1(c) Scope.

    1. Application received before July 22, 2011. This Part does not 
apply to a transaction if the creditor received the application for 
that transaction before July 22, 2011, even if the transaction was 
consummated or completed on or after July 22, 2011. Whether 12 
U.S.C. 3803(c) preempts State law with respect to such a transaction 
depends on whether: (1) The transaction was an alternative mortgage 
transaction as defined by the version of 12 U.S.C. 3802(1) in effect 
at the time of application; and (2) the State housing creditor 
complied with applicable federal regulations issued by the Office of 
the Comptroller of the Currency, the National Credit Union 
Administration, the Office of Thrift Supervision, or the Federal 
Home Loan Bank Board in effect at the time of application.
    2. Subsequent modifications and other actions. If applicable 
regulations under 12 U.S.C. 3803(c) (including this Part) preempted 
State law with respect to an alternative mortgage transaction at the 
time the application was received, the following actions with 
respect to that transaction are entitled to the same degree of 
preemption under such regulations:
    i. The subsequent consummation, completion, purchase, or 
enforcement of the transaction by a housing creditor.
    ii. The subsequent modification, renewal, or extension of the 
transaction. However, if such a transaction is satisfied and 
replaced by another transaction, the second transaction must 
independently meet the requirements for preemption in effect at the 
time the application for the second transaction was received.

Sec.  1004.2 Definitions

2(a) Alternative Mortgage Transaction

    1. Alternative mortgage transaction. For purposes of this Part, 
an alternative mortgage transaction that meets the definition in 
Sec.  1004.2(a) includes any consumer credit transaction that is 
secured by a mortgage, deed of trust, or other equivalent consensual 
security interest in a dwelling or in residential real property that 
includes a dwelling. The dwelling need not be the primary dwelling 
of the consumer. Home equity lines of credit and subordinate lien 
mortgages are alternative mortgage transactions for purposes of this 
Part to the extent they meet the definition in Sec.  1004.2(a).
    2. Examples of alternative mortgage transactions. Examples of 
alternative mortgage transactions include:
    i. Transactions in which the interest rate changes in accordance 
with fluctuations in an index.
    ii. Transactions in which the interest rate or finance charge 
may be increased or decreased after a specified period of time or 
under specified circumstances.
    iii. Balloon transactions in which payments are based on an 
amortization schedule and a large final payment is due after a 
shorter term, where the creditor makes a commitment to renew the 
transaction at specified intervals throughout the amortization 
period, but the interest rate may be renegotiated at renewal. For 
example, a fixed-rate mortgage loan with a 30-year amortization 
period but a balloon payment due five years after consummation is an 
alternative mortgage transaction under Sec.  1004.2(a) if the 
creditor commits to renew the mortgage at five-year intervals for 
the entire 30-year amortization period.
    iv. Transactions in which the creditor and the consumer agree to 
share some or all of the appreciation in the value of the property 
(shared equity/shared appreciation).
    However, this Part preempts State law only to the extent 
provided in Sec.  1004.3 and only to the extent that the 
requirements of Sec.  1004.4(a) through (c) (as applicable) are met.
    3. Examples of transactions that are not alternative mortgage 
transactions. The following are examples of transactions that are 
not alternative mortgage transactions:
    i. Transactions with a fixed interest rate where one or more of 
the regular periodic payments may be applied solely to accrued 
interest and not to loan principal (an interest-only feature).
    ii. Balloon transactions with a fixed interest rate where 
payments are based on an amortization schedule and a large final 
payment is due after a shorter term, where the creditor does not 
make a commitment to renew the transaction at specified intervals 
throughout the amortization period.
    iii. Transactions with a fixed interest rate where one or more 
of the regular periodic payments may result in an increase in the 
principal balance (a negative amortization feature).

2(b) Creditor

    1. Creditor. As defined in 12 CFR 226.2, ``creditor'' includes 
federally and State-chartered banks, thrifts, and credit unions, as 
well as non-depository institutions, such as State-licensed lenders. 
The Official Staff Commentary to 12 CFR 226.2 contains additional 
guidance on the definition of the term ``creditor.'' See 12 CFR 
226.2, Supp. I.

[[Page 44244]]

Sec.  1004.3 Preemption of State Law

    1. Scope of State laws. Regardless of whether a State law 
applies solely to alternative mortgage transactions or applies to 
both alternative mortgage transactions and other mortgage or 
consumer credit transactions, that law is preempted by Sec.  1004.3 
only to the extent that it restricts the ability of a State-
chartered or -licensed housing creditor to adjust or renegotiate an 
interest rate or finance charge with respect to an alternative 
mortgage transaction or to change the amount of interest or finance 
charges included in a regular periodic payment as a result of such 
an adjustment or renegotiation.
    2. Examples of State laws that are preempted. The following are 
examples of State laws that are preempted by Sec.  1004.3:
    i. Restrictions on the adjustment or renegotiation of an 
interest rate or finance charge, including restrictions on the 
circumstances under which a rate or charge may be adjusted, the 
method by which a rate or charge may be adjusted, and the amount of 
the adjustment to the rate or charge. For example, if a provision of 
State law prohibits creditors from increasing an adjustable rate 
more than two percentage points or from increasing an adjustable 
rate more than once during a year, that provision is preempted by 
Sec.  1004.3 with respect to alternative mortgage transactions that 
comply with Sec.  1004.4(a) through (c), as applicable. Similarly, 
if a provision of State law prohibits housing creditors from 
renewing balloon transactions that meet the definition of an 
alternative mortgage transaction in Sec.  1004.2(a) on different 
terms, that provision is preempted by Sec.  1004.3 only to the 
extent that it restricts a state housing creditor's ability to 
adjust or renegotiate the interest rate or finance charge at 
renewal. See also comment 1004.3-3.i.
    ii. Restrictions on the ability of a housing creditor to change 
the amount of interest or finance charges included in regular 
periodic payments as a result of the adjustment or renegotiation of 
an interest rate or finance charge. For example, if a provision of 
State law prohibits housing creditors from increasing payments or 
limits the amount of such increases with respect to both alternative 
mortgage transactions and other mortgage or consumer credit 
transactions, that provision is preempted by Sec.  1004.3 to the 
extent that it restricts a housing creditor's ability to adjust 
payments as a result of the adjustment or renegotiation of an 
interest rate on an alternative mortgage transaction. Other 
restrictions on changes to payments are not preempted, including 
restrictions on transactions in which one or more of the regular 
periodic payments may result in an increase in the principal balance 
(a negative amortization feature) or may be applied solely to 
accrued interest and not to loan principal (an interest-only 
feature).
    iii. Restrictions on the creditor and the consumer sharing some 
or all of the appreciation in the value of the property (shared 
equity/shared appreciation).
    iv. Underwriting requirements that address the adjustment or 
renegotiation of interest rates or finance charges. For example, if 
a provision of State law requires housing creditors to underwrite 
based on the maximum contractual rate, that provision is preempted 
by Sec.  1004.3 with respect to alternative mortgage transactions, 
regardless of whether the provision applies solely to alternative 
mortgage transactions or to both alternative mortgage transactions 
and other mortgage or consumer credit transactions.
    3. Examples of State laws that are not preempted. The following 
are examples of State laws that are not preempted by Sec.  1004.3 
regardless of whether the provision applies solely to alternative 
mortgage transactions or to both alternative mortgage transactions 
and other mortgage or consumer credit transactions:
    i. Restrictions on prepayment penalties or late charges 
(including an increase in an interest rate or finance charge as a 
result of a late payment).
    ii. Restrictions on transactions in which one or more of the 
regular periodic payments may result in an increase in the principal 
balance (a negative amortization feature) or may be applied solely 
to accrued interest and not to loan principal (an interest-only 
feature).
    iii. Requirements that disclosures be provided.

Sec.  1004.4 Requirements for Alternative Mortgage Transactions

4(a) Mortgages With Adjustable or Renegotiable Rates or Finance 
Charges and Home Equity Lines of Credit

    1. Index values. A creditor may use any measure of index values 
that meets the requirements in Sec.  1004.4(a)(2)(i). For example, 
the index may be either single values as of a specific date or an 
average of values calculated over a specified period.
    2. Index beyond creditor's control. A creditor may increase an 
adjustable interest rate pursuant to Sec.  1004.4(a)(2)(i) only if 
the increase is based on an index that is beyond the creditor's 
control. For purposes of Sec.  1004.4(a)(2)(i), an index is not 
beyond the creditor's control if the index is the creditor's own 
prime rate or cost of funds. A creditor is permitted, however, to 
use a published prime rate, such as the prime rate published in the 
Wall Street Journal, even if the creditor's own prime rate is one of 
several rates used to establish the published rate.
    3. Publicly available. For purposes of Sec.  1004.4(a)(2)(i), 
the index must be available to the public. A publicly available 
index need not be published in a newspaper, but it must be one the 
consumer can independently obtain (by telephone, for example) and 
use to verify the annual percentage rate applied to the alternative 
mortgage transaction.

4(c) Requirements for High-Cost and Higher-Priced Mortgage Loans

    1. Prepayment penalties. If applicable, creditors must comply 
with 12 CFR 226.32, including 12 CFR 226.32(d)(6) and (d)(7) which 
provide limitations on prepayment penalties. Similarly, if 
applicable, creditors must comply with 12 CFR 226.35, including 12 
CFR 226.35(b)(2), which also provides limitations on prepayment 
penalties. However, under Sec.  1004.3, State laws regarding 
prepayment penalties are not preempted. See comment 1004.3-3.i. 
Accordingly, creditors must also comply with any State laws 
regarding prepayment penalties unless an independent basis for 
preemption exists, such as because the State law is inconsistent 
with the requirements of Regulation Z, 12 CFR Part 226. See 12 CFR 
226.28.

4(d) Other Applicable Law

    1. Other applicable law. Section 1004.4(d) permits state housing 
creditors that do not seek preemption under Sec.  1004.3 and federal 
housing creditors to make alternative mortgage transactions 
consistent with applicable State or federal law other than Sec.  
1004.4(a) through (c). However, Sec.  1004.4(d) does not exempt 
those housing creditors from complying with the provisions of 
federal law that are incorporated by reference in Sec.  1004.4 and 
are otherwise applicable to the creditor. Specifically, nothing in 
Sec.  1004.4(d) exempts a housing creditor from complying with 12 
CFR 226.5b, 226.32, 226.34, or 226.35.

    Dated: July 19, 2011.
Alastair M. Fitzpayne,
Deputy Chief of Staff and Executive Secretary, Department of the 
Treasury.
[FR Doc. 2011-18676 Filed 7-21-11; 8:45 am]
BILLING CODE 4810-25-P