[Federal Register Volume 77, Number 180 (Monday, September 17, 2012)]
[Proposed Rules]
[Pages 57318-57406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-19977]



[[Page 57317]]

Vol. 77

Monday,

No. 180

September 17, 2012

Part III





Bureau of Consumer Financial Protection





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





12 CFR Part 1026





2012 Truth in Lending Act (Regulation Z) Mortgage Servicing; Proposed 
Rule

  Federal Register / Vol. 77 , No. 180 / Monday, September 17, 2012 / 
Proposed Rules  

[[Page 57318]]


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

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2012-0033]
RIN 3170-AA14


2012 Truth in Lending Act (Regulation Z) Mortgage Servicing

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

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

SUMMARY: The Bureau of Consumer Financial Protection (the Bureau or 
CFPB) is proposing to amend Regulation Z, which implements the Truth in 
Lending Act (TILA), and the official interpretation of the regulation. 
The proposed amendments implement the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Dodd-Frank Act or DFA) provisions 
regarding mortgage loan servicing. Specifically, this proposal 
implements Dodd-Frank Act sections addressing initial rate adjustment 
notices for adjustable-rate mortgages (ARMs), periodic statements for 
residential mortgage loans, and prompt crediting of mortgage payments 
and response to requests for payoff amounts. The proposed revisions 
also amend current rules governing the scope, timing, content, and 
format of current disclosures to consumers occasioned by the interest 
rate adjustments of their variable-rate transactions.
    Published elsewhere in today's Federal Register, the Bureau 
proposes companion regulations regarding mortgage servicing through 
amendments to Regulation X, which implements the Real Estate Settlement 
Procedures Act (RESPA).

DATES: Comments must be received on or before October 9, 2012, except 
that comments on the Paperwork Reduction Act analysis in part IX of the 
Federal Register notice must be received on or before November 16, 
2012.

ADDRESSES: You may submit comments identified by Docket No. CFPB-2012-
0033 or RIN 3170-AA14, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Bureau of Consumer Financial Protection, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: 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 1700 G Street NW., 
Washington, DC 20552 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.

e-Rulemaking Initiative

    The Bureau is working with the Cornell e-Rulemaking Initiative 
(CeRI) on a pilot project, Regulation Room, to use different Web 
technologies and approaches to enhance public understanding and 
participation in Bureau rulemakings and to evaluate the advantages and 
disadvantages of these techniques. The TILA and RESPA proposed 
rulemakings on mortgage servicing are the subject of the project. The 
Bureau has undertaken this project to increase effective public 
involvement in the rulemaking process and strongly encourages all 
parties interested in this rulemaking to visit the Regulation Room Web 
site, http://www.regulationroom.org, to learn about the Bureau's 
proposed mortgage servicing rules and the rulemaking process, to 
discuss the issues in the rules with other persons and groups, and to 
participate in drafting a summary of that discussion that CeRI will 
submit to the Bureau.
    Note that Regulation Room is sponsored by CeRI, and is not an 
official United States Government Web site. Participating in the 
discussion on that site will not result in individual formal comments 
that will be included in the Bureau's rulemaking record. If you would 
like to add a formal comment, please do so through the means identified 
above. The Bureau anticipates that CeRI will submit to the Bureau's 
rulemaking docket a summary of the discussion that occurs on the 
Regulation Room site and that participants will have a chance to review 
a draft and suggest changes before the summary is submitted. For 
questions about this project, please contact Whitney Patross, Attorney, 
Office of Regulations, at (202) 435-7700.

FOR FURTHER INFORMATION CONTACT: 
    Regulation Z (TILA): Whitney Patross, Attorney and Marta Tanenhaus, 
Senior Counsel at (202) 435-7700; Office of Regulations; Division of 
Research, Markets, and Regulations; Bureau of Consumer Financial 
Protection; 1700 G Street NW., Washington, DC 20552.
    Regulation X (RESPA): Jane Gao, Mitchell E. Hochberg, and Michael 
Scherzer, Counsels at (202) 435-7700; Office of Regulations; Division 
of Research, Markets, and Regulations; Bureau of Consumer Financial 
Protection; 1700 G Street NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: 

I. Overview

A. Background

    The recent financial crisis exposed pervasive consumer protection 
problems across major segments of the mortgage servicing industry. As 
millions of borrowers fell behind on their loans, many servicers failed 
to provide the level of service necessary to serve the needs of those 
borrowers. Many servicers simply had not made the investments in 
resources and infrastructure necessary to service large numbers of 
delinquent loans. Existing weaknesses in servicer practices, including 
inadequate recordkeeping and document management and lack of oversight 
of service providers, made it harder to sort out borrower problems to 
achieve optimal results. In addition, many servicers took short cuts 
that made things even worse. As one review of fourteen major servicers 
found, companies ``emphasize[d] speed and cost efficiency over quality 
and accuracy'' in their foreclosure processes.\1\
---------------------------------------------------------------------------

    \1\ Federal Reserve System, Office of the Comptroller of the 
Currency, & Office of Thrift Supervision, Interagency Review of 
Foreclosure Policies and Practices, at 5 (Apr. 2011) (Interagency 
Foreclosure Report), available at http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47a.pdf.
---------------------------------------------------------------------------

    The Dodd-Frank Act (Pub. L. 111-203, July 21, 2010) adopts several 
new servicing protections.\2\ The Bureau has the authority to 
promulgate regulations to implement the new servicing protections. 
These changes will significantly improve disclosures to make it easier 
for consumers to monitor their mortgage loans and servicers' 
activities. The changes also address critical servicer practices, 
including error resolution, prompt crediting of payments, and ``force-
placing'' insurance where borrowers have

[[Page 57319]]

allowed their hazard insurance policies to lapse.
---------------------------------------------------------------------------

    \2\ See Dodd-Frank Act sections 1418, 1420, 1463, and 1464.
---------------------------------------------------------------------------

    The Dodd-Frank Act also gives the Bureau discretionary authority to 
develop additional servicing rules. The Bureau proposes to use this 
authority to adopt requirements relating to reasonable information 
management policies and procedures, early intervention with delinquent 
borrowers, continuity of contact, and procedures for evaluating and 
responding to loss mitigation applications when the servicer makes loss 
mitigation options available in the ordinary course of business. These 
proposals address fundamental problems that underlie many consumer 
complaints and recent regulatory and enforcement actions. The Bureau 
believes these changes will reduce avoidable foreclosures and improve 
general customer service. The proposals cover nine major topics, as 
summarized below.
    The Bureau's proposal is split into two parts because Congress 
imposed some requirements under TILA and some under RESPA.\3\ This 
proposed rule would amend Regulation Z, which implements TILA, to 
implement provisions concerning adjustable-rate mortgage (ARM) 
disclosures, payoff statements, and payment crediting under sections 
1418, 1420, and 1464 of the Dodd-Frank Act and to harmonize similar 
existing requirements.
---------------------------------------------------------------------------

    \3\ Note that TILA and RESPA differ in their terminology. 
Consumers and creditors are the defined terms used in Regulation Z. 
Borrowers and lenders are the defined terms used in Regulation X.
---------------------------------------------------------------------------

B. Scope of Coverage

    The proposed rules generally apply to closed-end mortgage loans, 
with certain exceptions. Under the proposed amendments to Regulation X, 
open-end lines of credit and certain other loans, such as construction 
loans and business-purpose loans, are excluded. Under the proposed 
amendments to Regulation Z, the periodic statement and ARMs disclosure 
provisions apply only to closed-end mortgage loans, but the prompt 
crediting and payoff statement provisions apply both to open-end and 
closed-end mortgage loans. In addition, reverse mortgages and 
timeshares are excluded from the periodic statement requirement, and 
certain construction loans are excluded from the ARM disclosure 
requirements. As discussed below, the Bureau is seeking comment on 
whether to exempt small servicers from certain requirements or modify 
certain requirements for small servicers.

C. Summary

    The proposals cover nine major topics, summarized below. More 
details can be found in the proposed rules, which are split into two 
notices issued under TILA and RESPA, respectively.
    1. Periodic billing statements. The Dodd-Frank Act generally 
mandates that servicers of closed-end residential mortgage loans (other 
than reverse mortgages) must send a periodic statement for each billing 
cycle. These statements must meet the timing, form, and content 
requirements provided for in the rule. The proposal contains sample 
forms that servicers could use. The periodic statement requirement 
generally would not apply for fixed-rate loans if the servicer provides 
a coupon book, so long as the coupon book contains certain information 
specified in the rule and certain other information is made available 
to the consumer. The proposal also includes an exception for small 
servicers that service 1,000 or fewer mortgage loans and service only 
mortgage loans that they originated or own.
    2. Adjustable-rate mortgage interest-rate adjustment notices. 
Servicers would have to provide a consumer whose mortgage has an 
adjustable rate with a notice 60 to 120 days before an adjustment which 
causes the payment to change. The servicer would also have to provide 
an earlier notice 210 to 240 days prior to the first rate adjustment. 
This first notice may contain an estimate of the rate and payment 
change. Other than this initial notice, servicers would no longer be 
required to provide an annual notice if a rate adjustment does not 
result in an increase in the monthly payment. The proposal contains 
model and sample forms that servicers could use.
    3. Prompt payment crediting and payoff payments. As required by the 
Dodd-Frank Act, servicers must promptly credit payments from borrowers, 
generally on the day of receipt. If a servicer receives a payment that 
is less than a full contractual payment, the payment may be held in a 
suspense account. When the amount in the suspense account covers a full 
installment of principal, interest, and escrow (if applicable), the 
proposal would require the servicer to apply the funds to the oldest 
outstanding payment owed. A servicer also would be required to send an 
accurate payoff balance to a consumer no later than seven business days 
after receipt of a written request from the borrower for such 
information.
    4. Force-placed insurance. As required by the Dodd-Frank Act, 
servicers would not be permitted to charge a borrower for force-placed 
insurance coverage unless the servicer has a reasonable basis to 
believe the borrower has failed to maintain hazard insurance and has 
provided required notices. One notice to the borrower would be required 
at least 45 days before charging for forced-place insurance coverage, 
and a second notice would be required no earlier than 30 days after the 
first notice. The proposal contains model forms that servicers could 
use. If a borrower provides proof of hazard insurance coverage, then 
the servicer would be required to cancel any force-placed insurance 
policy and refund any premiums paid for periods in which the borrower's 
policy was in place. In addition, if a servicer makes payments for 
hazard insurance from a borrower's escrow account, a servicer would be 
required to continue those payments rather than force-placing a 
separate policy, even if there is insufficient money in the escrow 
account. The rule would also provide that charges related to forced 
place insurance (other than those subject to State regulation as the 
business of insurance or authorized by federal law for flood insurance) 
must relate to a service that was actually performed. Additionally, 
such charges would have to bear a reasonable relationship to the 
servicer's cost of providing the service.
    5. Error resolution and information requests. Pursuant to the Dodd-
Frank Act, servicers would be required to meet certain procedural 
requirements for responding to information requests or complaints of 
errors. The proposal defines specific types of claims which constitute 
an error, such as a claim that the servicer misapplied a payment or 
assessed an improper fee. A borrower could assert an error either 
orally or in writing. Servicers could designate a specific phone number 
and address for borrowers to use. Servicers would be required to 
acknowledge the request or complaint within five days. Servicers would 
have to correct or respond to the borrower with the results of the 
investigation, generally within 30 to 45 days. Further, servicers 
generally would be required to acknowledge borrower requests for 
information and either provide the information or explain why the 
information is not available within a similar amount of time. A 
servicer would not be required to delay a scheduled foreclosure sale to 
consider a notice of error unless the error relates to the servicer's 
improperly proceeding with a foreclosure sale during a borrower's 
evaluation for alternatives to foreclosure.
    6. Information management policies and procedures. Servicers would 
be

[[Page 57320]]

required to establish reasonable information management policies and 
procedures. The reasonableness of a servicer's policies and procedures 
would take into account the servicer's size, scope, and nature of its 
operations. A servicer's policies and procedures would satisfy the rule 
if the servicer regularly achieves the document retention and servicing 
file requirements, as well as certain objectives specified in the rule. 
Examples of such objectives include providing accurate and timely 
information to borrowers and the courts or enabling servicer personnel 
to have prompt access to documents and information submitted in 
connection with loss mitigation applications. In addition, a servicer 
must retain records relating to each mortgage until one year after the 
mortgage is discharged or servicing is transferred, and must create a 
mortgage servicing file for each loan containing certain specified 
documents and information.
    7. Early intervention with delinquent borrowers. Servicers would be 
required to make good faith efforts to notify delinquent borrowers of 
loss mitigation options. If a borrower is 30 days late, the proposal 
would require servicers to make a good faith effort to notify the 
borrower orally and to let the borrower know that loss mitigations 
options may be available. If the borrower is 40 days late, the servicer 
would be required to provide the borrower with a written notice with 
certain specific information, including examples of loss mitigation 
options available, if applicable, and information on how to obtain more 
information about loss mitigation options. The notice would also 
provide information to the borrower about the foreclosure process. The 
rule contains model language servicers could use for these notices.
    8. Continuity of contact with delinquent borrowers. Servicers would 
be required to provide delinquent borrowers with access to personnel to 
assist them with loss mitigation options where applicable. The proposal 
would require servicers to assign dedicated contact personnel for a 
borrower no later than five days after providing the early intervention 
notice. Servicers would be required to establish reasonable policies 
and procedures designed to ensure that the servicer personnel perform 
certain specified functions where applicable, such as access the 
borrower's records and provide the borrower with information about how 
and when to apply for a loss mitigation option and about the status of 
the application.
    9. Loss mitigation procedures. Servicers that offer loss mitigation 
options to borrowers would be required to implement procedures to 
ensure that complete loss mitigation applications are reasonably 
evaluated before proceeding with a scheduled foreclosure sale. The 
proposal would require servicers to exercise reasonable diligence to 
secure information or documents required to make an incomplete loss 
mitigation application complete. In certain circumstances, this could 
include notifying the borrower within five days of receiving an 
incomplete application. Within 30 days of receiving a borrower's 
complete application, the servicer would be required to evaluate the 
borrower for all available options, and, if the denial pertains to a 
requested loan modification, notify the borrower of the reasons for the 
servicer's decision, and provide the borrower with at least a 14-day 
period within which to appeal the decision. The proposal would require 
that appeals be decided within 30 days by different personnel than 
those responsible for the initial decision. A servicer that receives a 
complete application for a loss mitigation option could not proceed 
with a foreclosure sale unless (i) the servicer had denied the 
borrower's application and the time for any appeal had expired; (ii) 
the servicer had offered a loss mitigation option which the borrower 
declined or failed to accept within 14 days of the offer; or (iii) the 
borrower failed to comply with the terms of a loss mitigation 
agreement. The proposal would require that deadlines for submitting an 
application for a loss mitigation option be no earlier than 90 days 
before a scheduled foreclosure sale.

D. Small Servicers

    As discussed below, the Bureau convened a Small Business Regulatory 
Enforcement Fairness Act (SBREFA) panel to assess the impact of the 
possible rules on small servicers and to help the Bureau determine to 
what extent it may be appropriate to consider adjusting these standards 
for small servicers, to the extent permitted by law. Informed by this 
process, this proposal contains an exemption from the periodic 
statement requirement for certain small servicers. The Bureau seeks 
comment on whether other exemptions might be appropriate for small 
servicers.

E. Effective Date

    As discussed below, the Bureau is seeking comment on when this 
final rule should be effective. Because the final rule will provide 
important benefits to consumers, the Bureau seeks to make it effective 
as soon as possible. However, the Bureau understands that the final 
rules will require servicers to make revisions to their software and to 
retrain their staff. In addition, some entities will be required to 
implement other Dodd-Frank Act provisions, which are subject to 
separate rulemaking deadlines under the statute and will have separate 
effective dates. Therefore, the Bureau is seeking comment on how much 
time industry needs to make these changes.

II. Background

A. Overview of the Mortgage Servicing Market and Market Failures

    The mortgage market is the single largest market for consumer 
financial products and services in the United States, with 
approximately $10.3 trillion in loans outstanding.\4\ Mortgage 
servicers play a vital role within the broader market by undertaking 
the day-to-day management of mortgage loans on behalf of lenders who 
hold the loans in their portfolios or (where a loan has been 
securitized) investors who are entitled to the loan proceeds.\5\ Over 
60% of mortgage loans are serviced by mortgage servicers for investors.
---------------------------------------------------------------------------

    \4\ Inside Mortgage Finance, Outstanding 1-4 Family Mortgage 
Securities, Mortgage Market Statistical Annual (2012). For general 
background on the market and the recent mortgage crisis, see the 
2012 TILA-RESPA Proposal available at http://www.consumerfinance.gov/knowbeforeyouowe/.
    \5\ As of the end of 2011, approximately 33% of outstanding 
mortgage loans were held in portfolio, 57% of mortgage loans were 
owned through mortgage-backed securities issued by government 
sponsored enterprises (GSEs), and 11% of loans were owned through 
private label mortgage-backed securities. Inside Mortgage Finance, 
Issue 2012:13, at 11 (March 30, 2012). A securitization results in 
the economic separation of the legal title to the mortgage loan and 
a beneficial interest in the mortgage loan obligation. In a 
securitization transaction, a securitization trust is the owner or 
assignee of a mortgage loan. An investor is a creditor of the trust 
and is entitled to cash flows that are derived from the proceeds of 
the mortgage loans. In general, certain investors (or an insurer 
entitled to act on behalf of the investors) may direct the trust to 
take action as the owner or assignee of the mortgage loans for the 
benefit of the investors or insurers. See, e.g., Adam Levitin & Tara 
Twomey, Mortgage Servicing, 28 Yale J. on Reg., 1, 11 (2011) 
(Levitin & Twomey).
---------------------------------------------------------------------------

    Servicers' duties typically include billing borrowers for amounts 
due, collecting and allocating payments, maintaining and disbursing 
funds from escrow accounts, reporting to creditors or investors, and 
pursuing collection and loss mitigation activities (including 
foreclosures and loan modifications) with respect to delinquent 
borrowers. Indeed, without dedicated companies to perform these 
activities, it is

[[Page 57321]]

questionable whether a secondary market for mortgage-backed securities 
would exist in this country.\6\
---------------------------------------------------------------------------

    \6\ See, e.g., Levitin & Twomey at 11 (``All securitizations 
involved third-party servicers * * * [m]ortgage servicers provide 
the critical link between mortgage borrowers and the SPV and RMBS 
investors, and servicing arrangements are an indispensable part of 
securitization.'').
---------------------------------------------------------------------------

    Several aspects of the mortgage servicing business make it uniquely 
challenging for consumer protection purposes. Given the nature of their 
activities, servicers can have a direct and profound impact on 
borrowers. However, industry compensation practices and the structure 
of the mortgage servicing industry create wide variations in servicers' 
incentives to provide effective customer service to borrowers. Also, 
because borrowers cannot choose their own servicers, it is particularly 
difficult for them to protect themselves from shoddy service or harmful 
practices.
    Mortgage servicing is performed by banks, thrifts, credit unions, 
and non-bank servicers under a variety of business models. In some 
cases, creditors service mortgage loans that they originate or purchase 
and hold in portfolio. Other creditors sell the ownership of the 
underlying mortgage loan, but retain the mortgage servicing rights in 
order to retain the relationship with the borrower, as well as the 
servicing fee and other ancillary income. In still other cases, 
servicers have no role at all in origination or loan ownership, but 
rather purchase mortgage servicing rights on securitized loans or are 
hired to service a portfolio lender's loans.\7\
---------------------------------------------------------------------------

    \7\ See, e.g., Diane Thompson, Foreclosing Modifications: How 
Servicer Incentives Discourage Loan Modifications, 86 Wash. L. Rev. 
755, 763 (2011) (Thompson), available at: http://digital.law.washington.edu/dspace-law/bitstream/handle/1773.1/1074/86WLR755.pdf.
---------------------------------------------------------------------------

    These different servicing structures can create difficulties for 
borrowers if the servicer makes mistakes, fails to invest sufficient 
resources in its servicing operations, or does not properly service the 
borrower's loan. Although the mortgage servicing industry has numerous 
participants, the industry is highly concentrated, with the five 
largest servicers servicing approximately 55% percent of outstanding 
mortgage loans in this country.\8\ Small servicers generally operate in 
discrete segments of the market, for example, by specializing in 
servicing delinquent loans, or by servicing loans that they 
originate.\9\
---------------------------------------------------------------------------

    \8\ See, e.g, Top Mortgage Servicers in 2011 (Inside Mortg. 
Fin., Bethesda, Md.), Mar. 30, 2012, at 12. As of the end of the 
fourth quarter of 2011, the top 5 largest servicers serviced $5.66 
trillion of mortgage loans. See id.
    \9\ See, e.g., Fitch Ratings, U.S. Residential and Small Balance 
Commercial Mortgage Servicer Rating Criteria, at 14-15 (Jan. 31, 
2011), available at www.fitchratings.com.
---------------------------------------------------------------------------

    Contracts between the servicer and the mortgage loan owner specify 
the rights and responsibilities of each party. In the context of 
securitized loans, the contracts may require the servicer to balance 
the competing interests of different classes of investors when 
borrowers become delinquent. Certain provisions in servicing contracts 
may limit the servicer's ability to offer certain types of loan 
modifications to borrowers. Such contracts also may limit the 
circumstances under which investors can transfer servicing rights to a 
different servicer.
    Compensation structures vary somewhat for loans held in portfolio 
and securitized loans,\10\ but have tended to make pure mortgage 
servicing (where the servicer has no role in origination) a high-
volume, low-margin business in which servicers have little incentive to 
invest in customer service. A servicer will expect to recoup its 
investment in purchasing mortgage servicing rights and earn a profit 
through a net servicing fee (which is expressed as a constant rate 
assessed on unpaid mortgage balances),\11\ fees assessed on borrowers, 
interest float on payment accounts between receipt and disbursement, 
and cross-marketing other products and services to borrowers. Under 
this business model, servicers act primarily as payment collectors and 
processors, and provide minimal customer service to ensure 
profitability. Servicers also have an incentive to look for 
opportunities to impose fees on borrowers to enhance revenues and are 
generally not subject to market discipline because consumers have no 
opportunity to switch providers. Additionally, servicers may have 
financial incentives to foreclose rather than engage in loss 
mitigation.\12\
---------------------------------------------------------------------------

    \10\ At securitization, the cash flow that was part of interest 
income is bifurcated between the loan and the mortgage servicing 
right (MSR). The MSR represents the present value of all the cash 
flows, both positive and negative, related to servicing a mortgage. 
Prime MSRs are largely created by the GSE minimum servicing fee 
rate, which is calculated as 25 basis points (bps) per annum. The 
servicing fee rate is typically paid to the servicer monthly and the 
monthly amount owed is calculated by multiplying the pro rata 
portion of the servicing fee rate by the stated principal balance of 
the mortgage loan at the payment due date. Accounting rules require 
that a capitalized asset be created if the ``compensation'' for 
servicing (including float/ancillary) exceeds ``adequate 
compensation.'' For loans held in portfolio, there is no bifurcation 
of the interest income from the loan. The owner of the loan simply 
negotiates pricing, terms, and standards with the servicer, which, 
at larger institutions, is typically a separate affiliate or 
subsidiary of the owner of the loans. PowerPoint Presentation, 
Keefe, Bruyette & Woods, Inc., KBW Mortgage Matters: Mortgage 
Servicing Primer, 3 (April 17, 2012).
    \11\ See, e.g., Thompson, 86 Wash. L. Rev. 755, 767.
    \12\ Why Servicers Foreclose When They Should Modify and Other 
Puzzles of Servicer Behavior, NCLC p.v (October 2009), (``Servicers, 
unlike investors or homeowners, do not generally lose money on 
foreclosure. Servicers may even make money on a foreclosure.''), 
Diane Thompson, The Need for National Mortgage Servicing Standards 
(May 12, 2011), at 15 (``* * * modification will also likely reduce 
future income, cost more in the present in staffing, and delay 
recovery of expenses. Moreover, the foreclosure process itself 
generates significant income for servicers.'')
---------------------------------------------------------------------------

    These attributes of the servicing market created problems for 
certain borrowers even prior to the national mortgage crisis. For 
example, borrowers experienced problems with mortgage servicers even 
during regional mortgage market downturns that preceded the mortgage 
crisis.\13\ Borrowers were subjected to improper fees that servicers 
had no reasonable basis to impose on borrowers, improper force-placed 
insurance practices, and improper foreclosure and bankruptcy 
practices.\14\
---------------------------------------------------------------------------

    \13\ See Problems in Mortgage Servicing from Modification to 
Foreclosure: Hearings Before the Comm. on Banking, Housing and Urban 
Affairs, S. Hrg. 111-987, 111th Cong. 53-54 (2010) (statement of 
Thomas J. Miller, Iowa Attorney General) (Miller Testimony). See 
also, Kurt Eggert, Limiting Abuse and Opportunism by Mortgage 
Servicers 15:3 Housing Policy Debate (2004), available at http://ssrn.com/abstract=992095.
    \14\ See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage 
Servicers 15:3 Housing Policy Debate (2004), available at http://ssrn.com/abstract=992095 (collecting cases).
---------------------------------------------------------------------------

    When the mortgage crisis erupted, many servicers were ill-equipped 
to handle the high volumes of delinquent mortgages, loan modification 
requests, and foreclosures they were required to process. These 
servicers lacked the infrastructure, trained staff, controls, and 
procedures needed to manage effectively the flood of delinquent 
mortgages they were forced to handle. Consumer harm has manifested in 
many different areas, and major servicers have entered into significant 
settlement agreements with Federal and State governmental authorities. 
For example, in April 2011, the Office of the Comptroller of the 
Currency (OCC) and the Federal Reserve Board (the Board) undertook 
formal enforcement actions against several major servicers for unsafe 
and unsound residential mortgage loan servicing practices.\15\

[[Page 57322]]

These enforcement actions generally focused on practices relating to 
(1) filing of foreclosure documents without, for example, proper 
affidavits or notarizations; (2) failing to always ensure that loan 
documents were properly endorsed or assigned and, if necessary, in the 
possession of the appropriate party at the appropriate time; (3) 
failing to devote sufficient financial, staffing, and managerial 
resources to ensure proper administration of foreclosure processes; (4) 
failing to devote adequate oversight, internal controls, policies and 
procedures, compliance risk management, internal audit, third party 
management, and training to foreclosure processes; and (5) failing to 
sufficiently oversee outside counsel and other third-party providers 
handling foreclosure-related services.\16\ Congress has held 
significant detailed hearings on the issue of servicer ``robo-signing'' 
of foreclosure related documentation.\17\
---------------------------------------------------------------------------

    \15\ OCC Press Release, OCC Takes Enforcement Action Against 
Eight Servicers for Unsafe and Unsound Foreclosure Practices (April 
13, 2011), available at http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html, and Federal Reserve Board 
Press Release, Federal Reserve Issues Enforcement Actions Related to 
Deficient Practices in Residential Mortgage Loan Servicing (April 
13, 2011), available at http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm, and accompanying documents. In 
addition to enforcement actions against major servicers, Federal 
agencies have also undertaken formal enforcement actions against 
major service providers to mortgage servicers. See id.
    \16\ See id. None of the servicers admitted or denied the OCC's 
or Federal Reserve Board's findings.
    \17\ See, e.g., Problems in Mortgage Servicing from Modification 
to Foreclosure: Hearings Before the Comm. on Banking, Housing and 
Urban Affairs, S. Hrg. 111-987, 111th Cong. 53-54 (2010) (statement 
of Diane E. Thompson, NCLC) (Thompson Testimony).
---------------------------------------------------------------------------

    Servicers have also misled, or failed to communicate with, 
borrowers, lost or mishandled borrower-provided documents supporting 
loan modification requests, and generally provided inadequate service 
to delinquent borrowers. These problems became pervasive in broad 
segments of the mortgage servicing industry and had profound impacts on 
borrowers, particularly delinquent borrowers.\18\
---------------------------------------------------------------------------

    \18\ See U.S. Government Accountability Office, Troubled Asset 
Relief Program: Further Actions Needed to Fully and Equitably 
Implement Foreclosure Mitigation Actions, at 14-16 (June 2010); 
Miller Testimony at 54.
---------------------------------------------------------------------------

    The Bureau further understands from mortgage investors that there 
is a pervasive belief that servicers are making discretionary decisions 
based on the best interests of the servicer rather than to achieve 
results that will benefit owners or assignees of mortgages loans. When 
servicers hold a second lien that is behind a first lien owned by a 
different owner or assignee, one study has found a lower likelihood of 
liquidation and modification, and a higher likelihood of inaction by a 
servicer.\19\ Specifically, ``liquidation and modification of 
securitized first mortgages are 60% [to] 70% less likely respectively 
and no action is 13% more likely when the servicer of that securitized 
first mortgage holds on its portfolio the second lien attached to the 
first mortgage.'' \20\ These failures to take actions that may benefit 
both consumers and owners or assignees of first lien mortgage loans 
harm consumers.
---------------------------------------------------------------------------

    \19\ Sumit Agarwal et. Al, Second Liens and the Holdup Problem 
in First Mortgage Renegotiation (December 2011), available at http://ssrn.com/abstract=2022501.
    \20\ Id.
---------------------------------------------------------------------------

    The mortgage servicing industry, however, is not monolithic. Some 
servicers provide high levels of customer service. Some of these 
servicers may be compensated by investors in a way that incentivizes 
them to provide high levels of customer service in order to optimize 
investor outcomes. Other servicers provide high levels of customer 
service because they rely on providing other products and services to 
consumers and thus have an interest in preserving their reputations and 
relationships with their consumers. For example, as discussed further 
below, small servicers that the Bureau consulted as part of a process 
required under SBREFA described their businesses as requiring a ``high 
touch'' model of customer service both to ensure loan performance and 
maintain a strong reputation in their local communities.\21\
---------------------------------------------------------------------------

    \21\ See U.S. Consumer Fin. Prot., Bureau, Final Report of the 
Small Business Review Panel on CFPB's Proposals Under Consideration 
for Mortgage Servicing Rulemaking (June 11, 2012) (``SBREFA Final 
Report''), available at: http://www.consumerfinance.gov.
---------------------------------------------------------------------------

B. Mortgage Servicing Consumer Protection Regulation Before the Recent 
Crisis

    Prior to the adoption of the Dodd-Frank Act, the mortgage servicing 
industry was subject to limited Federal consumer financial protection 
regulation. RESPA set forth basic protections with respect to mortgage 
servicing that were implemented by the U.S. Department of Housing and 
Urban Development (HUD). These included required disclosures at 
application concerning whether the lender intended to service the 
mortgage loan and disclosures upon an actual transfer of servicing 
rights.\22\ RESPA further imposed substantive and disclosure 
requirements for escrow account management and required servicers to 
respond to ``qualified written requests''--written error resolution or 
information requests relating to a restricted definition of the 
``servicing'' of the borrower's mortgage loan.\23\
---------------------------------------------------------------------------

    \22\ See 12 U.S.C. 2605(a)-(e).
    \23\ See 12 U.S.C. 2605(e) and 2609.
---------------------------------------------------------------------------

    TILA set forth requirements on creditors that were implemented by 
servicers, including disclosures regarding interest rate adjustments on 
adjustable rate mortgage loans. Regulation Z, which implements TILA, 
was amended by the Board to include certain limited requirements 
directly on servicers, such as requirements to timely credit payments, 
provide payoff balances and prohibit pyramiding of late fees.\24\ 
Servicers also had some obligations under other Federal laws, 
including, for example, the Servicemembers Civil Relief Act.\25\
---------------------------------------------------------------------------

    \24\ See 12 CFR 1026.36(c).
    \25\ See 50 U.S.C. App. 501 et seq.
---------------------------------------------------------------------------

    Although TILA and RESPA did not impose many requirements on 
servicers, servicers were still required to navigate overlapping 
requirements governing their servicing responsibilities. In addition to 
Federal law, servicers were required to consider the impact of State 
and even local regulation on mortgage servicing. Servicers also had to 
comply with investor requirements to the extent they serviced loans 
owned or guaranteed by various types of entities. These include (1) 
servicing guidelines required by Federal National Mortgage Association 
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie 
Mac), together known as the government-sponsored enterprises (GSEs), as 
well as servicing guidelines required by the Government National 
Mortgage Association (Ginnie Mae); (2) government insured program 
guidelines issued by the Federal Housing Administration (FHA), 
Department of Veterans Affairs (VA), and the Rural Housing Service; (3) 
contractual agreements with investors (such as pooling and servicing 
agreements and subservicing contracts); and (4) bank or institution 
policies. All those requirements remain in effect today and going 
forward.

C. The National Mortgage Settlement and Other Regulatory Actions

    In response to the unprecedented mortgage crisis and pervasive 
problems in mortgage servicing, including the systemic violation of 
State foreclosure laws by many of the largest servicers, State and 
Federal regulators have engaged in a number of individual servicing 
related enforcement and regulatory actions over the last few years and 
have begun discussions about comprehensive national standards.

[[Page 57323]]

    For example, 49 State attorneys general,\26\ joined by numerous 
Federal agencies including the Bureau, entered into a National Mortgage 
Settlement (National Mortgage Settlement) with the nation's five 
largest servicers in February 2012.\27\ The National Mortgage 
Settlement applies to loans held in portfolio and serviced by the five 
largest servicers. Loans owned by GSEs, private investors, or smaller 
servicers are not covered by the settlement.
---------------------------------------------------------------------------

    \26\ Oklahoma elected not to join the settlement.
    \27\ The National Mortgage Settlement is available at http://www.nationalmortgagesettlement.com/. The five servicers subject to 
the settlement are Bank of America, JP Morgan Chase, Wells Fargo, 
CitiMortgage, and Ally/GMAC.
---------------------------------------------------------------------------

    Exhibit A to each of the settlements is a Settlement Term Sheet, 
which sets forth standards that each of the five largest servicers must 
follow to comply with the terms of the settlement.\28\ The settlement 
standards contained in the Settlement Term Sheet are sub-divided into 
the following eight categories: (1) Foreclosure and bankruptcy 
information and documentation; (2) third-party provider oversight; (3) 
bankruptcy; (4) loss mitigation; (5) protections for military 
personnel; (6) restrictions on servicing fees; (7) force-placed 
insurance; and (8) general servicer duties and prohibitions.
---------------------------------------------------------------------------

    \28\ See http://www.nationalmortgagesettlement.com/.
---------------------------------------------------------------------------

    In addition to the settlement, other Federal regulatory agencies 
have issued guidance on mortgage servicing and loan modifications,\29\ 
conducted coordinated reviews of the nation's largest servicers,\30\ 
and taken enforcement actions against individual companies.\31\ The 
Bureau and other Federal agencies have also engaged since spring 2011 
in informal discussions about the potential development of national 
mortgage servicing standards through regulations and guidance.
---------------------------------------------------------------------------

    \29\ Office of the Comptroller of the Currency, Bulletin 2011-29 
(June 30, 2011), available at: http://www.occ.gov/news-issuances/bulletins/2011/bulletin-2011-29.html; Letter from Edward J. DeMarco, 
Acting Director of FHFA, to Hon. Elijah E. Cummings, Ranking Member, 
Committee on Oversight and Government Reform, U.S. House of 
Representatives (Jan. 20, 2012), available at http://www.fhfa.gov/webfiles/23056/PrincipalForgivenessltr12312.pdf; Guidance, Home 
Affordable Modification Program, available at: https://www.hmpadmin.com/portal/programs/guidance.jsp. FHFA, Frequently 
Asked Questions--Servicing Alignment Initiative, available at: 
http://www.fhfa.gov/webfiles/21191/FAQs42811Final.pdf.
    \30\ See Interagency Foreclosure Report, a joint review of 
foreclosure processing of 14 federally regulated mortgage servicers 
during the fourth quarter of 2010 by the Federal Reserve System, 
Office of the Comptroller of the Currency, and Office of Thrift 
Supervision.
    \31\ See Interagency Foreclosure Report at 5; Federal Reserve 
Board, Press Release (May 24, 2012), available at: http://www.federalreserve.gov/newsevents/press/enforcement/20120524a.htm; 
Federal Reserve Board, Press Release (February 27, 2012), available 
at: http://www.federalreserve.gov/newsevents/press/enforcement/20120227a.htm; Office of the Comptroller of the Currency, News 
Release 2011-47 (April 13, 2011), available at: http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html.
---------------------------------------------------------------------------

    The Bureau's proposed rules under Regulation Z and X represent 
another important step towards establishing uniform minimum national 
standards. When adopted in final form, the Bureau's rules will apply to 
all mortgage servicers, whether depository institutions or non-
depository institutions, and to all segments of the mortgage market, 
regardless of the ownership of the loan. The proposals focus both on 
implementing the specific mortgage servicing requirements of the Dodd-
Frank Act and on addressing broader systemic problems that the Bureau 
believes are critical to ensure that the mortgage servicing market 
functions to serve consumer needs. To that end, the proposed TILA and 
RESPA mortgage servicing rules incorporate elements from four 
categories of the National Mortgage Settlement--(1) Foreclosure and 
bankruptcy information and documentation, (4) loss mitigation, (6) 
restrictions on servicing fees, and (7) force-placed insurance. In 
addition, the proposed requirement to maintain reasonable information 
management policies and procedures addresses oversight of service 
providers, which impacts category (2) of the settlement.
    The Bureau continues to consider whether to incorporate other 
settlement standards into rules or guidance, either alone or in 
conjunction with other Federal regulatory agencies; certain requests 
for comment in this proposal reflect these considerations. The Bureau 
is also continuing ongoing discussions with other regulators to ensure 
appropriate coordination of rulemaking and other initiatives relating 
to mortgage servicing issues.

D. The Statutory Requirements and Additional Proposals

    The Dodd-Frank Act mandates several protections for homeowners in 
the servicing of their loans. The Act requires new disclosures, 
specifically periodic statements (unless coupon books are provided in 
certain circumstances), notices prior to the reset of adjustable-rate 
mortgages, and force-placed insurance notices. These disclosures are 
designed to provide consumers with comprehensive and comprehensible 
information when they need it and in a form they can use, so they can 
better manage their obligations and avoid unnecessary problems.
    The Dodd-Frank Act also imposes new requirements on servicers to 
respond in a timely way to borrowers who assert that their servicer 
made an error. The statute also requires servicers to respond in a 
timely way to borrower requests for information.
    The Dodd-Frank Act contains requirements relating to the prompt 
crediting of payments, so that consumers are not wrongly penalized with 
late fees or other fees because servicers did not credit their payments 
quickly. The statute also requires servicers to provide timely 
responses to consumer requests for payoff amounts, so consumers can get 
this information when they need it, such as when refinancing.
    The Bureau is proposing additional standards to improve the way 
servicers treat all borrowers, including delinquent borrowers. Some 
servicers have made it very difficult for delinquent borrowers to 
explore and take advantage of potential alternatives to foreclosure. 
For example, servicers have frequently neglected to reach out or 
respond to such borrowers to discuss alternatives to foreclosure, lost 
or misplaced the documents of borrowers who have sought modifications 
or other relief, failed to keep track of borrower communications, and 
forced borrowers who have invested substantial time communicating with 
an employee of the servicer to repeat the process with a different 
employee.\32\
---------------------------------------------------------------------------

    \32\ See, e.g., Larry Cordell et al., The Incentives of Mortgage 
Servicers: Myths and Realities, at 9 (Federal Reserve Board, Working 
Paper No. 2008-46, Sept. 2008).
---------------------------------------------------------------------------

    To address these concerns, the Bureau is proposing new servicing 
standards in four areas. First, servicers would have to establish and 
maintain reasonable information management policies and procedures. 
These policies and procedures would have to be reasonably designed to 
achieve certain objectives and address certain obligations, including 
accessing and providing accurate information, evaluating borrowers for 
loss mitigation options, facilitating oversight of, and compliance by, 
service providers, and facilitating servicing transfers.
    Second, servicers would have to intervene early with delinquent 
borrowers to provide them with information about, and encourage them to 
explore, available alternatives to foreclosure.
    Third, servicers would have to provide delinquent borrowers with a 
point of contact that provides continuity

[[Page 57324]]

in the borrowers' dealings with the servicer. At such point of contact, 
staff must have access to complete records about that borrower, 
including records of prior communications with the borrower, and be 
able to assist the borrower in pursuing loss mitigation options.
    Fourth, servicers that offer loss mitigation options in the 
ordinary course of business would be required to follow certain 
procedures to ensure that borrowers' completed loss mitigation 
applications are evaluated in a timely manner, that borrowers are 
notified of the results, and that borrowers have a right to appeal the 
denial of a loan modification option. Servicers would also be required 
to provide borrowers who submit incomplete loss mitigation applications 
with timely notice about the additional documents or information needed 
to make a loss mitigation application complete.
    The Bureau recognizes that a one-size-fits-all approach may not be 
optimal with regard to either the mandated or additional requirements. 
As discussed below, the Bureau seeks comment on to what extent it may 
be appropriate to adjust these standards for small servicers.

III. Summary of Statute and Rulemaking Process

A. Overview of the Statute

    The Dodd-Frank Act imposes certain new requirements related to 
mortgage servicing. Some of these new requirements are amendments to 
TILA addressed in this proposal and others are amendments to RESPA, 
addressed in the 2012 RESPA Servicing Proposal.
    TILA amendments. There are three new mortgage servicing 
requirements under TILA. First, for closed-end credit transactions 
secured by a consumer's principal residence, section 1418 of the Dodd-
Frank Act adds a new section 128A to TILA. TILA section 128A states 
that, for hybrid ARMs with a fixed interest rate for an introductory 
period that adjusts or resets to a variable interest rate at the end of 
such period, a notice must be provided six months prior to the initial 
adjustment of the interest rate for closed-end credit transactions 
secured by a consumer's principal residence. Section 1418 of the Dodd-
Frank Act permits the Bureau to extend this requirement to ARMs that 
are not hybrid ARMs.
    Second, section 1420 of the Dodd-Frank Act, which adds section 
128(f) to TILA, requires the creditor, assignee, or servicer of any 
residential mortgage loan to transmit to the borrower, for each billing 
cycle, a periodic statement that sets forth certain specified 
information in a conspicuous and prominent manner. The statute also 
gives the Bureau the authority to require additional content to be 
included in the periodic statement. The statute provides an exception 
to the periodic statement requirement for fixed-rate loans where the 
borrower is given a coupon book containing substantially the same 
information as the statement.
    Third, section 1464 of the Dodd-Frank Act adds sections 129F and 
129G to TILA, which generally codify existing Regulation Z requirements 
for the prompt crediting of mortgage payments received by servicers in 
connection with consumer credit transactions secured by a consumer's 
dwelling. The statute also generally codifies the Regulation Z 
requirement on accurate and timely responses to borrower requests for 
payoff amounts.
    RESPA amendments. Section 1463 of the Dodd-Frank Act imposes a 
number of new servicing related requirements under RESPA that broadly 
relate to force-placed insurance and error resolution/responses to 
requests for information. First, the statute prohibits a servicer from 
obtaining force-placed hazard insurance, unless there is a reasonable 
basis to believe the borrower has failed to comply with the loan 
contract's requirement to maintain property insurance. A servicer may 
not impose any charge on any borrower for force-placed insurance with 
respect to any property secured by a federally related mortgage, unless 
the servicer sends, by first-class mail, two written notices to the 
borrower, at least 30 days apart. The notices must remind borrowers of 
their obligation to maintain hazard insurance on the property, alert 
borrowers to the servicer's lack of evidence of insurance coverage, 
tell borrowers what they must do to demonstrate that they have 
coverage, and state that the servicer may obtain coverage at the 
borrower's expense if the borrower fails to provide evidence of 
coverage. Servicers must terminate force-placed insurance coverage and 
refund to borrowers any premiums charged during any period when the 
borrower had private insurance coverage. The statute also provides that 
all charges imposed on the borrower related to force-placed insurance, 
apart from charges subject to State regulation as the business of 
insurance, must be bona fide and reasonable.
    Second, the statute prohibits certain acts and practices by 
servicers of federally related mortgages with regard to resolving 
errors and responding to requests for information. Specifically, the 
statute prohibits servicers of federally related mortgages from 
charging fees for responding to valid qualified written requests. The 
statute also provides that a servicer of a federally related mortgage 
must not fail to take timely action to respond to a borrower's requests 
to correct errors relating to: Allocation of payments, final balances 
for purposes of paying off the loan, avoiding foreclosure, or other 
standard servicer duties.
    Finally, the statue requires a servicer of a federally related 
mortgage to respond within ten business days to a request from a 
borrower to provide the identity, address, and other relevant contact 
information about the owner or assignee of the loan. The statue also 
reduces the amount of time that servicers of federally related 
mortgages have to correct errors and respond to inquiries generally, as 
well as refund escrow accounts upon payoff.\33\
---------------------------------------------------------------------------

    \33\ Other changes in section 1463 of the Dodd-Frank Act relate 
to increases in penalties for violations. These provisions are not 
addressed in this rulemaking.
---------------------------------------------------------------------------

    In addition, the statute provides that a servicer of a federally 
related mortgage must ``comply with any other obligation found by the 
Consumer Financial Protection Bureau, by regulation, to be appropriate 
to carry out the consumer protection purposes of this Act.'' \34\ This 
provision gives the Bureau broad authority to adopt additional 
regulations to govern the conduct of servicers of federally related 
mortgage loans. In light of the systemic problems in the mortgage 
servicing industry, the Bureau is proposing to exercise this authority 
to require servicers of federally related mortgages to: Establish 
reasonable information management policies and procedures; undertake 
early intervention with delinquent borrowers; provide delinquent 
borrowers with continuity of contact with staff equipped to assist 
them; and require servicers that offer loss mitigation options in the 
ordinary course of business to follow certain procedures when 
evaluating loss mitigation applications.
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 2605(k)(1)(E).
---------------------------------------------------------------------------

    The statute also requires a creditor or servicer to send accurate 
and timely responses to borrower requests for payoff amounts for home 
loans.
    The statutory provisions with enumerated mortgage servicing 
requirements become effective on January 21, 2013, unless final rules 
are issued on or before that date.

B. Outreach and Consumer Testing

    The Bureau has conducted extensive outreach in developing the 
mortgage servicing proposals. Bureau staff met

[[Page 57325]]

with mortgage servicers, force-placed insurance carriers, industry 
trade associations, consumer advocates, other Federal regulatory 
agencies, and other interested parties to discuss various aspects of 
the statute and the servicing industry.
    In preparing this proposed rule, the Bureau solicited input from 
small servicers through a Small Business Review Panel (SBREFA Panel) 
with the Chief Counsel for Advocacy of the Small Business 
Administration (SBA) and the Administrator of the Office of Information 
and Regulatory Affairs within the Office of Management and Budget 
(OMB).\35\ The Small Business Review Panel's findings and 
recommendations are contained in the Final Report of the Small Business 
Review Panel on CFPB's Proposals Under Consideration for Mortgage 
Servicing Rulemaking (SBREFA Final Report).\36\
---------------------------------------------------------------------------

    \35\ The Small Business Regulatory Enforcement Fairness Act of 
1996 (SBREFA) requires the Bureau to convene a Small Business Review 
Panel before proposing a rule that may have a substantial economic 
impact on a significant number of small entities. See Public Law 
104-121, tit. II, 110 Stat. 847, 857 (1996) (as amended by Pub. L. 
110-28, sec. 8302 (2007)).
    \36\ See SBREFA Final Report, supra note 22.
---------------------------------------------------------------------------

    The Bureau also engaged in other meetings and roundtables with a 
variety of other stakeholders to gather factual information about the 
servicing industry and to discuss various elements of the Bureau's 
proposals as they were being developed. As discussed above and in 
connection with section 1022 of the Dodd-Frank Act below, the Bureau 
has also consulted with relevant Federal regulators both regarding the 
Bureau's specific proposals and the need for and potential contents of 
national mortgage servicing standards in general. As it considers 
public comment and works to develop final rules on mortgage servicing, 
the Bureau will continue to seek input from all interested parties.
    In addition, the Bureau engaged ICF Macro (Macro), a research and 
consulting firm that specializes in designing disclosures and consumer 
testing, to conduct one-on-one cognitive interviews regarding 
disclosures connected with mortgage servicing. During the first quarter 
of 2012, the Bureau and Macro worked closely to develop and test 
disclosures that would satisfy the requirements of the Dodd-Frank Act 
and provide information to consumers in a manner that would be 
understandable and useful. These disclosures related to the ARM 
notices, the force-placed insurance notices, and the periodic 
statements. Macro conducted three rounds of one-on-one cognitive 
interviews with a total of 31 participants in the Baltimore, Maryland 
metro area (Towson, Maryland), Memphis, Tennessee, and Los Angeles, 
California. Participants were all consumers who held a mortgage loan 
and represented a range of ages and education levels. Efforts were made 
to recruit a significant number of participants who had trouble making 
mortgage payments in the last two years. During the interviews, 
participants were shown disclosure forms for periodic statements, ARM 
interest rate adjustment notices for the new disclosures required by 
Dodd-Frank Act section 1418, and force-placed insurance notices. 
Participants were asked specific questions to test their understanding 
of the information presented in each of the disclosures, how easily 
they could find various pieces of information presented in each of the 
disclosures, as well as to learn about how they would use the 
information presented in each of the disclosures. The disclosures were 
revised after each round of testing. Specific findings from the 
consumer testing are discussed in detail throughout the SUPPLEMENTARY 
INFORMATION where relevant.\37\
---------------------------------------------------------------------------

    \37\ ICF Macro International, Inc., Summary of Findings: Design 
and Testing of Mortgage Servicing Disclosures (Aug. 2012), available 
at: http://www.consumerfinance.gov/notice-and-comment/ (report on 
consumer testing submitted to the U.S. Consumer Fin. Prot. Bureau).
---------------------------------------------------------------------------

C. Other Dodd-Frank Act Mortgage-Related Rulemakings

    Including this proposal, the Bureau currently is engaged in seven 
rulemakings relating to mortgage credit to implement requirements of 
the Dodd-Frank Act:
     TILA-RESPA Integration: On July 9, 2012, the Bureau 
released proposed rules and forms combining the TILA mortgage loan 
disclosures with the Good Faith Estimate (GFE) and settlement statement 
required under RESPA, pursuant to DFA section 1032(f) as well as 
sections 4(a) of RESPA and 105(b) of TILA, as amended by DFA sections 
1098 and 1100A, respectively. 12 U.S.C. 2603(a); 15 U.S.C. 1604(b) (the 
2012 TILA-RESPA Proposal).\38\
---------------------------------------------------------------------------

    \38\ Available at http://www.consumerfinance.gov/notice-and-comment/.
---------------------------------------------------------------------------

     HOEPA: On July 9, 2012, the Bureau released proposed rules 
to implement Dodd-Frank Act requirements expanding protections for 
``high-cost'' mortgage loans under HOEPA, pursuant to TILA sections 
103(bb) and 129, as amended by DFA sections 1431 through 1433. 15 
U.S.C. 1602(bb) and 1639.\39\ Such loans have requirements on servicers 
related to payoff statements, late fees, prepayment penalties, and fees 
for loan modifications or deferrals.
---------------------------------------------------------------------------

    \39\ Id.
---------------------------------------------------------------------------

     Loan Originator Compensation: The Bureau is in the process 
of developing a proposal to implement provisions of the Dodd-Frank Act 
requiring certain creditors and mortgage loan originators to meet duty 
of care qualifications and prohibiting mortgage loan originators, 
creditors, and the affiliates of both from receiving compensation in 
various forms (including based on the terms of the transaction) and 
from sources other than the consumer, with specified exceptions, 
pursuant to TILA section 129B as established by DFA sections 1402 
through 1405. 15 U.S.C. 1639b.
     Appraisals: The Bureau, jointly with Federal prudential 
regulators and other Federal agencies, is in the process of developing 
a proposal to implement Dodd-Frank Act requirements concerning 
appraisals for higher-risk mortgages, appraisal management companies, 
and automated valuation models, pursuant to TILA section 129H as 
established by DFA section 1471, 15 U.S.C. 1639h, and sections 1124 and 
1125 of the Financial Institutions Reform, Recovery, and Enforcement 
Act of 1989 (FIRREA) as established by Dodd-Frank Act sections 1473(f), 
12 U.S.C. 3353, and 1473(q), 12 U.S.C. 3354, respectively. In addition, 
the Bureau is developing rules to implement section 701(e) of the Equal 
Credit Opportunity Act (ECOA), as amended by DFA section 1474, to 
require that creditors provide applicants with a free copy of written 
appraisals and valuations developed in connection with applications for 
loans secured by a first lien on a dwelling. 15 U.S.C. 1691(e).
     Ability to Repay: The Bureau is in the process of 
finalizing a proposal issued by the Board to implement provisions of 
the Dodd-Frank Act requiring creditors to determine that a consumer can 
repay a mortgage loan and establishing standards for compliance, such 
as by making a ``qualified mortgage,'' pursuant to TILA section 129C as 
established by Dodd-Frank Act sections 1411 and 1412 (ATR Rulemaking). 
15 U.S.C. 1639c.
     Escrows: The Bureau is in the process of finalizing a 
proposal issued by the Board to implement provisions of the Dodd-Frank 
Act requiring certain escrow account disclosures and exempting from the 
higher-priced mortgage loan escrow requirement loans made by certain 
small creditors, among

[[Page 57326]]

other provisions, pursuant to TILA section 129D as established by Dodd-
Frank Act sections 1461 and 1462. 15 U.S.C. 1639d.
    With the exception of the requirements being implemented in the 
2012 TILA-RESPA Proposal, the Dodd-Frank Act requirements referenced 
above generally will take effect on January 21, 2013, unless final 
rules implementing those requirements are issued on or before that date 
and provide for a different effective date. To provide an orderly, 
coordinated, and efficient comment process, the Bureau is generally 
setting the deadlines for comments on this and other proposed mortgage 
rules based on the date the proposal is issued, instead of the date 
this notice is published in the Federal Register. Therefore, the Bureau 
is providing 60 days for comment on those proposals, which will ensure 
that the Bureau receives comments with sufficient time remaining to 
issue final rules by January 21, 2013. Because the precise date this 
notice will be published cannot be predicted in advance, setting the 
deadlines based on the date of issuance will allow interested parties 
that intend to comment on multiple proposals to plan accordingly.
    The Bureau regards the foregoing rulemakings as components of a 
larger undertaking; many of them intersect with one or more of the 
others. Accordingly, the Bureau is coordinating carefully the 
development of the proposals and final rules identified above. Each 
rulemaking will adopt new regulatory provisions to implement the 
various Dodd-Frank Act mandates described above. In addition, each of 
them may include other provisions the Bureau considers necessary or 
appropriate to ensure that the overall undertaking is accomplished 
efficiently and that it ultimately yields a regulatory scheme for 
mortgage credit that achieves the statutory purposes set forth by 
Congress, while avoiding unnecessary burdens on industry.
    Thus, many of the rulemakings listed above involve issues that 
extend across two or more rulemakings. In this context, each rulemaking 
may raise concerns that might appear unaddressed if that rulemaking 
were viewed in isolation. For efficiency's sake, however, the Bureau is 
publishing and soliciting comment on a proposed approach to certain 
issues raised by two or more of its mortgage rulemakings in whichever 
rulemaking is most appropriate, in the Bureau's judgment, for 
addressing each specific issue. Accordingly, the Bureau urges the 
public to review this and the other mortgage proposals identified 
above, including those previously published by the Board, together. 
Such a review will ensure a more complete understanding of the Bureau's 
overall approach and will foster more comprehensive and informed public 
comment on the Bureau's several proposals, including provisions that 
may have some relation to more than one rulemaking but are being 
proposed for comment in only one of them.

D. Small Servicers

    The small entity representatives (SERs) who provided feedback to 
the SBREFA panel generally emphasized that their business models 
required a ``high touch'' approach to customer service and that they 
did not engage in many of the practices that contributed to the 
mortgage market process. The SERs indicated that they take a proactive 
approach to providing consumer information, resolving errors and 
working with delinquent borrowers to find alternatives to foreclosure. 
Nevertheless, they indicated that some elements of the proposals under 
consideration were not consistent with their current business practices 
and expressed concern about the need to begin providing extensive 
documentation to prove compliance with the proposed standards. The SERs 
urged the Bureau to adopt standards that would allow small servicers to 
stay in the market and provide choices to consumers with the new 
compliance burdens.\40\ The SERs were particularly concerned about the 
costs and burdens of complying with the periodic statement 
requirements, as well as certain aspects of the process for resolving 
errors and responding to inquiries.\41\
---------------------------------------------------------------------------

    \40\ SBREFA Final Report, supra note 22, at 16, 21.
    \41\ SBREFA Final Report, supra note 22, at 16-19, 21, and 23-
24.
---------------------------------------------------------------------------

    Informed by this process, the Bureau is proposing to exempt certain 
small servicers from the periodic statement requirement. The Bureau is 
also proposing that certain requirements, such as the requirement to 
maintain reasonable information management policies and procedures 
under Regulation X, should be applied in light of the scale of the 
servicer's operations as well as other contextual factors. The Bureau 
does not believe that these provisions, described more fully below in 
the section-by-section analysis of the applicable proposal, would 
impair consumer protection. The Bureau is also seeking comment more 
broadly on whether other exemptions or adjustments for small servicers 
would be warranted to reduce regulatory burden while appropriately 
balancing consumer protections.

E. Request for Comment on Effective Date

    The Bureau specifically requests comment on the appropriate 
effective date for each of the servicing-related rules contained in 
this proposal and the 2012 RESPA Servicing Proposal. As discussed 
above, the Dodd-Frank Act servicing requirements take effect 
automatically on January 21, 2013, unless final rules are issued on or 
before that date.\42\ Where rules are required to be issued, the Dodd-
Frank Act permits the Bureau to provide up to 12 months for 
implementation. For all other rules, the implementation period is left 
to the discretion of the Bureau.
---------------------------------------------------------------------------

    \42\ Public Law 111-203, 124 Stat. 1376, section 1400(c) (2010).
---------------------------------------------------------------------------

    Given the significant consumer benefits offered by the proposals 
and the challenges faced by delinquent borrowers in dealing with their 
servicers, the Bureau generally believes that the final rules should be 
made effective as soon as possible. However, the Bureau understands 
that various elements of the final rules would require servicers to 
adopt or revise existing software to generate compliant disclosures, 
retrain staff, assess and revise policies and procedures, and/or take 
other implementation measures. The Bureau therefore seeks detailed 
comment on the nature and length of implementation process for each 
individual servicing rule and in light of interactions between the 
rules. The Bureau is particularly interested in analyzing the impacts 
on both consumers and servicers of a staggered implementation sequence 
as compared to imposing a single date by which all rules must be 
implemented.
    The Bureau also notes that some companies may also need to 
implement other new requirements under other parts of the Dodd-Frank 
Act, as described above. The Bureau believes based on conversations and 
analysis to date that there is more overlap and interaction among the 
various proposals relating to mortgage origination than there is 
between the servicing proposals and the origination proposals. However, 
the Bureau seeks comment specifically on this issue and on whether the 
general cumulative burden on entities that are subject to both sets of 
rules will complicate implementation.
    Finally, the Bureau seeks comment on any particular implementation 
challenges faced by small servicers, and on whether an extended 
implementation period would be

[[Page 57327]]

appropriate or useful. For instance, to the extent that small servicers 
rely heavily on outside software vendors, the Bureau seeks comment on 
whether a delayed effective date would provide significant relief if 
the vendors will have to develop software solutions for larger 
servicers on a shorter timeline anyway. The Bureau also seeks comment 
on the impacts of delayed implementation on consumers and on other 
market participants.

IV. Discussion of Major Proposed Revisions

    The proposed amendments to Regulation Z implement sections 1418 
(initial ARM interest rate adjustment notice), 1420 (periodic 
statements) and 1464 (prompt crediting and provision of payoff 
statements) of the Dodd-Frank Act, which in turn amend TILA. The 
amendment also proposes to revise current Regulation Z ARM disclosure 
rules for consistency with DFA section 1418. The proposed revision 
eliminates the ARM interest rate adjustment notice required at least 
once each year during which an interest rate adjustment is implemented 
without resulting in a corresponding payment change.

A. Current and Proposed Interest Rate Adjustment Disclosures

    To implement DFA section 1418, the Bureau is proposing to revise 
Sec.  1026.20(d) to require that creditors, assignees, or servicers 
provide notices to consumers six to seven months prior to the first 
time the interest rate of their adjustable-rate mortgages adjusts. In 
contrast to this one-time disclosure, Regulation Z currently requires 
notice to consumers regarding each adjustment of their adjustable-rate 
mortgages.
    Under current rule Sec.  1026.20(c), creditors must provide 
consumers with a notice of interest rate adjustment for variable-rate 
transactions subject to Sec.  1026.19(b) at least 25, but no more than 
120, calendar days before a payment at a new level is due. For the 
reasons discussed below, the Bureau is proposing in Sec.  1026.20(c), 
among other things, to change the minimum time for providing advance 
notice to consumers from 25 days to 60 days before payment at a new 
level is due. The maximum time for advance notice would remain the 
same: 120 days prior to the due date of the first payment at a new 
level.
    Current Sec.  1026.20(c) also requires creditors to provide 
consumers with an adjustment notice at least once each year during 
which an interest rate adjustment is implemented without resulting in a 
corresponding payment change. The Bureau is proposing to eliminate this 
provision. As explained in more detail below in the section-by-section 
analysis, the Bureau believes that certain Dodd-Frank Act amendments to 
TILA and the Bureau's proposed amendments that would implement those 
provisions provide consumers with much of the information contained in 
the annual notice, thereby greatly minimizing its value for consumers.
    In the interest of harmonizing the two proposed ARM disclosures, 
the coverage, content, and format of proposed Sec.  1026.20(c) and (d) 
closely track one another and incorporate most of the content currently 
required by Sec.  1026.20(c).
    Historic context of Sec.  1026.20(c) rate adjustment disclosures. 
The Board adopted the rule that is current Sec.  1026.20(c) in 1987, as 
part of a larger revision of Regulation Z.\43\ In 2009, the Board 
proposed to revise regulations governing ARM disclosures as part of a 
larger revision of closed-end provisions in Regulation Z (2009 Closed-
End Proposal). In that proposal, the Board said that, in 1987, it set 
the minimum time for providing notice of a rate adjustment at 25 days 
before payment at new level is due in order to track the rules of the 
OCC and to provide creditors with flexibility in giving adjustment 
notices for a variety of ARMs.\44\ It also noted that, as of 2009, 
neither the OCC nor any other Federal financial institution supervisory 
agency had any comprehensive disclosure requirements for ARMs.\45\
---------------------------------------------------------------------------

    \43\ 52 FR 48665 (Dec. 24, 1987).
    \44\ 74 FR 43232, 43269 (Aug. 26, 2009) (citing 52 FR 48665, 
48668 (Dec. 24, 1987)).
    \45\ Id. at 43272.
---------------------------------------------------------------------------

    Since 1987, the popularity of ARMs has increased, especially during 
the period from 2002 to 2007.\46\ Beginning in 2007, ARM growth began 
to slow as consumers experienced difficulty repaying such loans and 
concerns grew about the risk of payment shock that ARMs pose.\47\ 
According to Freddie Mac, ``[i]n June 2004, ARMs hit a peak share of 
40% of the home-purchase market but by early 2009, that share had 
fallen to just 3%, according to the Federal Housing Finance Agency.'' 
\48\ Generally, ARMs are financing just over 10% of new home-purchase 
loans but are expected to rise to a 14% share of that market in 
2012.\49\
---------------------------------------------------------------------------

    \46\ Id. at 43269.
    \47\ Id.
    \48\ Press Release, Freddie Mac, Freddie Mac Releases 28th 
Annual ARM Survey Results (January 18, 2012), available at: http://freddiemac.mediaroom.com/index.php?s=12329&item=109996.
    \49\ Id.
---------------------------------------------------------------------------

    For many consumers, the current era of declining interest rates has 
reduced the incidence of the significant payment increases that can 
accompany ARM interest rate adjustments. Anecdotal evidence from 
mortgage servicers with which the Bureau has conducted outreach 
supports this conclusion. To the extent interest rates rise in the 
future, ARM interest rate adjustments may result in significant payment 
increases for many consumers. The popularity of adjustable-rate 
mortgages, which provide the opportunity for reduced interest rates, 
also may increase along with the advent of higher interest rates.
    Regardless of current market conditions, ARMs can pose a risk of 
payment shock. Therefore, it is critical that consumers receive advance 
notice of ARM payment changes so that, if their rates increase, they 
can prepare to make higher mortgage payments or pursue alternative 
plans, such as seeking to refinance their loans.
    Timing of current and proposed ARM regulations. DFA section 1418 
requires that interest rate adjustment disclosures be provided to 
consumers six to seven months before the interest rate adjusts for the 
first time (which is equivalent to 210 to 240 days before payment at a 
new level is due). Generally, this much advance notice will require 
disclosure of an estimated new interest rate and payment instead of 
exact amounts. This is because ARM contracts generally require an index 
value published closer to the adjustment date to calculate the adjusted 
interest rate and new payment. Nevertheless, the consumer would be put 
on notice of upcoming changes and would have ample time to refinance or 
pursue other alternatives if the estimate indicates a potential 
increase in payments that the consumer cannot afford.
    Current Sec.  1026.20(c) requires notice of rate adjustments 
resulting in a corresponding payment change at least 25 days prior to 
when payment at a new level is due. This notice, unlike the one 
required under DFA section 1418, provides the actual, not estimated, 
new interest rate and payment. Twenty-five days likely does not provide 
sufficient time for consumers to refinance, pursue other alternatives, 
or adjust their finances to make higher payments. Research conducted 
for the years 2004 through 2007 also suggested that a requirement to 
provide ARM adjustment disclosures 60, rather than 25, days before 
payment at a new level is due more closely reflects the time needed for

[[Page 57328]]

consumers to refinance a loan.\50\ In the current market, the nation's 
biggest mortgage lenders take an average of more than 70 days to 
complete a refinance.\51\
---------------------------------------------------------------------------

    \50\ Robert B. Avery, Kenneth P. Brevoort, & Glenn B. Canner, 
The 2007 HMDA Data, 94 Fed. Reserve Bull. A107 (Dec. 23, 2008).
    \51\ Nick Timiraos & Ruth Simon, Borrowers Face Big Delays in 
Refinancing Mortgages, Wall St. J., May 9, 2012, at A1, available 
at: http://online.wsj.com/article/SB10001424052702303459004577364102737025584.html.
---------------------------------------------------------------------------

    For these reasons, proposed Sec.  1026.20(c) revises the time frame 
for providing the ARM adjustment notice from the current 25 to 120 days 
to 60 to 120 days before payment at a new level is due. Under the 
proposed rule, consumers will know the actual amount of their new 
interest rate and payment at least 60 days before the new payment is 
due. Most existing ARMs will be able to comply with this proposed 
timing. The Bureau proposes grandfathering existing ARMs that 
contractually will not be able to comply with the new timing, i.e., 
those with look-back periods of less than 45 days. See section-by-
section analysis for proposed Sec.  1026.20(c) for a full discussion of 
timing and look-back periods.
    Content of current and proposed ARM regulations. The Bureau is 
generally proposing to retain the content required by current Sec.  
1026.20(c). Proposed Sec.  1026.20(c) would require additional 
information such as a statement that the consumer's interest rate is 
scheduled to adjust, the adjustment may change the mortgage payment, 
the time period the current interest rate has been in effect, and the 
dates of the future rate adjustments; the date when the new payment is 
due after the adjustment; any interest rate or payment limits; any 
unapplied carryover interest and the earliest date it could be applied; 
additional amortization information for negatively-amortizing and 
interest-only loans; and the amount and expiration date of any 
prepayment penalty. Much of this additional content was proposed by the 
Board's 2009 Closed-End Proposal to amend Regulation Z's payment change 
interest rate adjustment disclosures.\52\
---------------------------------------------------------------------------

    \52\ 74 FR 43232, 43269-73 (Aug. 26, 2009).
---------------------------------------------------------------------------

    The initial interest rate adjustment notices proposed by Sec.  
1026.20(d) include much of the same information listed above for 
proposed Sec.  1026.20(c). The content of the two proposed notices in 
Sec.  1026.20(c) and (d) closely track one another in order to promote 
consistency and simplify compliance. However, proposed Sec.  
1026.20(c), which applies to the ongoing disclosures at each interest 
rate adjustment that results in a corresponding payment change, would 
not require some of the disclosures mandated for the initial interest 
rate adjustment notices by DFA section 1418. These disclosures include 
a list of alternatives consumers may pursue, including refinancing, 
renegotiation of loan terms, payment forbearance, and pre-foreclosure 
sales; contact information for the appropriate State housing finance 
agency; and information on how to access a list of government-certified 
counseling agencies and programs. The Bureau believes it is not 
necessary to provide this information in Sec.  1026.20(c) notices 
because much of it will be provided to consumers through other mortgage 
servicing measures implemented by the Dodd-Frank Act. For example, new 
TILA section 128(f), which would be implemented by proposed rule Sec.  
1026.41 for periodic statements, each billing cycle would provide 
information on how to contact the appropriate State housing finance 
authority and how to access a list of government-certified counseling 
agencies and programs. Also, the early intervention provisions of the 
2012 RESPA Servicing Proposal would require this same information as 
well as examples of alternatives consumers may want to consider. 
Finally, consumers will have received this information pursuant to 
Sec.  1026.20(d) the first time their adjustable-rate mortgages adjust.
    The model forms proposed for Sec.  1026.20(c) and (d) closely track 
one another and disclose virtually the same information, except for the 
additional information proposed for Sec.  1026.20(d), as discussed 
above, and the reference to estimates in the proposed Sec.  1026.20(d) 
notices. The Bureau believes that harmonizing the two proposed rules 
regarding ARM interest rate adjustment disclosures would ease the 
burden of compliance for creditors, assignees, and servicers while 
providing consumers with consistent information in similar notices.
    The Bureau is proposing model and sample forms \53\ for both Sec.  
1026.20(c) and (d). The Bureau worked with Macro to design and test the 
forms for Sec.  1026.20(d), but did not specifically test Sec.  
1026.20(c) notices. See Part II.B above. Because of the similarity in 
the model forms for both proposed rules, the results of the testing of 
Sec.  1026.20(d) forms is relevant for proposed Sec.  1026.20(c) as 
well. Thus, throughout the section-by-section analysis for Sec.  
1026.20(c), the Bureau refers to the testing results for Sec.  
1026.20(d) where the information and concepts tested are identical in 
the model forms for both proposed Sec.  1026.20(c) and (d).
---------------------------------------------------------------------------

    \53\ The Bureau proposes four model forms for the ARM adjustment 
notices: Two forms for the Sec.  1026.20(c) ARM payment change 
notices, one labeled a model form and the other a sample form and 
two forms for the Sec.  1026.20(d) ARM initial interest rate 
adjustment notices, one labeled a model form and the other a sample 
form. See Appendix H-4(D)(1)-(4).
---------------------------------------------------------------------------

B. Proposed Rule Regarding Prompt Crediting of Mortgage Payments and 
Response to Requests for Payoff Amounts

    DFA section 1464(a) codifies the existing Regulation Z requirements 
in Sec.  1026.36(c)(1)(i) on prompt crediting of payments. The proposed 
modifications to Sec.  1026.36(c) would clarify the handling of partial 
payments. The proposal would limit application of the current prompt 
crediting provision, existing Sec.  1026.36(c)(1)(i), to full 
contractual payments (as opposed to all payments), and add a new 
provision, Sec.  1026.36(c)(1)(ii), to address the handing of partial 
payments (anything less than a full contractual payment).
    DFA section 1464(b) generally codifies the existing Regulation Z 
requirement in Sec.  1026.36(c)(3) to provide payoff statements, with 
modifications relating to the scope and timing of the requirement, and 
the need for the request to be written. Proposed modifications to Sec.  
1026.36(c) reflect these changes.
    As part of implementing these changes, the Bureau is proposing a 
reorganization of the requirements in Sec.  1026.36(c).

C. Proposed Rule Regarding Periodic Statements

    DFA section 1420 establishes new TILA section 128(f), requiring 
periodic statements for residential mortgage loans to be provided each 
billing cycle. The statute requires that a creditor, assignee, or 
servicer disclose certain information in the periodic statement, along 
with ``such other information as the Bureau may prescribe in 
regulations.'' \54\ The statute requires the Bureau to develop and 
prescribe a standard form for this disclosure, taking into account that 
the required statements may be transmitted in writing or 
electronically.\55\ The statute also provides an exemption to the 
periodic statement requirement for fixed-rate loans where the creditor, 
assignee, or servicer provides the obligor with a coupon book which 
provides substantially the same information as the periodic 
statement.\56\
---------------------------------------------------------------------------

    \54\ TILA section 128(f)(1)(H).
    \55\ TILA section 128(f)(2).
    \56\ TILA section 128(f)(3).

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

[[Page 57329]]

    Proposed Sec.  1026.41 contains the periodic statement requirement. 
Paragraph (a) establishes the general requirement for creditors, 
assignees, or servicers to provide a periodic statement. Paragraphs 
(b)-(d) establish requirements for the timing, form, content, and 
layout of the statement. Paragraph (e) sets forth exemptions from the 
periodic statement requirement.
    The periodic statement is designed to serve a variety of purposes, 
including informing consumers of their payment obligations, providing 
the consumer with information about their mortgage in an easily 
readable and understandable format, creating a record of the 
transaction to aid in error detection and resolution, and providing 
information to certain delinquent borrowers.
    The Bureau is proposing sample forms in accordance with TILA 
section 129(f)(2). The Bureau examined several forms used today by 
various servicers, considered how these forms met the needs of 
consumers, and identified changes that would benefit consumers. As 
discussed above in part II.B, the Bureau worked with Macro to design 
and test sample forms.
    The proposed periodic statement is designed to provide information 
to consumers in a format they can easily understand and use. As such, 
the proposed regulation would require certain related pieces of 
information to be grouped together. The proposed formatting 
requirements of the periodic statement are discussed in detail in the 
section-by-section analysis for proposed Sec.  1026.41(d).
    The proposed periodic statement is also designed to provide 
additional information to consumers in several potentially confusing 
scenarios: Partial payments, payment-option loans, and delinquency. 
First, the handling of partial payments would be clarified on the 
periodic statement, both on the transaction activity line and in the 
past payment breakdown. Additionally, if funds are held in a suspense 
or unapplied funds account, the proposed rule would require a message 
on what must be done to release the funds. Second, payments for 
payment-option loans would be clarified by listing the options in the 
Amount Due section, and providing details about each of the options in 
the Explanation of Amount Due section. Finally, delinquent consumers 
would receive information in several places on the periodic statement. 
The overdue amount would be stated in the Explanation of Amount Due 
section, and any fees would be listed in the Transaction Activity 
section. The breakdown of past payments will help the consumer 
understand how past payments were applied, which can be confusing. 
Additionally, consumers who are more than 45 days delinquent will have 
a delinquency information included in the periodic statement providing 
specific information about their loan. These requirements are discussed 
in greater detail in the section-by-section analysis on proposed Sec.  
1026.41 below.
    Finally, the proposal contains several exemptions from the periodic 
statement requirement. One exemption is for fixed-rate loans using 
coupon books that meet certain requirements, as set forth in TILA 
128(f)(3). Another exemption clarifies that timeshares are not subject 
to the periodic statement requirement as per the definition of 
``residential mortgage loan.'' \57\ The Bureau is also proposing 
exemptions for reverse mortgages and certain small servicers.
---------------------------------------------------------------------------

    \57\ TILA section 103(cc)(5).
---------------------------------------------------------------------------

V. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under TILA and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act 
transferred to the Bureau the ``consumer financial protection 
functions'' previously vested in certain other Federal agencies, 
including the Board. 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.'' \58\ TILA, Title X of the 
Dodd-Frank Act, and certain subtitles and provisions of Title XIV of 
the Dodd Frank Act, are Federal consumer financial laws.\59\ 
Accordingly, the Bureau has authority to issue regulations pursuant to 
TILA, Title X, and the enumerated subtitles and provisions of Tile XIV, 
including to implement the additions and amendments to TILA's mortgage 
servicing requirements made by Title XIV of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \58\ 12 U.S.C. 5581(a)(1).
    \59\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA), Dodd-Frank 
section 1400(b), 15 U.S.C. 1601 note (defining ``enumerated consumer 
laws'' to include certain subtitles and provisions of Title XIV).
---------------------------------------------------------------------------

    Sections 1418, 1420 and 1464 of the Dodd-Frank Act create new 
requirements under TILA in new sections 128A, 128(f), and 129F and 
129G, respectively. Section 1418 of the Dodd-Frank Act amends 
Regulation Z to require that certain disclosures be provided to 
consumers with hybrid adjustable-rate mortgages secured by the 
consumer's principal residence the first time the interest resets or 
adjusts. Additionally, the savings clause in TILA section 128A(c) 
allows the Bureau to require this notice for adjustable-rate mortgage 
loans that are not hybrid adjustable-rate loans. DFA section 1420 
requires that a periodic statement be provided to consumers for each 
billing cycle of a consumer's closed-end mortgage secured by a 
dwelling, except for fixed-rate loans with coupon books containing 
substantially the same information. The statute requires a list of 
specific information that must be included in the periodic statement. 
Additionally, pursuant to TILA section 128(f)(1)(H), the periodic 
statement must also include such information as the Bureau may require 
in regulations. DFA section 1464 generally requires the prompt 
crediting of mortgage payments in connection with consumer credit 
transactions secured by a consumer's principal dwelling and an accurate 
timely response to requests for payoff amounts for home loans. In 
addition to proposing rules to implement these TILA provisions of the 
Dodd-Frank Act, the Bureau proposes amending current TILA interest rate 
adjustment disclosures required by Sec.  1026.20(c) as proposed Sec.  
1026.20(c).
    The proposed rule also relies on the rulemaking and exception 
authorities specifically granted to the Bureau by TILA and the Dodd-
Frank Act, including the authorities discussed below:

The Truth in Lending Act

    TILA section 105(a). As amended by the Dodd-Frank Act, TILA section 
105(a), 15 U.S.C. 1604(a), directs the Bureau to prescribe regulations 
to carry out the purposes of TILA, and provides that such regulations 
may contain additional requirements, classifications, differentiations, 
or other provisions, and may provide for such adjustments and 
exceptions for all or any class of transactions, that the Bureau judges 
are necessary or proper to effectuate the purposes of TILA, to prevent 
circumvention or evasion thereof, or to facilitate compliance. The 
purposes of TILA are ``to assure a meaningful disclosure of credit 
terms so that the consumers will be able to compare more readily the 
various credit terms available and avoid the uninformed use of credit'' 
and to protect consumers against inaccurate and unfair credit billing 
practices. TILA section 102(a); 15 U.S.C. 1601(a).

[[Page 57330]]

    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit and avoid 
unfair credit billing practices through required disclosures and 
substantive regulation of certain practices. Dodd-Frank Act section 
1100A additionally clarifies the Bureau's TILA section 105(a) authority 
by amending that section to provide express authority to prescribe 
regulations that contain ``additional requirements'' that the Bureau 
finds are necessary or proper to effectuate the purposes of TILA, to 
prevent circumvention or evasion thereof, or to facilitate compliance. 
This amendment clarified that the Bureau has the authority to exercise 
TILA section 105(a) to prescribe requirements beyond those specifically 
listed in the statute that meet the standards outlined in section 
105(a). The Dodd-Frank Act also clarified the Bureau's rulemaking 
authority over certain high-cost mortgages pursuant to section 105(a). 
As amended by the Dodd-Frank Act, TILA section 105(a) authority to make 
adjustments and exceptions to the requirements of TILA applies to all 
transactions subject to TILA, except with respect to the provisions of 
TILA section 129 \60\ that apply to the high-cost mortgages referred to 
in TILA section 103(bb), 15 U.S.C. 1602(bb).
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 1639. TILA section 129 contains requirements for 
certain high-cost mortgages, established by the Home Ownership and 
Equity Protection Act (HOEPA), which are commonly called HOEPA 
loans.
---------------------------------------------------------------------------

    For the reasons discussed in this notice, the Bureau is proposing 
regulations to carry out TILA's purposes and is proposing such 
additional requirements, adjustments, and exceptions as, in the 
Bureau's judgment, are necessary and proper to carry out the purposes 
of TILA, prevent circumvention or evasion thereof, or to facilitate 
compliance. In developing these aspects of the proposal pursuant to its 
authority under TILA section 105(a), the Bureau has considered the 
purposes of TILA, including ensuring meaningful disclosures, helping 
consumers avoid the uninformed use of credit, and protecting consumers 
against inaccurate and unfair credit billing practices. See TILA 
section 102(a); 15 U.S.C. 1601(a).
    TILA section 105(f). Section 105(f) of TILA, 15 U.S.C. 1604(f), 
authorizes the Bureau to exempt from all or part of TILA any class of 
transactions if the Bureau determines that TILA coverage does not 
provide a meaningful benefit to consumers in the form of useful 
information or protection. In exercising this authority, the Bureau 
must consider the factors identified in section 105(f) of TILA and 
publish its rationale at the time it proposes an exemption for public 
comment. Specifically, the Bureau must consider:
    (a) The amount of the loan and whether the disclosures, right of 
rescission, and other provisions provide a benefit to the consumers who 
are parties to such transactions, as determined by the Bureau;
    (b) The extent to which the requirements of this subchapter 
complicate, hinder, or make more expensive the credit process for the 
class of transactions;
    (c) The status of the borrower, including--
    (1) Any related financial arrangements of the borrower, as 
determined by the Bureau;
    (2) The financial sophistication of the borrower relative to the 
type of transaction; and
    (3) The importance to the borrower of the credit, related 
supporting property, and coverage under this subchapter, as determined 
by the Bureau;
    (d) Whether the loan is secured by the principal residence of the 
consumer; and
    (e) Whether the goal of consumer protection would be undermined by 
such an exemption. For the reasons discussed in this notice, the Bureau 
is proposing to exempt certain transactions from the requirements of 
TILA pursuant to its authority under TILA section 105(f). In developing 
this proposal under TILA section 105(f), the Bureau has considered the 
relevant factors and determined that the proposed exemptions may be 
appropriate.

The Dodd-Frank Act

    Dodd-Frank Act section 1022(b). Section 1022(b)(1) of the Dodd-
Frank Act authorizes the Bureau to prescribe rules ``as may be 
necessary or appropriate to enable the Bureau to administer and carry 
out the purposes and objectives of the Federal consumer financial laws, 
and to prevent evasions thereof[.]'' 12 U.S.C. 5512(b)(1). Section 
1022(b)(2) of the Dodd-Frank Act prescribes certain standards for 
rulemaking that the Bureau must follow in exercising its authority 
under section 1022(b)(1). 12 U.S.C. 5512(b)(2). As discussed above, 
TILA is a Federal consumer financial law. Accordingly, the Bureau 
proposes to exercise its authority under DFA section 1022(b) to 
prescribe rules under TILA that carry out the purposes and prevent 
evasion of those laws.
    Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act 
governs disclosures and provides that the Bureau ``may prescribe rules 
to ensure that the features of any consumer financial product or 
service, both initially and over the term of the product or service, 
are fully, accurately, and effectively disclosed to consumers in a 
manner that permits consumers to understand the costs, benefits, and 
risks associated with the product or service, in light of the facts and 
circumstances.'' 12 U.S.C. 5532(a). The authority granted to the Bureau 
in DFA section 1032(a) is broad, and empowers the Bureau to prescribe 
rules regarding the disclosure of the ``features'' of consumer 
financial products and services generally. Accordingly, the Bureau may 
prescribe rules containing disclosure requirements even if other 
Federal consumer financial laws do not specifically require disclosure 
of such features.
    Dodd-Frank Act section 1032(c) provides that, in prescribing rules 
pursuant to DFA section 1032, the Bureau ``shall consider available 
evidence about consumer awareness, understanding of, and responses to 
disclosures or communications about the risks, costs, and benefits of 
consumer financial products or services.'' 12 U.S.C. 5532(c). 
Accordingly, in developing proposed rules under Dodd-Frank Act section 
1032(a) for this proposal, the Bureau has considered available studies, 
reports, and other evidence about consumer awareness, understanding of, 
and responses to disclosures or communications about the risks, costs, 
and benefits of consumer financial products or services. For the 
reasons discussed in this notice, the Bureau is proposing portions of 
this rule pursuant to its authority under Dodd-Frank Act section 
1032(a).
    In addition, DFA section 1032(b)(1) provides that ``any final rule 
prescribed by the Bureau under this [section 1032] requiring 
disclosures may include a model form that may be used at the option of 
the covered person for provision of the required disclosures.'' 12 
U.S.C. 5532(b)(1). Any model form issued pursuant to that authority 
shall contain a clear and conspicuous disclosure that, at a minimum, 
uses plain language that is comprehensible to consumers, using a clear 
format and design, such as readable type font, and succinctly explains 
the information that must be communicated to the consumer. DFA section 
1032(b)(2); 12 U.S.C. 5532(b)(2). As discussed in the section-by-
section analysis for proposed Sec. Sec.  1026.20(d) and 1026.41, the 
Bureau is proposing model forms for ARM interest rate adjustment 
notices and periodic

[[Page 57331]]

statements. As discussed in this notice, the Bureau is proposing these 
model forms pursuant to its authority under DFA section 1032(b)(1).
    Dodd-Frank Act section 1405(b). Section 1405(b) of the Dodd-Frank 
Act provides that, ``[n]otwithstanding any other provision of [title 14 
of the Dodd-Frank Act], in order to improve consumer awareness and 
understanding of transactions involving residential mortgage loans 
through the use of disclosures, the Bureau may, by rule, exempt from or 
modify disclosure requirements, in whole or in part, for any class of 
residential mortgage loans if the Bureau determines that such exemption 
or modification is in the interest of consumers and in the public 
interest.'' 15 U.S.C. 1601 note. Section 1401 of the Dodd-Frank Act, 
which amends TILA section 103(cc), 15 U.S.C. 1602(cc), generally 
defines residential mortgage loan as any consumer credit transaction 
that is secured by a mortgage on a dwelling or on residential real 
property that includes a dwelling other than an open-end credit plan or 
an extension of credit secured by a consumer's interest in a timeshare 
plan. Notably, the authority granted by section 1405(b) applies to 
``disclosure requirements'' generally, and is not limited to a specific 
statute or statutes. Accordingly, DFA section 1405(b) is a broad source 
of authority to modify the disclosure requirements of TILA.
    In developing proposed rules for residential mortgage loans under 
Dodd-Frank Act section 1405(b) for this proposal, the Bureau has 
considered the purposes of improving consumer awareness and 
understanding of transactions involving residential mortgage loans 
through the use of disclosures, and the interests of consumers and the 
public. For the reasons discussed in this notice, the Bureau is 
proposing portions of this rule pursuant to its authority under Dodd-
Frank Act section 1405(b).
    See the section-by-section analysis for each proposed section for 
further elaboration on legal authority.

VI. Section-by-Section Analysis

A. Regulation Z

Section 1026.17 General Disclosure Requirements
17(a) Form of Disclosures
17(a)(1)
    Section 1026.17(a)(1) contains form requirements generally 
applicable to disclosures under subpart C. The Bureau proposes to make 
certain modifications to these requirements as applicable to the ARM 
interest rate adjustment payment change notices under proposed Sec.  
1026.20(c) and the initial ARM interest rate adjustment notices under 
proposed Sec.  1026.20(d).
    Section 1026.17(a) requires, among other things, that certain 
disclosures contain only information directly related to that 
disclosure. Current Sec.  1026.20(c) is not included in the list of 
disclosures subject to this requirement. Further, commentary to Sec.  
1026.17(a)(1) states that the disclosures required by current Sec.  
1026.20(c) are not subject to the general segregation requirements 
under Sec.  1026.17(a)(1).
    The payment change notice proposed by Sec.  1026.20(c) is intended 
to inform consumers of upcoming changes to their interest rate and 
mortgage payments and to give them time to explore alternatives. The 
Bureau does not believe that the form requirements applicable to 
current Sec.  1026.20(c) notices are sufficient to highlight and 
emphasize important information consumers need to make decisions about 
their adjustable-rate mortgages. Presenting information to consumers 
separate from other information enhances consumers' awareness of the 
material. Therefore, the Bureau proposes to amend Sec.  1026.17(a)(1) 
and comment 17(a)(1)-2.ii to add proposed Sec.  1026.20(c) to the 
enumerated disclosures required to contain only information directly 
related to the disclosure and to require that proposed Sec.  1026.20(c) 
disclosures be grouped together and segregated from everything else.
    Other Sec.  1026.17(a)(1) requirements, such as that disclosures be 
clear and conspicuous, in writing, and provided electronically subject 
to compliance with Electronic Signatures in Global and National 
Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.), would continue to 
apply to Sec.  1026.20(c).
    TILA section 128A provides that the initial ARM interest rate 
adjustment notices, which the Bureau proposes to implement in proposed 
Sec.  1026.20(d), be ``separate and distinct from all other 
correspondence to the consumer.'' Accordingly, the Bureau proposes to 
revise Sec.  1026.17(a), to make clear that the proposed Sec.  
1026.20(d) disclosures are not subject to the general segregation 
requirement under that section but rather, pursuant to proposed Sec.  
1026.20(d), are required to be separate and distinct from all other 
correspondence. See comment 20(d) for further discussion of the 
separate and distinct requirement. Other requirements of Sec.  
1026.17(a), such as that disclosures be clear and conspicuous, in 
writing, and provided electronically subject to compliance with the E-
Sign Act, would apply to the proposed Sec.  1026.20(d) disclosures.
    The proposed application of Sec.  1026.17(a)(1), as modified, to 
proposed Sec.  1026.20(c) and (d) is authorized, in part, under TILA 
section 122, which requires that disclosures under TILA be clear and 
conspicuous, in accordance with regulations of the Bureau. The 
requirements are further authorized under TILA section 105(a) because 
the Bureau believes that the proposed form requirements are necessary 
and proper to effectuate the purposes of TILA to assure a meaningful 
disclosure of credit terms, avoid the uninformed use of credit, and 
protect consumers against inaccurate and unfair credit billing 
practices by ensuring that consumers understand the content of the 
proposed ARM notices. Moreover, as discussed below, the disclosures 
proposed under Sec.  1026.20(c) are authorized, among other provisions, 
under TILA section 128(f)(2), which authorizes the Bureau to develop 
and prescribe a standard form for the disclosures required under TILA 
section 128(f).
    As to proposed Sec.  1026.20(d) disclosures, DFA section 1418, TILA 
section 128A(b) specifically provides that the disclosures shall be in 
writing, separate and distinct from all other correspondence. In 
addition, the Bureau believes, consistent with DFA section 1032(a), 
that the proposed application of Sec.  1026.17(a)(1), as modified, to 
Sec.  1026.20(d) will ensure that the features of ARM loans are 
effectively disclosed to consumers in a manner that allows consumers to 
understand the information disclosed. The Bureau further believes, 
consistent with DFA section 1405(a), that it is proper to modify DFA 
section 1418 to apply the form requirements in proposed Sec.  
1026.17(a)(1) to improve consumer awareness and understanding of ARM 
adjustments.
17(b) Time of Disclosures
    The Bureau is proposing to revise Sec.  1026.17(b) to add proposed 
Sec.  1026.20(d) to the list of variable-rate disclosure provisions 
with special timing requirements. This proposed amendment would alert 
creditors, assignees, and servicers that, as with proposed Sec.  
1026.20(c) payment adjustment notices, there are timing requirements 
particular to the proposed Sec.  1026.20(d) initial interest rate 
adjustment notices.

[[Page 57332]]

17(c) Basis of Disclosures and Use of Estimates
17(c)(1)
    Section 1026.17(c)(1) requires disclosures to reflect the terms of 
the legal obligation between the parties. Current comment 17(c)(1)-1 
provides that, under this requirement, disclosures generally must 
reflect the credit terms to which the parties are legally bound as of 
the outset of the transaction, but that in the case of disclosures 
required under Sec.  1026.20(c), the disclosures shall reflect the 
credit terms to which the parties are legally bound when the 
disclosures are provided. The Bureau proposes revising comment 
17(c)(1)-1 to make clear that the disclosures required under proposed 
Sec.  1026.20(d), like those under proposed Sec.  1026.20(c), shall 
reflect the credit terms to which the parties are legally bound when 
the disclosures are provided, rather than at the outset of the 
transaction.
Section 1026.18 Content of Disclosures
18(f) Variable Rate
18(f)-1
    Current comment 18(f)-1 clarifies that creditors electing to 
substitute Sec.  1026.19(b) disclosures for Sec.  1026.18(f)(1) 
disclosures, as permitted by Sec.  1026.18(f)(1) and (3), may, but need 
not, also provide disclosures required by current Sec.  1026.20(c). 
Under current Sec.  1026.20(c), disclosures are permissive in such 
cases because the Sec.  1026.19(b) substitution is only permitted for 
variable-rate transactions not secured by the consumer's principal 
dwelling or variable-rate transactions secured by the consumers' 
principal dwelling, but with a term of one year or less. These 
transactions are not covered by current Sec.  1026.20(c). Thus, current 
comment 18(f)-1 does not alter the legal requirements applicable to 
creditors. The clarification was, however, helpful because current 
Sec.  1026.20(c) cross-references Sec.  1026.19(b) and applies to 
transactions covered by Sec.  1026.19(b).
    The Bureau proposes to delete this reference to Sec.  1026.20(c) 
from the comment because it is no longer helpful since neither proposed 
Sec.  1026.20(c) nor (d) cross-references Sec.  1026.19(b) and those 
proposed provisions define their scope of coverage without reference to 
Sec.  1026.19(b). Moreover, proposed Sec.  1026.20(c) or (d) apply to 
some ARMs with terms of one year or less such that applying the current 
comment would create an unwarranted exception to the requirement to 
provide ARM notices to consumers with those types of ARMs. For these 
reasons, the Bureau proposes to delete the reference to Sec.  
1026.20(c) in comment 18(f)-1.
Section 1026.19 Certain Mortgage and Variable-Rate Transactions
19(b) Certain Variable Rate Transactions
19(b)-4 Other Variable-Rate Regulations
    The Bureau proposes revising comment 19(b)-4 to delete reference to 
current Sec.  1026.20(c) and (d). Current comment 19(b)-4 explains that 
transactions in which the creditor is required to comply with and has 
complied with the disclosure requirements of the variable-rate 
regulations of other Federal agencies are exempt from the requirements 
of Sec.  1026.20(c) by virtue of current Sec.  1026.20(d). Consistent 
with the proposed deletion of current Sec.  1026.20(d), the Bureau 
proposes revising comment 19(b)-4 to delete reference to current Sec.  
1026.20(c) and (d).
19(b)-5.i.C Certain Mortgage and Variable-Rate Transactions
    The Bureau proposes revising comment 19(b)-5.i.C to cross-reference 
other commentary that makes clear that proposed Sec.  1026.20(c) and 
(d) do not apply to ``price-level-adjusted mortgages'' that have a 
fixed-rate of interest but provide for periodic adjustments to payments 
and the loan balance to reflect changes in an index measuring prices or 
inflation.
19(b)(2)(xi)-1 Adjustment Notices
    Pursuant to current Sec.  1026.19(b)(2)(xi), disclosures regarding 
the type of information that will be provided in notices of interest 
rate adjustments and the timing of such notices must be provided to 
consumers applying for variable-rate transactions secured by the 
consumer's principal dwelling with a term greater than one year. 
Current comment 19(b)(2)(xi)-1 clarifies that these disclosures include 
information regarding the content and timing of disclosures consumers 
will receive pursuant to current Sec.  1026.20(c). The Bureau proposes 
adding reference to proposed Sec.  1026.20(d) to the comment, since 
those disclosures would be provided to consumers under the Bureau's 
proposed rule. The proposed comment also makes conforming changes to 
the text suggested for describing the ARM notices to reflect the timing 
and content of the disclosures proposed by Sec.  1026.20(c) and (d).
Section 1026.20 Subsequent Disclosure Requirements
20(c) Rate Adjustments
    Current Sec.  1026.20(c) requires that disclosures be provided to 
consumers with variable-rate mortgages each time an adjustment results 
in a corresponding payment change and at least once each year during 
which an interest rate adjustment is implemented without a 
corresponding payment change.
    The current rule does not differentiate between the content 
required for the annual notice and the notices required each time the 
interest rate adjustment results in a corresponding payment change. 
Current Sec.  1026.20(c) requires that adjustment notices disclose the 
following: (1) The current and prior interest rates for the loan; (2) 
the index values upon which the current and prior interest rates are 
based; (3) the extent to which the creditor has foregone any increase 
in the interest rate; (4) the contractual effects of the adjustment, 
including the payment due after the adjustment is made, and a statement 
of the loan balance; and (5) the payment, if different from the payment 
due after adjustment, that would be required to fully amortize the loan 
at the new interest rate over the remainder of the loan term.
    The Bureau proposes two major changes to Sec.  1026.20(c). First, 
the Bureau proposes eliminating the annual notice sent each year during 
which an interest rate adjustment is implemented without a 
corresponding payment change. As explained in more detail below, the 
Bureau believes that Dodd-Frank Act amendments to TILA, and the 
Bureau's proposed amendments to Regulation Z that would implement those 
provisions, would provide consumers with much of the information 
contained in the annual notice thereby greatly minimizing the need for 
its protections. Second, the proposal updates current Sec.  1026.20(c) 
by adding disclosures that the Bureau believes will enhance protections 
for consumers with ARMs. The proposed revisions to Sec.  1026.20(c) 
also harmonize with the requirements the Bureau is proposing for the 
initial ARM interest rate adjustment notice under Sec.  1026.20(d), 
thereby promoting consistency between the Regulation Z ARM provisions.
    Elimination of annual disclosure. First, proposed Sec.  1026.20(c) 
eliminates the annual notice requirement under the current rule. The 
Bureau believes that consumers who receive the current annual notice, 
such as consumers with ARMs with payment caps, would

[[Page 57333]]

receive much of the same information in the periodic statement under 
proposed Sec.  1026.41, discussed below. The proposed periodic 
statement would provide consumers with comprehensive information about 
their mortgages each billing cycle. The periodic statement would 
include some of the same key information provided to consumers under 
the current Sec.  1026.20(c) annual notice, such as the current 
interest rate and the date after which that rate would adjust. It also 
would provide other information that may be useful to consumers who 
would receive the Sec.  1026.20(c) annual ARM notice, including the 
existence and amount of any prepayment penalty; allocation of the 
consumer's payment by principal, interest, and escrow; the amount of 
the outstanding principal; contact information for the State housing 
finance authority; and information to access a list of Federally-
certified housing counselors.
    In light of the amount, type, and frequency of the information the 
Bureau proposes to provide in the periodic statement to consumers with 
ARMs that are subject to the current Sec.  1026.20(c) annual ARM 
interest rate notice, the Bureau proposes to eliminate the requirement 
for the annual notice as duplicative and as potentially contributing to 
information overload that could deflect consumer attention away from 
the information such consumers would receive in other required 
disclosures. The Bureau solicits comments on the need, value, or use of 
retaining the annual notice required under current Sec.  1026.20(c) for 
consumers whose ARM interest rates adjust during the course of a year 
without resulting in corresponding payment changes.
    The Bureau proposes to delete comments 20(c)(1)-1 and 20(c)(4)-1 
which, among other things, address the content of the Sec.  1026.20(c) 
annual notice the Bureau is proposing to eliminate. Current comment 
20(c)(1)-1 also explains, among other things, the meaning of the terms 
``current'' and ``prior'' rates and that in disclosing all other rates 
that applied during the period between notices, the creditor may 
disclose a range of the highest and lowest rates during that year 
period. Current comment 20(c)(4)-1, among other things, defines the 
term loan ``balance'' and explains that a ``contractual effect'' of a 
rate adjustment includes disclosure of any change in the term or 
maturity of the loan if the change resulted from the rate adjustment. 
The Bureau also proposes deletion of these current comments as they 
relate to the recurring disclosures that would be required by proposed 
Sec.  1026.20(c) for interest rate adjustments resulting in a 
corresponding payment change. The Bureau proposes to replace these 
comments with the new commentary discussed below.
    Amendment of payment change disclosure. Second, proposed Sec.  
1026.20(c) would amend existing Sec.  1026.20(c) as it relates to 
interest rate adjustments that result in a corresponding payment 
change. The proposal retains much of the content required in the 
current notice and also would require disclosure of additional 
information that the Bureau believes would help consumers better 
understand and manage their adjustable-rate mortgages. The proposed 
revisions to current Sec.  1026.20(c) harmonize with the initial ARM 
interest rate adjustment notice proposed by Sec.  1026.20(d). The 
Bureau believes that promoting consistency between the ARM disclosure 
provisions of Sec.  1026.20(c) and (d) would reduce compliance burdens 
on industry and minimize consumer confusion.
    Creditors, assignees, and servicers. The Bureau also proposes to 
amend Sec.  1026.20(c) to provide that it applies to creditors, 
assignees, and servicers. Current Sec.  1026.20(c) applies to creditors 
and existing comment 20(c)-1 clarifies that the requirements of Sec.  
1026.20(c) also apply to subsequent holders, i.e., assignees. The 
Bureau's proposal provides that Sec.  1026.20(c) would apply to 
servicers, as well as to creditors and assignees. Proposed comment 
20(c)-1 clarifies that a creditor, assignee, or servicer that no longer 
owns the mortgage loan or the mortgage servicing rights is not subject 
to the requirements of Sec.  1026.20(c).
    As discussed below, proposed Sec.  1026.20(c) is authorized under, 
among other authorities, TILA section 128(f), which applies to 
creditors, assignees, and servicers. The proposal is consistent with 
proposed Sec.  1026.20(d) such that both proposed Sec.  1026.20(c) and 
(d) would apply to creditors, assignees and servicers.
    The Bureau believes that applying Sec.  1026.20(c) to creditors and 
assignees, but not servicers, would compromise consumers' recourse in 
the case of a violation of Sec.  1026.20(c). Many creditors and 
assignees do not service the loans they own and instead sell the 
mortgage servicing rights to a third party. The servicer is the party 
with which consumers have contact on an ongoing basis regarding their 
mortgages. Consumers send their payments to the servicer and 
communicate with the servicer regarding any questions or problems with 
their mortgage that may arise. Where the owner and the servicer are 
different entities, consumers may not know the identity of the owner 
and may not even realize that the servicer is not the owner of their 
mortgage. Moreover, it can be difficult for consumers to ascertain the 
identity of the creditor or assignee, even though servicers would be 
required to identify the owner of a mortgage under rules proposed 
pursuant to DFA section 1463. Thus, in the case of a violation of 
proposed Sec.  1026.20(c), consumers should be able to seek relief 
against the servicer as the primary party from whom they receive 
service and with whom they maintain communication regarding their 
mortgages. See below, section 20(d), for a discussion of application of 
proposed Sec.  1026.20(d) initial ARM interest rate adjustment notices 
to assignees. The same rationale applies to proposed Sec.  1026.20(c) 
ARM payment adjustment notices.
    Proposed comment 20(c)-1 explains that any provision of subpart C 
that applies to the disclosures required by Sec.  1026.20(c) also 
applies to creditors, assignees, and servicers. This is the case even 
where the other provisions of subpart C refer only to creditors. For 
the reasons discussed above, the Bureau proposes that the requirements 
of other regulations that apply to the Sec.  1026.20(c) ARM payment 
adjustment notices apply to servicers as well as to creditors and 
assignees.
    The proposal also would delete current comment 20(c)-1, which, 
among other things, refers to subsequent holders, in favor of 
consistent usage of the term assignee in proposed Sec.  1026.20(c) and 
(d). It would also delete comment 20(c)-3 as duplicative of the Sec.  
1026.17(c)(1) requirement that the disclosures reflect the terms of the 
parties' legal obligations.
    Conversions. Proposed Sec.  1026.20(c) also applies to ARMs 
converting to fixed-rate mortgages when the adjustment to the interest 
rate results in a corresponding payment change. Providing this notice 
would alert consumers to their new interest rate and payment following 
conversion from an ARM to a fixed-rate mortgage. Proposed comment 
20(c)-2 explains that, in the case of an open-end account converting to 
a closed-end adjustable-rate mortgage, Sec.  1026.20(c) disclosures are 
not required until the implementation of the first interest rate 
adjustment that results in a corresponding payment change post-
conversion. Under the proposed rule, this conversion is analogous to 
consummation. Thus, like other ARMs subject to the requirements of 
proposed Sec.  1026.20(c), disclosures for these types of converted 
ARMs would not be

[[Page 57334]]

required until the first interest rate adjustment following the 
conversion which results in a corresponding payment change. The 
proposed rule is consistent with existing commentary and proposed Sec.  
1026.20(d) regarding conversions. See current comment 20(c)-1.
    Authority. The Bureau proposes to amend Sec.  1026.20(c) pursuant 
to its authority under TILA section 105(a). For the reasons discussed 
in the section-by-section analysis for each of the proposed amendments 
to Sec.  1026.20(c), the Bureau believes that the proposed amendments 
are necessary and proper to effectuate the purposes of TILA to assure a 
meaningful disclosure of credit terms, avoid the uninformed use of 
credit, and protect consumers against inaccurate and unfair credit 
billing practices. Proposed Sec.  1026.20(c) also is authorized under 
TILA section 128(f), which requires that certain information enumerated 
in the statute be provided to consumers every billing cycle in a 
periodic statement and also confers on the Bureau the authority to 
require periodic disclosure of ``[s]uch other information as the Bureau 
may prescribe in regulations.'' Proposed Sec.  1026.20(c) is further 
authorized under DFA section 1405(b), which permits the Bureau to 
modify disclosure requirements where such modification is in the 
interest of consumers and the public.
    Although TILA section 128(f) authorizes the Bureau to require that 
the content for the Sec.  1026.20(c) ARM notices be included in the 
periodic statement, the Bureau believes, for the reasons set forth 
above and below, that consumers would be better served if this 
information was provided as a separate disclosure. Under proposed Sec.  
1026.17(a), the proposed Sec.  1026.20(c) ARM payment adjustment notice 
would have to be provided separate and distinct from the periodic 
statement. The disclosures required by proposed Sec.  1026.20(c), 
however, may be provided to consumers together with the periodic 
statement, depending on the mode of delivery, in the same envelope or 
as an additional attachment to the email. The Bureau also believes that 
the interest of consumers and the public interest would be better 
served by receiving the Sec.  1026.20(c) ARM notice, within the time 
frame discussed below, each time the ARM interest rate adjusts 
resulting in a corresponding payment change, rather than with each 
billing cycle.
20(c)(1) Coverage of Rate Adjustment Disclosures
20(c)(1)(i) In General
    Proposed Sec.  1026.20(c)(1) defines an adjustable-rate mortgage, 
for purposes of Sec.  1026.20(c), as a closed-end consumer credit 
transaction secured by the consumer's principal dwelling in which the 
annual percentage rate may increase after consummation. Current Sec.  
1026.20(c) requires disclosures only for adjustments to the interest 
rate in variable-rate transactions subject to Sec.  1026.19(b), which 
is limited to loans secured by the consumer's principal dwelling with a 
term of greater than one year. The Bureau proposes deleting the cross-
reference to Sec.  1026.19(b), thereby expanding the scope of proposed 
Sec.  1026.20(c) to include loans with terms of one year or less. 
Proposed Sec.  1026.20(c)(1)(i) would replace current Sec.  1026.20(c) 
and comment 20(c)-1 with regard to which loans are subject to the 
interest rate adjustment disclosures.
    There is one type of short-term ARM that the Bureau proposes to 
except from the requirements of Sec.  1026.20(c): Construction loans 
with terms of one year or less. See section 20(c)(1)(ii) below for a 
full discussion of this proposed exception for construction ARMs with 
terms of one year or less. The Bureau solicits comment on whether there 
are other ARMs with terms of less than one year and whether the 
proposed 60-day minimum notice period is appropriate for such loans. 
See section 20(c)(2) below for a full discussion of the timing proposed 
for Sec.  1026.20(c). If the 60-day period is not appropriate, the 
Bureau solicits comment on what period would be appropriate that would 
also provide consumers with sufficient notice of a payment change. This 
proposal regarding coverage is consistent with the statutory 
requirements of TILA section 128A and proposed Sec.  1026.20(d) in that 
those provisions generally apply to all ARMs, regardless of term 
length. Thus, the proposal to expand Sec.  1026.20(c) to ARMs with 
terms of one year or less would harmonize the coverage of the two types 
of ARM adjustment notices, thereby ensuring that both Sec.  1026.20(d) 
notices and Sec.  1026.20(c) notices, when required, are provided to 
the same consumers.
    The Bureau proposes using the terms ``adjustable-rate mortgage'' or 
``ARM'' to replace the term ``variable-rate transaction'' in current 
Sec.  1026.20(c). Proposed comment 20(c)(1)(i)-1 clarifies that the 
term ``variable-rate transaction,'' as used in Sec.  1026.19(b) and 
elsewhere in Regulation Z, is synonymous with the term ``adjustable-
rate mortgage'' or ``ARM'', except where specifically distinguished. 
The Bureau proposes this revision because ``adjustable-rate mortgage'' 
or ``ARM'' are the terms commonly used for mortgages covered by current 
and proposed Sec.  1026.20(c).
    Proposed comment 20(c)(1)(i)-1 also clarifies that the requirements 
of Sec.  1026.20(c)(1)(i) are not limited to transactions financing the 
initial acquisition of the consumer's principal dwelling, but also 
would apply to other closed-end ARM transactions secured by the 
consumer's principal dwelling, consistent with current comment 19(b)-1 
and current Sec.  1026.20(c).
20(c)(1)(ii) Exceptions
    Proposed Sec.  1026.20(c)(1)(ii) sets forth two exceptions to the 
disclosure requirements of Sec.  1026.20(c). These exceptions apply to: 
(1) Construction loans with terms of one year or less; and (2) the 
first adjustment to an ARM if the first payment at the adjusted level 
is due within 210 days after consummation and the actual, not 
estimated, new interest rate was disclosed at consummation, in the 
initial ARM interest rate adjustment notice that would be required by 
proposed Sec.  1026.20(d). Proposed comments 20(c)(1)(ii)-1 and -2 
provide further explanation. Proposed Sec.  1026.20(d) also would 
except the same construction loans.
    As discussed in more detail below in connection with the notice 
required for an initial ARM interest rate adjustment under Sec.  
1026.20(d), the Bureau also considered, but decided against, permitting 
or requiring small creditors, assignees, and servicers to include in 
the periodic statement the information required for the first payment 
change notice under proposed Sec.  1026.20(c). The Bureau also 
considered this option with regard to all notices that small entities 
would be required to provide to consumers under proposed Sec.  
1026.20(c). As discussed further below, the Bureau solicits comments 
from small entities--and from creditors, assignees, and servicers in 
general--as to whether small entities or all creditors, assignees, and 
servicers should be permitted or required to provide the information 
required in the first payment change notices under proposed Sec.  
1026.20(c) in the periodic statement instead of as a separate ARM 
notice and whether this should be done for all Sec.  1026.20(c) 
notices.
    Regarding the first exception the Bureau proposes, construction 
loans generally have short terms of six months to one year and are 
subject to frequent interest rate adjustments, usually monthly or 
quarterly. The construction

[[Page 57335]]

period usually involves several disbursements of funds at times and in 
amounts that are unknown at the beginning of that period. The consumer 
generally pays only accrued interest until construction is completed. 
The creditor, assignee, or servicer, in addition to disbursing payments 
in stages, closely monitors the progress of construction. Generally, at 
the completion of the construction, the construction loan is converted 
into permanent financing in which the loan amount is amortized just as 
in a standard mortgage transaction. See comment 17(c)(6)-2 for 
additional information on construction loans.
    The frequent interest rate adjustments, multiple disbursements of 
funds, short loan term, and on-going communication between the 
creditor, assignee, or servicer and consumer, distinguish construction 
loans from other ARMs. These loans are meant to function as bridge 
financing until construction is completed and permanent financing can 
be put in place. Consumers with construction ARM loans are not at risk 
of payment shock like other ARMs where interest rates change less 
frequently. Moreover, given the frequency of interest rate adjustments 
on construction loans, creditors, assignees, or servicers would have 
difficulty complying with the proposed requirement to provide the 
notice to consumers 60 to 120 days before payment at a new level is due 
for each adjustment resulting in a corresponding payment change. For 
these reasons, providing notices under Sec.  1026.20(c) for these loans 
would not provide a meaningful benefit to the consumer nor improve 
consumers' awareness and understanding of their construction loans with 
terms of one year or less. Proposed comment 20(c)(1)(i)-1 applies the 
standards in comment 19(b)-1 for determining the term of a construction 
loan.
    The second exception, for the first adjustment to an ARM causing a 
payment change if the first payment at the adjusted level is due within 
210 days after consummation, would apply only if the exact interest 
rate, not an estimate, is disclosed at consummation. For ARMs adjusting 
within six months of consummation, i.e., 210 days before the first 
payment is due at the new level, the disclosures proposed by Sec.  
1026.20(d) must be provided at consummation. The recency of 
consummation obviates the need for the Sec.  1026.20(c) notice in this 
circumstance because consumers would have been apprised of the upcoming 
adjustment and payment change just months prior to its occurrence and 
their mortgages would be so new as to not require the alerts in the 
notice regarding pursuing alternatives. Thus, providing Sec.  
1026.20(c) disclosures in these circumstances would be duplicative, not 
contribute to consumer awareness and understanding, and not provide a 
meaningful benefit to consumers.
    Proposed comment 20(c)(1)(ii)-3 discusses other loans to which the 
proposed rule does not apply. Proposed comment 20(c)(1)(ii)-3 is 
consistent with proposed comment 20(d)(1)(ii)-2 with regard to the 
loans which are not subject to the proposed ARM disclosure rules. 
Certain Regulation Z provisions treat some of these loans as variable-
rate transactions, even if they are structured as fixed-rate 
transactions. The proposed comment clarifies that, for purposes of 
Sec.  1026.20(c), the following loans, if fixed-rate transactions, are 
not ARMs and therefore not subject to ARM notices pursuant to Sec.  
1026.20(c): Shared-equity or shared-appreciation mortgages; price-level 
adjusted or other indexed mortgages that have a fixed rate of interest 
but provide for periodic adjustments to payments and the loan balance 
to reflect changes in an index measuring prices or inflation; 
graduated-payment mortgages or step-rate transactions; renewable 
balloon-payment instruments; and preferred-rate loans. The particular 
features of these types of loans may trigger interest rate or payment 
changes over the term of the loan or at the time the consumer pays off 
the final balance. However, these changes are based on factors other 
than a change in the value of an index or a formula. Because the 
enumerated loans are not ARMs they are not covered by proposed Sec.  
1026.20(c) and require no disclosures under this section.
    Proposed and current Sec.  1026.20(c) are generally consistent with 
regard to the ARMs to which they do not apply. The principal difference 
is that current Sec.  1026.20(c) does apply to renewable balloon-
payment instruments and preferred-rate loans, even if they are 
structured as fixed-rate transactions while proposed Sec.  1026.20(c) 
would not apply to such loans. See Sec.  1026.19(b) and comment 19(b)-
5.i.A and B. Also, as discussed above, current Sec.  1026.20(c) does 
not apply to loans with terms of one year or less. This category 
includes construction loans, which are excepted from coverage under 
proposed Sec.  1026.20(c). Logically, the Bureau's proposed exception 
for initial Sec.  1026.20(c) ARM adjustments if the first payment at 
the adjusted level is due within 210 days of consummation is 
inapplicable to the current rule since proposed Sec.  1026.20(d) is not 
yet implemented to replace the current Sec.  1026.20(c) disclosures 
provided at consummation.
    Like proposed comment 20(c)(1)(ii)-3, current comment 20(c)-2 
clarifies that Sec.  1026.20(c) does not apply to shared-equity or 
shared-appreciation mortgages or to price-level adjusted or other such 
indexed mortgages. The current rule cross-references Sec.  1026.19(b) 
and applies to all variable-rate transactions covered by that rule. 
Comment 19(b)-4 explains that graduated-payment mortgages and step-rate 
transactions without variable-rate features are not subject to Sec.  
1026.19(b). Therefore, like the proposed rule, such loans are not 
subject to current Sec.  1026.20(c).
    The current rule does not mention renewable balloon-payment 
instruments and preferred-rate loans, but current Sec.  1026.20(c) 
applies to these loan products through the rule's cross-reference to 
Sec.  1026.19(b) and therefore to comment 19(b)-5.i.A and B. As 
discussed above, these loans are not adjustable-rate mortgages and the 
Bureau does not believe that it is appropriate to require the 
disclosures in proposed Sec.  1026.20(c) for such loans. The particular 
features of these types of loans may trigger interest rate or payment 
changes over the term of the loan or at the time the consumer pays off 
the final balance. However, these changes are based on factors other 
than a change in the value of an index or a formula. For example, 
whether or when the interest rate will adjust for a preferred-rate loan 
with a fixed interest rate is likely not knowable to the creditor, 
assignee, or servicer 60 to 120 days in advance of the due date for the 
first payment at a new level after the adjustment. This is because the 
loss of the preferred rate is based on factors other than a formula or 
change in the value of an index agreed to at consummation. Like the 
Bureau's proposed rule, the Board also proposed to remove renewable 
balloon-payment instruments and preferred-rate loans from coverage 
under Sec.  1026.20(c) in its 2009 Closed-End Proposal.\61\
---------------------------------------------------------------------------

    \61\ 74 FR 43232, 43264, 43387 (Aug. 26, 2009).
---------------------------------------------------------------------------

20(c)(2) Timing and Content of Rate Adjustment Disclosures
    Proposed Sec.  1026.20(c)(2) would require that ARM disclosures be 
provided to consumers 60 to 120 days before payment at a new level is 
due. Under current Sec.  1026.20(c), notices must be provided to 
consumers 25 to 120 days before payment at a new level is due. Thus, 
the proposed rule would increase the minimum advance notice to 
consumers from 25 to 60 days before a new payment amount is due. There 
are

[[Page 57336]]

two circumstances under which the rule proposes a different time frame, 
which are discussed below. Proposed comment 20(c)(2)-1 would replace 
current comment 20(c)-1 regarding timing.
    Current and proposed Sec.  1026.20(c) disclosures provide consumers 
with their actual new interest rate and payment. The disclosures 
proposed by Sec.  1026.20(d) likely would provide estimates of these 
amounts. The longer time frame proposed by the rule is intended to give 
consumers adequate time to refinance or take other actions based on 
these exact amounts, if they are not able to make higher payments. The 
current minimum time of 25 days does not give consumers sufficient time 
to pursue meaningful alternatives such as refinancing, home sale, loan 
modification, forbearance, or deed in lieu of foreclosure. In the 
current market, ``it now takes the nation's biggest mortgage lenders an 
average of more than 70 days to complete a refinance.\62\ Even if 
consumers elect not to refinance or pursue other alternatives, the 
proposed rule would give them more time to adjust their finances to the 
actual amount of an increase in their mortgage payments.
---------------------------------------------------------------------------

    \62\ Timiraos & Simon, supra note 52.
---------------------------------------------------------------------------

    The Bureau believes that for most adjustable-rate mortgages, the 
proposed 60-day minimum time frame would provide sufficient time for 
creditors, assignees, and servicers to comply with the proposed rule. 
Through outreach to servicers of adjustable-rate mortgages it appears 
that, for most ARMs, servicers know the index value from which the new 
interest rate and payment are calculated at least 45 days before the 
date of the interest rate adjustment. Because interest generally is 
paid one month in arrears, this mean that, for most ARMs, servicers 
know the index value approximately 75 days before the due date of the 
first new payment, depending on the number of days in the month during 
which interest begins accruing at the new rate.
    Creditors, assignees, and servicers generally refer to the date the 
adjusted interest rate goes into effect as the ``change date.'' The 
``look-back period'' is the number of days prior to the change date on 
which the index value will be selected which serves as the basis for 
the new interest rate and payment. In general, interest rate change 
dates occur on the first of the month to correspond with payment due 
dates. Thus, the due date for the new payment generally falls on the 
first of the month following the change date.
    Based on outreach conducted by the Bureau, it appears that small 
servicers often send out the payment change notices required by Sec.  
1026.20(c) on the same day the index value is selected. In that case, 
for a loan with a 45-day look-back period, the notice is ready 45 days 
before the change date and, with an approximately 30-day billing cycle 
between the change date and the date payment at the new level is due, 
the interest rate adjustment notice can be provided to the consumer 
approximately 75 days before the new payment is due. Under these 
circumstances, the servicer could comfortably comply with a rule 
requiring that notice be provided to consumers 60 days before the 
payment at a new level is due.
    On the other hand, many large creditors, assignees, or servicers 
conduct what is referred to as a ``verification period'' before sending 
out the notices required by Sec.  1026.20(c). This verification period 
generally takes anywhere from three to ten days and involves confirming 
the index rate and other quality control measures to insure the notices 
are correct.\63\ In these cases, for a loan with a 45-day look-back 
period, the payment change notices can be provided between 
approximately 42 and 35 days prior to the change date, which is either 
70 to 73 or 63 to 66 days before the new payment is due, depending on 
the verification period used and the length of the billing cycle. Under 
these circumstances, payment change notices could be provided to 
consumers within the 60-day period, even assuming a verification period 
of up to thirteen days. For loans with the shortest verification period 
of three days, the payment change notice could be provided to consumers 
within 70 days prior to payment due at a new level.
---------------------------------------------------------------------------

    \63\ No creditor, assignee, or servicer contacted by the Bureau 
used a system employing an automatic feed of information from the 
publisher of an index source. All data was entered and verified 
manually.
---------------------------------------------------------------------------

    In sum, it appears that for most ARMs, creditors, assignees, or 
servicers could comply with the 60-day time period proposed by the 
Bureau. The Bureau solicits comment about this proposed timing of the 
Sec.  1026.20(c) notice.
    Some ARMs have look-back periods shorter than 45 days. For example, 
ARMs backed by the FHA and VA often have look-back periods of 15 or 30 
days. For some ARMs, the calculation date is the first business day of 
the month that precedes the effective date of the interest rate change. 
Since the first day of that month may not fall on a business day, the 
look-back period may be less than 30 days, excluding any verification 
period.
    In two circumstances, the Bureau is proposing a different time 
period from the proposed 60 to 120 days. The Bureau proposes that 
existing ARMs with look-back periods of less than 45 days that were 
originated before a specified date provide the notices required under 
this proposed rule within 25 to 120 days before payment at a new level 
is due. The Bureau proposes that the specified date be July 21, 2013. 
The Bureau understands that the creditors, assignees, or servicers of 
such loans would not be able to comply with the 60- to 120-day time 
frame proposed in Sec.  1026.20(c). Although this time frame would 
shorten the advance notice provided to some consumers, the Bureau is 
proposing to grandfather these ARMs in order to prevent altering 
existing contractual agreements regarding the look-back period. Thus, 
going forward, ARMs must be structured to permit compliance with the 
proposed 60- to 120-day time frame. The Bureau solicits comment on 
whether it should grandfather existing ARMs with look-back periods of 
less than 45 days. The Bureau also seeks comment on whether July 21, 
2013 is an appropriate time frame for grandfathering existing ARMs with 
look-back periods of less than 45 days or if another time period would 
be more appropriate and why. If not, the Bureau seeks comment on what 
would be an appropriate time frame for the expiration of the 
grandfathering period. The Bureau also solicits comments on whether 
other adjustable-rate mortgages should be allowed to continue with a 
25- to 120-day period.
    The Bureau also proposes to alter the timing requirements for ARMs 
that adjust for the first time within 60 days of consummation where the 
actual, not estimated, new interest rate was not disclosed at 
consummation. (If the actual interest rate was disclosed at 
consummation, such loans would be excepted from the rule pursuant to 
proposed Sec.  1026.20(c)(1)(ii)). The creditors, assignees, or 
servicers of such loans would not be able to comply with the proposed 
60-day time frame. For such loans, the disclosures proposed by Sec.  
1026.20(c) must be provided to consumers as soon as practicable, but 
not less than 25 days before a payment at a new level is due.
    The Bureau solicits comment about the feasibility of applying the 
proposed 60-day period to ARMs that have look-back period of less than 
45 days. The Bureau solicits comments about whether a look-back period 
of 45 days or longer is feasible going forward for loans that currently 
use shorter look-

[[Page 57337]]

back periods and, if not, why not. The Bureau solicits comments on the 
extent, if any, to which the relative length of the look-back period 
may affect the interest rate risk for the creditor, assignee, or 
servicer.
    For all ARMs, the Bureau solicits comments on the operational 
changes that would be required to provide Sec.  1026.20(c) notices at 
least 60 days before payment at a new level is due. Comment is 
requested on any factors that would hinder compliance with this time 
frames. In light of technological and other advances since the 
promulgation of current Sec.  1026.20(c) in 1987, the Bureau also 
solicits comment on whether, and if so why, lengthy verification 
periods are necessary and on the feasibility of reducing the length of 
these verification periods.
20(c)(2)(i) Statement Regarding Changes to Interest Rate and Payment
    For interest rate adjustments resulting in corresponding payment 
changes, proposed Sec.  1026.20(c)(2)(i)(A) would inform consumers 
that, under the terms of their adjustable-rate mortgage, the specific 
period in which their interest rate stayed the same will end on a 
certain date and that their interest rate and mortgage payment will 
change on that date. This disclosure is similar to the pre-consummation 
disclosures provided to consumers pursuant to current Sec.  
1026.19(b)(2)(i) and Sec.  1026.37(i) as recently proposed by the 2012 
TILA-RESPA Proposal.
    Under proposed Sec.  1026.20(c)(2)(i)(B), the creditor, assignee, 
or servicer must include in the disclosure the date of the impending 
and future interest rate adjustments. Proposed Sec.  
1026.20(c)(2)(i)(C) would require disclosure of any other changes to 
the loan taking place on the same day of the rate adjustment, such as 
changes in amortization caused by the expiration of interest-only or 
payment-option features.
    The first ARM model form tested did not contain the proposed 
statement informing consumers of impending and future changes to their 
interest rate and the basis for these changes. Although participants 
understood that their interest rate was adjusting and this would affect 
their payment, they did not understand that these changes would occur 
periodically subject to the terms of their mortgage contract. Inclusion 
of this statement in the second round of testing successfully resolved 
this confusion. All but one consumer tested in round two and three of 
testing understood that, under the scenario presented to them, their 
interest rate would change annually.\64\
---------------------------------------------------------------------------

    \64\ Macro Report, supra note 38, at vii.
---------------------------------------------------------------------------

20(c)(2)(ii) Table With Current and New Interest Rates and Payments
    Proposed Sec.  1026.20(c)(2)(ii) would require disclosure of the 
following information in the form of a table: (A) The current and new 
interest rates; (B) the current and new periodic payment amounts and 
the date the first new payment is due; and (C) for interest-only or 
negatively- mortizing payments, the amount of the current and new 
payment allocated to interest, principal, and property taxes and 
mortgage-related insurance, as applicable. The information in this 
table would appear within the larger table containing all the required 
disclosures.
    This table would follow the same order as, and have headings and 
format substantially similar to, those in the table in Forms H-4(D)(1) 
and (2) in Appendix H of subpart C. The Bureau learned through consumer 
testing that, when presented with information in a logical order, 
consumers more easily grasped the complex concepts contained in the 
proposed Sec.  1026.20(c) notice. For example, the form begins by 
informing consumers of the basic purpose of the notice: Their interest 
rate is going to adjust, when it will adjust, and the adjustment will 
change their mortgage payment. This introduction is immediately 
followed by a visual illustration of this information in the form of a 
table comparing consumers' current and new interest rates. Based on 
consumer testing, the Bureau believes that consumer understanding is 
enhanced by presenting the information in a simple manner, grouped 
together by concept, and in a specific order that allows consumers the 
opportunity to build upon knowledge gained. For these reasons, the 
Bureau proposes that creditors, assignees, or servicers disclose the 
information in the table as set forth in Forms H-4(D)(1) and (2) in 
Appendix H.
    Proposed Sec.  1026.20(c)(2)(ii) replaces current Sec.  
1026.20(c)(1) and (4), but retains the obligation to disclose the 
current and new interest rates and the amount of the new payment. 
Proposed Sec.  1026.20(c)(2)(ii)(A) also would require disclosure of 
the date when the consumer must start paying the new payment and 
proposed comment Sec.  1026.20(c)(2)(ii)(A)-1 clarifies that the new 
interest rate must be the actual rate, not an estimate. Proposed rule 
Sec.  1026.20(c)(2)(ii) also replaces the language ``prior'' and 
``current'' in the current rule with the terms ``current'' and ``new,'' 
respectively, and deletes comment 20(c)(2)-1 which, among other things, 
uses the terms ``prior'' and ``current.'' This change is designed to 
make clear that ``current'' means the interest rate and payment in 
effect prior to the interest rate adjustment and ``new'' means the 
interest rate and payment resulting from the interest rate adjustment.
    Proposed comment 20(c)(2)(ii)(A)-1 defines the term ``current'' 
interest rate as the one in effect on the date of the disclosure. This 
more succinct definition replaces the lengthy definition of ``prior 
interest rates'' in current comment 20(c)(1) as the interest rate 
disclosed in the last notice, as well as all other interest rates 
applied to the transaction in the period since the last notice, or, if 
there had been no prior adjustment notice, the interest rate applicable 
at consummation and all other interest rates applied to the transaction 
in the period since consummation.
    In all rounds of testing, consumers were presented with model forms 
with tables depicting a scenario in which the interest rate and payment 
would increase as a result of the adjustment. All participants in all 
rounds of testing understood that their interest rate and payment were 
going to increase and when these changes would occur.\65\
---------------------------------------------------------------------------

    \65\ Id.
---------------------------------------------------------------------------

    Current ARM notices are not required to show the allocation of 
payments among principal, interest, and escrow accounts for any ARM. 
The Bureau proposes including this information in the table for 
interest-only and negatively-amortizing ARMs. The Bureau believes this 
information would help consumers better understand the risk of these 
products by demonstrating that their payments would not reduce the 
principal. The Bureau also believes providing the payment allocation 
would help consumers understand the effect of the interest rate 
adjustment, especially in the case of a change in the ARM's features 
coinciding with the interest rate adjustment, such as the expiration of 
an interest-only or payment-option feature. Since payment allocation 
may change over time, the proposed rule would require disclosure of the 
expected payment allocation for the first payment period during which 
the adjusted interest rate would apply.
    The allocation of payment disclosure was tested in the third round 
of testing. The rate adjustment notice tested showed the following 
scenario: The first adjustment of a 3/1 hybrid ARM--an ARM with a fixed 
interest rate for three years followed by annual interest rate

[[Page 57338]]

adjustments--with interest-only payments for the first three years. On 
the date of the adjustment, the interest-only feature would expire and 
the ARM would become amortizing. Only about half of participants 
understood that their payments were changing from interest-only to 
amortizing. Participants generally understood the concept of allocation 
of payments but were confused by the table in the notice that broke out 
principal and interest for the current payment, but combined the two 
for the new amount. As a result, this table was revised so that 
separate amounts for principal and interest were shown for all 
payments.\66\
---------------------------------------------------------------------------

    \66\ Id. at vii-viii. This revision to the allocation 
disclosure, which is identical in the proposed Sec.  1026.20(c) and 
(d) notices, was made after the third round of testing of the Sec.  
1026.20(d) notice, and therefore was not tested with consumers.
---------------------------------------------------------------------------

    The Bureau recognizes that certain Dodd-Frank Act amendments to 
TILA will restrict origination of non-amortizing and negatively-
amortizing loans. For example, TILA section 129C and the 2011 ATR 
(Ability to Repay) Proposal which would implement that provision, 
generally require creditors to determine that a consumer can repay a 
mortgage loan and include a requirement that these determinations 
assume a fully-amortizing loan. Thus, this law and regulation, when 
finalized, will restrict the origination of risky mortgages such as 
interest-only and negatively-amortizing ARMs.
    Other Dodd-Frank amendments to TILA, such as the proposed periodic 
statement provisions discussed below, will provide payment allocation 
information to consumers for each billing cycle. Thus, consumers who 
currently have interest-only or negatively-amortizing loans or may 
obtain such loans in the future will receive information about the 
interest-only or negatively-amortizing features of their loans through 
the payment allocation information in the periodic statement. Also, as 
noted above, consumer testing showed that participants were confused by 
the allocation table. Since the Bureau was not able to test a revised 
version of the model form to see if it rectified the confusion caused 
by the allocation table or if the concepts of interest-only and 
negatively-amortizing ARMs themselves are the source of the confusion, 
the Bureau is uncertain of the value of disclosing this information to 
consumers in the ARM interest rate adjustment notice. In view of these 
changes to the law and the outcome of consumer testing, the Bureau 
solicits comments on whether to include allocation information for 
interest-only and negatively-amortizing ARMs in the table proposed 
above.
20(c)(2)(iii) Explanation of How the Interest Rate Is Determined
    Proposed Sec.  1026.20(c)(2)(iii) would require the ARM disclosures 
to explain how the interest rate is determined. Consumer testing 
revealed that consumers generally have difficulty understanding the 
relationship of the index, margin, and interest rate.\67\ Therefore, 
the Bureau is proposing a relatively brief and simple explanation that 
the new interest rate is calculated by taking the published index rate 
and adding a certain number of percentage points, called the 
``margin.'' Proposed Sec.  1026.20(c)(2)(iii) would also require 
disclosure of the specific amount of the margin.
---------------------------------------------------------------------------

    \67\ Id. at viii.
---------------------------------------------------------------------------

    The proposed explanation of how the consumer's new interest rate is 
determined, such as adjustment of the index by the addition of a 
margin, mirrors the pre-consummation disclosure required around the 
time of application by current Sec.  1026.19(b)(2)(iii) and TILA 
section 128A requirements for initial interest rate disclosures. It 
also parallels the pre-consummation disclosure of the index and margin 
proposed in the 2012 TILA-RESPA Proposal. Proposed Sec.  1026.20(c) 
also would require disclosure of the name and published source of the 
index or formula, as required in other disclosures by Sec.  
1026.19(b)(2)(ii) and TILA section 128A.
    The proposed rule would replace the current Sec.  1026.20(c)(2) 
required disclosure of the index values upon which the ``current'' and 
``prior'' interest rates are based. The Bureau believes that providing 
consumers with index values is less valuable than providing them with 
their actual interest rates. Current comment 20(c)(2)-1, which 
addresses the requirement to disclose current and prior interest rate, 
would also be deleted.
    Consumer testing indicated that the explanation helped consumers 
better understand the relationship between interest rate, index, and 
margin. It also helped dispel the notion held by many consumers in the 
initial rounds of testing that lenders subjectively determined their 
new interest rate at each adjustment.\68\ The Bureau believes that its 
proposed rule and forms strike an appropriate balance between providing 
consumers with key information necessary to understand the basic 
interest rate adjustment of their adjustable-rate mortgages without 
overloading consumers with complex and confusing technical information.
---------------------------------------------------------------------------

    \68\ Id.
---------------------------------------------------------------------------

20(c)(2)(iv) Rate Limits and Unapplied Carryover Interest
    Proposed Sec.  1026.20(c)(2)(iv) would require the disclosure of 
any limits on the interest rate or payment increases at each adjustment 
and over the life of the loan. It also would require disclosure of the 
extent to which the creditor has foregone any increase in the interest 
rate due to a limit, called unapplied carryover interest. Disclosure of 
rate limits is not required by the current rule. The Bureau believes 
that knowing the limitations of their ARM rates and payments would help 
consumers understand the consequences of interest rate adjustments and 
weigh the relative benefits of pursuing alternatives. For example, if 
an adjustment causes a significant increase in the consumer's payment, 
knowing how much more the interest rate or payment could increase could 
help inform a consumer's decision on whether or not to seek alternative 
financing.
    Both proposed Sec.  1026.20(c)(2)(iv) and current Sec.  
1026.20(c)(3) require disclosure of any foregone interest rate 
increase. Unlike the current rule, the proposed rule would require an 
explanation in the ARM payment change notice that the additional 
interest was not applied due to a rate limit and provide the earliest 
date such foregone interest may be applied.
    Proposed comment 20(c)(2)(iv)-1 regarding unapplied interest 
closely parallels, and would replace, current comment 20(c)(3)-1. The 
proposed comment explains that disclosure of foregone interest would 
apply only to transactions permitting interest rate carryover. It 
further explains that the amount of the interest increase foregone is 
the amount that, subject to rate caps, can be added to future interest 
rate adjustments to increase, or offset decreases in, the rate 
determined according to the index or formula.
    Consumers had difficulty understanding the concept of interest rate 
carryover when it was introduced during the third round of testing. 
This difficulty may have been due to the simultaneous introduction of 
other complex notions, such as interest-only or negatively-amortizing 
features and the allocation of interest, principal, and escrow payments 
for such loans. In response, the Bureau has simplified the explanation 
of carryover interest.\69\
---------------------------------------------------------------------------

    \69\ Id. at viii-ix.
---------------------------------------------------------------------------

    The Bureau recognizes that the disclosure of rate limits and 
unapplied

[[Page 57339]]

carryover interest provide information that may help consumers better 
understand their ARMs. However, the Bureau is considering whether the 
help this information may provide outweighs its distraction from other 
more key information. Also, as explained above, consumers had 
difficulty understanding the concept of carryover interest and the 
Bureau does not want this difficulty to diminish the effectiveness of 
the proposed Sec.  1026.20(c) disclosures. The Bureau solicits comment 
on whether to include rate limits and unapplied carryover interest in 
the proposed Sec.  1026.20(c) disclosures.
20(c)(2)(v) Explanation of How the New Payment Is Determined
    Proposed Sec.  1026.20(c)(2)(v) would require ARM disclosures to 
explain how the new payment is determined, including (A) the index or 
formula, (B) any adjustment to the index or formula, such as by 
addition of the margin or application of previously foregone interest, 
(C) the loan balance, and (D) the length of the remaining loan term. 
This explanation is consistent with the disclosures provided at the 
time of application pursuant to Sec.  1026.19(b)(2)(iii). It is also 
consistent with the TILA section 128A requirement to disclose the 
assumptions upon which the new payment is based, which the Bureau 
proposes to implement in proposed Sec.  1026.20(d), and thus promotes 
consistency among Regulation Z ARM disclosures.
    The current rule, as explained in comment 20(c)(4)-1, which the 
proposed rule would delete, requires disclosure of the contractual 
effects of the adjustment. This includes the payment due after the 
adjustment is made and whether the payment has been adjusted. The 
proposed rule would require disclosure of this information as well as 
the name of the index and any specific adjustment to the index, such as 
the addition of a margin or an adjustment due to carryover interest. 
Proposed comment 20(c)(2)(v)(B)-1 explains that a disclosure regarding 
the application of previously foregone interest is required only for 
transactions permitting interest rate carryover. The proposed comment 
further explains that foregone interest is any percentage added or 
carried over to the interest rate because a rate cap prevented the 
increase at an earlier adjustment. As discussed above, the Bureau found 
that this explanation helped consumers better understand how the index 
or formula and margin determine their new payment and dispelled the 
notion held by many consumers in the initial rounds of testing that the 
lender subjectively determined their new interest rate, and thus the 
new payment, at each adjustment.
    The proposal would require disclosure of both the loan balance and 
the remaining loan term expected on the date of the interest rate 
adjustment. The current rule requires disclosure of the loan balance 
but not the remaining loan term. The date on which the balance is taken 
differs slightly in proposed Sec.  1026.20(c) from the current rule. 
Current comment 20(c)(4)-1 explains that the balance disclosed is the 
one that serves as the basis for calculating the new adjusted payment 
while the Bureau proposes disclosure of a more current balance, i.e., 
the one expected on the date of the adjustment. Both the proposed rule 
and the current rule, as explained in current comment 20(c)(4)-1, 
provide for disclosure of any change in the term or maturity of the 
loan caused by the adjustment.
    Disclosure of the four key assumptions upon which the new payment 
is based provides a succinct overview of how the interest rate 
adjustment works. It also demonstrates that factors other than the 
index can increase consumers' interest rates and payments. Disclosures 
of these factors would provide consumers with a snapshot of the current 
status of their adjustable-rate mortgages and with basic information to 
help them make decisions about keeping their current loan or shopping 
for alternatives.
    Current comment 20(c)(4)-1 requires disclosure of certain 
information related to loans that are not fully amortizing. Disclosure 
of similar information is proposed in Sec.  1026.20(c)(2)(vi), 
discussed below.
20(c)(2)(vi) Interest-Only and Negative-Amortization Statement and 
Payment
    Proposed Sec.  1026.20(c)(2)(vi) would require Sec.  1026.20(c) 
notices to include a statement regarding the allocation of payments to 
principal and interest for interest-only or negatively-amortizing 
loans. If negative amortization occurs as a result of the interest rate 
adjustment, the proposed rule would require disclosure of the payment 
necessary to fully amortize such loans at the new interest rate over 
the remainder of the loan term. As explained in proposed comment 
20(c)(2)(vi)-1, for interest-only loans, the statement would inform the 
consumer that the new payment covers all of the interest but none of 
the principal owed and, therefore, will not reduce the loan balance. 
For negatively-amortizing ARMs, the statement would inform the consumer 
that the new payment covers only part of the interest and none of the 
principal, and therefore the unpaid interest will add to the balance or 
increase the term of the loan. The current rule, clarified by current 
comment 20(c)(5)-1, requires disclosure of the payment necessary to 
fully amortize loans that become negatively-amortizing as a result of 
the adjustment but does not require the statement regarding 
amortization. Proposed Sec.  1026.20(c)(2)(vi) and proposed comments 
20(c)(2)(vi)-1 and 20(c)(2)(vi)-2 would replace the current rule and 
current comment 20(c)(5)-1.
    Both current Sec.  1026.20(c) and the Board's 2009 Closed-End 
Proposal to revise Sec.  1026.20(c) include, for ARMs that become 
negatively amortizing as a result of the interest rate adjustment, 
disclosure of the payment necessary to fully amortize those loans at 
the new interest rate over the remainder of the loan term. However, the 
Bureau believes there are countervailing considerations regarding 
whether to include this information in proposed Sec.  1026.20(c).
    The Bureau recognizes that certain Dodd-Frank Act amendments to 
TILA will restrict origination of non-amortizing and negatively-
amortizing loans. For example, TILA section 129C and the 2011 ATR 
Proposal that would implement that provision, generally require 
creditors to determine that a consumer can repay a mortgage loan and 
include a requirement that these determinations assume a fully-
amortizing loan. Thus, this law and regulation, when finalized, will 
restrict the origination of risky mortgages such as interest-only and 
negatively-amortizing ARMs.
    Other Dodd-Frank amendments to TILA, such as the periodic statement 
proposed by Sec.  1026.41, will include information about non-
amortizing and negatively-amortizing loans in each billing cycle, such 
as an allocation of payments. Thus, consumers who currently have 
interest-only and negatively-amortizing ARMs or may obtain such loans 
in the future will receive certain information about the interest-only 
or negatively-amortizing features of their loans in another disclosure, 
although this will not include the payment required to fully amortize 
negatively-amortizing loans. Disclosure of the payment necessary to 
fully amortize negatively-amortizing loans was not consumer tested but 
testing of the table showing the payment allocation of interest-only 
and negatively-amortizing ARMs indicated that consumers were confused 
by the concept of amortization. Thus, the Bureau is weighing the value 
of disclosing specific information regarding amortization, such as the 
payment needed to fully amortize

[[Page 57340]]

negatively-amortizing ARMs. In view of these changes to the law and the 
outcome of consumer testing, the Bureau solicits comments on whether to 
include the payment required to amortize ARMs that became negatively 
amortizing as a result of an interest rate adjustment.
20(c)(2)(vii) Prepayment Penalty
    Proposed Sec.  1026.20(c)(2)(vii) would require disclosure of the 
circumstances under which any prepayment penalty may be imposed, such 
as selling or refinancing the principal residence, the time period 
during which such penalty would apply, and the maximum dollar amount of 
the penalty. The current rule does not have this requirement. The 
proposed rule cross-references the definition of prepayment penalty in 
subpart E, Sec.  1026.41(d)(7)(iv), in the proposed rule for periodic 
statements.
    Interest rate adjustments may cause payment shock or require 
consumers to pay their mortgage at a rate they may no longer be able to 
afford, prompting them to consider alternatives such as refinancing. In 
order to fully understand the implications of such actions, the Bureau 
believes that consumers should know whether prepayment penalties may 
apply. Such information should include the maximum penalty in dollars 
that may apply and the time period during which the penalty may be 
imposed. The dollar amount of the penalty, as opposed to a percentage, 
is more meaningful to consumers.
    The Bureau also proposes disclosure of any prepayment penalty in 
Sec.  1026.20(d) ARM rate adjustment notices and in the periodic 
statements proposed by Sec.  1026.41. Consumer testing of the periodic 
statement included a scenario in which a prepayment penalty applied. 
Most participants understood that a prepayment penalty applied if they 
paid off the balance of their loan early, but some participants were 
unclear whether it applied to the sale of the home, refinancing, or 
other alternative actions consumers could pursue in lieu of maintaining 
their adjustable-rate mortgages.\70\ For this reason, the Bureau 
proposes to clarify the circumstances under which a prepayment penalty 
would apply. The proposed forms would alert consumers that a prepayment 
penalty may apply if they pay off their loan, refinance, or sell their 
home before the stated date.
---------------------------------------------------------------------------

    \70\ Id. at vi.
---------------------------------------------------------------------------

    The Bureau recognizes that Dodd-Frank Act amendments to TILA, such 
as 129C and the 2011 ATR Proposal that would implement that provision, 
would significantly restrict a lender's ability to impose prepayment 
penalties. Other Dodd-Frank amendments to TILA, such as the proposed 
periodic statement, would provide consumers with information about 
their prepayment penalties for each billing cycle. Thus, consumers who 
currently have ARMs with prepayment penalty provisions or may obtain 
such loans in the future would generally receive information about them 
at frequent intervals in another disclosure. In view of these changes 
to the law, the Bureau solicits comments on whether to include 
information regarding prepayment penalties in proposed Sec.  
1026.20(c).
20(c)(3) Format of Disclosures
    As discussed above, the Bureau proposes to make Sec.  1026.20(c) 
subject to certain of the Sec.  1026.17(a)(1) form requirement to which 
Sec.  1026.20(c) disclosures are currently not subject. These 
requirements include grouping the disclosures together, segregating 
them from everything else, and prohibiting inclusion of any information 
not directly related to the Sec.  1026.20(c) disclosures.\71\ As 
discussed above in connection with Section 17(a)(1), this revises the 
current rule but the Bureau believes the revision is necessary to 
effectively highlight information for consumers about changes to their 
ARM interest rates and payments.
---------------------------------------------------------------------------

    \71\ Other Sec.  1026.17(a)(1) form requirements that currently 
apply to Sec.  1026.20(c) would continue to apply, such as the 
option of providing the disclosures to consumers in electronic form, 
subject to compliance with consumer consent and other applicable 
provisions of the E-Sign Act.
---------------------------------------------------------------------------

20(c)(3)(i) All Disclosures in Tabular Form
    Proposed Sec.  1026.20(c)(3)(i) would require that the ARM 
adjustment disclosures be provided in the form of a table and in the 
same order as, and with headings and format substantially similar to, 
Forms H-4(D)(1) and (2) in Appendix H to subpart C for interest rate 
adjustments resulting in a corresponding payment change.
    The proposed ARM adjustment notice contains complex concepts 
challenging for consumers to understand. For example, consumer testing 
revealed that participants generally had difficulty understanding the 
relationship among index, margin, and interest rate.\72\ They also had 
difficulty with the concepts of amortization and interest rate 
carryover.\73\ As a starting point, the Bureau looked at the model 
forms developed by the Board for its 2009 Closed-End Proposal to amend 
Sec.  1026.20(c). The Bureau then conducted its own consumer testing.
---------------------------------------------------------------------------

    \72\ Macro Report, supra note 38, at viii.
    \73\ Id. at viii-ix.
---------------------------------------------------------------------------

    The Bureau's testing showed that consumers can more readily 
understand these concepts when the information is presented to them in 
a simple manner and in the groupings contained in the model forms. The 
Bureau also observed that consumers more readily understood the 
concepts when they were presented in a logical order, with one concept 
presented as a foundation to understanding other concepts. For example, 
the form begins by informing consumers of the purpose of the notice: 
That their interest rate is going to adjust, when it will adjust, and 
that the adjustment will change their mortgage payment. This 
introduction is immediately followed by a table visually showing 
consumers' current and new interest rates. In another example, the 
proposed notice informs consumers about their index rate and margin 
before explaining how the new payment is calculated based on those 
factors, as well as other factors such as the loan balance and 
remaining loan term.
    Based on consumer testing, the Bureau believes that consumer 
understanding is enhanced by presenting the information in a simple 
manner, grouped together by concept, and in a specific order that 
allows consumers the opportunity to build upon knowledge gained. For 
these reasons, the Bureau proposes that creditors, assignees, or 
servicers disclose the information required by proposed Sec.  
1026.20(c) with headings, content, and format substantially similar to 
Forms H-4(D)(1) and (2) in Appendix H to this part.
    Over the course of consumer testing, participant comprehension 
improved with each successive iteration of the model form. As a result, 
the Bureau believes that displaying the information in tabular form 
focuses consumer attention and lends to greater understanding. 
Similarly, the Bureau found that the particular content and order of 
the information, as well as the specific headings and format used, 
presented the information in a way that consumers both could understand 
and from which they could benefit.
20(c)(3)(ii) Format of Interest Rate and Payment Table
    Proposed Sec.  1026.20(c)(3)(ii) would require tabular format for 
ARM payment change notices of: The current and new interest rates, the 
current and new payments, and the date the first new payment is due. 
For interest-only and negatively-amortizing ARMs, the table would also 
include the allocation of

[[Page 57341]]

payments. This table would be located within the table proposed by 
Sec.  1026.20(c)(3)(i). This table is substantially similar to the one 
tested by the Board for its 2009 Closed-End Proposal to revise Sec.  
1026.20(c). The proposal would require the table to follow the same 
order as, and have headings, content, and format substantially similar 
to, Forms H-4(D)(1) and (2) in Appendix H of subpart C.
    Disclosing the current interest rate and payment in the same table 
allows consumers to readily compare those rates with the adjusted rate 
and new payment. Consumer testing revealed that nearly all participants 
were readily able to identify the table and understand the content.\74\ 
The new interest rate and payment and date the first new payment is due 
is key information the consumer must know in order to commence payment 
at the new rate. For these reasons, the Bureau proposes locating this 
information prominently in the disclosure.
---------------------------------------------------------------------------

    \74\ Id. at vii.
---------------------------------------------------------------------------

20(d) Initial Rate Adjustments
    Elimination of current Sec.  1026.20(d). Current Sec.  1026.20(d) 
permits creditors to substitute information provided in accordance with 
variable-rate subsequent disclosure regulations of other Federal 
agencies for the disclosures required by Sec.  1026.20(c). In the 2009 
Closed-End Proposal, the Board proposed amending the regulation that is 
now Sec.  1026.20, including deleting the provision that is current 
Sec.  1026.20(d). The Board stated that, as of August 2009, there were 
``[n]o comprehensive disclosure requirements for variable-rate mortgage 
transactions * * * in effect under the regulations of the other Federal 
financial institution supervisory agencies.'' \75\ The Board explained 
that when it originally adopted the provision in 1987, as footnote 45c 
of Sec.  226.20(c) of Regulation Z,\76\ the regulations of other 
financial institution supervisory agencies--namely the OCC, the Federal 
Home Loan Bank Board (the FHLBB), and HUD--contained subsequent 
disclosure requirements for ARMs.\77\
---------------------------------------------------------------------------

    \75\ 74 FR 43232, 43272 (Aug. 26, 2009).
    \76\ Regulation Z was previously implemented by the Board at 12 
CFR 226. In light of the general transfer of the Board's rulemaking 
authority for TILA to the Bureau, the Bureau adopted an interim 
final rule recodifying the Board's Regulation Z at 12 CRF 1026.
    \77\ 74 FR 43232, 43273 (citing 52 FR 48665, 48671 (Dec. 24, 
1987)).
---------------------------------------------------------------------------

    The Bureau proposes deleting the current content of Sec.  
1026.20(d) because it is not aware of any other Federal financial 
institution supervisory agency rules requiring comprehensive disclosure 
requirements for ARMs. The Bureau solicits comment on whether there is 
any reason to retain this provision. The Bureau solicits comments, for 
example, on whether this proposed regulatory change would have 
implications for rights under the Alternative Mortgage Transaction 
Parity Act. For the reasons discussed above with respect to proposed 
Sec.  1026.20(c), the Bureau proposes this deletion pursuant to its 
authority under TILA sections 105(a) and 128(f)(1)(H) and DFA section 
1405(b).
    New initial ARM interest rate adjustment disclosures. In the 
section that would be left vacant by the proposed deletion of Sec.  
1026.20(d), the Bureau proposes to implement the initial ARM adjustment 
notice mandated by TILA section 128A. Proposed Sec.  1026.20(d) would 
require disclosure to consumers with certain adjustable-rate mortgages, 
approximately six months prior to the initial interest rate adjustment, 
of key information about the upcoming adjustment, including the new 
rate and payment and options for pursuing alternatives to their 
adjustable-rate mortgage. This initial ARM adjustment notice would 
harmonize with the ARM payment change notice that would be required 
under the proposed revisions to Sec.  1026.20(c). The Bureau believes 
that promoting consistency between the ARM disclosure provisions of 
proposed Sec.  1026.20(c) and (d) would reduce compliance burdens on 
industry and minimize consumer confusion.
    Form of delivery. As required under TILA section 128A(b), proposed 
Sec.  1026.20(d) would require that the initial ARM interest rate 
adjustment notices be provided to consumers in writing, separate and 
distinct from all other correspondence. Proposed comment 20(d)-2 
explains that to satisfy this requirement, the notices must be mailed 
or delivered separately from any other material. For example, in the 
case of mailing the disclosure, there should be no material in the 
envelope other than the initial interest rate adjustment notice. In the 
case of emailing the disclosure, the only attachment should be the 
initial interest rate adjustment notice. This requirement contrasts 
with proposed Sec.  1026.20(c), which would be subject to the less 
stringent segregation requirements of Sec.  1026.17(a)(1), as amended 
by the Bureau's proposal. The proposed comment further explains that 
the notices proposed by Sec.  1026.20(d) may be provided to consumers 
in electronic form with consumer consent, pursuant to the requirements 
of Sec.  1026.17(a)(1). The Bureau solicits comments on whether 
consumer protection would be compromised by providing Sec.  1026.20(d) 
notices on a separate piece of paper but in the same envelope or as 
email correspondence with other messages from the creditor, assignee, 
or servicer.
    Creditors, assignees, and servicers. Proposed Sec.  1026.20(d) 
applies to creditors, assignees, and servicers. Proposed comment 20(d)-
1 clarifies that a creditor, assignee, or servicer that no longer owns 
the mortgage loan or the mortgage servicing rights is not subject to 
the requirements of Sec.  1026.20(c). This proposed language tracks, in 
part, the requirements of TILA section 128A that creditors and 
servicers must provide the initial ARM interest rate adjustment 
notices, but adds assignees to the list of covered persons. The Bureau 
believes that holding creditors, but not assignees, liable under the 
regulation would result in inconsistent levels of consumer protection 
and an unlevel playing field for owners of mortgages.
    It is a common practice for creditors to sell many or all of the 
loans they originate rather than hold them in portfolio. If the 
creditor were to sell the ARM, the consumer would have no recourse 
against the subsequent holder for violations of Sec.  1026.20(d) if 
assignees were not made subject to Sec.  1026.20(d). Shielding 
assignees from liability under the proposed rule would have 
particularly deleterious effects on consumers seeking relief against a 
servicer to whom an assignee sold the ARM's mortgage servicing rights, 
if that servicer had insufficient resources to satisfy a judgment the 
consumer may obtain for violations of Sec.  1026.20(d). Consumers who 
happen to have ARMs sold by the original creditor to a subsequent 
holder would have less protection under the regulation than consumers 
with ARMs that are retained in portfolio by the creditor originating 
the loan. It also would create an unfair advantage for assignees. The 
Bureau believes that the protections afforded under proposed Sec.  
1026.20(d) should not be determined by the happenstance of loan 
ownership or favor one sector of the mortgage market over another. For 
these reasons, the Bureau proposes to make assignees, along with 
creditors and servicers, subject to the requirements Sec.  1026.20(d).
    Proposed comment 20(d)-1 explains that any provision of subpart C 
that applies to the disclosures required by Sec.  1026.20(d) also 
applies to creditors, assignees, and servicers. This is the case even 
where the other provisions of subpart C refer only to creditors. For 
the reasons discussed above, the Bureau

[[Page 57342]]

proposes that the requirements of other regulations that apply to the 
Sec.  1026.20(d) initial ARM interest rate adjustment notices apply to 
assignees as well as to creditors and servicers.
    The extension of the requirement to assignees is authorized under 
TILA section 105(a) because, for the reasons discussed above, it is 
necessary and proper to effectuate the purposes of TILA, including to 
assure a meaningful disclosure of credit terms and protect the consumer 
against unfair credit billing practices, and to prevent circumvention 
or evasion of TILA. The Bureau also proposes to use its authority under 
DFA section 1405(b) to extend the applicability of the initial ARM 
adjustment notices under TILA section 128A to assignees. As discussed 
above, this extension would serve the interest of consumers and the 
public interest. Application of proposed Sec.  1026.20(d) to assignees 
is consistent with current Sec.  1026.20(c) commentary applying that 
disclosure requirement to subsequent holders. Application of proposed 
Sec.  1026.20(d) to creditors, assignees, and servicers also promotes 
consistency with proposed Sec.  1026.20(c) and the periodic statement 
proposed by Sec.  1026.41, which also apply to creditors, assignees, 
and servicers.
    Timing. Proposed Sec.  1026.20(d) generally follows the statutory 
requirement in TILA section 128A that the initial interest rate 
adjustment notice must be provided to consumers during the one-month 
period that ends six months before the date on which the interest rate 
in effect during the introductory period ends. Thus, the disclosure 
must be provided six to seven months before the initial interest rate 
adjustment. The Sec.  1026.20(d) disclosures are designed to avoid 
payment shock so as to put consumers on notice of upcoming changes to 
their adjustable-rate mortgages that may result in higher payments. The 
six to seven month advance notice allows sufficient time for consumers 
to consider their alternatives if the notice discloses an increase in 
payment that they cannot afford. One alternative consumers might 
consider is refinancing their home. In the current market, ``it now 
takes the nation's biggest mortgage lenders an average of more than 70 
days to complete a refinance . * * * '' \78\
---------------------------------------------------------------------------

    \78\ Timiraos & Simon, supra note 52.
---------------------------------------------------------------------------

    In the interest of consistency within Regulation Z, proposed Sec.  
1026.20(d) ties its timing requirement to the date the first payment at 
a new level is due rather than the date of the interest rate 
adjustment. This is consistent with the time frame for both current and 
proposed Sec.  1026.20(c). Since interest generally is paid in arrears, 
for most ARMs, this adds another approximately 30 days to the time 
frame for delivery of the disclosures. Thus, the notices proposed by 
Sec.  1026.20(d) must be provided to consumers seven to eight months in 
advance of payment at the adjusted rate. Measured in days, the initial 
interest rate adjustment disclosures are due at least 210, but not more 
than 240, days before the first payment at the adjusted level is due. 
By tying the timing of the disclosure to the date payment at a new 
level is due and calculating it in days rather than months, proposed 
Sec.  1026.20(d) is more precise, since months can vary in length, and 
maintains consistency with the timing requirements of proposed Sec.  
1026.20(c).
    Pursuant to TILA section 128A, for ARMs adjusting for the first 
time within six months after consummation, the proposed Sec.  
1026.20(d) initial interest rate adjustment notices must be provided at 
consummation. The proposed rule states that when this occurs, the 
disclosure must be provided 210 days before the first date payment at a 
new level is due. The proposed rule ties the timing of this requirement 
to days rather than months, thereby ensuring both internal consistency 
and consistency with Sec.  1026.20(c).
    Proposed comment 20(d)-2 explains that the timing requirements 
exclude any grace period. It also explains that the date the first 
payment at the adjusted level is due is the same as the due date of the 
first payment calculated using the adjusted interest rate.
    SBREFA. The small entity representatives (SERs) that advised the 
SBREFA panel on the mortgage servicing rules under consideration by the 
Bureau expressed doubt as to the value of the Sec.  1026.20(d) notices 
because providing the notices so many months in advance of the interest 
rate adjustment would require disclosure of an estimated, rather than 
the actual, interest rate and payment due.\79\ Several SERS expressed 
concern that the estimates would confuse consumers. They also noted 
that, in addition to the requirement to provide initial interest rate 
adjustment notices under Sec.  1026.20(d), servicers would remain 
obliged to also provide a later notice in the case of a payment change, 
pursuant to Sec.  1026.20(c), for the initial rate adjustments in order 
to apprise consumers of the actual amount of their interest rate and 
payment resulting from the adjustment. They expressed concerns about 
the one-time development costs and on-going costs associated with 
providing both the initial ARM adjustment notices and the recurring 
notices under Sec.  1026.20(c).\80\
---------------------------------------------------------------------------

    \79\ See SBREFA Final Report, supra note 22, at 20-21, 29-30.
    \80\ Id.
---------------------------------------------------------------------------

    Consistent with this recommendation, after conclusion of the SBREFA 
process, the Bureau conducted further policy analysis of a possible 
exemption for small creditors, assignees, and servicers. After 
additional consideration, however, the Bureau decided to propose that 
notices under both Sec.  1026.20(c) and Sec.  1026.20(d) be provided. 
The Bureau believes that the two notices serve related but distinct 
purposes, such that eliminating the Sec.  1026.20(c) notice could harm 
consumers. In particular, the Sec.  1026.20(d) notice is designed to 
provide consumers with very early warning that their rates are about to 
change, so that consumers can begin exploring other options. If the 
consumer chooses not to do so or has not completed that process, a 
notice closer to the adjustment date that reflects the actual rather 
than estimated change in payment is still valuable to the consumer as 
both a second warning and budgeting tool. While the ARM interest rate 
adjustment information proposed for the first payment change notice 
required by proposed Sec.  1026.20(c) could be provided in the periodic 
statement that would be provided to consumers under proposed Sec.  
1026.41, discussed below, rather than as a standalone notice under 
Sec.  1026.20(c), the Bureau notes that that might require greater 
programming complexity in connection with the periodic statements. In 
addition, the Bureau is proposing to exempt certain small servicers 
from the periodic statement requirement.
    The Bureau also believes that the amount of burden reduction for 
servicers from an exemption from providing a Sec.  1026.20(c) notice in 
connection with an initial interest rate adjustment would be extremely 
minimal, given that servicers would have to maintain systems to 
generate Sec.  1026.20(c) notices for each subsequent interest rate 
adjustment resulting in a corresponding payment change. Thus, excepting 
small servicers from providing the first Sec.  1026.20(c) notice would 
not provide a significant reduction in burden.
    The Bureau also considered whether to except small servicers, 
creditors, and assignees from the initial ARM interest rate notice 
required by Sec.  1026.20(d). The SERs expressed concern that consumers 
would be confused by receiving estimates, rather than their actual new 
interest rate and payment, in the

[[Page 57343]]

Sec.  1026.20(d) notice.\81\ However, the Bureau believes the best 
approach to address this concern is to clarify the contents of the 
notice, rather than eliminate it entirely. Congress has made a specific 
policy judgment that an early notice has value to consumers. Creating 
an exemption for small creditors, assignees, and servicers would 
deprive certain consumers of the benefits that Congress intended, 
specifically advance notice seven to eight months before payment at a 
new level is due after the initial interest rate adjustment to allow 
consumers time to weigh the potential impacts of a rate change and to 
explore alternative actions. An exception would also deprive certain 
consumers of the information provided in the Sec.  1026.20(d) notice 
about alternatives and how to contact their State housing finance 
authority and access a list of government-certified counseling agencies 
and programs.
---------------------------------------------------------------------------

    \81\ Id. at 21.
---------------------------------------------------------------------------

    On balance, the Bureau does not believe that the Sec.  1026.20(d) 
notice imposes a significant burden on small entities because it is a 
one-time notice. Moreover, the notice is designed to be consistent with 
the Sec.  1026.20(c) notice in order to, among other things, reduce the 
burden on industry. For these reasons, the Bureau proposes generally to 
require all creditors, assignees, and servicers to provide the ARM 
interest rate adjustment notices required by proposed Sec.  1026.20(c) 
and (d). However, the Bureau seeks comment on the issues raised by the 
two sets of disclosures, particularly whether the burden imposed on 
small entities by the requirements of Sec.  1026.20(d) outweighs the 
consumer protection benefits afforded by the early notice of the 
initial ARM interest rate adjustment.
    The Bureau also solicits comment on whether small servicers (or 
creditors, assignees, and servicers in general) that provide a periodic 
statement to a consumer with an ARM should be permitted or required to 
provide the information required by Sec.  1026.20(c), for an initial 
interest rate adjustment for which a notice under Sec.  1026.20(d) is 
required, in a periodic statement provided to consumers 60 to 120 days 
before payment at a new level is due. The Bureau further solicits 
comment on whether to permit or require all Sec.  1026.20(c) notices 
required by the proposed rule to be incorporated into periodic 
statements in lieu of providing a separate notice.
    Conversions. Proposed comment 20(d)-3 explains that in the case of 
an open-end account converting to a closed-end adjustable-rate 
mortgage, Sec.  1026.20(d) disclosures are not required until the 
implementation of the initial interest rate adjustment post-conversion. 
Under the proposed rule, the conversion is analogous to consummation. 
Thus, like other ARMs subject to the requirements of proposed Sec.  
1026.20(d), disclosures for these converted ARMs would not be required 
until the first interest rate adjustment following the conversion. This 
proposal is consistent with the Sec.  1026.20(c) proposal for open-end 
accounts converting to closed-end adjustable-rate mortgages.
20(d)(1) Coverage of the Initial Rate Adjustment Disclosures
20(d)(1)(i) In General
    Proposed Sec.  1026.20(d)(1)(i) defines an adjustable-rate mortgage 
or ARM as a closed-end consumer credit transaction secured by the 
consumer's principal dwelling in which the annual percentage rate may 
increase after consummation. The proposed rule uses the wording from 
the definitions of ``adjustable-rate'' and ``variable-rate'' mortgage 
in subpart C of Regulation Z. It does this to promote consistency 
within the regulation. Proposed comment 20(d)(1)(i)-1 explains that the 
definition of ARM means variable-rate mortgage as that term is used 
elsewhere in subpart C of Regulation Z, except as provided in proposed 
comment 20(d)(1)(ii)-2.
    Applicability to closed-end transactions. The Bureau believes that 
TILA section 128A and the implementing disclosures in proposed 
1026.20(d) primarily benefit consumers with closed-end adjustable-rate 
mortgages. In contrast, open-end credit transactions secured by a 
consumer's dwelling (home equity plans) with adjustable-rate features 
are subject to distinct disclosure requirements under TILA and subpart 
B of Regulation Z that substitute for the proposed Sec.  1026.20(c) and 
(d) disclosures. Therefore, as discussed below, the Bureau proposes to 
use its authority under TILA section 105(a) and (f) to exempt 
adjustable-rate home equity plans from the requirements of proposed 
Sec.  1026.20(d).
    Section 127A of TILA and Sec.  1026.40(b) and (d) of Regulation Z 
require the disclosure of specific information about home equity plans 
at the time an application is provided to the consumer. These 
disclosures include specific information about variable or adjustable-
rate plans, including, among other things, the fact that the plan has a 
variable or adjustable-rate feature, the index used in making 
adjustments and a source of information about the index, an explanation 
of how the index is adjusted such as by the addition of a margin, and 
information about frequency of and limitations to changes to the 
applicable rate, payment amount, and index. See Sec.  1026.40(d)(12). 
The required account opening disclosures for home equity plans also 
must include information about any variable or adjustable-rate feature, 
including the circumstances under which rates may increase, limitations 
on the increase, and the effect of any increase. See Sec.  
1026.6(a)(1)(ii) and (3)(vii).
    Thus, Regulation Z already contains a comprehensive scheme for 
disclosing to consumers the variable or adjustable-rate features of 
home equity plans. The Bureau believes that requiring servicers to 
provide information about the index and an explanation of how the 
interest rate and payment would be determined, as required by TILA 
section 128A and proposed by Sec.  1026.20(d), in connection with home 
equity plans would be inconsistent with, and largely duplicative of, 
the current disclosure regime and would be confusing and unhelpful for 
consumers. Moreover, unlike closed-end adjustable-rate mortgages, 
consumers with home equity plans generally may draw from the 
adjustable-rate feature on the account at any time. Thus, providing the 
good faith estimate of the amount of the monthly payment that would 
apply after the interest rate adjustment, as required by TILA section 
128A and proposed by Sec.  1026.20(d), would not be useful because the 
estimate would be based on the outstanding loan balance at the time the 
notice is given, which would change after the notice is given anytime 
the consumer withdraws funds. Finally, the alerts to consumers required 
by TILA section 128A and proposed by Sec.  1026.20(d) would not provide 
a benefit to consumers with home equity plans with adjustable-rate 
features. Generally, introductory periods for adjustable-rate features 
on home equity plans tend to last less than six months. The Bureau 
believes it is unlikely consumers would consider pursuing alternatives 
so close in time to opening their home equity plans.
    Two other factors also support the Bureau's use of the TILA section 
105(a) exemption authority to exclude home equity plans from the 
requirements of proposed Sec.  1026.20(d). First, use of the term 
``consummation'' in TILA section 128A supports the application of 
proposed Sec.  1026.20(d) only to closed-end transactions. Regulation Z 
generally requires disclosures for closed-end credit transactions to be 
provided ``before consummation of the

[[Page 57344]]

transaction.'' By contrast, Regulation Z generally requires account 
opening disclosures for open-end credit transactions to be provided 
``before the first transaction is made under the plan.'' See Sec.  
1026.17(b) and Sec.  1026.5(b)(1)(i). Because Regulation Z uses the 
term ``consummation'' in connection with closed-end credit 
transactions, use of the word ``consummation'' in DFA section 1418 
supports the Bureau's proposed exemption for open-end home equity plans 
from the requirements of Sec.  1026.20(d). Second, DFA section 1418 is 
codified in TILA section 128A. The adjacent and similarly numbered 
provision, TILA section 128, is entitled and applies only to ``Consumer 
Credit not under Open End Credit Plans.'' Congress's placement of the 
new ARM disclosure requirement in a segment of TILA that applies only 
to closed-end credit transactions further supports the Bureau's 
decision to exempt open-end credit transactions, in this case variable 
or adjustable-rate home equity plans, from the requirements of that 
section.
    For the reasons discussed above, exempting home equity plans from 
the requirements of Sec.  1026.20(d) is necessary and proper under TILA 
section 105(a) to further the consumer protection purposes of TILA and 
facilitate compliance. As discussed above, the Bureau believes that the 
information contained in the notice proposed by Sec.  1026.20(d) would 
not be meaningful to consumers with home equity plans that have 
adjustable-rate features and could lead to information overload and 
confusion for those consumers. The Bureau further proposes the 
exemption for open-end transactions pursuant to its authority under 
TILA section 105(f). As discussed above, because open-end transactions 
are subject to their own regulatory scheme, are not structured in such 
a way as to garner benefit from the disclosures proposed by Sec.  
1026.20(d), and the placement of 128A in TILA indicates congressional 
intent to limit its coverage to closed-end transactions, the Bureau 
believes, in light of the factors in TILA section 105(f)(2), that 
requiring the proposed Sec.  1026.20(d) notice for open-end accounts 
that have adjustable-rate features would not provide a meaningful 
benefit to consumers. Specifically, the Bureau considers that the 
exemption is proper irrespective of the amount of the loan or the 
status of the borrower (including related financial arrangements, 
financial sophistication, and the importance to the borrower of the 
loan). The Bureau further notes, in light of TILA section 105(f)(2)(D), 
that the requirements in Sec.  1026.20(d) would only apply to loans 
secured by the consumer's principal dwelling.
    Savings Clause. Regarding other categories of loans to which 
proposed Sec.  1026.20(d) would apply, the statute's provisions apply 
to hybrid ARMs, which it defines as ``consumer credit transaction[s] 
secured by the consumer's principal residence with a fixed interest 
rate for an introductory period that adjusts or resets to a variable 
interest rate after such period.'' \82\ The statute, however, has a 
``savings clause,'' that allows the Bureau to require the initial 
interest rate adjustment notice for loans that are not hybrid ARMs. The 
Bureau proposes to use this authority generally to extend the 
disclosure requirements of proposed Sec.  1026.20(d) to ARMs that are 
not hybrid. The Bureau believes this approach is necessary because both 
hybrid ARMs and those that are not hybrid may subject consumers to the 
same payment shock that the advance notice of the first interest rate 
adjustment is designed to address. For example, both 3/1 hybrid ARMs, 
where the initial interest rate is fixed for three years and then 
adjusts every year after that, and 3/3 ARMs, where the initial interest 
rate adjusts after three years and then every three years after that, 
adjust for the first time after three years and present the same 
potential payment shock to consumers holding either mortgage. The same 
is true for 5/1 hybrid ARMs and 5/5 ARMs, 7/1 hybrid ARMs and 7/7 ARMs, 
10/1 hybrid ARMs and 10/10 ARMs, etc. In sum, conventional ARMs and 
hybrid ARMs can have the same initial periods without an interest rate 
adjustment and thus, the same potential jump in their interest rates at 
the time of the first interest rate adjustment.
---------------------------------------------------------------------------

    \82\ TILA section 128A. For example, a \3/1\ hybrid ARM has a 
three-year introductory period with a fixed interest rate, after 
which the interest rate adjusts annually. ARMs that are not hybrid, 
on the other hand, have no period with a fixed rate of interest. 
Such ARMs start out with a rate that adjusts at set intervals, such 
as \3/3\ (adjusts every three years), \5/5\ (adjusts every five 
years), etc.
---------------------------------------------------------------------------

    Proposed comment 20(d)(1)(i)-1 clarifies that the initial ARM 
adjustment notice are not limited to transactions financing the initial 
acquisition of the consumer's principal dwelling but also would apply 
to other closed-end ARM transactions secured by the consumer's 
principal dwelling, consistent with current comment 19(b)-1 and 
proposed Sec.  1026.20(c).
20(d)(1)(ii) Exceptions
    Proposed Sec.  1026.20(d)(1)(ii) excepts construction loans with 
terms of one year or less from the disclosure requirements of Sec.  
1026.20(d). Proposed Sec.  1026.20(c) includes the same exception. 
Proposed comment 20(d)(1)(ii)-1 applies the standards in comment 19(b)-
1 for determining the term of a construction loan.
    Construction loans generally have short terms of six months to one 
year and are subject to frequent interest rate adjustments, usually 
monthly or quarterly. The construction period usually involves several 
disbursements of funds at times and in amounts that are unknown at the 
beginning of that period. The consumer generally pays only accrued 
interest until construction is completed. The creditor, assignee, or 
servicer, in addition to disbursing payments in stages, closely 
monitors the progress of construction. Generally, at the completion of 
the construction, the construction loan is converted into permanent 
financing in which the loan amount is amortized just as in a standard 
mortgage transaction. See comment 17(c)(6)-2 for additional information 
on construction loans.
    The frequent interest rate adjustments, multiple disbursements of 
funds, the short loan term, and on-going communication between the 
creditor, assignee, or servicer and consumer distinguish construction 
loans from other ARMs. These loans are meant to function as bridge 
financing until construction is completed and permanent financing can 
be put in place. Consumers with construction ARM loans are not at risk 
of payment shock like other ARM where interest rates change less 
frequently. Moreover, given the frequency of interest rate adjustments 
on construction loans, creditors, assignees, or servicers would have 
difficulty complying with the proposed requirement to provide the 
notice to consumers 210 to 240 days before the first payment at the 
adjusted level is due. For these reasons, providing notices under Sec.  
1026.20(d) for these loans would not provide a meaningful benefit to 
the consumer nor improve consumers' awareness and understanding of 
their construction loans with terms of less than one year.
    Authority. Accordingly, the Bureau proposes to use its authority 
under TILA section 105(a) to except construction loans with terms of 
one year or less from the requirements of proposed Sec.  1026.20(d). As 
explained above, the disclosure requirements of Sec.  1026.20(d) would 
be confusing and difficult to comply with in the context of a short-
term construction loan. Thus, exempting such loans is necessary and 
proper under TILA section 105(a) to further the consumer protection

[[Page 57345]]

purposes of TILA and facilitate compliance. The Bureau further proposes 
the exemption for construction loans pursuant to its authority under 
TILA section 105(f). For the reasons discussed above, the Bureau 
believes, in light of the factors in TILA section 105(f)(2), that 
requiring the Sec.  1026.20(d) notice for construction loans with terms 
of one year or less would not provide a meaningful benefit to 
consumers. Specifically, the Bureau considers that the exemption is 
proper irrespective of the amount of the loan or the status of the 
borrower (including related financial arrangements, financial 
sophistication, and the importance to the borrower of the loan). The 
Bureau further notes, in light of TILA section 105(f)(2)(D), that the 
requirements in Sec.  1026.20(d) would only apply to loans secured by 
the consumer's principal dwelling.
    The Bureau solicits comment on whether there are other ARMs with 
terms of less than one year, and whether such ARMs should be excepted 
from the requirements of Sec.  1026.20(d). If the time period of the 
advance notice for consumers required by Sec.  1026.20(d) is not 
appropriate for these short-term ARMs, the Bureau solicits comment on 
what period would be appropriate that would also provide consumers with 
sufficient notice of the estimated initial adjusted interest rate and 
any new payment.
    Proposed comment 20(d)(1)(ii)-2 discusses other loans to which the 
proposed rule does not apply. Proposed comment 20(d)(1)(ii)-2 is 
consistent with proposed comment 20(c)(1)(ii)-3 with regard to the 
loans which are not subject to the proposed ARM disclosure rules. 
Certain Regulation Z provisions treat some of these loans as variable-
rate transactions, even if they are structured as fixed-rate 
transactions. The proposed comment clarifies that, for purposes of 
proposed Sec.  1026.20(d), the following loans, if fixed-rate 
transactions, are not ARMs and therefore are not subject to ARM notices 
pursuant to Sec.  1026.20(d): Shared-equity or shared-appreciation 
mortgages; price-level adjusted or other indexed mortgages that have a 
fixed rate of interest but provide for periodic adjustments to payments 
and the loan balance to reflect changes in an index measuring prices or 
inflation; graduated-payment mortgages or step-rate transactions; 
renewable balloon-payment instruments; and preferred-rate loans. The 
particular features of these types of loans may trigger interest rate 
or payment changes over the term of the loan or at the time the 
consumer pays off the final balance. However, these changes are based 
on factors other than a change in the value of an index or a formula. 
For example, whether or when the interest rate will adjust for the 
first time for a preferred-rate loan with a fixed interest rate is 
likely not knowable six to seven months in advance of the adjustment. 
This is because the loss of the preferred rate is based on factors 
other than a formula or change in the value of an index agreed to at 
consummation. Because the enumerated loans are not ARMs they are not 
covered by TILA section 128A or proposed Sec.  1026.20(d) and require 
no disclosures under this rule.
20(d)(2) Content of Initial Rate Adjustment Disclosures
    Statutorily-required content. TILA section 128A requires that the 
following content be included in the Sec.  1026.20(d) initial rate 
adjustment notice: (1) Any index or formula used in adjusting or 
resetting the interest rate and a source of information about the index 
or formula; (2) an explanation of how the new rate and payment would be 
determined, including how the index may be adjusted, such as by the 
addition of a margin; (3) a good faith estimate, based on accepted 
industry standards, of the amount of the resulting monthly payment 
after the adjustment or reset and the assumptions on which the estimate 
is based; (4) a list of alternatives that the consumers may pursue, 
including refinancing, renegotiation of loan terms, payment 
forbearance, and pre-foreclosure sales, and descriptions of actions the 
consumer must take to pursue these alternatives; (5) contact 
information for HUD- or State housing agency-approved housing 
counselors or programs reasonably available; and (6) contact 
information for the State housing finance authority for the State where 
the consumer resides.
    The Bureau interprets the explanation of how the interest rate and 
payments will be determined set forth in (2) above to require 
disclosure of any adjustment to the index, for example, the amount of 
any margin and an explanation of what a margin is; the loan balance; 
the length of the remaining term of the loan; and any change in the 
term or maturity of the loan caused by the interest rate adjustment.
    The Bureau interprets the good faith estimate, required under (3) 
above, to require disclosure, when available, of the exact amount of 
the new monthly payment after the interest rate adjustment. As 
discussed below, the Bureau believes that in most cases the lengthy 
advance notice required by proposed Sec.  1026.20(d) will necessitate 
disclosure in the initial ARM interest rate adjustment notices of 
estimates of the new interest rate and payment, rather than exact 
amounts. The Bureau believes, however, that a good faith estimate would 
require disclosure of the exact amount of the new monthly payment, if 
known, rather than an estimate. The Bureau interprets the assumptions 
on which the good faith estimate is based to require disclosure, among 
other things, of the current interest rate and payment, as well as the 
amount of the new interest rate after the adjustment, if known, or an 
estimate if the exact amount of the new interest rate is not known. As 
with the new payment amount, the Bureau believes that generally only an 
estimate of the new interest rate will be available at the time the 
notice is provided, but interprets the statute to require disclosure of 
the exact amount of the new interest rate, if this amount is available. 
Even if this content were not contemplated under the statute, the 
Bureau believes it would be appropriate to use its adjustment authority 
to require disclosure of such information for the reasons discussed 
below.
    Additional content. In addition to the content explicitly required 
under the statute, the Bureau proposes, as discussed in more detail 
below, to require the ARM initial interest rate notices to include the 
date of the disclosures; the telephone number of the creditor, 
assignee, or servicer; statements specifying that the consumer's 
interest rate is scheduled to adjust pursuant to the terms of the loan, 
that the adjustment may effect a change in the mortgage payment, the 
specific time period the current interest rate has been in effect, the 
dates of the upcoming and future interest rate adjustments, and any 
other changes to loan terms, features, or options taking effect on the 
same date as the interest rate adjustment; the due date of the first 
payment after the adjustment; for interest-only or negatively-
amortizing payments, the amount of the current and new payment 
allocated to principal, interest, and taxes and insurance in escrow, as 
applicable; a statement regarding payment allocation for interest-only 
and negatively-amortizing loans, including the payment required to 
fully amortize an ARM that becomes negatively-amortizing as a result of 
the interest rate adjustment; any interest rate or payment limits and 
any foregone interest; if the new interest rate or new payment provided 
is an estimate, a statement that another disclosure containing the 
actual new interest rate and payment will be provided within a 
specified time period--if the actual

[[Page 57346]]

interest rate adjustment results in a corresponding payment change; and 
the amount and expiration date of any prepayment penalty and the 
circumstances under which such penalty might apply.
    The proposed additional content, including the content that the 
Bureau interprets to be required under the statute, is authorized under 
TILA section 105(a). As further discussed below, the proposed 
additional content is necessary and proper to assure that consumers 
understand the consequences of the upcoming ARM rate adjustments and 
have sufficient time to adjust their behavior accordingly, thereby 
avoiding the uninformed use of credit and protecting consumers against 
inaccurate and unfair credit billing practices. The proposed additional 
content is further authorized under DFA section 1032 by assuring that 
the key features of consumers' adjustable-rate mortgage, over the term 
of the ARM, are ``fully, accurately, and effectively disclosed to 
consumers in a manner that permits consumers to understand [its] costs, 
benefits, and risks.'' The proposed additional information better 
informs consumers of the implications of interest-rate adjustments 
before they happen and thus enables them to weigh their options going 
forward. For the same reasons, the Bureau believes, consistent with DFA 
section 1405(b), that the proposed additional content would improve 
consumer awareness and understanding of their residential ARM loans and 
is thus in the interest of consumers and the public interest. The 
proposed additional content is also consistent with TILA section 
128A(b) itself, which provides a non-exclusive list of required 
content, thereby statutorily contemplating additional content.
    Good faith estimate. As noted above, TILA section 128A provides 
that the Sec.  1026.20(d) interest rate adjustment disclosures should 
include ``[a] good faith estimate, based on accepted industry standards 
* * * of the amount of the monthly payment that will apply after the 
date of the adjustment or reset, and the assumptions on which the 
estimate is based.'' ARM contracts generally provide that the 
calculation of the new interest rate and payment be based on an index 
value published closer to the date of the interest rate adjustment than 
those available during the time frame within which creditors, 
assignees, and servicers must provide the initial ARM interest rate 
adjustments pursuant to Sec.  1026.20(d). See 20(c)(2) above for a full 
discussion of the time frame generally required for ascertaining the 
index rate used to calculate the adjusted interest rate and new 
payment. Thus, it is unlikely creditors, assignees, and servicers will 
be able to disclose the actual new interest rate and payment in the 
initial ARM interest rate notices. For this reason, consistent with the 
language of the statute regarding estimates, proposed Sec.  
1026.20(d)(2) provides that if the new interest rate or any other 
calculation using the new interest rate is not known as of the date of 
the disclosure, use of an estimate, labeled as such, is permissible. 
The Bureau interprets the statutory good faith standard to require 
disclosure of the actual amounts if they are available at the time the 
creditor, assignee, or servicer provides the initial ARM interest rate 
adjustment notices to consumers pursuant to the time frame required by 
proposed Sec.  1026.20(d). Since the notice is designed to alert 
consumers to upcoming changes to their mortgage and to provide 
consumers with the time needed to take ameliorative actions should the 
new interest rate and payment be too high, providing the actual new 
payment would benefit consumers. Across all rounds of consumer testing, 
most participants shown notices containing estimates of the new rate 
and payment understood that these amounts were estimates that could 
change before payment at a new level was due.\83\
---------------------------------------------------------------------------

    \83\ Macro Report, supra note 38, at viii.
---------------------------------------------------------------------------

    To implement the requirements of TILA section 128A that the good 
faith estimate of the new payment be based on accepted industry 
standards, proposed Sec.  1026.20(d) would require that any estimate be 
calculated using the index figure disclosed in the source of 
information described in proposed Sec.  1026.20(d)(2)(iii)(A) within 
fifteen business days prior to the date of the disclosure. Linking the 
date of the notice to the date of the index value used to estimate the 
new interest rate and payment would prevent consumer confusion as to 
the recency of the index value. As discussed above under Section 
20(c)(2), the fifteen-day period allows creditors, assignees, and 
servicers sufficient time to calculate the estimates and perform any 
necessary quality control measures before providing the Sec.  
1026.20(d) notices to consumers.
20(d)(2)(i) Date of the Disclosure
    Proposed Sec.  1026.20(d)(2)(i) would require that the initial ARM 
adjustment notice include the date of the disclosure. In order to group 
together all data regarding the ARM, proposed Sec.  1026.20(d)(3)(ii) 
would require that the date appear outside of and above the table 
described in proposed Sec.  1026.20(d)(3)(i).
    Proposed comment 20(d)(2)(i)-1 explains that the date would be the 
date the creditor, assignee, or servicer generates the notice. It also 
must be within fifteen business days after publication of the index 
level used to calculate the adjusted interest rate and new payment, if 
it is an estimate and not the actual adjusted interest rate and new 
payment.\84\ Because the disclosures must be provided to consumers so 
far in advance, the Bureau expects estimates will be used in most 
cases. Tying the date of the disclosure to the date of the index level 
should prevent consumer confusion as to the recency of the index value 
upon which the estimated interest rate and new payment are based.
---------------------------------------------------------------------------

    \84\ See proposed Sec.  1026.20(d)(2).
---------------------------------------------------------------------------

20(d)(2)(ii) Statement Regarding Change to Interest Rate and Payment
    Proposed Sec.  1026.20(d)(2)(ii)(A) would require the initial ARM 
interest rate adjustment notices to include a statement alerting 
consumers that, under the terms of their adjustable-rate mortgage, the 
specific period in which their interest rate stayed the same will end 
on a certain date, that their interest rate may change on that date, 
and that any change in their interest rate may result in a change to 
their mortgage payment. This information is similar to the information 
required to be disclosed in the pre-consummation disclosures provided 
to consumers pursuant to current Sec.  1026.19(b)(2)(i) and Sec.  
1026.37(i), recently proposed in the 2012 TILA-RESPA Proposal. Proposed 
comment 20(d)(2)(ii)(A)-1 clarifies that the current interest rate is 
the one in effect on the date of the disclosure.
    Proposed Sec.  1026.20(d)(2)(ii)(B) would require the proposed 
initial ARM interest rate adjustment notices to include the dates of 
the impending and future interest rate adjustments and inform consumers 
that these changes are dictated by the terms of their adjustable-rate 
mortgages. Proposed Sec.  1026.20(d)(2)(ii)(C) also would require the 
Sec.  1026.20(d) disclosures to inform consumers of any other loan 
changes taking place on the same day as the adjustment, such as changes 
in amortization caused by the expiration of interest-only or payment-
option features.
    The first ARM model form tested did not contain the statement 
required by proposed Sec.  1026.20(d)(2)(ii) informing consumers of 
impending and future changes to their interest rate and the

[[Page 57347]]

basis for these changes. Although participants understood that their 
interest rate was adjusting and their payment might change as a result, 
they did not understand that these changes would occur periodically 
subject to the terms of their mortgage contract. Inclusion of this 
statement in the second round of testing successfully resolved this 
confusion. All but one consumer tested in rounds two and three of 
testing understood that, under the scenario presented to them, their 
interest rate would change on an annual basis.\85\
---------------------------------------------------------------------------

    \85\ Macro Report, supra note 38, at vii.
---------------------------------------------------------------------------

20(d)(2)(iii) Table With Current and New Interest Rates and Payments
    Proposed Sec.  1026.20(d)(2)(iii) would require disclosure of the 
following information in the form of a table: (A) The current and new 
interest rates; (B) the current and new periodic payment amounts and 
the date the first new payment is due; and (C) for interest-only or 
negatively-amortizing payments, the amount of the current and estimated 
new payment allocated to interest, principal, and property taxes and 
mortgage-related insurance, as applicable. The information in this 
table would appear within the larger table containing the other 
required disclosures, except for the date of the disclosure.
    This table would follow the same order as, and have headings and 
format substantially similar to, those in the table in Forms H-4(D)(3) 
and (4) in Appendix H of subpart C. The Bureau learned through consumer 
testing that, when presented with information in a logical order, 
consumers more easily grasped the complex concepts contained in the 
proposed Sec.  1026.20(d) notice. For example, the form begins by 
informing consumers of the basic purpose of the notice: Their interest 
rate is going to adjust, when it will adjust, and the adjustment will 
change their mortgage payment. This introduction is immediately 
followed by a visual illustration of this information in the form of a 
table comparing the consumers' current and new interest rates. Based on 
consumer testing, the Bureau believes that consumer understanding is 
enhanced by presenting the information in a simple manner, grouped 
together by concept, and in a specific order that allows consumers the 
opportunity to build upon knowledge gained. For these reasons, the 
Bureau proposes that creditors, assignees, or servicers disclose the 
information in the table as set forth in Forms H-4(D)(3) and (4) in 
Appendix H.
    In all rounds of testing, consumers were presented with model forms 
with tables depicting a scenario in which the interest rate and payment 
would increase as a result of the adjustment. All participants in all 
rounds of testing understood that their interest rate and payment were 
going to increase and when these changes would occur.\86\
---------------------------------------------------------------------------

    \86\ Id.
---------------------------------------------------------------------------

    The Bureau proposes including allocation information in the table 
for interest-only and negatively-amortizing ARMs. The Bureau believes 
this information would help consumers better understand the risk of 
these products by demonstrating that their payments would not reduce 
the loan principal. The Bureau also believes providing the payment 
allocation would help consumers understand the effect of the interest 
rate adjustment, especially in the case of a change in the ARM's 
features coinciding with the interest rate adjustment, such as the 
expiration of an interest-only or payment-option feature. Since payment 
allocation may change over time, the proposed rule would require 
disclosure of the expected payment allocation for the first payment 
period during which the adjusted interest rate will apply.
    The allocation of payment disclosure was tested in the third round 
of testing. The notice tested showed the scenario of a \3/1\ hybrid ARM 
with interest-only payments for the first three years of the loan 
adjusting for the first time. On the date of the adjustment, the 
interest-only feature would expire and the ARM would become amortizing. 
Only about half of participants understood that their payments would be 
changing from interest-only to amortizing. Participants generally 
understood the concept of allocation of payments but were confused by 
the table in the notice that broke out principal and interest for the 
current payment, but combined the two for the new amount. As a result, 
this table was revised so that separate amounts for principal and 
interest were shown for all payments.\87\
---------------------------------------------------------------------------

    \87\ Id. at vii-viii. This revision was made after the third 
round of testing, and therefore was not tested with consumers.
---------------------------------------------------------------------------

    The Bureau recognizes that certain Dodd-Frank Act amendments to 
TILA will restrict origination of non-amortizing and negatively-
amortizing loans. For example, TILA section 129C and the 2011 ATR 
Proposal that would implement that provision, generally require 
creditors to determine that a consumer can repay a mortgage loan and 
include a requirement that these determinations assume a fully-
amortizing loan. Thus, this law and regulation, when finalized, will 
restrict the origination of risky mortgages such as interest-only and 
negatively-amortizing ARMs.
    Other Dodd-Frank amendments to TILA, such as the proposed periodic 
statement provisions discussed below, will provide payment allocation 
information to consumers for each billing cycle. Thus, consumers who 
currently have interest-only or negatively-amortizing loans or may 
obtain such loans in the future will receive information about the 
interest-only or negatively-amortizing features of their loans through 
the payment allocation information in the periodic statement. Also, as 
noted above, consumer testing showed that participants were confused by 
the allocation table. Since the Bureau was not able to test a revised 
version of the form to see if it rectified the confusion caused by the 
allocation table or if the concepts of non-amortizing and negatively-
amortizing ARMs themselves are the source of the confusion, the Bureau 
questions the value of disclosing this information to consumers in the 
ARM interest rate adjustment notice. In view of these changes to the 
law and the outcome of consumer testing, the Bureau solicits comments 
on whether to include allocation information for interest-only and 
negatively-amortizing ARMs in the table proposed above.
20(d)(2)(iv) Explanation of How the Interest Rate Is Determined
    TILA section 128A mandates that the initial interest rate 
adjustment notices include any index or formula used in making 
adjustments to or resetting the interest rate, and a source of 
information about the index or formula. Accordingly, proposed Sec.  
1026.20(d)(2)(iv)(A) would require disclosure of the name and published 
source of the index or formula. This disclosure requirement is 
consistent with the pre-consummation disclosure requirements of current 
rule Sec.  1026.19(b)(2)(iii). Proposed Sec.  1026.37(i), part of the 
2012 TILA-RESPA Proposal, likewise would require disclosure of the 
index name prior to consummation.
    TILA section 128A also mandates that the initial interest rate 
disclosures include an explanation of how the new interest rate and 
payment would be determined, including an explanation of how the index 
was adjusted, such as by the addition of a margin. Proposed Sec.  
1026.20(d)(2)(iv) would require Sec.  1026.20(d) notices to include an 
explanation of how the new interest rate is determined. This disclosure 
requirement is consistent with the pre-

[[Page 57348]]

consummation disclosure requirements of current rule Sec.  
1026.19(b)(2)(iii). The 2012 TILA-RESPA Proposal's proposed 1026.37(i) 
likewise would require disclosure prior to consummation of the amount 
of the margin expressed as a percentage.
    Consumer testing revealed that consumers generally have difficulty 
understanding the relationship of the index, margin, and interest 
rate.\88\ Therefore, the Bureau is proposing a relatively brief and 
simple explanation that the new interest rate is calculated by taking 
the published index rate and adding a certain number of percentage 
points, called the ``margin.'' Proposed Sec.  1026.20(d)(2)(iii) also 
includes the specific amount of the margin.
---------------------------------------------------------------------------

    \88\ Id. at viii.
---------------------------------------------------------------------------

    Consumer testing indicated that the explanation helped consumers 
better understand the relationship between the interest rate, index, 
and margin. It also helped dispel the notion held by many of the 
consumers in the initial rounds of testing that the lender subjectively 
determined their new interest rate at each adjustment.\89\ The Bureau 
believes that its proposed rule and forms strike an appropriate balance 
between providing consumers with key information necessary to 
understand the basic interest rate adjustment of their adjustable-rate 
mortgages without overloading consumers with complex and confusing 
technical information.
---------------------------------------------------------------------------

    \89\ Id.
---------------------------------------------------------------------------

20(d)(2)(v) Rate Limits
    Proposed rule Sec.  1026.20(d)(2)(v) would require the disclosure 
of any limits on the interest rate or payment increases at each 
adjustment and over the life of the loan. The Bureau believes that 
knowing the limitations of their ARM rates and payments would help 
consumers understand the consequences of each interest rate adjustment 
and weigh the relative benefits of the alternatives that would be 
required to be disclosed under proposed Sec.  1026.20(d)(2)(viii). For 
example, if an adjustment might cause a significant increase in the 
consumer's payment, knowing how much more the interest rate or payment 
could increase could help inform a consumer's decision on whether or 
not to seek alternative financing.
    Proposed Sec.  1026.20(d)(2)(v) also requires disclosure of the 
extent to which the creditor, assignee, or servicer has foregone any 
increase in the interest rate. If there is foregone interest, it would 
require disclosure that the additional interest was not applied due to 
a rate limit and include the earliest date such foregone interest may 
be applied. Proposed comment 20(d)(2)(iv)-1 explains that disclosure of 
foregone interest would apply only to transactions permitting interest 
rate carryover. It further explains that the amount of increase 
foregone at the initial adjustment is the amount that, subject to rate 
caps, can be added to future interest rate adjustments to increase, or 
offset decreases in, the rate determined according to the index or 
formula.
    Consumers had difficulty understanding the concept of interest rate 
carryover when it was introduced during the third round of testing. 
This difficulty may have been due to the simultaneous introduction of 
other complex notions, such as interest-only or negatively-amortizing 
features and the allocation of interest, principal, and escrow payments 
for such loans. In response, the Bureau has simplified the explanation 
of carryover interest.\90\
---------------------------------------------------------------------------

    \90\ Id. at viii-ix.
---------------------------------------------------------------------------

    The Bureau recognizes that the disclosure of rate limits and 
unapplied carryover interest provide information that may help 
consumers better understand their ARMs. However, the Bureau is 
considering whether the help this information would provide outweighs 
its distraction from other more key information. Also, as explained 
above, consumers had difficulty understanding the concept of carryover 
interest and the Bureau is concerned this difficulty might diminish the 
effectiveness of the proposed Sec.  1026.20(d) disclosures. The Bureau 
solicits comment on whether to include rate limits and unapplied 
carryover interest in the proposed Sec.  1026.20(d) disclosures.
20(d)(2)(vi) Explanation of How the New Payment Is Determined
    TILA section 128A mandates that the initial interest rate notices 
include an explanation of how the new interest rate and payment would 
be determined, including an explanation of how the index was adjusted, 
such as by the addition of a margin. Proposed Sec.  1026.20(d)(2)(vi) 
would implement this statutory provision by requiring the content 
discussed below. This proposed disclosure is consistent with the 
disclosures required at the time of application pursuant to 
currentSec.  1026.19(b)(2)(iii). It is also consistent with content 
required under proposed Sec.  1026.20(c) and thus promotes consistency 
in Regulation Z ARM disclosures.
    The disclosure required under proposed Sec.  1026.20(d)(2)(vi) 
explains that the new payment is based on (A) the index or formula, (B) 
any adjustment to the index or formula, such as by addition of the 
margin, (C) the loan balance, (D) the length of the remaining loan 
term, and, (E) if the new interest rate or new payment provided is an 
estimate, a statement that another disclosure containing the actual new 
interest rate and new payment will be provided to the consumer 2 to 4 
months prior to the date the first new payment is due, if the interest 
rate adjustment causes a corresponding change in payment, pursuant to 
Sec.  1026.20(c).
    The proposal would require disclosure of both the loan balance and 
the remaining loan term expected on the date of the interest rate 
adjustment. The proposed rule also would require disclosure of any 
change in the term or maturity of the loan caused by the adjustment.
    As discussed in proposed Sec.  1026.20(d)(2)(iv) above, the Bureau 
found that this explanation helped consumers better understand how the 
index or formula and margin determine their new payment and dispelled 
the notion held by many consumers in the initial rounds of testing 
that, at each adjustment, the lender subjectively determined their new 
interest rate, and thus the new payment. Disclosure of the four key 
assumptions upon which the new payment is based provides a succinct 
overview of how the interest rate adjustment works. It also 
demonstrates that factors other than the index can increase consumers' 
interest rates and payments. Disclosures of these factors would provide 
consumers with a snapshot of the current status of their adjustable-
rate mortgages and with basic information to help them make decisions 
about keeping their current loan or shopping for alternatives. If an 
estimated new interest rate and new payment is used, the statement that 
the consumer will receive another disclosure with the actual new 
interest rate and new payment, if the interest rate adjustment results 
in a corresponding payment change, notifies consumers that the 
creditor, assignee, or servicer will inform them of the actual rate and 
payment two to four months in advance of the date their first new 
payment is due.
20(d)(2)(vii) Interest-Only and Negative-Amortization Statement and 
Payment
    Proposed Sec.  1026.20(d)(2)(vii) would require Sec.  1026.20(d) 
notices to include a statement regarding the allocation of payments to 
principal and interest for interest-only or negatively-amortizing 
loans. If negative amortization occurs as a result of the interest rate 
adjustment,

[[Page 57349]]

the proposed rule would require disclosure of the payment necessary to 
fully amortize such loans at the new interest rate over the remainder 
of the loan term. As explained in proposed comment 20(d)(2)(vii)-1, for 
interest-only loans, the statement would inform the consumer that the 
new payment covers all of the interest but none of the principal owed 
and, therefore, will not reduce the loan balance. For negatively-
amortizing ARMs, the statement would inform the consumer that the new 
payment covers only part of the interest and none of the principal, and 
therefore the unpaid interest will add to the balance or increase the 
term of the loan.
    Both current Sec.  1026.20(c) and the Board's 2009 Closed-End 
Proposal to revise Sec.  1026.20(c) include, for ARMs that become 
negatively amortizing as a result of the interest rate adjustment, 
disclosure of the payment necessary to fully amortize loans at the new 
interest rate over the remainder of the loan term. However, the Bureau 
believes there are countervailing considerations regarding whether to 
include this information in proposed Sec.  1026.20(d).
    The Bureau recognizes that certain Dodd-Frank Act amendments to 
TILA will restrict origination of non-amortizing and negatively-
amortizing loans. For example, TILA section 129C and the 2011 ATR 
Proposal that would implement that provision, generally require 
creditors to determine that a consumer can repay a mortgage loan and 
include a requirement that these determinations assume a fully-
amortizing loan. Thus, this law and regulation, when finalized, will 
restrict the origination of risky mortgages such as interest-only and 
negatively-amortizing ARMs.
    Other Dodd-Frank Act amendments to TILA, such as the periodic 
statement proposed by Sec.  1026.41, will include information about 
non-amortizing and negatively-amortizing loans in each billing cycle, 
such as an allocation of payments. Thus, consumers who currently have 
interest-only and negatively-amortizing ARMs or may obtain such loans 
in the future will receive certain information about the interest-only 
or negatively-amortizing features of their loans in another disclosure, 
although this will not include the payment required to fully amortize 
negatively-amortizing loans. The payment necessary to fully amortize 
these loans was not consumer tested but testing of the table showing 
the payment allocation of interest-only and negatively-amortizing ARMs 
indicated that consumers were confused by this concept. Thus, the 
Bureau is weighing the value of disclosing specific information 
regarding amortization, such as the payment needed to fully amortize 
negatively-amortizing ARMs. In view of these changes to the law and the 
outcome of consumer testing, the Bureau solicits comments on whether to 
include the payment required to amortize ARMs that became negatively 
amortizing as a result of an interest rate adjustment.
20(d)(2)(viii) List of Alternatives
    TILA section 128A mandates that the initial interest rate 
adjustment notices include a list of alternatives consumers may pursue 
before adjustment or reset and descriptions of the actions consumers 
must take to pursue these alternatives. These alternatives include 
refinancing, renegotiation of loan terms, payment forbearance, and pre-
foreclosure sales. Proposed Sec.  1026.20(d)(2)(viii) would require 
disclosure in Sec.  1026.20(d) initial ARM interest rate notices of the 
four alternatives set forth in the statute. The Bureau proposes to use 
simpler, commonly used terms in the model forms to describe the 
alternatives when possible.
    The proposed model forms present the list as possibilities for 
consumers seeking alternatives to the upcoming changes to their 
interest rate and payment. The proposed forms also explain that most of 
the alternatives are subject to approval by the lender. All 
participants tested in the first and second round of testing were able 
to identify the list of alternatives.\91\
---------------------------------------------------------------------------

    \91\ Id. at viii.
---------------------------------------------------------------------------

    The list of alternatives generally and concisely describes the 
actions consumers must take to pursue these alternatives, such as 
contacting their lender or another lender. Another action consumers may 
take to pursue these alternatives is contacting government 
organizations. Proposed Sec.  1026.20(d)(2)(xi) would require 
disclosure in the initial ARM interest rate adjustment notice of 
information on how to contact such agencies, including the contact 
information for the State housing finance authority for the State in 
which the consumer resides and the Web site and telephone number to 
access the most current list of homeownership counselors or counseling 
organizations either made available by the Bureau or maintained by HUD. 
The Bureau proposes to require disclosure of this concise list of 
alternatives in lieu of a more detailed account of actions consumers 
may take in order to maximize the effectiveness of the disclosure 
without weighing it down with information that may not add significant 
value.
20(d)(ix) Prepayment Penalty
    Proposed Sec.  1026.20(c)(d)(ix) would require disclosure of the 
circumstances under which any prepayment penalty may be imposed, such 
as selling or refinancing the principal dwelling, the time period 
during which such penalty would apply, and the maximum dollar amount of 
the penalty. The proposed rule cross-references the definition of 
prepayment penalty in subpart E under Sec.  1026.41(d)(7)(iv) in the 
proposed rule for periodic statements.
    Interest rate adjustments may cause payment shock or require 
consumers to pay their mortgage at a rate they may no longer be able to 
afford, prompting them to consider alternatives such as refinancing. In 
order to fully understand the implications of such actions, the Bureau 
believes that consumers should know whether prepayment penalties may 
apply. Such information should include the maximum penalty (in dollars) 
that may apply and the time period during which the penalty may be 
imposed. The dollar amount of the penalty, as opposed to a percentage, 
is more meaningful to consumers.
    The Bureau also proposes disclosure of any prepayment penalty in 
Sec.  1026.20(c) ARM payment change notices and the periodic statements 
proposed by Sec.  1026.41. Consumer testing of the periodic statement 
included a scenario in which a prepayment penalty applied. Most 
participants understood that a prepayment penalty applied if they paid 
off the balance of their loan early, but some participants were unclear 
whether it applied to the sale of the home, refinancing, or other 
alternative actions consumers could pursue in lieu of maintaining their 
adjustable-rate mortgages.\92\ For this reason, the Bureau proposes to 
clarify the circumstances under which a prepayment penalty would apply. 
The proposed forms alert consumers that a prepayment penalty may apply 
if they pay off their loan, refinance, or sell their home before the 
stated date.
---------------------------------------------------------------------------

    \92\ Id. at vi.
---------------------------------------------------------------------------

    The Bureau recognizes that Dodd-Frank Act amendments to TILA, such 
as 129C and the 2011 ATR Proposal proposing to implement that 
provision, would significantly restrict a lender's ability to impose 
prepayment penalties. Other Dodd-Frank amendments to TILA, such as the 
proposed periodic statement, would provide consumers with information 
about their prepayment penalty for each billing

[[Page 57350]]

cycle. Thus, consumers who currently have ARMs with prepayment penalty 
provisions or may obtain such loans in the future would generally 
receive information about them at frequent intervals in another 
disclosure. In view of these changes to the law, the Bureau solicits 
comments on whether to include information regarding prepayment 
penalties in proposed Sec.  1026.20(d).
20(d)(2)(x) Telephone Number of Creditor, Assignee, or Servicer
    Proposed Sec.  1026.20(d)(2)(x) would require disclosure of the 
telephone number of the creditor, assignee, or servicer for consumers 
to call if they anticipate having problems paying the new payment.
20(d)(2)(xi) Contact Information for Government Agencies and Counseling 
Agencies or Programs
    TILA section 128A mandates that the initial interest rate 
adjustment notices include the name, mailing and Internet address, and 
telephone number of the State housing finance authority (as defined in 
section 1301 of FIRREA) for the State in which the consumer resides. 
Proposed Sec.  1026.20(d)(2)(xi) would implement this statutory mandate 
by requiring inclusion of this information in the Sec.  1026.20(d) 
initial interest rate adjustment notice. Two other mortgage servicing 
rulemakings proposed by the Bureau, the periodic statement, see below, 
and the early intervention for delinquent borrowers in the 2012 RESPA 
Servicing Proposal, also would require contact information for the 
State housing finance authority. However, those proposals would require 
the contact information for the State in which the property is located 
rather than in which the consumer resides, since the scope of those 
proposed rules is not limited to a consumer's principal dwelling. This 
is consistent with the proposed ARM rule since the consumer's principal 
dwelling should be located in the State in which the property is 
located. The Bureau seeks comment on how to address any compliance 
difficulties posed by this inconsistency.
    TILA section 128A also mandates that the initial interest rate 
adjustment notices include the names, mailing and Internet addresses, 
and telephone numbers of counseling agencies or programs reasonably 
available to the consumer that have been certified or approved and made 
publicly available by HUD or a State housing finance authority.
    On July 9, 2012, the Bureau released proposed rules to implement 
other Dodd-Frank Act requirements expanding protections for ``high-
cost'' mortgage loans under HOEPA, including a requirement that 
borrowers receive housing counseling (2012 HOEPA Proposal).\93\ The 
2012 HOEPA proposal also proposed to implement other homeownership-
counseling-related requirements that are not amendments to HOEPA, 
including a proposed amendment to Regulation X that lenders provide a 
list of five homeownership counselors or counseling organizations to 
applicants for a federally related mortgage loan.\94\
---------------------------------------------------------------------------

    \93\ See 2012 HOEPA Proposal, available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf, at 29-35.
    \94\ The list provided by the lender pursuant to the 2012 HOEPA 
Proposal would include only homeownership counselors or counseling 
organizations from either the most current list of homeownership 
counselors or counseling organizations made available by the Bureau 
for use by lenders, or the most current list maintained by HUD of 
homeownership counselors or counseling organizations certified by 
HUD, or otherwise approved by HUD. The 2012 HOEPA Proposal proposed 
that the list include five homeownership counselors or counseling 
organizations located in the zip code of the loan applicant's 
current address, or, if there are not the requisite five counselors 
or counseling organizations in that zip code, then counselors or 
organizations within the zip code or zip codes closest to the loan 
applicant's current address. To facilitate compliance with the 
proposed list requirement, the Bureau is expecting to develop a Web 
site portal that would allow lenders to type in the loan applicant's 
zip code to generate the requisite list, which could then be printed 
for distribution to the loan applicant. See 2012 HOEPA Proposal at 
31-32 (discussing proposed Regulation X Sec.  1024.20(a)).
---------------------------------------------------------------------------

    The Bureau has taken an alternative approach with regard to the 
initial ARM interest rate adjustment notice and proposes to use its 
exception authority to require creditors, assignees, and servicers 
simply to provide the Web site address to access either the Bureau list 
or the HUD list of homeownership counseling agencies and programs,\95\ 
instead of requiring contact information for a list of specific 
counseling agencies or programs. The Bureau believes that this approach 
appropriately balances consumer and industry interests based on the 
following considerations:
---------------------------------------------------------------------------

    \95\ At the time of publishing, the Bureau list was not yet 
available; the HUD list is available at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.
---------------------------------------------------------------------------

    The ARM notice required by proposed Sec.  1026.20(d) has limited 
space and contains a significant amount of important technical 
information about the consumer's loan. Including too much information 
could overwhelm consumers and minimize the value of the other 
information contained in the notice. Also, not all consumers would 
benefit from the counselor information, although it would provide an 
important benefit for those consumers who face financial difficulties 
if their initial interest rate adjustment may cause their mortgage 
payments to significantly increase. Finally, importing updated 
information from the Bureau or HUD Web site would involve more 
programming burden than simply listing one of the agencies' Web sites.
    Providing consumers with the Web site address for either the Bureau 
or HUD list of homeownership counseling agencies and programs would 
streamline the disclosure and present clear and concise information for 
the consumer to use. However, directing consumers to the actual list 
would allow them to choose a conveniently located program or agency and 
to locate other programs or agencies if those contacted initially could 
not help the consumer at that time. The Bureau seeks comment on whether 
this proposal strikes an appropriate balance, and on the benefits and 
burdens to both consumers and industry of requiring that a list of 
several individual housing counselors be included in the initial ARM 
interest rate adjustment notice.
    Authority. The Bureau proposes to use its authority under TILA 
sections 105(a) and (f) and DFA section 1405(b) to exempt creditors, 
assignees, and servicers from the requirement in TILA section 128A to 
include in the initial ARM interest rate adjustment notice contact 
information for specific government-certified counseling agencies or 
programs reasonably available to the consumer, and its authority under 
TILA section 105(a) and DFA section 1405(b) to instead require that the 
initial ARM interest rate adjustment notice contain information that 
directs consumers to the Bureau list or HUD list of homeownership 
counselors or counseling agencies. For the reasons discussed above, the 
Bureau believes that the proposed exception and addition is necessary 
and proper under TILA section 105(a) both to effectuate the purposes of 
TILA--to promote the informed use of credit and protect consumers 
against inaccurate and unfair credit billing practices--and to 
facilitate compliance. Moreover, the Bureau believes, in light of the 
factors in TILA section 105(f), that disclosure of the government-
certified counseling agencies or programs reasonably available to the 
consumer specified in TILA section 128A would not provide a meaningful 
benefit to consumers. Specifically, the Bureau considers that the 
exemption is proper irrespective of the amount of the loan and the 
status of the borrower (including related financial arrangements, 
financial sophistication, and the importance to the borrower of the 
loan). The Bureau

[[Page 57351]]

further notes, in light of TILA section 105(f)(2)(D), that the 
requirements in Sec.  1026.20(d) would only apply to loans secured by 
the consumer's principal dwelling. Moreover, in the estimation of the 
Bureau, the proposed exemption would simplify the initial ARM 
adjustment notice and improve the housing counselor information 
provided to the consumer, thus furthering the consumer protection 
purposes of TILA. In addition, consistent with section 1405(b) of the 
Dodd-Frank Act, the Bureau believes that the proposed modification of 
the requirements in TILA section 128A would improve consumer awareness 
and understanding and is in the interest of consumers and in the public 
interest.
20(d)(3) Format of Initial Rate Adjustment Disclosures
    As discussed above, the Bureau proposes to make proposed Sec.  
1026.20(d) subject to certain of the general form requirements of Sec.  
1026.17(a)(1), including requiring that the disclosure be clear and 
conspicuous, in writing, and in a form consumers can keep, and giving 
creditors, assignees, and servicers the option of providing the 
disclosures to consumers in electronic form, subject to compliance with 
consumer consent and other applicable provisions of the E-Sign Act. 
However, as discussed above, because Sec.  1026.20(d) disclosures are 
subject to the statutory requirement that they must be provided 
separate and distinct from all other correspondence, the Bureau 
proposes to amend Sec.  1026.17(a) to provide that the general 
segregation and grouping requirements in that provision would not apply 
to Sec.  1026.20(d).
    Authority. In addition, as described below, Sec.  1026.20(d)(3) 
proposes additional form requirements for initial ARM adjustment 
notices. For the reasons described below, these requirements are 
authorized under TILA section 105(a) and DFA sections 1032(a) and 
1405(b). As discussed in the section-by-section analysis for each of 
the proposed sections of Sec.  1026.20(d)(3), the Bureau believes, 
consistent with TILA section 105(a), that the proposed formatting 
requirements are necessary and proper to effectuate the purposes of 
TILA to assure a meaningful disclosure of credit terms, to avoid the 
uninformed use of credit, and to protect consumers against inaccurate 
and unfair credit billing practices. Further the Bureau believes, 
consistent with DFA section 1032(a), that the proposed formatting 
requirements ensure that the features of the ARM loans covered by 
proposed Sec.  1026.20(d) are fully, accurately, and effectively 
disclosed to consumers in a manner that permits them to understand the 
costs, benefits, and risks associated with such loans, in light of 
their individual facts and circumstances. Moreover, consistent with DFA 
section 1405(b), the Bureau believes that modification of the provision 
in TILA section 128A to require the proposed format discussed below 
would improve consumer awareness and understanding of residential 
mortgage loans transactions involving ARMs, and is thus in the interest 
of consumers and in the public interest.
20(d)(3)(i) All Disclosures in Tabular Form, Except the Date
    Proposed Sec.  1026.20(d)(3)(i) would require that, except for the 
date of the notice, the initial ARM adjustment disclosures be provided 
in the form of a table and in the same order as, and with headings and 
format substantially similar to, Forms H-4(D)(3) and (4) in Appendix H 
to subpart C for initial interest rate adjustments.
    The proposed ARM adjustment notice contains complex concepts 
challenging for consumers to understand. For example, consumer testing 
revealed that participants generally had difficulty understanding the 
relationship among index, margin, and interest rate.\96\ They also had 
difficulty with the concepts of amortization and interest rate 
carryover.\97\ As a starting point, the Bureau looked at the model 
forms developed by the Board for its 2009 Closed-End Proposal to amend 
Sec.  1026.20(c). The Bureau then conducted its own consumer testing.
---------------------------------------------------------------------------

    \96\ Macro Report, supra note 38, at viii.
    \97\ Id. at viii-ix.
---------------------------------------------------------------------------

    The Bureau's testing showed that consumers can more readily 
understand these concepts when the information is presented to them in 
a simple manner and in the groupings contained in the model forms. The 
Bureau also observed that consumers more readily understood the 
concepts when they were presented in a logical order, with one concept 
presented as a foundation to understanding other concepts. For example, 
the form begins by informing consumers of the purpose of the form: That 
their interest rate is going to adjust, when it will adjust, and that 
the adjustment may change their mortgage payment. This introduction is 
immediately followed by a table visually showing the consumers' current 
and estimated new interest rates. In another example, the proposed 
notice informs consumers about their index rate and margin before 
explaining how the new payment is calculated based on those factors as 
well as other factors such as the loan balance and remaining loan term.
    Based on consumer testing, the Bureau believes that consumer 
understanding is enhanced by presenting the information in a simple 
manner, grouped together by concept, and in a specific order that 
allows consumers the opportunity to build upon knowledge gained. For 
these reasons, the Bureau proposes that creditors, assignees, or 
servicers disclose the information required by proposed Sec.  
1026.20(d) with headings, content, and format substantially similar to 
Forms H-4(D)(3) and (4) in Appendix H to this part.
    Over the course of consumer testing, participant comprehension 
improved with each successive iteration of the model form. As a result, 
the Bureau believes that displaying the information in tabular form 
focuses consumer attention and lends to greater understanding. 
Similarly, the Bureau found that the particular content and order of 
the information, as well as the specific headings and format used, 
presented the information in a way that consumers both could understand 
and from which they could benefit.
20(d)(3)(ii) Format of Date of Disclosure
    Proposed Sec.  1026.20(d)(3)(ii) would require that the date of the 
disclosure appear outside of and above the table required by proposed 
Sec.  1026.20(d)(3)(i). As discussed above with respect to paragraph 
20(d)(2)(i), the date would be segregated since it is not information 
specific to the consumer's adjustable-rate mortgage.
20(d)(3)(iii) Format of Interest Rate and Payment Table
    Proposed Sec.  1026.20(d)(3)(iii) would require tabular format for 
initial ARM interest rate adjustment notices for interest rates, 
payments, and the allocation of payments for loans that are interest-
only or are negatively amortizing. This table would be located within 
the table proposed by Sec.  1026.20(d)(3)(i). This table is 
substantially similar to the one tested by the Board for its 2009 
Closed-End Proposal to revise Sec.  1026.20(c). The proposal would 
require the table to follow the same order as, and have headings and 
format substantially similar to, Forms H-4(D)(3) and (4) in Appendix H 
of subpart C.
    Disclosing the current interest rate and payment in the same table 
allows consumers to readily compare them with the estimated or actual 
adjusted rate and new payment. Consumer testing revealed that nearly 
all participants were readily able to

[[Page 57352]]

identify and understood the table and its contents.\98\ The estimated 
or actual new interest rate and payment and date the first new payment 
is due is key information the consumer must know in order to commence 
payment at the new rate. For these reasons, the Bureau proposes 
locating this information prominently in the disclosure.
---------------------------------------------------------------------------

    \98\ Id. at vii.
---------------------------------------------------------------------------

Section 1026.36 Prohibited Acts or Practices in Connection With Credit 
Secured by a Dwelling
36(c) Servicing Practices
    Existing Sec.  1026.36(c) provides requirements for servicers in 
connection with a consumer credit transaction secured by a consumer's 
principal dwelling. Essentially, such servicers must promptly credit 
payments, must not ``pyramid'' late fees, and must provide payoff 
statements at the consumer's request. The Dodd-Frank Act essentially 
codifies the Sec.  1026.36(c) provisions on prompt crediting and payoff 
statements with minor changes, as discussed below. The Bureau is 
amending Regulation Z both to implement the new statutory requirements, 
and to address the related issue of the handling of partial payments. 
Currently, Regulation Z addresses prompt crediting in Sec.  
1026.36(c)(1)(i). The Bureau is proposing limiting the scope of 
existing Sec.  1026.36(c)(1)(i) to full contractual payments, and 
addressing partial payments (anything less than a full contractual 
payment) in proposed Sec.  1026.36(c)(1)(ii), as discussed below. The 
Bureau proposes to retain the substantive requirements on non-
conforming payments currently in Sec.  1026.36(c)(2), but to move them 
to paragraph (c)(1)(iii). Likewise, the Bureau does not propose to 
change the Regulation Z provision addressing ``pyramiding'' of late 
fees currently in Sec.  1026.36(c)(1)(ii), but only to move the 
provision to new paragraph (c)(3). Finally, the Bureau is proposing 
four substantive changes to the provisions on payoff statements, 
currently located in Sec.  1026.36(c)(1)(iii), as well as to move these 
provisions to proposed paragraph 36(c)(3).
    The Bureau believes these changes to Regulation Z are best 
implemented by restructuring paragraph (c) and simplifying some of the 
language. This restructuring generally is not intended to make any 
substantive changes. All substantive changes to the paragraph (c) are 
discussed below.
36(c)(1)(i) Full Contractual Payments
    DFA section 1464(a) established TILA section 129F, which codifies 
existing Regulation Z Sec.  1026.36(c)(1)(i) with regard to prompt 
crediting of mortgage loan payments. The statute and the existing 
regulation both provide generally that ``no servicer shall fail to 
credit a payment to the consumer's loan account as of the date of 
receipt, except when a delay in crediting does not result in any charge 
to the consumer or in the reporting of negative information to a 
consumer reporting agency.'' Proposed new paragraph (c)(1)(i) generally 
restates existing (c)(1)(i) with the only change that the existing 
regulation applies to all payments, while proposed (c)(1)(i) would be 
limited to full contractual payments. The Bureau is proposing to 
establish new Sec.  1026.36(c)(1)(ii) to clarify servicers' obligations 
when they receive a partial payment (anything less than a full 
contractual payment), as discussed below.
    As discussed above, proposed Sec.  1026.36(c)(i) generally tracks 
the Dodd-Frank Act and current regulation, but changes the reference to 
``a payment'' to ``a full contractual payment'' and makes minor 
modifications to reflect the proposed restructuring of the regulation. 
The proposed regulation text provides that a full contractual payment 
covers principal, interest, and escrow (if applicable), but not late 
fees. The Bureau engaged in outreach and found that many servicers 
already apply payments that cover principal, interest, and escrow (if 
applicable) without deducting late fees. This ensures that consumers 
get the full benefit of having made a payment. The Bureau seeks comment 
as to whether late fees should also be included in the definition of a 
full contractual payment.
36(c)(1)(ii) Partial Payments
    Current Regulation Z does not define what constitutes a ``payment'' 
for purposes of the crediting requirement, but leaves that question to 
be determined by the contractual documents and other applicable law. 
Specifically, current comment 36(c)(1)(i)-2 refers to ``the legal 
obligation between the consumer and the creditor'' as determined by 
``applicable state or other law'' to determine whether a partial 
payment is a ``payment'' under the payment crediting provisions. 
Outreach to consumer and industry stakeholders revealed that partial 
payments are currently handled in a variety of ways. Some lenders do 
not accept partial payments, some lenders apply partial payments, and 
some lenders send partial payments to a suspense or unapplied funds 
account. Currently there is no Federal regulation that governs such 
accounts. The Bureau is proposing to address partial payments in new 
Sec.  1026.36(c)(1)(ii).
    Proposed Sec.  1026.36(c)(1)(ii) provides specific rules regarding 
the handling of partial payments and suspense accounts. New paragraph 
(c)(1)(ii) would require, consistent with the proposed periodic 
statement requirements in Sec.  1026.41 discussed below, that if a 
servicer holds a partial payment, meaning any payment less than a full 
contractual payment, in a suspense or unapplied funds account, the 
servicer must disclose on the periodic statement the amount of funds 
held in such account. The servicer must also disclose when such funds 
will be applied to the outstanding payments due on the account. This 
proposed requirement is authorized under TILA section 129(f), which 
requires creditors, assignees, and servicers to send statements for 
each billing cycle including ``[s]uch other information as the Bureau 
may prescribe in regulations.''
    Additionally, proposed Sec.  1026.36(c)(1)(ii) provides that if a 
servicer holds a partial payment in a suspense or unapplied funds 
account, once there are sufficient funds in the account to cover a full 
contractual payment, the servicer must apply those funds to the oldest 
outstanding payment due. The proposed requirement that the funds be 
applied to the oldest outstanding payment would advance the date of 
delinquency by one billing cycle, and thus benefit the consumer. For 
example, suppose a previously current consumer must make a $1,000 
monthly payment, and the consumer paid $500 on January 1st and $500 on 
February 1st. When the second $500 payment is made, a full contractual 
payment of $1,000 (assuming late fees are not included in the 
definition of full contractual payment) is in the suspense account and 
must be applied to the January payment. Thus, this consumer would only 
be one month delinquent at the end of February. The Bureau interprets 
the language in TILA section 129F(a), that servicers must ``credit'' 
payments as of the date of receipt, except when a delay in crediting 
does not result in ``any charge'' to the consumer to authorize the 
proposed requirement that partial payments held in suspense accounts be 
credited to the oldest outstanding payment when a full contractual 
payment accumulates. Crediting the funds to a payment that

[[Page 57353]]

was not the most delinquent would result in a charge to the consumer by 
extending the duration of the delinquency. To the extent not required 
under TILA section 129F(a), the Bureau believes this proposed 
requirement regarding crediting of funds is authorized under TILA 
section 105(a). As explained above, the Bureau believes the requirement 
is necessary and proper to effectuate the purpose of TILA to protect 
consumers against inaccurate and unfair credit billing practices by 
ensuring that funds held in a suspense account are promptly applied to 
the oldest outstanding payment when sufficient funds accumulate in such 
an account to cover a full contractual payment.
    Proposed comment 36(c)(1)(ii)-1 describes the servicer's options 
upon receipt of a partial payment, including: Crediting the payment on 
receipt, returning the payment, or holding the payment in a suspense or 
unapplied funds account.
    The proposed regulation would leave servicers significant 
flexibility in the handling of partial payments in accordance with 
contractual terms and other applicable law, for instance by rejecting 
the payment, crediting it immediately, or holding it in a suspense 
account. However, the proposed rule would also ensure greater 
consistency in the handling of suspense accounts by requiring, 
consistent with proposed Sec.  1026.41, that servicers disclose on the 
periodic statement that the funds are being held in such accounts and, 
once sufficient funds accumulate to cover a full contractual payment, 
that the servicer apply the funds to the oldest outstanding payment 
owed by the consumer. If sufficient funds accumulate to cover more than 
one full contractual payment, these funds would be applied to the next 
oldest outstanding payment. Partial payment amounts would be treated as 
described above.
    The Bureau believes this proposed approach would clarify servicers' 
obligations in processing both full contractual payment and partial 
payments, as well as ensure all payments are properly applied. The 
proposed disclosures would help consumers understand that their 
payments are being held in a suspense account rather than having been 
applied, and when those partial payments would be applied. 
Additionally, requiring application to the oldest outstanding payment 
when a full payment accumulates will provide protection to consumers, 
as well as reduce the outstanding principal balance on certain consumer 
loans.
    Finally, the Bureau seeks comment on if this approach is the proper 
way to address suspense accounts, and specifically, whether there 
should be time requirements on returning partial payments. If a 
servicer chooses not to accept a partial payment, must that payment be 
returned within a specific amount of time, and if so, how long should 
that time be? Additionally, the SBREFA Panel recommended the Bureau 
consider if additional flexibility can be provided in the proposed rule 
for small servicers, to the extent their current practices differ from 
the proposal and provide appropriate consumer protections.\99\ The 
Bureau seeks comment on whether the proposed rule differs from existing 
small servicer practices, and if so, how additional flexibility can be 
provided while still providing appropriate consumer protection.
---------------------------------------------------------------------------

    \99\ SBREFA Final Report, supra note 22, at 32.
---------------------------------------------------------------------------

36(c)(1)(iii) Non-Conforming Payments
    TILA section 129F(b) further provides that ``[i]f a servicer 
specifies in writing requirements for the consumer to follow in making 
payments, but accepts a payment that does not conform to the 
requirements, the servicer shall credit the payment as of 5 days after 
receipt.'' This provision codifies the treatment of non-conforming 
payments in current Sec.  1026.36(c)(2). The Bureau is not making any 
substantive changes to this provision, as the current rule is clear and 
provides protection for consumers, but the Bureau proposes to 
redesignate the section as new Sec.  1026.36(c)(1)(iii).
    The Bureau notes that payments held in a suspense or unapplied 
funds account, as addressed in proposed Sec.  1026.36(c)(1)(ii) 
discussed above, would not be considered to have been ``accepted'' by 
the servicer. Thus, under the Bureau's proposal, partial payments 
retained in suspense or unapplied funds accounts are treated as 
payments that have not been accepted subject to Sec.  
1026.36(c)(1)(ii), as opposed to non-conforming payments that have been 
accepted subject to proposed Sec.  1026.36(c)(1)(iii), which must be 
credited within five days of receipt.
36(c)(2) Prohibition on Pyramiding of Late Fees
    The Bureau is not proposing any substantive changes to existing 
36(c)(1)(ii), prohibiting the pyramiding of late fees. However the 
Bureau proposes redesignating this as new paragraph 36(c)(2).
36(c)(3) Payoff Statements
    DFA section 1464(b) established TILA section 129G, which requires 
that a creditor or servicer send an accurate payoff balance amount to 
the consumer within a reasonable time, but in no case more than seven 
business days, after the receipt of a written request for such balance 
from or on behalf of the consumer. This provision generally codifies 
existing Sec.  1026.36(c)(1)(iii) of Regulation Z regarding provision 
of payoff statements with four substantive changes. First, while 
existing Regulation Z only applied the requirements to servicers, the 
statute applies the requirements to both servicers and creditors. 
Second, the statute applies the prompt response requirement to ``home 
loans,'' rather than consumer credit transactions secured by the 
consumer's principal dwelling. Third, the statute limits the reasonable 
time for responding to not more than seven business days; by contrast, 
existing comment 36(c)(1)(iii)-1 generally creates a five business day 
safe harbor for responding, but notes that it might be reasonable to 
take longer to respond in certain circumstances. Fourth, the statute 
requires a prompt response only to written requests for payoff amounts, 
while the existing regulation requires a prompt response to all such 
requests. Due to the reorganization of paragraph (c), the proposed 
provisions on payoff statements will be located in paragraph (c)(3).
    Covered persons. Existing Sec.  1026.36(c)(1)(iii) applies to 
servicers. TILA section 129G, as established by DFA section 1464(b), 
applies the payoff statement requirement to creditors and servicers. 
For the reasons discussed in the section-by-section analysis of Sec.  
1026.20(d) above, the Bureau interprets this to mean the payoff 
statement provision applies to creditors, assignees, and servicers as 
applicable. Proposed comment 36(c)(3)-1 clarifies that a creditor who 
no longer owns the mortgage loan or the mortgage servicing rights is 
not ``applicable'' and therefore not subject to the payoff statement 
requirements. The Bureau notes that the other subparts of paragraph (c) 
continue to be limited to servicers.
    Scope. Existing Sec.  1026.36(c)(1)(iii) is limited to consumer 
credit transactions secured by principal dwellings. The Bureau is 
proposing to expand the scope of the provision to consumer credit 
transactions secured by all dwellings. TILA section 129G, as 
established by DFA section 1464(b), applies the payoff statement 
requirement to ``home loans,'' a term not used elsewhere in TILA. The 
Bureau interprets this term to expand

[[Page 57354]]

the scope of the requirement from consumer credit transaction secured 
by principal dwellings to consumer credit transactions secured by any 
dwelling. Thus, the proposed regulation applies to consumer credit 
transactions (both open- and closed-end), secured by a dwelling, not 
just a principal dwelling. The Bureau notes that the other subparts of 
paragraph (c) continue to be limited to consumer credit transactions 
secured by a consumer's principal dwelling.
    Seven business days. Existing Sec.  1026.36(c)(1)(iii) requires the 
payoff statement to be sent within a reasonable amount of time, and 
comment 36(c)(1)(iii)-1 clarifies that a reasonable time is ``within 5 
business days under most circumstances.'' New TILA section 129G 
provides that a reasonable time may not be more than seven business 
days after the receipt of the request. Proposed Sec.  1026.36(c)(3) 
reflects this change. Because of this change, the Bureau proposes 
removing existing comment 36(c)(1)(iii)-1.
    Written requests. Existing Sec.  1026.36(c)(1)(iii) requires the 
payoff statement to be sent after a request is received from the 
consumer. New TILA section 129G limits the requirement to provide a 
prompt response to ``written requests'' for payoff statements. Thus 
proposed new paragraph (c)(3) would require payoff statements to be 
provided after receipt of a written request. Related comment (c)(3)-3 
(renumbered from (c)(1)(iii)-3)), which provides examples of reasonable 
requirements the servicer may establish for payoff requests, is also 
updated to reflect this change.
    The SBREFA Panel recommended the Bureau consider if additional 
flexibility can be provided in the proposed rule for small servicers, 
to the extend their current practices differ from the proposal and 
provide appropriate consumer protections.\100\ The Bureau seeks comment 
on whether the proposed rule differs from existing small servicer 
practices, and if so, how additional flexibility can be provided while 
still providing appropriate consumer protection.
---------------------------------------------------------------------------

    \100\ Id.
---------------------------------------------------------------------------

Section 1026.41 Periodic Statements for Residential Mortgage Loans
    Proposed Sec.  1026.41 would establish the periodic statement 
requirement for residential mortgage loans. This section implements 
TILA section 128(f) as established by DFA section 1420. The statute 
requires the periodic statement to disclose seven items of information 
(the amount of the principal obligation, current interest rate and 
reset date if applicable, information on prepayment penalties and late 
fees, contact information for the servicer, and housing counselor 
information), as well as such other information as the Bureau may 
prescribe in regulations.\101\ The Bureau believes the periodic 
statement would provide the greatest value to consumers by also 
providing information regarding upcoming payment obligations and the 
application of past payments; a list of recent transaction activity; 
additional account information; and delinquency information. Thus, the 
Bureau proposes pursuant to TILA section 129(f)(1)(H) that each 
periodic statement also include this additional information.
---------------------------------------------------------------------------

    \101\ TILA section 129(f)(1).
---------------------------------------------------------------------------

    TILA section 128(f) applies the requirement to provide a periodic 
statement to creditors, assignees, and servicers of residential 
mortgage loans. To increase readability, proposed Sec.  1026.41 uses 
the term ``servicer'' to describe the entities covered by the proposed 
requirement, and defines servicer to mean creditors, assignees, or 
servicers for the purposes of Sec.  1026.41. This terminology is also 
used in the section-by-section analysis for proposed Sec.  1026.41. The 
statute applies the periodic statement to ``the creditor, assignee, or 
servicer.'' Comment 41(a)-3 clarifies that only one periodic statement 
must be sent to the consumer each billing cycle, while the creditor, 
assignee and servicer are subject to the periodic statement 
requirement, they may decide among themselves who will sent the 
statement. Comment 41(a)-4 clarifies that a creditor who no longer owns 
the mortgage loan or the mortgage servicing rights is not 
``applicable'' and therefore not subject to the requirements. The 
Bureau interpretation of the statute would not apply the on-going 
periodic statement requirements to an entity that originated the loan, 
but has sold both the loan and the servicing rights and no longer has 
any connection to the loan.
    As proposed, the periodic statement carefully balances the need to 
provide consumers with sufficient information against the risk of 
overwhelming consumers with too much information. The proposed 
requirements are designed to make the statement easy to read, whether 
provided in a paper form or electronically. The Bureau believes that 
imposing a requirement that information be grouped would present the 
information in a logical format, while allowing servicers flexibility 
in customizing the statement. Thus, the proposed regulations discussed 
below would require the following groupings of information:
     The Amount Due: The most prominent disclosure on the 
statement would be the amount due. The due date of the payment due and 
information on the late fee is also included in this grouping.
     Explanation of Amount Due: This grouping would include a 
breakdown of the amount due, showing allocation to principal, interest, 
and escrow. This grouping would also provide the total sum of any fees 
or charges imposed, and any amount of past due payment.
     Past Payment Breakdown: This grouping would include a 
breakdown of how previous payments were applied.
     Transaction Activity: This grouping would be a list of any 
activity that credits or debits the outstanding account balance, for 
example, charges imposed or payments received.

The periodic statement would also include the following information:

     Certain messages as required at certain times (for 
example, information on funds held in a suspense or unapplied funds 
account).
     Contact information for the servicer.
     Account information as required by the statute, including 
the amount of the principal obligation, current interest rate, and when 
it might change (if applicable), information on prepayment penalties 
(if applicable) and late fees, contact information for the servicer, 
and housing counselor information.
     Finally, additional delinquency information would be 
required when a consumer is more than 45 days delinquent on his or her 
loan. Each of these disclosures is discussed below.

Additionally, the proposed regulation sets forth requirements regarding 
the timing and form of the periodic statement and establishes 
exemptions to the requirement to provide a periodic statement.
41(a) In General
    Proposed Sec.  1026.41(a) states the general requirement that, for 
a closed-end consumer credit transaction secured by a dwelling, a 
creditor, assignee, or servicer must transmit to the consumer for each 
billing cycle a periodic statement meeting the timing, form, and 
content requirements of Sec.  1026.41, unless an exemption applies. As 
discussed below, the proposed requirements and exemptions are 
authorized under TILA sections 128(f), and 105(a) and (f), and DFA 
sections 1032(a) and 1405(b).
    As discussed above, the periodic statement is intended to serve a 
variety of purposes, including informing consumers of their payment 
obligations, providing information about the

[[Page 57355]]

mortgage loan, creating a record of transactions that increase or 
decrease the outstanding balance, providing the information needed to 
identify and assert errors, and providing information when borrowers 
are delinquent. To meet these goals, paragraphs (b), (c), and (d) 
respectively, propose the requirements for the timing, form, content, 
and layout of the periodic statement. Paragraph (e) proposes exemptions 
from the proposed periodic statement requirement.
    Entities covered. TILA section 128(f) imposes the periodic 
statement requirement on creditors, assignees, and servicers. Proposed 
Sec.  1026.41(a) would implement this provision by specifying that the 
duty to transmit periodic statements applies to the servicer, defined 
to mean creditor, assignee, or servicer. The consumer is only required 
to receive one periodic statement each billing cycle, but creditors, 
assignees, and servicers would all be responsible for ensuring that the 
consumer receives a periodic statement that meets the requirements of 
Sec.  1026.41.
    Scope. Under TILA section 128(f), the periodic statement 
requirement applies to residential mortgage loans. The term 
``residential mortgage loan'' is generally defined in TILA section 
103(cc)(5) to mean any consumer credit transaction that is secured by a 
mortgage, deed of trust, or other equivalent consensual security 
interest on a dwelling or on residential real property that includes a 
dwelling, other than a consumer credit transaction under an open-end 
credit plan. Consistent with this definition, proposed paragraph (a) 
would apply the periodic statement requirement to ``any closed-end 
consumer credit transaction secured by a dwelling.'' This language 
implements the substantive scope of the statute; no substantive change 
is intended.
    Transmit to the consumer. Proposed Sec.  1026.41(a) would require 
the servicer to transmit the periodic statement to the consumer. The 
term ``transmit'' is used in the statute. Use of this term would 
indicate that the servicer must do more than simply make the statement 
available; the statement would be required to be sent to the consumer. 
Paper statements mailed to the consumer would meet this requirement. As 
discussed below with respect to proposed Sec.  1026.41(c), if the 
servicer is using an electronic method of distribution, a servicer may 
send the consumer an email indicating that the statement is available, 
rather than attaching the statement itself, to account for information 
security concerns.
    Proposed comment 41(a)-1 clarifies that joint obligors need not 
receive separate statements; a single statement addressed to both of 
them would satisfy the periodic statement requirement.
    Billing cycles. Proposed Sec.  1026.41(a) would require a periodic 
statement to be sent each ``billing cycle.'' The billing cycle 
corresponds to the frequency of payments, as established by the legal 
obligation of the consumer as determined by the mortgage note and any 
subsequent modifications to that obligation. Thus, if a loan requires 
the consumer to make monthly payments, that consumer will have a 
monthly billing cycle. Likewise, if a consumer makes quarterly 
payments, that consumer will have a quarterly billing cycle.
    Based on industry outreach, the Bureau has learned of other 
alternatives to monthly billing cycles. Some loans may be timed to 
accommodate consumers employed in seasonal industries (for example, a 
loan may have 10 payments over the course of a year). For such loans 
the billing cycle may not align with the calendar months. Another non-
monthly payment arrangement may occur when payments are made every 
other week, or other similar less-then-monthly periods. For example, 
servicers and consumers may arrange a bi-weekly payment program to 
align mortgage payments with the consumer's paychecks. Such billing 
cycles may be arrangements with the servicer that do not modify the 
legal obligation of the consumer. In such cases, a periodic statement 
may, but is not required to, reflect this modified payment cycle.
    The Bureau realizes that a requirement to provide statements every 
other week may be costly for servicers and unhelpful to consumers. In 
addition, such a short cycle may cause problems with information on the 
statement being outdated. Thus, paragraph (a) allows that if a loan has 
a billing cycle shorter than a period of 31 days (for example, a bi-
weekly billing cycle), a periodic statement covering an entire month 
may be used. Related proposed comment 41(a)-2 clarifies how such a 
single statement would aggregate information from multiple billing 
cycles.
    Authority. Proposed paragraph (a) implements new TILA section 
128(f)(1) requiring that a creditor, assignee, or servicer, with 
respect to any closed-end consumer credit transaction secured by a 
dwelling must transmit a periodic statement to the consumer. In 
addition, the Bureau proposes in paragraph (a) to use its authority 
under TILA section 105(a) and (f) and DFA section 1405(b) to exempt 
creditors, assignees, and servicers of residential mortgage loans from 
the requirement in TILA section 128(f)(1)(G) to transmit periodic 
statement each billing cycle when the billing cycle is less than a 
month, and to instead permit servicers to provide an aggregated 
periodic statement covering an entire month. For the reasons discussed 
above, the Bureau believes that the proposed exception is necessary and 
proper under TILA section 105(a) both to effectuate the purposes of 
TILA--to promote the informed use of credit and protect consumers 
against inaccurate and unfair credit billing practices--and to 
facilitate compliance. Moreover, the Bureau believes, in light of the 
factors in TILA section 105(f), that sending periodic statements more 
than once a month would not provide a meaningful benefit to consumers. 
Specifically, the Bureau considers that the exemption is proper 
irrespective of the amount of the loan, the status of the borrower 
(including related financial arrangements, financial sophistication, 
and the importance to the borrower of the loan), or whether the loan is 
secured by the principal residence of the consumer. Further, in the 
estimation of the Bureau, consistent with DFA section 1405(b), the 
proposed exemption will prevent the consumer confusion that might 
result from receiving multiple periodic statements in close sequence, 
thus furthering the consumer protection purposes of the statute.
    Paragraph (b) interprets the statutory requirement that a periodic 
statement must be provided for each billing cycle by requiring the 
periodic statement be delivered or placed in the mail within a 
reasonably prompt time after the close of the grace period of the 
previous billing cycle.
    Paragraph (c) invokes authority under TILA sections 105(a), 122, 
and 128(f)(2) to require that the disclosures must be made clearly and 
conspicuously in writing, or electronically if the consumer agrees, and 
in a form the consumer may keep. The Bureau also interprets the statute 
to mandate certain of these form requirements.
    As discussed in more detail below, the Bureau generally proposes to 
impose the periodic statement requirement pursuant to its authority 
under TILA sections 128(f) and 105(a), and DFA sections 1032(a) and 
1405(b).
41(b) Timing of the Periodic Statement
    Proposed Sec.  1026.41(b) provides that the periodic statement must 
be sent within a reasonably prompt time after the close of the grace 
period of the previous billing cycle. Proposed comment 41(b)-1 provides 
that four days after the close of any grace period would be considered 
reasonably prompt.

[[Page 57356]]

    For the first payment on the mortgage loan, proposed paragraph (b) 
would require that the first periodic statement be sent no later than 
10 days before this first payment is due. This adjustment is necessary 
because there is no previous billing cycle from which to time the 
sending of the first statement.
    The periodic statement serves the dual purposes of giving an 
accounting of payments received since the pervious periodic statement, 
and reminding the consumer about the upcoming payment. To achieve these 
dual purposes, the periodic statement must arrive after the last 
payment was received and before the next payment is due, which can be a 
relatively narrow window. If a payment is due on the first of the 
month, grace periods may give the consumer as late as the 15th of the 
month to make that payment. Thus, if a statement is sent before the 
15th of the month, that statement may not reflect the consumer's most 
recent payment, or any late charge imposed due to a late payment. 
However, if a statement is sent at the close of the month, that 
statement may not arrive before the next payment is due on the first 
day of the next month. Allowing a few days for processing and mailing 
of statements creates a tight timeframe. The Bureau seeks comment on 
whether the proposed regulation appropriately addresses this timeframe. 
Additionally, the Bureau seeks comment on whether it is operationally 
difficult to have the first statement delivered or placed in the mail 
10 days before the first payment is due.
    The Bureau interprets the requirement in TILA section 128(f) that 
periodic statements be sent for ``each billing cycle'' to authorize the 
timing requirements proposed in Sec.  1026.41(b). In addition, the 
proposed timing requirements are authorized under TILA section 105(a), 
and DFA sections 1032(a) and 1405(b). For the reasons noted above, the 
Bureau believes, consistent with TILA section 105(a), that the proposed 
requirements are necessary and proper to effectuate the purposes of 
TILA to assure a meaningful disclosure of credit terms and protect 
consumers against inaccurate and unfair credit billing practices by 
assuring that consumers receive the periodic statement at a time that 
is useful to them. In addition, consistent with DFA section 1032(a), 
the Bureau believes that the proposed timing requirements help ensure 
that the features of consumers' residential mortgage loans, both 
initially and over the term of the loan, are effectively disclosed to 
consumers in a manner that permits them to understand the costs, 
benefits, and risks associated with the loan. Moreover, consistent with 
DFA section 1405(b), the Bureau believes that the proposed timing 
requirements would improve consumer awareness and understanding of 
their residential mortgage loans by assuring that consumers receive the 
periodic statements at a meaningful time, after their last payment is 
made and before their next payment is due, and that proposed 
requirements are thus in the interest of consumers.
41(c) Form of the Periodic Statement
    Proposed Sec.  1026.41(c) provides that the periodic statement 
disclosures required by section Sec.  1026.41 must be made clearly and 
conspicuously in writing, or electronically, if the consumer agrees, 
and in a form the consumer may keep. TILA section 128(f)(1) specifies 
that periodic statements must be ``conspicuous and prominent,'' and 
TILA section 128(f)(2) requires the Bureau to develop and prescribe a 
standard form to be transmitted in writing or electronically. The 
Bureau proposes to implement these provisions, in part through the form 
requirements set forth in proposed Sec.  1026.41(c) and the related 
forms provided in Appendix H-28. In addition, the proposed form 
requirements are authorized under TILA section 122, which requires the 
disclosures under TILA be clear and conspicuous, TILA section 105(a) 
and DFA sections 1032(a) and 1405(b). As discussed below, the Bureau 
believes, consistent with TILA section 105(a), that the proposed form 
requirements are necessary and proper to effectuate the purposes of 
TILA to assure a meaningful disclosure of credit terms and protect the 
consumer against inaccurate and unfair credit billing practices by 
assuring that the periodic statement sent to consumers is in a form 
that they can understand. In addition, consistent with DFA section 
1032(a), the Bureau believes that the proposed form requirements help 
ensure that the features of consumers' residential mortgage loans, both 
initially and over the term of the loan, are effectively disclosed to 
consumers in a manner that permits them to understand the costs, 
benefits, and risks associated with the loan. Moreover, consistent with 
DFA section 1405(b), the Bureau believes that the proposed form 
requirements would improve consumer awareness and understanding of 
their residential mortgage loans by assuring that the periodic 
statements sent to consumers are in a useable form that is easy to 
understand and that the form requirements are thus in the interest of 
consumers and the public interest.
    Clear and conspicuous. TILA section 122 requires that disclosures 
under TILA be clear and conspicuous. Existing Sec.  1026.31(b) 
generally implements this requirement with respect to disclosures 
required by subpart E, where new Sec.  1026.41 will be located. Section 
1026.31(b) applies only to creditors, however. Thus, to make this 
requirement applicable to servicers (defined to include creditors and 
assignees), proposed paragraph 41(c) would require, consistent with 
TILA section 122 and existing Sec.  1026.31(b), that the periodic 
statement be clear and conspicuous. Proposed comment 41(c)-1 clarifies 
the clear and conspicuous standard, stating that it generally requires 
that disclosures be in a reasonably understandable form, and explains 
that other information may be included on the statement, so long as 
that other information does not overwhelm or obscure the required 
disclosures. Thus, information that is traditionally found on their 
periodic statements, but not proposed as required by this regulation, 
such as the servicer's logo, information on payment methods, or 
additional information on escrow accounts, may continue to be included 
on periodic statements.
    Additional information. Proposed comment 41(c)-2 states that 
nothing in this subpart prohibits a servicer from including additional 
information or combining disclosures required by other laws with the 
disclosures required by Sec.  1026.41, unless such prohibition is 
expressly set forth in Sec.  1026.41 or the applicable law. For 
example, the grouping requirements discussed below may not be 
overridden by additional information in the statement.
    Based on industry outreach, the Bureau understands that some 
institutions provide a combined statement for mortgage loans and other 
financial products. For example if a consumer has both a checking 
account and a mortgage with a credit union, the consumer may receive a 
single combined statement. The Bureau seeks comment on how servicers 
would actually combine statements. In particular, the Bureau notes that 
difficulties may arise when different disclosures have different timing 
requirements, and when multiple disclosures have requirements that 
information be presented on the first page of the statement. For 
example, if both mortgage loan disclosures and credit card disclosures 
are required to be on the first page of a statement, how would these 
statements be combined?
    Electronic distribution. TILA section 128(f)(2) provides that 
periodic statements ``may be transmitted in

[[Page 57357]]

writing or electronically.'' Consistent with this provision, proposed 
Sec.  1026.41(c) would allow statements to be provided electronically, 
if the consumer agrees. As discussed above, the requirement to transmit 
a periodic statement to the consumer may be met by sending the consumer 
an e-mail notification that the statement is available, rather than e-
mailing the statement itself in light of information security concerns. 
This paragraph would require only affirmative consent by the consumer 
to receive statements, not compliance with E-Sign verification 
procedures. The Bureau does not believe E-Sign consent is required by 
the statute. E-Sign is designed to provide an electronic alternative to 
required writings. The statute, however, requires only periodic 
``statements'' as opposed to ``writings'' to be transmitted to 
consumers. Additionally, the statute contemplates electronic 
statements, as TILA section 129(f)(2) provides that the Bureau shall 
prescribe a standard form, taking into account that the statements 
required may be transmitted in writing or electronically. Thus, the 
Bureau believes that Congress did not intend to require E-Sign 
verification procedures. The Bureau seeks comment as to whether 
additional requirements should be placed on when a consumer consents to 
receiving electronic statements. For example, must consent be obtained 
or confirmed electronically in a manner that demonstrates that the 
consumer is able to access information electronically? The Bureau also 
seeks comment on whether consumers who already receive electronic 
statements should be deemed as having consented to receive statements 
electronically. Additionally, the Bureau seeks comment on whether 
consumers who have auto-debit set up to deduct payments from their bank 
account should be deemed as having consented to receive statements 
electronically.
    Retainability. Proposed Sec.  1026.41(c) would require the 
disclosure be provided in a form the consumer may keep. Paper 
statements sent by mail or provided in person, would satisfy this 
requirement. If electronic statements are used, they must be in a form 
which the consumer can print or download.
    Sample forms. Proposed Sec.  1026.41(c) also states that sample 
forms are provided in Appendix H-28, and that appropriate use of these 
forms will be deemed to comply with the section. The sample forms were 
developed through consumer testing as discussed in part III.B above, 
and are intended to give guidance regarding compliance with proposed 
Sec.  1026.41. However, they are not required forms, and any 
arrangements of the information that meet the requirements of proposed 
Sec.  1026.41 would be considered in compliance with the section. The 
sample forms also contain additional information (for example, a tear-
off coupon on the bottom) that is not required to be on the form, but 
is included to give context to the sample. These proposed regulations 
and sample forms were crafted to give servicers flexibility in 
designing their periodic statements. The Bureau proposes these sample 
forms pursuant to its authority, inter alia, under TILA section 
128(f)(2).
41(d) Content and Layout of the Periodic Statement
    Proposed Sec.  1026.41(d) contains content and layout requirements 
that implement, in part, TILA section 128(f), and is additionally 
authorized under TILA section 105(a) and DFA sections 1302(a) and 
1405(b).
    The content required by paragraph (d) is authorized under TILA 
section 128(f)(1). Such content is authorized as follows:
     Statutorily-required content: TILA sections 128(f)(1)(a) 
through (g) requires the inclusion of certain items of information in 
the periodic statement. The proposed regulation generally implement 
these provisions by requiring the content set forth in Sec.  
1026.41(d)(1)(ii), (6) and (7), and the description of late fees in 
Sec.  1026.41(d)(4).
     Additional content: TILA section 128(f)(1)(H) requires 
inclusion in periodic statements of such other information as the 
Bureau may prescribe by regulation. The remainder of the content of the 
periodic statement is proposed under this authority.
    The grouping and other form requirements of the layout in paragraph 
(d) implement, in part, the requirement under TILA section 128(f)(1) 
that the content of the periodic statement be presented in a 
conspicuous and prominent manner, and under TILA section 128(f)(2) for 
the Bureau to develop and prescribe a standard form for the periodic 
statement disclosure. In addition, as discussed above with respect to 
the form requirements under Sec.  1026.41(c) and for the reasons 
explained below, the proposed grouping and form requirements under 
Sec.  1026.41(d) are authorized under TILA section 105(a) and DFA 
sections 1032(a) and 1405(b).
    The periodic statement is designed to provide the consumer with 
information in an easy-to-read format. The goal of the proposed 
grouping and form requirements is to highlight key information--the 
amount due--and organize information so the statement would not be 
overwhelming to the consumer. The commentary to paragraph (d), 
discussed below, reflects these goals.
    Exemptions and adjustments: TILA section 128(f)(1)(G) requires the 
periodic statement to include the names, addresses and other contact 
information for government-certified counseling agencies or programs 
reasonably available to the consumer. For the reasons discussed below, 
the Bureau proposes to use its authority under TILA section 105(a) and 
(f) to exempt servicers from having to include this information in 
periodic statements to and to instead require the periodic statement to 
include contact information for the State housing finance authority for 
the State in which the property is located and information to access 
the HUD list or Bureau list of homeownership counselors or counseling 
organizations. This adjustment is additionally authorized under DFA 
section 1405(b).
    Close proximity. Proposed Sec.  1026.41(d) would require specific 
disclosures be grouped together and presented in close proximity. 
Information is grouped together to aid the consumer in understanding 
relatively complex information about their mortgage. The General Design 
Principles discussed in the Macro final report (Macro Report) include 
grouping together related concepts and figures because consumers are 
likely to find it easier to absorb and make sense of financial forms if 
the information is grouped in a logical way.\102\
---------------------------------------------------------------------------

    \102\ Macro Report, supra note 38, at 4.
---------------------------------------------------------------------------

    Proposed comment 41(d)-1 clarifies that close proximity requires 
items to be grouped together and set off from the other groupings of 
items. This can be accomplished, for example, by including lines or 
boxes on the statement, or by including white space between the 
groupings. Items required to be in close proximity should not have any 
intervening text between them. The close proximity standard is found in 
other parts of Regulation Z, including Sec. Sec.  1026.24(b) and 
1026.48. In both provisions, the commentary interprets close proximity 
to require the information to be located immediately next to or 
directly above or below, without any intervening text or graphical 
displays.\103\
---------------------------------------------------------------------------

    \103\ See comments 24(b)-2 and 48-3 respectively.
---------------------------------------------------------------------------

    Information not applicable. Proposed comment 41(d)-2 provides that 
information that is not applicable to the loan may be omitted from a 
periodic statement. For example, if a loan does

[[Page 57358]]

not have a prepayment penalty, the periodic statement may omit the 
prepayment penalty disclosure.
    Terminology. Proposed comment 41(d)-3 provides that the periodic 
statement may use terminology other than that found on the sample forms 
so long as the new terminology is commonly understood. This gives 
servicers the flexibility to use regional terminology or commonly used 
terms with which consumers are familiar. For example, during consumer 
testing in California, participants were confused by the use of the 
term ``escrow.'' One participant explained that in California, the term 
``escrow'' refers to an account set up to hold funds until a homebuyer 
closes on the house. This participant said he was more familiar with 
the term ``impound account'' to refer to the account holding funds for 
taxes and insurance.\104\ In this example, use of the term ``impound 
account'' to refer to the escrow account for taxes and insurance would 
be permitted for periodic statements provided to consumers in 
California.
---------------------------------------------------------------------------

    \104\ Macro Report, supra note 38, at 12.
---------------------------------------------------------------------------

41(d)(1) Amount Due
    Proposed Sec.  1026.41(d)(1) would require the periodic statement 
to provide information on the amount due, the payment due date, and the 
amount of any fee that would be assessed for a late payment, as well as 
the date on which that fee would be imposed if payment is not received. 
This information would have to be grouped together and located at the 
top of the first page of the statement. The amount due would have to be 
more prominent than any information on the page. This is consistent 
with the general principle of designing disclosures to highlight the 
most important information for consumers to make it easy for them to 
find.\105\ A primary purpose of the periodic statement is to alert the 
consumer to upcoming payment obligations. The Bureau interprets TILA 
section 129(f)(E), which requires the periodic statement to include a 
description of any late payment fees, to require disclosure of the 
amount of any fees that would be assessed for late payments as well as 
the date the fee would be imposed if the payment has not been received, 
as well as other information regarding late fees discussed below. 
Although information concerning the amount due and the payment due date 
is not enumerated in the statute, the Bureau believes that this is the 
information the consumer is most likely to need. Because of the 
importance of this information, it is placed in the prominent position 
of the top of the first page, and the total amount must be the most 
prominent item on the page. In consumer testing, all participants were 
able to identify the amount due on the sample periodic statement 
presented to them.\106\
---------------------------------------------------------------------------

    \105\ Id. at 4.
    \106\ See id. at 6.
---------------------------------------------------------------------------

    If the consumer has a payment-option loan, each of the payment 
options must be displayed with the amount due information. An example 
of such a statement is included in proposed Appendix H-28(C).
41(d)(2) Explanation of Amount Due
    Proposed Sec.  1026.41(d)(2) would require periodic statements to 
include an explanation of the amount due, providing the monthly payment 
amount, including the allocation of that payment to principal, interest 
and escrow (if applicable). Additionally, the statement would have to 
provide the total fees or charges incurred since the last statement, 
and any amount past-due (which would include both over-due payments and 
over-due fees). This information would have to be grouped together in 
close proximity and located on the first page of the statement.
    The Explanation of Amount Due is intended to give consumers a 
snapshot of why they are being asked to pay the amount due. At a 
glance, consumers would be able to see their payment amount; how much 
is allocated to principal, interest and escrow (if applicable); and the 
total fees or other charges incurred since the last statement; and any 
post-due amounts. In this section, the fees incurred since the last 
statement would be shown in aggregate; a breakdown of the individual 
fees would be provided in the Transaction Activity section, discussed 
below. Additionally, this section would show the total of past due 
payments and fees from previous billing cycles. In the first round of 
consumer testing, Macro tested the form to see if participants were 
able to understand what charges constituted the total amount due. The 
sample form used in testing showed a late payment fee. After looking at 
the Explanation of Amount Due, all participants understood the amount 
due included a regular monthly payment and a late fee.\107\ This 
indicates that the Explanation of Amount Due helps consumers understand 
the amount they need to pay.
---------------------------------------------------------------------------

    \107\ Id.
---------------------------------------------------------------------------

    If the consumer has a payment-option loan, a breakdown of each of 
the payment options would be required in the Explanation of Amount Due. 
Additionally, the Explanation of Amount Due would require inclusion of 
information about how each of the payment options will affect the 
outstanding loan balance. A form with such a box was tested during 
consumer testing. All but one of the participants were able to 
understand the effects the different payment options would have on 
their loan balance--that the loan balance would decrease, stay the same 
(for interest-only payments) or increase.\108\ A sample form is 
provided in Appendix H-28(C).
---------------------------------------------------------------------------

    \108\ Id. at 14.
---------------------------------------------------------------------------

41(d)(3) Past Payment Breakdown
    Proposed paragraph (d)(3) would require periodic statements to 
include a snapshot of how past payments have been applied. Proposed 
Sec.  1026.41(d)(3)(i) would require the periodic statement to include 
both the total of all payments received since the last statement and a 
breakdown of how those payments were applied to principal, interest, 
escrow, fees, and charges, and any partial payment or suspense account 
(if applicable). Proposed Sec.  1026.41(d)(3)(ii) would require the 
total of all payments received since the beginning of the calendar year 
and a breakdown of how those payments were applied to principal, 
interest, escrow, fees, and charges, as well as the amount currently 
held in any partial payment or suspense account (if applicable). This 
information would have to be grouped together in close proximity, and 
located on the first page of the statement.
    The past payment breakdown disclosure serves several purposes on 
the periodic statement, including creating a record of payment 
application, providing the consumer information needed to assert any 
errors, and providing information about the mortgage expenses.
    The breakdown in paragraph (d)(3)(i), showing all payments made 
since the last statement, would allow the consumer to confirm that his 
or her payments was properly applied. If the payments were not properly 
applied, the breakdown would provide the consumers the information 
needed to assert an error. Although testing participants had some 
confusion about partial payments as discussed below, they were able to 
identify how their payments had been applied based on the past payment 
breakdown information included on the sample statement.\109\
---------------------------------------------------------------------------

    \109\ Id. at 9.
---------------------------------------------------------------------------

    Both the breakdown since the last billing cycle and the breakdown 
of the

[[Page 57359]]

year-to-date play an important role in educating the consumer. The 
payments since the last statement inform consumers of how much their 
outstanding principal has decreased, while the year-to-date information 
educates consumers on the costs of their mortgage loan. Consumer 
testing revealed that consumers may be surprised by how much of their 
payment is going to interest or fees as opposed to principal. 
Aggregated over the year-to-date can bring this expense to a consumers' 
attention, and motivate them to possibly change behaviors that are 
generating significant expenses. For example, consumers who habitually 
submit their payment a few days late may correct this behavior if they 
realize it is costing them hundreds of dollars a year. The breakdown of 
all payments made in the current calendar year to date is of particular 
importance in educating consumers about their loans, especially since 
there is no other mandated year-end summary of all payments received 
and their application. The past payment breakdown, of both the payments 
since the last statement, and payments for the year to date, provides 
the consumer with important information that is not currently required 
to be disclosed.
    Partial Payments. Proposed comment 41(d)(3)-1 provides guidance on 
how partial payments that have been sent to a suspense account should 
be reflected in the past payments breakdown section of the periodic 
statement. The proposed comment provides illustrative examples of how 
partial payments sent to a suspense account should be listed as 
unapplied funds since the last statement and year to date. Consumer 
testing revealed that consumers have very little understanding about 
how partial payments are handled.\110\ As discussed in part IV.C above, 
the periodic statement is designed to help consumers understand how 
partial payments are processed. The past payment breakdown is useful in 
communicating information about partial payments and suspense accounts 
to consumers.
---------------------------------------------------------------------------

    \110\ Id. at 11.
---------------------------------------------------------------------------

41(d)(4) Transaction Activity
    Proposed Sec.  1026.41(d)(4) would require the periodic statement 
to include a Transaction Activity section that lists any activity since 
the last statement that credits or debits the outstanding account 
balance. For each transaction, the statement would include the date of 
the transaction, a description of the transaction, and the amount of 
the transaction. This information must be grouped together, but may be 
provided anywhere on the statement.
    Proposed comment 41(d)(4)-1 clarifies that transaction activity 
includes any activity that credits or debits the outstanding loan 
balance. For example, proposed comment 41(d)(4)-1 states that 
transaction activity would include, without limitation, payments 
received and applied, payments received and sent to a suspense account, 
and the imposition of any fee or charge. Thus, the Transaction Activity 
section would provide a list of all charges and payments, covering the 
time from the last statement until the current statement is printed. 
This disclosure would allow the consumer to understand what charges are 
being imposed and provide further detail regarding the aggregated 
numbers found in the ``Explanation of Amount Due'' section. The 
Transaction Activity section would provide a record of the account 
since the last statement, allowing the consumer to review for errors, 
ensure payments were received, and understand any and all costs. If a 
servicer receives a partial payment and decides to return the payment 
to the consumer, such a payment would not need to be included as a line 
item in the Transaction Activity section, because this activity would 
neither credit nor debit the outstanding account balance. The Bureau 
seeks comment on whether the periodic statement should be required to 
include a message under paragraph (d)(5) when a partial payment is 
returned to the consumer.
    Late fee description. Proposed comment 41(d)(4)-2 clarifies that 
the description of any late fee charge in the transaction activity 
section includes the date of the late fee, the amount of the late fee, 
and the fact that a late fee was imposed. The Bureau interprets TILA 
section 129(f)(E), which requires that the periodic statement include 
``a description'' of any late payment fees, to require disclosure of 
this information, as well as information regarding late fees discussed 
above.
    Suspense accounts. Proposed comment 41(d)(4)-3 clarifies that if a 
partial payment is sent to a suspense account, the fact of the transfer 
should be reflected in the transaction description (for example, a 
partial payment entry in the transaction activity might read: ``Partial 
payment sent to suspense account''), the funds sent to the suspense 
account should be reflected in the unapplied funds section of the past 
payment breakdown, and an explanation of what must be done to release 
the funds should be provided in the messages section. The messages 
section, discussed below, should include an explanation of what the 
consumer must do to release the funds from the suspense account.
41(d)(5) Messages
    Proposed Sec.  1026.41(d)(5) would require a message on the front 
of the statement if a partial payment of funds is being held in a 
suspense account regarding what must be done for the funds to be 
applied.
    The Bureau seeks comment on what, if any, additional messages 
should be required. In particular, the Bureau seeks comment on whether 
there should be a required disclosure where the consumer has a 
negatively-amortizing or interest-only loan. Additionally, the Bureau 
seeks comment on whether there should be a required disclosure on 
private mortgage insurance and when it may be eliminated. Finally, the 
Bureau seeks comment as to if more than one message is required, and if 
so, should these be grouped together and should these messages be 
required to be on the first page of the statement?
41(d)(6) Contact Information
    Proposed Sec.  1026.41(d)(6) would require that the periodic 
statement contain contact information specifying where a consumer may 
obtain information regarding the mortgage. Proposed comment 41(d)(6)-2 
clarifies that this contact information must be the same as the contact 
information for asserting errors or requesting information. The Bureau 
seeks comment on whether consumers are likely to contact the servicer 
for information other than errors or inquiries, which would necessitate 
a different number being included on the periodic statement. Proposed 
Sec.  1026.41(d)(6) provides that the contact information provided must 
include a toll-free telephone number. Proposed comment 41(d)(6)-1 
clarifies that the servicer may provide additional information, such as 
a web address, at its option. Proposed Sec.  1026.41(d)(6) does not 
require that the contact information be set off in a separate section, 
but simply that it be included on the front page of the statement. This 
proposed requirement would allow servicers to include this information 
with their company name and logo at the top of the page or elsewhere on 
the statement.
41(d)(7) Account Information
    Proposed Sec.  1026.41(d)(7) would require that the following 
information about the mortgage, as required by the statute, be included 
on the statement: The amount of principal obligation, the current 
interest rate in effect for the loan, the date on which the interest 
rate

[[Page 57360]]

may next reset or adjust, the amount of any prepayment penalty, and 
information on housing counselors. This information may be included 
anywhere on the statement. This information may, but need not be, 
grouped together. While the sample form has this information on the 
first page, the servicer is not required to include this information on 
the first page.
    Prepayment penalty. Proposed Sec.  1026.41(d)(7)(iv) defines a 
prepayment penalty as ``a charge imposed for paying all or part of a 
transaction's principal before the date on which the principal is 
due.'' This definition is further clarified in the proposed commentary. 
Proposed comment 41(d)(7)(iv)-1 gives the following examples of 
prepayment penalties: (1) A charge determined by treating the loan 
balance as outstanding for a period of time after prepayment in full 
and applying the interest rate to such ``balance,'' even if the charge 
results from interest accrual amortization used for other payments in 
the transaction under the terms of the loan contract; (2) a fee, such 
as an origination or other loan closing cost, that is waived by the 
creditor on the condition that the consumer does not prepay the loan; 
(3) a minimum finance charge in a simple interest transaction; and (4) 
computing a refund of unearned interest by a method that is less 
favorable to the consumer than the actuarial method, as defined by 
section 933(d) of the Housing and Community Development Act of 1992, 15 
U.S.C. 1615(d). Proposed comment 41(d)(7)(iv)-1.i further clarifies 
that ``interest accrual amortization'' refers to the method by which 
the amount of interest due for each period (e.g., month) in a 
transaction's term is determined and states, for example, that 
``monthly interest accrual amortization'' treats each payment as made 
on the scheduled, monthly due date even if it is actually paid early or 
late (until the expiration of any grace period). The proposed comment 
also provides an example where a prepayment penalty of $1,000 is 
imposed because a full month's interest of $3,000 is charged even 
though only $2,000 in interest was accrued in the month during which 
the consumer prepaid.
    Proposed comment 41(d)(7)(iv)-2 clarifies that a prepayment penalty 
does not include: (1) Fees imposed for preparing and providing 
documents when a loan is paid in full, if the fees are imposed whether 
or not the loan is prepaid, such as a loan payoff statement, a 
reconveyance document, or another document releasing the creditor's 
security interest in the dwelling that secures the loan; or (2) loan 
guarantee fees.
    The definition of prepayment penalty in proposed Sec.  
1026.41(d)(7)(iv) and comments 41(d)(7)(iv)-1 and -2 substantially 
incorporate the definitions of and guidance on prepayment penalties 
from other rulemakings addressing mortgages and, as necessary, 
reconciles their differences. For example, the Bureau is proposing to 
incorporate the language from the Board's 2009 Closed-End Proposal but 
omitted in the Board's 2011 ATR Proposal listing a minimum finance 
charge as an example of a prepayment penalty and stating that loan 
guarantee fees are not prepayment penalties, because similar language 
is found in longstanding Regulation Z commentary. Based on the 
differing approaches taken by the Board in its recent mortgage 
proposals, however, the Bureau seeks comment on whether a minimum 
finance charge should be listed as an example of a prepayment penalty 
and whether loan guarantee fees should be excluded from the definition 
of the term prepayment penalty.
    The Bureau expects to coordinate the definition of the term 
prepayment penalty in proposed Sec.  1026.41(d)(7)(iv) with the 
definitions in other pending rulemakings relating to mortgages.
    The Bureau seeks comment on the feasibility of disclosing the 
amount of any prepayment penalty, as the amount of the penalty could 
depend on the timing or amount of prepayment, and if a preferable 
alternative would be to disclose the maximum amount of a prepayment 
penalty. Alternatively, the Bureau seeks comment on whether a better 
alternative would be for the periodic statement to disclose the 
existence of a prepayment penalty in place of the amount.
    Housing counselors. Proposed Sec.  1026.41(d)(7)(v) would require 
the periodic statement to include contact information for the State 
housing finance authority for the State in which the property is 
located, and information to access either the Bureau list or the HUD 
list of homeownership counselors or counseling organizations.
    TILA section 128(f)(1)(G) requires the periodic statement to 
include the names, addresses, telephone numbers and Internet addresses 
of counseling agencies or programs reasonably available to the consumer 
that have been certified or approved and made publically available by 
the Secretary of Housing and Urban Development or a State housing 
finance authority.
    On July 9, 2012, the Bureau released the 2012 HOEPA Proposal to 
implement other Dodd-Frank Act provisions, including the requirement to 
provide a list of housing counselors in connection with the application 
process for mortgage loans.\111\ In connection with those requirements, 
the Bureau proposed to require creditors to provide a list of five 
homeownership counselors or counseling organizations to applicants for 
various categories of mortgage loans. The Bureau also indicated that it 
is expecting to develop a website portal that would allow lenders to 
type in the loan applicant's zip code to generate the requisite list, 
which could then be printed for distribution to the loan applicant. 
This will allow creditors to access lists of the housing counselors 
with a minimum amount of effort.\112\
---------------------------------------------------------------------------

    \111\ See 2012 HOEPA Proposal, available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf, at 29-35.
    \112\ The list provided by the lender pursuant to the 2012 HOEPA 
Proposal would include only homeownership counselors or counseling 
organizations from either the most current list of homeownership 
counselors or counseling organizations made available by the Bureau 
for use by lenders, or the most current list maintained by HUD of 
homeownership counselors or counseling organizations certified by 
HUD, or otherwise approved by HUD. See id. at 32-33.
---------------------------------------------------------------------------

    In connection with the periodic statement requirement, however, the 
Bureau is proposing to use its exception authority to require servicers 
simply to list where consumers can find a list of counselors, rather 
than to reproduce a list of counselors in each billing cycle. The 
Bureau believes that this approach appropriately balances consumer and 
servicer interests based on several considerations.
    First, the Bureau is concerned about information overload for 
consumers. The periodic statement contains a significant amount of 
information already. While consumers who are deciding whether to take 
out a mortgage loan in the first instance may greatly benefit from 
consultation with a housing counselor, that likelihood is greatly 
reduced with regard to consumers receiving regular periodic statements 
on existing loans.
    Second, the burden on servicers to import the list of counselors 
into a periodic statement document or to attach a list with each 
billing cycle is significantly higher than with regard to a single 
provision of the list. Space on the periodic statements is limited, and 
importing updated information from the CFPB website each cycle would 
involve more programming burden than simply listing the two agencies' 
websites in the first instance.
    To address these concerns, the proposal would require that the 
periodic

[[Page 57361]]

statements include the contact information to access the State housing 
finance authority for the State in which the property is located, and 
the website and telephone number to access either the Bureau list or 
the HUD list of homeownership counselors or counseling 
organizations.\113\ Directing consumers to this information would allow 
them to choose a program or agency conveniently located for them, and 
would allow the consumer to locate other programs or agencies if those 
contacted initially could not help the consumer at that time. The 
Bureau seeks comment on whether this proposal strikes an appropriate 
balance, and on the benefits and burdens to both borrowers and 
servicers of requiring that a list of several individual housing 
counselors be included in or with the periodic statement.
---------------------------------------------------------------------------

    \113\ At the time of publishing, the Bureau list was not yet 
available and the HUD list is available at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.
---------------------------------------------------------------------------

    Because housing counselor information may not be relevant to 
consumers who are current and not facing any problems, the proposal 
does not require this information to be on the front of the statement. 
The Bureau seeks comment if this information should be required to be 
located on the front of this statement. In a related requirement, when 
the delinquency information is provided, the proposed regulations would 
require that the delinquency information contain a reference to this 
housing counselor information. This would ensures that the housing 
counselor information would be brought to the attention of delinquent 
consumers. These provisions are discussed further below.
    The Bureau expects to coordinate the housing counselor information 
requirement in proposed Sec.  1026.41(d)(7)(v) with the definitions in 
other pending rulemakings concerning mortgage loans that address 
housing counselors. The Bureau believes that, to the extent consistent 
with consumer protection objectives, adopting a consistent approach to 
providing housing counselor information across its various pending 
rulemakings will facilitate compliance. The Bureau notes that other 
housing counselor requirements (for example, the ARMs initial interest 
rate adjustment notification) require the contact information for the 
State housing finance authority for the State in which the consumer 
resides (as opposed to the State in which the property is located). 
While the Bureau expects the State in which the property is located 
will most often be the State where the consumer resides, under certain 
circumstances (a vacation home), these may be different States. 
Additionally, the Bureau notes that a difference in regulation 
requirements for different disclosures may increase compliance costs 
for servicers. The Bureau seeks comment on which State housing finance 
authority's contact information should be required on the periodic 
statement.
    The Bureau proposes to use its authority under TILA section 105(a) 
and (f) and DFA section 1405(b) to exempt creditors, assignees, and 
servicers of residential mortgage loans from the requirement in TILA 
section 128(f)(1)(G) to include in periodic statements contact 
information for government-certified counseling agencies or programs 
reasonably available to the consumer, and to instead require that 
periodic statements disclose the State housing finance authority for 
the State in which the property is located and information to access 
either the Bureau list or HUD list of homeownership counselors or 
organizations. For the reasons discussed above, the Bureau believes 
that the proposed exception and addition is necessary and proper under 
TILA section 105(a) both to effectuate the purposes of TILA--to promote 
the informed use of credit and protect consumers against inaccurate and 
unfair credit billing practices--and to facilitate compliance. 
Moreover, the Bureau believes, in light of the factors in TILA section 
105(f), that disclosure of the information specified in TILA section 
128(f)(1)(G) would not provide a meaningful benefit to consumers. 
Specifically, the Bureau considers that the exemption is proper 
irrespective of the amount of the loan, the status of the borrower 
(including related financial arrangements, financial sophistication, 
and the importance to the borrower of the loan), or whether the loan is 
secured by the principal residence of the consumer. Further, in the 
estimation of the Bureau, the proposed exemption will simplify the 
periodic statement, and improve the housing counselor information 
provided to the consumer, thus furthering the consumer protection 
purposes of the statute. In addition, consistent with DFA section 
1405(b), the Bureau believes that the proposed modification of the 
requirements in TILA section 128(f)(1)(G) will improve consumer 
awareness and understanding and is in the interest of consumers and in 
the public interest.
41(d)(8) Delinquency Notice
    Proposed Sec.  1026.41(d)(8) would require that if the consumer is 
more than 45 days delinquent, the servicer must include on the periodic 
statement certain delinquency information grouped together. The 
accounting of mortgage payments is confusing at best, and becomes 
significantly more complicated in a delinquency scenario. The 
combination of fees, partial payments being sent to suspense accounts, 
and application of payments to oldest outstanding payments due can 
quickly lead to confusion. Additionally, consumers in delinquency are 
often facing stress due to the situation that left them unable to make 
their mortgage payments. The proposed early intervention rules would 
require servicers to disclose information about loss mitigation or loan 
modification, but this information would not be customized to 
individual consumers. The delinquency notice, discussed below, would 
provide information that is tailored to the specific consumer. This 
information would benefit the consumer in several ways. First, this 
notice would ensure that the consumer is aware of the delinquency as 
well as potential consequences. Second, this information would ensure 
that the consumer has the information about his or her loan. For 
example, certain loan modification programs are tied to specific 
timelines in delinquency. This information would ensure that consumers 
understand the timeline for their delinquency so they can benefit from 
early intervention information. Finally, the delinquency information 
would create a record of how payments were applied, which would both 
help consumers understand the amount due and give consumers the 
information needed to become aware of any errors so they could use the 
appropriate error resolution procedures.
    Delinquency date and risks. Proposed paragraph (d)(8)(i) would 
require the periodic statement to include the date on which the 
consumer became delinquent. Many timelines relevant to the loss 
mitigation and foreclosure processes are based on the number of days of 
delinquency. For example, under certain programs consumers may not be 
eligible for a loan modification unless they are at least 60 days 
delinquent. However consumers may not know the date on which he or she 
was first considered delinquent. This can be especially confusing in a 
scenario where the consumer is making partial payments. Proposed 
paragraph (d)(8)(ii) would require the periodic statement to include a 
statement reminding the consumer of potential risks of delinquency, for 
example, late fees may be assessed or, after a number of months, the 
consumer can be subject to foreclosure.

[[Page 57362]]

    A recent account history. Proposed paragraph (d)(8)(iii) would 
require the periodic statement to include a recent account history as 
part of the delinquency information. The accounting associated with 
mortgage loan payments is complicated, and can be even more so in 
delinquency situations. The accrual of fees and the application of 
payments to past months can make it very difficult for consumers to 
understand the exact amount he or she owes on the loan, and how that 
total was calculated. Additionally, this complex accounting makes it 
very difficult for a consumer to identify errors in of payment 
allocations. Although some of this information would be available from 
previous periodic statements, the Bureau believes that providing a 
separate recent account history is warranted under the circumstances.
    The Bureau believes that the recent account history would enable 
the consumer to understand how past payments were applied, provide the 
information needed to identify any errors, and provide the information 
necessary to make financial decisions. Proposed paragraph (d)(8)(iii) 
would require the account history to show the amount due for each 
billing cycle, or the date on which a payment for a billing cycle was 
considered fully paid. The date on which the payment was considered 
fully paid is included to help a consumer understand that a past 
payment that was previously delinquent has been considered paid. For 
example, suppose a delinquent consumer does not make a payment in 
January, but makes a regular payment in February. Without the account 
history, the consumer would not be able to verify that payments were 
properly applied. The account history is limited to the lesser of the 
past 6 months or the last time the account was current to avoid 
creating a long list that could overwhelm the rest of the periodic 
statement.
    Notice of any loan modification programs. Proposed paragraph 
(d)(8)(iv) would require the periodic statement to include as part of 
the delinquency information in the periodic statement notice of any 
acceptance into a modification program, either trial or permanent, 
create a record of acceptance into the modification program.
    Notice if the loan has been referred to foreclosure. Proposed 
paragraph (d)(8)(v) would require the periodic statement to include, as 
part of the delinquency information notice, that the loan has been 
referred to foreclosure, if applicable, to ensure that the consumer is 
aware of any pending foreclosure.
    Total amount to bring the loan current. Proposed paragraph 
(d)(8)(vi) would require that the total amount needed to bring the loan 
current be included in the delinquency information to ensure that 
consumers knows how much money they must pay to bring the loan back to 
current status.
    Housing counselor information reference. Proposed paragraph 
(d)(8)(vii) would require that the delinquency notice also contain a 
statement directing the consumer to the housing counselor information 
located on the statement, as proposed by paragraph (d)(7)(v). For 
example, if the housing counselor information is on the back of the 
statement, the delinquency information, on the front of the statement, 
would direct consumers to the back of the statement.
    45 Days. The delinquency information is intended to assist 
consumers who have fallen behind on their mortgage payments. The 
proposal would not require provision of this information until the 
consumer is 45 days delinquent. The Bureau recognizes that not all 
delinquencies indicate troubled consumers; a single missed payment may 
be the result of other factors such as misdirected mail. Such consumers 
would likely be notified of a single missed payment by their servicer, 
and the lack of payment received would be reflected on the next 
periodic statement. These consumers would receive minimal additional 
benefit from the delinquency information, and, if this is a frequent 
occurrence, such consumers might become accustomed to ignoring the 
delinquency information. By contrast, two missed payments likely 
indicate a potentially more serious issue, unlike simply failing to 
remember to send in a payment on time. Thus, the delinquency 
information would be required at 45 days to ensure receipt of this 
information by a borrower who missed two consecutive payments.
41(e) Exemptions
41(e)(1) Reverse Mortgages
    Proposed Sec.  1026.41(e)(1) exempts reverse mortgages, as defined 
by Sec.  1026.33(a), from the periodic statement requirement. The 
Bureau is proposing this exemption for reverse mortgages because the 
periodic statement requirement was designed for a traditional mortgage 
product. Information that would be relevant and useful on a reverse 
mortgage statement differs substantially from the information required 
on the periodic statement. Incorporating the unique aspects of a 
reverse mortgage into the periodic statement regulations would require 
massive alterations to the form and regulation. The Bureau believes 
that it is more appropriate to address consumer protections relating to 
reverse mortgages in a separate comprehensive rulemaking.
    The Bureau proposes to use its authority under TILA sections 105(a) 
and (f) and DFA section 1405(b) to exempt reverse mortgages from the 
requirement in TILA section 128(f) to provide periodic statements. For 
the reasons discussed above, the Bureau believes the proposed exemption 
is necessary and proper under TILA section 105(a) both to effectuate 
the purposes of TILA, and to facilitate compliance.
    Moreover, the Bureau believes, in light of the factors in TILA 
section 105(f), that disclosure of the information specified in TILA 
section 128(f)(1) would not provide a meaningful benefit to consumers 
of reverse mortgages. Specifically, the Bureau considers that the 
exemption is proper irrespective of the amount of the loan, the status 
of the borrower (including related financial arrangements, financial 
sophistication, and the importance to the borrower of the loan), or 
whether the loan is secured by the principal residence of the consumer. 
Further, in the estimation of the Bureau, the proposed exemption would 
further the consumer protection purposes of the statute by avoiding the 
consumer confusion that would result by applying the same disclosure 
requirements to reverse mortgages as other mortgages and leaving 
reverse mortgages to be addressed in a comprehensive reverse mortgage 
rulemaking.
    In addition, consistent with DFA section 1405(b), the Bureau 
believes that the proposed modification of the requirements in TILA 
section 128(f) to exempt reverse mortgages would improve consumer 
awareness and understanding and is in the interest of consumers and in 
the public interest.
41(e)(2) Time Shares
    Proposed Sec.  1026.41(e)(2) would clarify that timeshares as 
defined by 11 U.S.C. 101 (53(D)) are exempt from the periodic statement 
requirement. TILA section 128(f) provides that the periodic statement 
requirement applies to residential mortgage loans. The definition of 
residential mortgage loans set forth in TILA section 103(cc)(5) 
specifies that timeshares do not fall under this definition.

[[Page 57363]]

41(e)(3) Coupon Book Exemption
    Proposed Sec.  1026.41(e)(3) would implement the statutory 
exemption for fixed-rate loans for which the servicer provides a coupon 
book containing substantially similar information as found in the 
periodic statement. The Bureau recognizes the value of the coupon book 
as striking a balance between ensuring consumers receive important 
information, and providing a low burden method for servicers to comply 
with the periodic statement requirements. As such, the Bureau seeks to 
effectuate the coupon book exemption. The nature of a coupon book (both 
its smaller size and static nature) creates difficulties in including 
substantially similar information as would be on a periodic statement. 
The main problem is the static nature of a coupon book. Because a 
coupon book may cover an entire year or more, it cannot include 
information that changes on a monthly basis. By contrast, a periodic 
statement can provide dynamic information that changes on a monthly 
basis. To address this problem, the Bureau is proposing to modify the 
coupon book exception permitted by TILA section 128(f)(3) to apply the 
exception where the coupon book contains certain static information and 
other dynamic information is made accessible to the consumer.
    Proposed comment 41(e)(3)-1 defines ``fixed-rate'' by reference to 
Sec.  1026.18(s)(7)(iii), which defines ``fixed-rate mortgage'' as a 
transaction secured by a dwelling that is not an adjustable-rate or a 
step-rate mortgage. Proposed comment 41(e)(3)-2 explains what a coupon 
book is.
    The Bureau proposes to use its authority under TILA section 105(a) 
to give effect to the coupon book exemption in TILA section 128(f)(3). 
TILA section 128(f)(3) provides an exemption to the periodic statement 
for fixed-rate loans when a coupon book that contains substantially 
similar information to the periodic statement is provided. Using its 
authority under TILA section 128(f)(1)(H), the Bureau has added certain 
dynamic items to the periodic statement that would be infeasible to 
include in a coupon book. The Bureau is proposing to use its TILA 
105(a) authority to permit use of a coupon book even where certain 
dynamic information is not included in the book so long as such 
information is made available via the inquiry process. The Bureau 
believes this proposed exemption is necessary and proper to facilitate 
compliance.
    Information in the coupon book. Proposed paragraph (e)(3)(i) would 
require the following information to be included on each coupon within 
the book: The payment due date, the amount due, and the amount and date 
that any late fee will be incurred. In specifying the amount due on 
each coupon, servicers would assume that all prior payments have been 
paid in full.
    Proposed paragraph (e)(3)(ii) would require the following 
information to be included in the coupon book itself, though it need 
not be on each coupon: The amount of the principal loan balance, the 
interest rate in effect for the loan, the date on which the interest 
rate may next change; the amount of any prepayment fee that may be 
charged, the contact information for the servicer, and housing 
counselor information. Each of these items is discussed above in the 
section-by-section analysis of proposed paragraph (d). The coupon book 
would also be required to disclose information on how the consumer may 
obtain the dynamic information discussed below. The information 
described above may, but is not required to be, included on each 
coupon. Instead, it may be included anywhere in the coupon book, 
including on the covers, or on filler pages, as explained by proposed 
comment 41(e)(3)-3.
    Because the outstanding principal balance will typically change 
during the time period covered by the coupon book, proposed comment 
41(e)(3)-4 clarifies that a coupon book need only include the 
outstanding principal balance at the beginning of that time period.
    Information made available. As discussed above, due to the static 
nature of the coupon book, certain dynamic information that is required 
to be included on periodic statements cannot be included. To use the 
coupon book provision, the proposed rule would require that the dynamic 
information be made available upon the consumer's request. The servicer 
could provide the information orally, or in writing, or electronically, 
if the consumer consents. Thus, proposed paragraph (e)(3)(iii) would 
require the following dynamic information be made available to the 
consumer upon request: The monthly payment amount, including a 
breakdown showing how much, if any, will be allocated to principal, 
interest, and any escrow account; the total of fees or charges imposed 
since the last payment period; any payment amount past due; the total 
of all payments received since the beginning of the payment period, 
including a breakdown of how much, if any, of those payments was 
applied to principal, interest, escrow, fees and charges, and any 
partial payment suspense accounts; the total of all payments received 
since the beginning of the calendar year, including a breakdown of how 
much, if any, of those payments was applied to principal, interest, 
escrow, fees and charges, and how much is currently in any partial 
payment or suspense account; and a list of all the transaction activity 
(as defined in proposed comment 41(d)(4)-1) that occurred since the 
payment period.
    The Bureau seeks comment on whether requiring servicers to make 
this information available would impose significant burden or costs 
that exceed consumer benefits. In particular, the Bureau seeks comment 
on whether providing the past payment breakdown information would 
impose greater burden then benefits.
    Delinquency information. Because of the importance of the 
delinquency information, proposed paragraph (e)(3)(iv) would require 
that to qualify for the coupon book exception, the delinquency 
information required by proposed Sec.  1026.41(d)(8), discussed above, 
to be sent to the consumer in writing for each billing cycle for which 
the consumer is more than 45 days delinquent at the beginning of the 
billing cycle.
41(e)(4) Small Servicer Exemption
    Proposed paragraph (e)(4) would exempt certain smaller servicers 
from the duty to provide periodic statements for certain loans. A small 
servicer would be defined as a servicer (i) who services 1,000 or fewer 
mortgage loans; and (ii) only services mortgage loans for which the 
servicer or an affiliate is the owner or assignee, or for which the 
servicer or an affiliate is the entity to whom the mortgage loan 
obligation was initially payable.
    The Bureau has decided to propose this exemption after careful 
consideration of the benefits and burdens of the periodic statement 
requirement. As proposed, the Bureau believes that the periodic 
statement will be helpful to consumers because it will provide a well-
integrated communication that not only contains information about 
upcoming payments due, but also information about loan status, fees 
charged, past payment crediting, and potential resources and other 
useful information for consumers who have fallen behind in their 
payments. The Bureau believes that providing a single-integrated 
document, in place of a number of other communications that contain 
fragments of this information can be more efficient for consumers and 
servicers alike. And in light of the historic problems that have been 
reported in parts of the

[[Page 57364]]

servicing industry, the periodic statement could be a useful tool for 
consumers to monitor their servicers' performance and identify any 
issues or errors as soon as they occur.
    At the same time, the Bureau recognizes that the servicing industry 
is not monolithic. Producing a periodic statement with the elements 
proposed in Sec.  1026.41 requires sophisticated programming to place 
individualized information on each borrower's statement for each 
billing cycle. The Bureau recognizes that very small servicers would 
likely have to rely on outside vendors to develop or modify existing 
systems to produce statements in compliance with the rule. As discussed 
further below, the Bureau received detailed information from the SBREFA 
panel process confirming the technological and operational challenges 
faced by small servicers, as well as postage and other expenses that 
would be associated with providing periodic statements on an ongoing 
basis. Because small servicers maintain small portfolios, the SBREFA 
participants emphasized that they cannot spread fixed costs across a 
large number of loans the way that larger servicers can.
    Where small servicers already have incentives to provide high 
levels of customer contact and information, the Bureau believes that 
the circumstances may warrant exempting those servicers from complying 
with the periodic statement requirement. In particular, small servicers 
that make loans in their local communities and then either hold their 
loans in portfolio or retain the servicing rights have incentives to 
maintain ``high-touch'' customer service models. Affirmative 
communications with consumers help such servicers (and their 
affiliates) to ensure loan performance, protect their reputations in 
their communities, and market other consumer financial products and 
services.\114\ Because those servicers have a long-term relationship 
with the borrowers, their incentives with regard to charging fees and 
other servicing practices may be more aligned with borrower interests. 
These motivations to ensure a good relationship incentivize good 
customer service, including making information about upcoming payments, 
fees charged and payment history, and information for distressed 
borrowers easily available to consumers by other means.
---------------------------------------------------------------------------

    \114\ See Re-Thinking Loan Serving, Prime Alliance Loan 
Servicing, p. 8 (April 2010) available at: http://cuinsight.com/media/doc/WhitePaper_CaseStudy/wpcs_ReThinking_LoanServicing_May2010.pdf.
---------------------------------------------------------------------------

    The Bureau believes, however, that both conditions are necessary to 
warrant a possible exemption from the periodic statement rule--that is, 
that an exemption may be appropriate only for servicers that service a 
relatively small number of loans and that originated the loans and 
either retained ownership or servicing rights. Larger servicers are 
likely to be much more reliant on and sophisticated users of computer 
technology in order to manage their operations efficiently. In such 
situations, implementation of the periodic statement requirement is 
likely to be somewhat easier to accomplish and perhaps even provide 
technological benefits for the servicers. Larger servicers also 
generally operate in a larger number of communities under circumstances 
in which the ``high touch'' model of customer service is not 
practicable. In light of this fact and the consumer benefits from 
integrated communications, the Bureau does not believe it would be 
appropriate to exempt all servicers who originate loans that they then 
hold in portfolio or with respect to which they retain servicing 
rights, without regard to size.
    SBREFA Panel. The proposed exemption is consistent with feedback 
that the Bureau received from small entity representatives during the 
SBREFA panel process regarding the potentially significant burdens that 
would be imposed by a periodic statement requirement. Participants 
explained that they already provided much of the information in the 
proposed periodic statement through alternative means, including 
correspondence, more limited periodic statements, coupon books, 
passbooks, and telephone conversations.\115\ Even where SERs did not 
affirmatively provide particular items of information to borrowers, 
they stated that their companies would generally provide it on request. 
However, the participants emphasized repeatedly that consolidating all 
of the information into a single monthly dynamic statement would be 
difficult for small servicers.\116\
---------------------------------------------------------------------------

    \115\ SBREFA Final Report, supra note 22, at 16-19.
    \116\ Id.
---------------------------------------------------------------------------

    The SERs explained that due to their small size, they generally do 
not maintain in-house technological expertise and would generally use 
third-party vendors to develop periodic statements. Due to their small 
size, they believed they would have no control over these vendor 
costs.\117\ Additionally, the small servicers have smaller portfolios 
over which to spread the fixed costs of producing periodic statements. 
Such servicers stated they are unable to gain cost efficiencies and 
cannot effectively spread the implementation costs of periodic 
statements across their loan portfolios. Finally, several SERs stated 
that simply mailing periodic statements could cost thousands of dollars 
per month beyond some of their current alternative communication 
channels, such as coupon books or passbooks.
---------------------------------------------------------------------------

    \117\ Id. at 17.
---------------------------------------------------------------------------

    Small Servicer Defined. The Bureau lacks the data necessary to 
precisely calibrate the amount of burden that would be imposed by the 
periodic statement requirement on servicers of different sizes. 
However, the Bureau believes that a threshold of 1,000 loans serviced 
may be an appropriate approximation to limit the proposed exemption to 
smaller servicers in the market. Assuming that, on average, most loans 
are refinanced about every five years, this threshold works out to an 
average of 200 originations per year. The Bureau estimates that a small 
servicer of this size would earn about $600,000 annually in servicing 
fee revenues.\118\ The SERs estimated that the periodic statement 
burden could cost thousands of dollars each month.\119\ For comparison, 
the Bureau notes that the top 100 mortgage servicers, as measured by 
size of unpaid principal balance serviced, (which together have 
approximately 82% of the mortgage servicing market share \120\) each 
service in excess of $3 billion of unpaid principal balance.
---------------------------------------------------------------------------

    \118\ This estimate assumes that a servicer generates a net 
mortgage servicing fee rate of 35 basis points and that the average 
unpaid principal balance on the 1,000 loans is $175,000. The 35 
basis points represents a blend of different mortgage servicing 
asset quality. Mortgage servicing fees for conventional servicing 
are generally 25 basis points; mortgage servicing fees for subprime 
mortgage loans or loans sold to trusts guaranteed by Ginnie Mae may 
vary between 40-50 basis points. Servicers are also able to generate 
ancillary income from sources other than the mortgage servicing fee, 
including additional fee revenue, such as late fees, and float on 
principal, interest and escrow payments, the composition of which 
may vary significantly among servicers. The Bureau believes that 35 
basis points is a reasonable assumption in current market 
conditions. See, e.g., Newcastle Investment Corp., Form 10-Q, filed 
May 10, 2012, at 15-16, available at http://www.sec.gov/Archives/edgar/data/1175483/000138713112001455/nct-10q_033112.htm (last 
accessed June 13, 2012 (describing REIT investment in excess 
mortgage servicing rights (MSRs) from a portfolio of MSRs generating 
an initial weighted average total mortgage servicing fee amount of 
35 basis points).
    \119\ SBREFA Final Report, supra note 22, at 19. (One SER 
estimated it could cost an additional $11,000 per month in on-going 
support, another SER estimated that a vendor might charge $1,000-
$2,000 per month in fees, a third SER estimated monthly costs of 
$2,200 based on a cost of $1 per statement).
    \120\ Inside Mortgage Finance, Issue 2012:13 (March 30, 2012) at 
12.
---------------------------------------------------------------------------

    In addition to the 1,000 loan threshold, the exemption from the

[[Page 57365]]

periodic statement would be limited to entities that exclusively 
service loans that they or an affiliate originated or was the entity to 
which the obligation was initially payable. A servicer must both 
exclusively service such loans and satisfy the 1000-loan threshold to 
qualify for the small servicer exemption. The exemption is limited to 
these servicers because of the incentive discussed above.
    The proposed commentary clarifies the application of the small 
servicer definition. Proposed comment 41(e)(4)-1 states that loans 
obtained by a servicer or an affiliate in connection with a merger or 
acquisition are considered loans for which the servicer or an affiliate 
is the creditor to whom the mortgage loan is initially payable.
    The proposed rule also states that in determining whether a small 
servicer services 1,000 mortgage loans or less, a servicer is evaluated 
based on its size as of January 1 for the remainder of the calendar 
year. A servicer that, together with its affiliates, crosses the 
threshold will have six months or until the beginning of the next 
calendar year, whichever is later, to begin providing periodic 
statements. Proposed comment 41(e)(4)-2 gives examples for calculating 
when a servicer who crosses the 1,000 loan threshold would need to 
begin sending periodic statements. The purpose of this provision is to 
permit a servicer that crosses the 1,000 loan threshold a period of 
time (the greater of either six months, or until the beginning of the 
next calendar year) to bring the servicer's operations into compliance 
with the periodic statement provisions for which the servicer was 
previously exempt.
    Proposed comments 41(e)(4)-3 clarifies when subservicers or 
servicers who do not own the loans they are servicing, do not qualify 
for the small servicer exemption, even if such servicers are below the 
1,000 loan threshold.
    Proposed comment 41(e)(4)-4 clarifies if a servicer subservices 
mortgage loans for a master servicer that does not meet the small 
servicer exemption, the subservicer cannot claim the benefit of the 
exemption, even if it services 1,000 or fewer loans. The Bureau 
believes that permitting an exemption in such circumstance could 
potentially exempt a larger master servicer from the obligation to 
provide periodic statements, even if it has master servicing 
responsibility for several thousand loans.
    The Bureau seeks comment on all aspects of the proposed exemption, 
particularly whether the regulation should exempt small servicers,\121\ 
and, if so, whether the proposed scope and definition of a small 
servicer is appropriate. Specifically, should the test be the one 
proposed regarding origination, and is 1,000 or less the appropriate 
size threshold? The Bureau particularly requests data on implementation 
costs and the level of general activity by small servicers. The Bureau 
also seeks comment on whether it would be appropriate to exempt small 
servicers from other elements of the proposed servicing rules under 
TILA and RESPA.
---------------------------------------------------------------------------

    \121\ As discussed above, for the purposes of Sec.  1026.41, the 
term ``servicer'' includes creditors, assignees and servicers.
---------------------------------------------------------------------------

    Authority. The Bureau proposes to exercise its authority under TILA 
section 105(a) and (f), and DFA section 1405(b) to exempt small 
servicers from the periodic statement requirement under TILA section 
128(f). For the reasons discussed above, the Bureau believes the 
proposed exemption is necessary and proper under TILA section 105(a) to 
facilitate compliance. As discussed above, it would be very expensive 
for small servicers to incur the initial costs of setting up a system 
to send periodic statements, as a result, such servicers may choose to 
exit the market. In addition, consistent with TILA section 105(f) and 
in light of the factors in that provision, the Bureau believes that 
requiring small servicers to comply with the periodic statement 
requirement specified in TILA section 128(f) would not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Bureau believes that the business model of small 
servicers ensures their consumers already receive the necessary 
information, and that requiring them to provide periodic statements 
would impose significant costs and burden. Specifically, the Bureau 
believes that the exemption is proper without regard to the amount of 
the loan, the status of the borrower (including related financial 
arrangements, financial sophistication, and the importance to the 
borrower of the loan), or whether the loan is secured by the principal 
residence of the consumer. In addition, consistent with DFA section 
1405(b), for the reasons discussed above, the Bureau believes that the 
proposed modification of the requirements in TILA section 128(f) to 
exempt small servicers would further the consumer protection purposes 
of TILA.
Appendix H to Part 1026
    The Bureau proposes to exercise its authority under TILA section 
105(c) to propose model and sample forms for Sec.  1026.20(c) and (d).
Appendix H-4(D) to Part 1026
    The Bureau proposes to exercise its authority under TILA section 
105(c) to propose model and sample forms for Sec.  1026.20(c) and (d).
Appendices G and H--Open-End and Closed-End Model Forms and Clauses
    Proposed revisions to Appendices G and H-1 would add the appendix 
sections that would illustrate examples of the model forms and sample 
forms for the ARM disclosures proposed by Sec.  1026.20(c) and (d) to 
the list of appendix sections illustrating examples of other model 
disclosures required by Regulation Z whose format or content may not be 
changed by creditors.
Appendix H--Closed Model Forms and Clauses-7(i)
    Proposed revisions to Appendix H-7(i) would include Sec.  
1026.20(d), as well as Sec.  1026.20(c), as the types of models 
illustrated in this appendix. The proposed revision also would add text 
so that the provision stated that the Appendix H-4(D) includes examples 
of the two types of model forms for adjustable-rate mortgages: Sec.  
1026.20(d) initial adjustment notices and Sec.  1026.20(c) payment 
change notices for adjustments resulting in corresponding payment 
changes.

VII. Section 1022(b)(2) Analysis

    In developing the proposed rule, the Bureau has considered 
potential benefits, costs, and impacts, and has consulted or offered to 
consult with the prudential regulators, HUD, the FHFA, and the Federal 
Trade Commission, including regarding consistency with any prudential, 
market, or systemic objectives administered by such agencies.\122\ The 
Bureau also held discussions with or solicited feedback from the U.S. 
Department of Agriculture Rural Housing Service, the Farm Credit 
Administration, the FHA, and the VA regarding the potential impacts of 
the proposed rule on those entities' loan programs.
---------------------------------------------------------------------------

    \122\ Specifically, section 1022(b)(2)(A) of the Dodd-Frank Act 
calls for the Bureau to consider the potential benefits and costs of 
a regulation to consumers and covered persons, including the 
potential reduction of access by consumers to consumer financial 
products or services; the impact 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.
---------------------------------------------------------------------------

    In this rulemaking, the Bureau proposes to amend Regulation Z, 
which implements TILA, and the official commentary to the regulation, 
as part of

[[Page 57366]]

its implementation of the Dodd-Frank Act amendments to TILA's mortgage 
servicing rules. The proposed amendments to Regulation Z implement 
Dodd-Frank Act Sections 1418 (initial interest rate adjustment notice 
for ARMs), 1420 (periodic statement), and 1464 (prompt crediting of 
mortgage payments and response to requests for payoff amounts). The 
proposed rule would also revise certain existing regulatory 
requirements for disclosing rate and payment changes to adjustable-rate 
mortgages in current Sec.  1026.20(c).
    Elsewhere in today's Federal Register, the Bureau is also 
publishing the 2012 RESPA Servicing Proposal that would implement 
section 1463 of the Dodd-Frank Act. The RESPA proposal addresses 
procedures for obtaining force-placed insurance; procedures for 
investigating and resolving alleged errors and responding to requests 
for information; reasonable information management policies and 
procedures; early intervention for delinquent borrowers; continuity of 
contact for delinquent borrowers; and loss-mitigation procedures.
    As discussed in part II above, mortgage servicing has been marked 
by pervasive and profound consumer protection problems. As a result of 
these problems, Congress included in the Dodd-Frank Act the provisions 
described above, which specifically address mortgage servicing. The new 
protections in the rules proposed under TILA and RESPA would 
significantly improve the transparency of mortgage loans after 
origination, provide substantive protections to consumers, enhance 
consumers' ability to obtain information from and dispute errors with 
servicers, and provide consumers, particularly distressed and 
delinquent consumers, with better customer service when dealing with 
servicers.

A. Provisions To Be Analyzed

    The analysis below considers the benefits, costs, and impacts of 
the following major proposed provisions:
    1. New initial interest rate adjustment notices for most closed-end 
adjustable-rate mortgages.
    2. Changes in the format, content, and timing of the Regulation Z 
Sec.  1026.20(c) disclosure for most closed-end adjustable-rate 
mortgages.
    3. New periodic statement disclosure for most closed-end mortgages.
    4. Prompt crediting of payments for consumer credit transactions 
(both open- and closed-end) secured by the consumer's principal 
dwelling and response to requests for payoff amounts from consumers 
with consumer credit transactions (both open- and closed-end) secured 
by a dwelling.
    With respect to each major proposed provision, the analysis 
considers the benefits and costs to consumers and covered persons. The 
analysis also addresses certain alternative provisions that were 
considered by the Bureau in the development of the rule. The Bureau 
requests comments on the analysis of the potential benefits, costs and 
impacts of the proposal.

B. Baseline for Analysis

    The amendments to TILA are self-effectuating, and the Dodd-Frank 
Act does not require the Bureau to adopt regulations to implement these 
amendments. Specifically, the proposed provisions regarding the new 
initial interest rate adjustment notice and the new periodic statement 
disclosure implement self-effectuating amendments to TILA. Thus, many 
costs and benefits of these proposed provisions would arise largely or 
entirely from the statute, not from the proposed rule. The proposed 
provisions would provide substantial benefits compared to allowing 
these TILA amendments to take effect alone, even without the proposed 
additional content and other features of the disclosures, by clarifying 
parts of the statute that are ambiguous. Greater clarity on these 
issues should reduce the compliance burdens on covered persons by 
reducing costs for attorneys and compliance officers as well as 
potential costs of over-compliance and unnecessary litigation. 
Moreover, the costs that these provisions would impose beyond those 
imposed by the statute itself are likely to be minimal.
    DFA section 1022 permits the Bureau to consider the benefits, 
costs, and impacts of the proposed rule solely compared to the state of 
the world in which the statute takes effect without an implementing 
regulation. To provide the public better information about the benefits 
and costs of the statute, however, the Bureau has chosen to consider 
the benefits, costs, and impacts of the major provisions of the 
proposed rule against a pre-statutory baseline (i.e., to consider the 
benefits, costs, and impacts of the relevant provisions of the Dodd-
Frank Act and the regulation combined).
    The proposed provisions regarding prompt crediting of payments and 
response to requests for payoff amounts also implement self-
effectuating amendments to TILA. These amendments to TILA, however, 
largely codify existing Regulation Z provisions in Sec.  1026.36(c). 
Thus, the pre-statute and post-statute baselines are substantially the 
same. The proposed provisions would clarify servicer \123\ duties that 
are ambiguous under the statute and existing regulations.
---------------------------------------------------------------------------

    \123\ Reference in parts VII, VIII, and IX to ``servicers'' with 
regard to the proposed rule for requests for payoff amounts means 
creditors and servicers.
---------------------------------------------------------------------------

    Finally, the proposed provisions regarding the Sec.  1026.20(c) 
disclosure for adjustable-rate mortgages impose obligations on 
servicers \124\ that are authorized, but not required, under TILA 
sections 105(a) and 128(f) and DFA section 1405(b). With respect to 
proposed Sec.  1026.20(c), the Bureau has chosen to consider the 
benefits, costs, and impacts of the proposed provisions against the 
baseline provided by the current provisions of Sec.  1026.20(c).
---------------------------------------------------------------------------

    \124\ Reference in parts VII, VIII, and IX to ``servicers'' with 
regard to the proposed rules for adjustable-rate mortgages means 
creditors, assignees, and servicers.
---------------------------------------------------------------------------

    The Bureau has discretion in future rulemakings to choose the most 
appropriate baseline for that particular rulemaking.

C. Coverage of the Proposal

    Each proposed provision covers certain consumer credit transactions 
secured by a dwelling, as described further in each section below.

D. Potential Benefits and Costs to Consumers and Covered Persons

1. New Initial Interest Rate Adjustment Notice for Adjustable-Rate 
Mortgages
    Section 1418 of the Dodd-Frank Act requires servicers to provide a 
new disclosure to consumers who have hybrid ARMs. The disclosure 
concerns the initial interest rate adjustment and must be given either 
(a) between 6 and 7 months prior to such initial interest rate 
adjustment or (b) at consummation of the mortgage if the initial 
interest rate adjustment occurs during the first six months after 
consummation.
    The Bureau proposes to implement this provision by requiring that 
the disclosure be given at least 210, but not more than 240, days 
before the first payment at the adjusted level is due. The Bureau, 
relying upon the savings clause in TILA section 128A(b), proposes to 
broaden the scope of the proposed rule to include ARMs that are not 
hybrid. The proposed disclosure would include the content required by 
the statute, except for providing contact information for housing 
counseling agencies and programs (where the proposed rule provides an 
alternative disclosure), and certain additional information. Finally, 
as explained above, the Bureau conducted three rounds of consumer 
testing. The

[[Page 57367]]

disclosures were revised after each round of testing to improve their 
effectiveness with consumers.
    Benefits to consumers. The information in the proposed interest 
rate adjustment notice would provide a number of benefits to consumers 
with closed-end adjustable-rate mortgages at the initial interest rate 
adjustment. These benefits may be broadly categorized as facilitating 
(a) the choice of an alternative to making the new payment, including 
refinancing; (b) the correction of any errors in the adjusted payment; 
(c) the budgeting of household resources; and (d) the accumulation of 
equity by certain consumers (i.e., those with interest-only or 
negatively-amortizing payments). Individual items in the disclosure may 
provide more than one of these benefits.
    The proposed rule would require disclosure of the new interest rate 
and payment--the exact amount, where available, or an estimate, where 
exact amounts are unavailable. Disclosing an estimate of the interest 
rate and any new payment at least 210, but not more than 240, days 
before the first payment at the adjusted level is due would give 
consumers a significant amount of time in which to pursue alternatives 
to repaying the loan at the adjusted level. When interest rates are 
stable, the estimate is informative about the future mortgage payment, 
and consumers benefit from being able to plan future budgets or to 
address a problem with affordability, perhaps by refinancing. The 
estimate is less informative about the future mortgage payment when 
interest rates are volatile, but under any circumstances, an estimated 
payment that is well above the highest amount that the consumer can 
afford alerts the consumer to a potential problem and the need to 
gather additional information.
    While some consumers with adjustable-rate mortgages may benefit 
from disclosure of any potential new interest rate and payment (or 
estimates of these amounts) well before payment is due, the benefits 
from this information are likely greatest when provided prior to the 
initial interest rate adjustment. Subsequent interest rate adjustments 
reflect the difference between two fully indexed interest rates (i.e., 
interest rates that are the sum of a benchmark rate and a margin). In 
contrast, the initial interest rate adjustment may reflect the 
difference between an interest rate that is below the fully indexed 
rate at the time of origination (a so-called ``teaser'' or 
``introductory'' rate) and a rate that is fully indexed at the time of 
adjustment. For example, in 2005, the teaser rate on subprime ARMs with 
an initial fixed-rate period of two or three years was 3.5 percentage 
points below the fully indexed rate.\125\ As a result, mortgages 
originated in that year faced a potentially large change in the 
interest rate and payment, or ``payment shock,'' at the first 
adjustment. Furthermore, consumers facing the initial interest rate 
adjustment may fail to anticipate even the possibility of a change in 
payment, since this is necessarily the first time since origination 
that the payment could change. Consumers facing payment shock or an 
unanticipated change in payment also benefit from having additional 
time to plan future budgets or to address a problem with affordability. 
Thus, consumers facing the initial interest rate adjustment may benefit 
from the proposed notice through both the information it provides 
regarding the potentially new interest rate and payment and the 
additional time it provides consumers to adapt.
---------------------------------------------------------------------------

    \125\ See Christopher Mayer, Karen Pence, & Shane Sherlund, The 
Rise in Mortgage Defaults, 23 J. Econ. Persps. 27, 37 (2009).
---------------------------------------------------------------------------

    A number of items on the proposed disclosure would help the 
consumer respond to problems with making the new payment. In addition 
to information on the amount of the new payment, the proposed 
disclosure lists alternatives to making the new payment and gives a 
brief explanation of each alternative. It explains the circumstances 
under which any prepayment penalty may be imposed and the maximum 
amount of the penalty. It provides information on rate limits that may 
affect future payment changes. It provides the telephone number of the 
creditor, assignee, or servicer to call if the consumer anticipates 
having problems making the new payment. Finally, it gives contact 
information for the State housing authority and information to access 
certain lists of homeownership counselors made available by Federal 
agencies. All of this information benefits a consumer who needs to find 
an alternative to making the new payment.
    Certain items on the proposed disclosure may assist the consumer in 
detecting any errors in the computation of the new payment estimate. 
The proposed disclosure provides an explanation of how the new interest 
rate and payment are determined, including the index or formula used 
and any additional adjustment, such as a margin added to the index. It 
also states any limits on the increase in the interest rate or payment 
at each adjustment and over the life of the loan. This information may 
also facilitate consumers' ability to compare their current mortgage 
against competing products and provide other benefits, but at the very 
least it assists consumers in verifying the accuracy of the new 
estimated payment.
    Finally, certain items on the proposed disclosure may facilitate 
the accumulation of equity by consumers with interest-only or 
negatively-amortizing payments. For these consumers, the disclosure 
states the amount of both the current and the expected new payment 
allocated to principal, interest, and escrow, as applicable.\126\ The 
disclosure also states that the new payment will not be allocated to 
pay loan principal. If negative amortization occurs as a result of the 
adjustment, the disclosure must state the payment required to fully 
amortize the loan at the new interest rate. The proposed disclosure 
alerts consumers with these types of loans to features that bear on 
equity accumulation, and it provides this information at a time when 
these consumers may be evaluating their mortgage terms and considering 
refinancing.
---------------------------------------------------------------------------

    \126\ The current payment allocation would also appear on the 
proposed periodic statement disclosure. However, listing the current 
and expected new payment allocation in one disclosure benefits 
consumers by making clear any differences between the two 
allocations. The Bureau recognizes that the benefit of information 
in a particular disclosure may be mitigated to the extent that the 
same information is available in other disclosures that are provided 
at the same (or nearly the same) time.
---------------------------------------------------------------------------

    As discussed above, the Bureau is proposing formatting requirements 
for the initial interest rate adjustment notice. These requirements 
benefit consumers by facilitating consumer understanding of the 
information in the disclosures. Except for the date of the notice, the 
proposed rule requires that the disclosures must be provided in the 
form of a table and in the same order as, and with headings and format 
substantially similar to, certain forms provided with the proposed 
rule. The Bureau's testing showed that consumers readily understood the 
information in the notice when the terms and calculations were 
presented in the groupings and logical order contained in the model 
forms. While there is no formula for producing the ideal disclosure, 
the proposed formatting requirements are generally informed by decades 
of consumer testing. The Bureau believes that disclosures that satisfy 
the proposed formatting requirements likely provide greater benefits to 
consumers than both the

[[Page 57368]]

alternatives tested and disclosures that do not satisfy these 
requirements.\127\
---------------------------------------------------------------------------

    \127\ For a general discussion of disclosure formatting, 
disclosure testing and consumer benefits, see Jeanne Hogarth & Ellen 
Merry, Designing Disclosures to Inform Consumer Financial 
Decisionmaking: Lessons Learned from Consumer Testing, 97 Fed. 
Reserve Bull. 1 (Aug. 2011).
---------------------------------------------------------------------------

    Magnitude of the benefits to consumers. Research shows that 
consumers make important decisions about housing finance at the initial 
interest rate adjustment. Consumers often choose to prepay at the 
initial interest rate adjustment, and the greater the payment shock, 
the greater the likelihood of prepayment. These results hold for 
conventional ARMs originated in the 1990s as well as for subprime 
hybrid ARMs (2/28 and 3/27) originated in the 2000s.\128\
---------------------------------------------------------------------------

    \128\ Brent W. Ambrose & Michael LaCour-Little, Prepayment Risk 
in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some 
New Evidence, 29 Real Est. Econs. 305 (2001) (showing that the 
expiration of teaser rates causes more ARM prepayments, using data 
from the 1990s). The same result, using data from the 2000s and 
focusing on subprime mortgages, is reported in Shane Sherland, The 
Past, Present and Future of Subprime Mortgages, (Div. of Research & 
Statistics and Div. of Monetary Affairs, Fed. Reserve Bd., 
Washington, D.C. 2008); The result that larger payment increases 
generally cause more ARM prepayments, using data from the 1980s, 
appears in James Vanderhoff, Adjustable and Fixed Rate Mortgage 
Termination, Option Values and Local Market Conditions, 24 Real Est. 
Econs. 379 (1996).
---------------------------------------------------------------------------

    More controversial is the question of whether payment shock at the 
initial interest rate adjustment causes default. In general, data from 
the 2000s does not find a causal relationship between payment shock at 
the initial interest rate adjustment and default.\129\ However, for 
consumers with certain hybrid ARMs originated in the 2000s, a 
substantial number experienced a payment shock of at least 5% at the 
initial interest rate adjustment, and some research finds that the 
default rate for these loans was three times higher than it would have 
been if the payment had not changed.\130\
---------------------------------------------------------------------------

    \129\ Mayer, Pence, & Sherlund, supra note 125, at 37.
    \130\ Anthony Pennington-Cross & Giang Ho, The Termination of 
Subprime Hybrid and Fixed-Rate Mortgages, 38 Real Est. Econs. 399, 
420 (2010).
---------------------------------------------------------------------------

    Whether or not the proposed initial interest rate adjustment notice 
would reduce default under certain conditions, the disclosure may 
generally facilitate the important decisions about housing finance that 
consumers make at the initial interest rate adjustment. Extrapolating 
from FHFA data, the Bureau estimates that approximately 285,000 
adjustable-rate mortgages will have an initial interest rate adjustment 
in each of the next three years. Few adjustable-rate mortgages in 
recent years have had teaser rates; however, consumers with these 
mortgages may benefit from shifting to a fixed-rate mortgage. If the 
new initial interest rate adjustment notice prompts just 1% of 
consumers who receive the notice to refinance and these consumers save 
$50 per month, the annual savings to consumers would be over $1.7 
million.
    The Bureau does not have the data necessary to fully quantify the 
benefits of the proposed initial interest rate adjustment notice to 
consumers. Certain consumers with adjustable-rate mortgages will be 
aware of the upcoming initial interest rate adjustment and the 
possibility of refinancing or (if there is a payment adjustment) 
considering alternatives to making a new payment, of needing to 
reallocate household resources in light of a new payment, of addressing 
an error in computing a new payment, and of reviewing the household 
balance sheet in light of an interest-only or negatively-amortizing 
loan. The Bureau is not aware of data with which it could fully 
quantify the value of the information in the disclosure to these 
consumers or determine the savings to them in time and other resources 
from not having to obtain this information from other sources. 
Furthermore, there are other consumers with adjustable-rate mortgages 
who may be uninformed or misinformed (or perhaps forgetful) about the 
upcoming initial interest rate adjustment, the possibility of an error 
in computing a potential new payment, or the financial implications of 
interest-only and negatively-amortizing loans on equity accumulation. 
The Bureau is not aware of data with which it could quantify the 
benefits to these consumers of becoming better informed about these 
features of their mortgages. However, the Bureau believes that the 
proposed initial interest rate adjustment notice may provide 
substantial benefits to these consumers.
    Costs to consumers. As explained below in the discussion of costs 
to covered persons, the cost per disclosure would be about $2.60. This 
estimate takes into account both one-time costs (amortized over five 
years) and annual production and distribution costs.\131\ Under 
conservative assumptions, in the illustration above, the benefits to 
consumers who receive the disclosure would be $6.
---------------------------------------------------------------------------

    \131\ In this and subsequent numerical discussions, 
``amortizing'' an amount $x over a certain number of years means 
making equal payments in each year that sum up to $x.
---------------------------------------------------------------------------

    Given the small cost per disclosure, the Bureau believes that 
consumers would see at most a minimal increase in fees or charges. 
Servicers may in general attempt to shift a cost increase onto others 
and consumers may ultimately bear part of an increase that falls 
nominally on servicers. For the proposed initial interest rate 
adjustment notice, however, the costs to be shifted are small. 
Furthermore, even if servicers did attempt to shift the costs, it is 
not clear that consumers would bear them. Consider, for example, 
servicers who bid for servicing rights on mortgages originated by 
others. The additional costs associated with providing the initial rate 
adjustment notice may cause servicers to bid less aggressively for 
certain servicing rights. In this case, lenders or investors may bear 
some of the cost. Servicers may also attempt to obtain higher 
compensation for servicing from originators. Originators may respond by 
attempting to increase fees or charges at origination or by increasing 
the cost of credit. In this case consumers may bear some of the costs, 
but not necessarily all of them. The relative sensitivity of supply and 
demand in these inter-related markets would determine the proportion of 
the cost increase borne by different persons, including consumers.
    The proposed rule limits how servicers may present the required 
information in the disclosure. Servicers would have to present the 
required information in a format substantially similar to the format of 
the proposed model forms. The Bureau recognizes the possibility that 
constraints on the way servicers present information to consumers may 
prohibit the use of more effective forms that servicers are using or 
may develop. The constraints would then impose a cost on consumers. The 
Bureau does not believe there are any such costs in this case. The 
Bureau is unaware of any efforts by servicers to develop an initial 
interest rate adjustment notice that meets the requirements of the 
Dodd-Frank Act and provides the benefits to consumers of the proposed 
model forms. The Bureau worked closely with Macro to develop the model 
disclosures, conducted three rounds of consumer testing, and revised 
the disclosure after testing.
    During the SBREFA process, the Bureau received comments from some 
SERs that disclosing an estimate of the new monthly payment may confuse 
certain consumers. The Bureau believes that clearly stating on the form 
that the new monthly payment is an estimate and that consumers will 
receive a notice with the exact amounts two to four months prior to the 
date the first payment at the adjusted level is due (in cases where the 
interest rate adjustment results in a corresponding payment change) 
will mitigate consumer

[[Page 57369]]

confusion on this point. The Bureau notes that section 1418 of the 
Dodd-Frank Act requires disclosure of a good faith estimate of the new 
monthly payment. In addition, servicers must provide an accurate 
statement of the new monthly payment in the notice if it is available; 
and if it is not available, then consumers will receive an accurate 
statement of the new monthly payment between 60 and 120 days before the 
first payment is due, if the interest rate adjustment causes a 
corresponding change in payment pursuant to the proposed Sec.  
1026.20(c) disclosure.
    Benefits to covered persons. The timing and the content of the 
proposed initial interest rate adjustment notice may provide certain 
benefits to servicers. Servicers benefit when distressed consumers 
contact them well in advance of a possible increase in interest rate 
and payment, since early communication gives servicers and consumers 
more time to work together constructively. The proposed disclosure 
provides consumers with substantial advance notice about their 
potential future payment and alternatives. Distressed consumers with 
such notice may be more likely to contact their servicer well in 
advance of an increase in payment, work constructively with their 
servicer, and, if necessary, explore alternatives.
    Costs to covered persons. The proposed initial interest rate 
adjustment notice will result in certain compliance costs to covered 
persons. Servicers (or their vendors) may need to adapt their software 
and compliance systems to produce the new form. The new proposed form 
would also provide to borrowers information that is not currently 
disclosed to them, including information that is specific to each loan. 
Servicers (or their vendors) may not have ready access to all of this 
additional loan-level information; for example, if some of this 
additional information is stored in a database that is not regularly 
accessed by systems that produce the current disclosures. The Bureau 
seeks information from servicers and vendors that provide services to 
servicers with respect to operations regarding the storage of loan-
level information and the costs of providing the proposed new loan-
level information to consumers.
    Some of the information provided in the proposed initial interest 
rate adjustment notice is also provided in the proposed revisions to 
the Sec.  1026.20(c) disclosure. The Bureau believes that harmonizing 
the two disclosures would mitigate the compliance burden for servicers 
and reduce the aggregate production costs to servicers.
    Based on discussions with servicers and software vendors to date, 
the Bureau believes that servicers will for the most part use vendors 
for one-time software and IT upgrades and for ongoing production and 
distribution (i.e., mailing) of the disclosure. Servicers will also 
incur one-time costs to learn about the proposed rule, but those costs 
will be minimal. Furthermore, the Bureau believes that under existing 
mortgage servicing contracts, vendors would absorb the one-time 
software and IT costs and ongoing production costs of disclosures for 
large- and medium-sized servicers but pass along these costs to small 
servicers. All servicers would pay distribution costs.
    Based on discussions with industry and extrapolating from FHFA 
data, the Bureau estimates the one-time cost of the proposed disclosure 
to be just over $3 million for 12,800 servicers. Amortizing this cost 
over five years and combining it with annual costs of $139,000 gives a 
total annual cost of $58 per servicer, or $2.60 per notice. The use of 
vendors substantially mitigates the costs of revising software and IT, 
as the efforts of a single vendor addresses the needs of a large number 
of servicers. The ongoing costs reflect the fact that there will be 
relatively few initial interest rate adjustments on adjustable-rate 
mortgages over the next few years.
    For small servicers, the one-time cost of the proposed disclosure 
is $2.3 million. This also gives a total annual cost of about $58 per 
servicer. However, it is not possible to estimate the number of initial 
interest rate adjustment notices that small servicers will produce each 
year, since the Bureau is not aware of any reasonably obtainable data 
on the loan portfolios of small servicers. The Bureau believes that the 
number is small since the total number of mortgages serviced by small 
servicers is small and the notice is given only once to each ARM 
borrower. The Bureau seeks comment on these estimates and asks 
interested parties to provide data, research, and other information 
that may inform the further consideration of these costs.
    The Bureau recognizes that certain financial benefits to consumers 
from the initial interest rate adjustment notice may have an associated 
financial cost to covered persons. Servicer compensation is not 
directly tied to the interest rate on a consumer's mortgage, but rather 
to the unpaid principal balance. Thus, when a consumer refinances a 
mortgage at a lower interest rate, one servicer incurs a cost but 
another has a benefit. On the other hand, if a consumer refinances from 
an adjustable-rate mortgage to a fifteen year fixed-rate mortgage, then 
the consumer would pay off the unpaid principal balance more quickly 
and servicer income would fall. Servicers may also receive reduced fee 
income from delinquent borrowers (or investors) if the notice helps 
borrowers avoid delinquency. The Bureau believes that the proposed 
initial interest rate adjustment notice is likely to have a small 
effect on the costs to servicers through the channels just described, 
but the Bureau seeks data with which it may further consider these 
costs.
    Finally, as discussed in part VI, the Bureau considered but decided 
not to except small servicers from the proposed initial interest rate 
adjustment notice. The Bureau is not proposing an exception for small 
servicers because an exception would deprive certain consumers of the 
seven to eight months advance notice before payment at a new level is 
due that is provided by the disclosure and the information about 
alternatives and how to contact various sources of assistance. 
Conversely, the Bureau believes that the benefit to small entities from 
an exception would be small. Vendors will spread the one-time software 
and IT costs of the notice over many small servicers and the annual 
costs will be small since the proposed notice is given just once to 
each consumer with an adjustable-rate mortgage. As discussed above, the 
Bureau believes that five annual payments of $58 by each small servicer 
will fully amortize the one-time cost of the proposed interest rate 
adjustment notice.
2. Changes in the Format, Content, and Timing of the Regulation Z Sec.  
1026.20(c) Disclosure for Adjustable-Rate Mortgages
    Under current Sec.  1026.20(c), creditors must mail or deliver to 
consumers whose payments will change as a result of an interest rate 
adjustment a notice of interest rate adjustment for variable-rate 
transactions subject to Sec.  1026.19(b) at least 25, but no more than 
120, calendar days before a payment at a new level is due. Creditors 
must also provide an annual disclosure to consumers whose interest 
rate, but not mortgage payment, changes during the year covered by the 
disclosure. The Bureau is proposing to eliminate the annual disclosure. 
Thus, the discussion below relates exclusively to the payment change 
disclosure required under Sec.  1026.20(c).\132\ The

[[Page 57370]]

Bureau is proposing to change the minimum time for providing advance 
notice to consumers from 25 days to 60 days before payment at a new 
level is due, with an accommodation for existing ARMs with look-back 
periods of less than 45 days.\133\ The maximum time for advance notice 
would remain the same: 120 days prior to the due date of the first 
payment at a new level. The coverage, content, and format of the 
revised Sec.  1026.20(c) disclosure closely tracks the coverage, 
content, and format of the proposed initial interest rate adjustment 
disclosure.
---------------------------------------------------------------------------

    \132\ As discussed in part VI, the Bureau believes that annual 
notice is duplicative given the proposed periodic statement, which 
would provide much of the same information. Thus, eliminating the 
annual notice reduces costs for servicers with little or no loss in 
benefits to consumers.
    \133\ As explained above, the Bureau is aware that for certain 
ARMs, there is currently less than 60 days between the date on which 
the index value is selected that serves as the basis for the new 
payment and the date on which payment at a new level is due. It may 
therefore be difficult for servicers to provide a notice of interest 
rate adjustment within 60 days of the date on which payment at a new 
level is due. The Bureau may provide an accommodation for some of 
these ARMs by requiring a different minimum time for providing this 
advance notice. The Bureau solicits comments on the operational 
changes that would be required to provide Sec.  1026.20(c) notices 
at least 60 days before payment at a new level is due.
---------------------------------------------------------------------------

    Benefits to consumers. Regarding the change in timing, the Bureau 
does not believe that the current minimum of 25 days provides 
sufficient time for consumers to pursue meaningful alternatives such as 
refinancing, home sale, loan modification, forbearance, or deed in lieu 
of foreclosure. Nor does this minimum provide sufficient time for 
consumers to adjust household finances to cover new payments. The 
Board's 2009 Closed-End Proposal stated that HMDA data for the years 
2004 through 2007 suggested that a requirement to provide ARM 
adjustment disclosures 60, rather than 25, days before payment at a new 
level is due more closely reflects the time needed for consumers to 
refinance a loan.
    Regarding the proposed changes in the content of the Sec.  
1026.20(c) disclosure, the Bureau believes that it is helpful to 
consumers to receive similar notices for similar purposes. Thus, the 
Bureau believes there is some consumer benefit in harmonizing the Sec.  
1026.20(c) disclosure with the proposed initial interest rate 
adjustment disclosure. However, the two disclosures are triggered by 
different (although related) events and the benefit of the information 
to consumers is somewhat different.
    Both the current and proposed Sec.  1026.20(c) disclosure provide 
the current and upcoming interest rate and payment (not an estimate) 
and the date the first new payment is due. This information facilitates 
household budgeting and may alert the consumer to a potential problem 
with affordability.
    Proposed Sec.  1026.20(c) requires the disclosure to include an 
explanation of how the new interest rate and payment are determined, 
including the index or formula used, any margin added, and any 
previously foregone interest increase applied. The proposed disclosure 
also states any limits on the interest rate or payment increase at each 
adjustment and over the life of the loan. This information assists the 
consumer in detecting any errors in the computation of the new payment. 
In contrast, the current Sec.  1026.20(c) disclosure provides the index 
value without any explanation and does not provide information about 
limits on interest rate or payment increases.
    Information provided in the proposed Sec.  1026.20(c) disclosure 
facilitates the evaluation of alternatives to paying the new amount 
due. For example, the proposed disclosure provides an explanation of 
the circumstances under which any prepayment penalty may be imposed and 
the maximum amount of the penalty, which highlights the direct cost of 
refinancing into a different loan. Also, disclosure of key features of 
the loan like the new allocation of payments for interest-only and 
negatively-amortizing ARMs, the rate limit per year and over the life 
of the loan, and warnings about interest-only payments and increases in 
the loan balance may also facilitate the comparison of the current loan 
with alternatives. Disclosures required by current Sec.  1026.20(c) do 
not provide any of this information.
    The proposed Sec.  1026.20(c) disclosure provides the same 
information as the proposed initial interest rate adjustment notice 
regarding features of the mortgage that affect the accumulation of 
equity. The disclosure of the loan balance itself is useful for this 
purpose. For interest-only or negatively-amortizing loans, the 
disclosure states the amount of the new payment allocated to pay 
principal, interest, and taxes and insurance in escrow, as applicable, 
and that the new payment will not be allocated to pay loan principal. 
If negative amortization will occur due to the interest rate 
adjustment, the disclosure states the payment required to fully 
amortize the loan at the new interest rate. The proposed disclosure 
alerts consumers with these types of loans to features that bear on 
equity accumulation, and it provides this information at a time when 
these consumers may be evaluating their mortgage terms and considering 
refinancing. In contrast, the current Sec.  1026.20(c) disclosures 
provide only the loan balance and information about the payment 
required to fully amortize the loan at the new interest rate if the 
interest rate adjustment caused the negative amortization.
    As noted above, the Bureau recognizes that the benefit to consumers 
of information in a particular disclosure may be attenuated to the 
extent that the same information is available in other disclosures that 
are provided at the same (or nearly the same) time. However, some of 
the information on the proposed Sec.  1026.20(c) disclosure that also 
appears on the proposed periodic statement disclosure is provided on 
the Sec.  1026.20(c) disclosure in order to facilitate comparisons 
between the current and new payment before the new payment is due. 
Since the proposed Sec.  1026.20(c) disclosure is provided only if the 
payment changes, the benefit to consumers from receiving the same 
information on both disclosures is likely greater than the benefit of 
receiving this information only on the periodic statement 
disclosure.\134\
---------------------------------------------------------------------------

    \134\ Of course, a consumer who receives the proposed Sec.  
1026.20(c) disclosure may derive little additional benefit from 
shortly thereafter receiving the same information on the proposed 
periodic statement disclosure. There would, however, likely be 
little cost saving for servicers in not having to provide the 
information on the proposed periodic statement disclosure that also 
appears on the Sec.  1026.20(c) disclosure for just one or two 
months.
---------------------------------------------------------------------------

    Finally, the Bureau is proposing formatting requirements for the 
Sec.  1026.20(c) disclosure similar to those for the initial interest 
rate adjustment notice. As discussed above, these requirements benefit 
consumers by facilitating consumer understanding of the information in 
the disclosures. The proposed rule provides that the disclosures must 
be provided in the form of a table and in the same order as, and with 
headings and format substantially similar to, certain forms provided 
with the proposed rule. The Bureau's testing of the same information 
proposed for inclusion in Sec.  1026.20(c) notice in the proposed Sec.  
1026.20(d) notice showed that consumers readily understood the 
information in the notice when the terms and calculations were 
presented in the logical order contained in the model forms. As 
discussed above, while there is no formula for producing the ideal 
disclosure, the Bureau believes that disclosures that satisfy the 
proposed formatting requirements likely provide greater benefits to 
consumers than both the alternatives tested and disclosures that do not 
satisfy these requirements.

[[Page 57371]]

    Extrapolating from FHFA data, the Bureau estimates that 
approximately 650,000 adjustable-rate mortgages will adjust in each of 
the next three years. To illustrate the possible benefits of the 
proposed Sec.  1026.20(c) disclosure, suppose that the proposed change 
in the timing of the disclosure from 25 days to 60 days before payment 
at a new level is due prompts certain consumers to refinance one month 
sooner. If the change in timing provides just 5% of consumers with ARMs 
a one-time benefit of $50, the annual savings to consumers would be 
over $1.6 million.
    Costs to consumers. As explained further in the discussion of costs 
to covered persons, the proposed provisions would produce a minimal 
increase in costs, about 80 cents per disclosure. This estimate takes 
into account both one-time additional costs (amortized over five years) 
and additional annual production and distribution costs. Under 
conservative assumptions, in the illustration above, the benefit to 
consumers would be $2.50 per disclosure.
    Given the small additional cost per disclosure, the Bureau believes 
that consumers would not see any increase in fees or charges. Servicers 
may in general attempt to shift a cost increase onto others and 
consumers may ultimately bear part of an increase that falls nominally 
on servicers. For the proposed Sec.  1026.20(c) disclosure, however, 
the costs to be shifted are very small. Thus, the proposed disclosure 
is not likely to impose any cost increase on consumers.
    As with the proposed initial interest rate adjustment notice, the 
proposed rule limits how servicers may present the required information 
in the proposed Sec.  1026.20(c) disclosure. Servicers would have to 
present the required information in a format substantially similar to 
the format of the proposed model form. The Bureau recognizes the 
possibility that constraints on the way servicers present information 
to consumers may prohibit the use of more effective forms that 
servicers are using or may develop. The constraints would then impose a 
cost on consumers. The Bureau does not believe there are any such costs 
in this case. The Bureau is unaware of any efforts by servicers to 
develop a payment adjustment notice that meets the requirements of 
proposed Sec.  1026.20(c) and provides the benefits to consumers of the 
proposed model forms.
    As discussed above, some consumers have adjustable-rate mortgages 
with look-back periods shorter than 45 days. For example, FHA and VA 
ARMs often have look-back periods of 15 or 30 days. These ARMs 
contractually will not be able to comply with the proposal to require 
sending the Sec.  1026.20(c) disclosure 60 to 120 days before payment 
at a new level is due. The Bureau is proposing grandfathering these 
existing ARMs. Going forward, however, ARMs must be structured to 
permit compliance with the proposed 60- to 120-day time frame.
    Initial outreach suggests that the absence of adjustable-rate 
mortgages with short look-back periods will not reduce the mortgage 
options available to consumers. It is possible, however, that mortgages 
with short look-back periods may have certain cost advantages to 
servicers or investors in certain interest rate environments (e.g., 
when rates are rising quickly) and that competition may translate some 
of these advantages into benefits to consumers. In this case, the 
proposed 60- to 120-day time frame would impose a cost on consumers. 
The Bureau seeks comments on both the grandfathering provision and 
general requirement for compliance with the proposed time frame going 
forward.
    Benefits to covered persons. The timing and content of the proposed 
Sec.  1026.20(c) disclosure may provide certain benefits to servicers. 
Servicers benefit when distressed consumers contact them in advance of 
a possible increase in interest rate and payment, since early 
communication gives servicers and consumers more time to work together 
constructively. Changing the minimum time for providing advance notice 
to consumers from 25 days to 60 days before payment at a new level is 
due provides essential household budgeting information to consumers 
sooner. Distressed consumers may then contact their servicer sooner, 
and the servicer and the consumer would then have additional time to 
work together and if necessary to explore alternatives.
    Costs to covered persons. The proposed modifications of the Sec.  
1026.20(c) disclosure will result in certain compliance costs to 
covered persons. Servicers (or their vendors) may need to adapt their 
software and compliance systems to produce the revised disclosure. The 
revised disclosure would also provide to borrowers information that is 
not currently disclosed to them, including information that is specific 
to each loan. Servicers (or their vendors) may not have ready access to 
all of this additional loan-level information; for example, if some of 
this additional information is stored in a database that is not 
regularly accessed by systems that produce the current disclosures. The 
Bureau solicits information about servicer and vendor operations 
regarding the storage of loan-level information and the costs of 
providing the proposed new loan-level information to consumers.
    As discussed above, some of the information provided in the 
proposed revisions to the Sec.  1026.20(c) disclosure is also provided 
in the proposed initial interest rate adjustment disclosure. The Bureau 
believes that harmonizing the two disclosures would mitigate the 
compliance burden for servicers and reduce the aggregate production 
costs to servicers.
    Based on discussions with servicers and software vendors to date, 
the Bureau believes that, in general, servicers of all sizes will incur 
minimal one-time costs to learn about the proposed provision. They will 
for the most part use vendors for one-time software and IT upgrades and 
for producing and distributing (i.e., mailing) the disclosure. Under 
existing vendor contracts, large servicers will not be charged for the 
upgrades and production but may be charged for distribution. Smaller 
servicers may be charged for all these costs, but they service 
relatively few loans so in aggregate these costs are small.
    Based on discussions with industry and extrapolating from FHFA 
data, the Bureau estimates one-time costs of just under $2 million for 
the 12,800 servicers overall. Amortizing this cost over five years and 
combining it with annual costs of $129,000 gives a total annual cost of 
$41 per servicer, or 80 cents per disclosure. For small servicers, the 
one-time cost is $1.65 million. This also gives a total additional 
annual cost of about bout $41 per servicer. The Bureau is not aware of 
any reasonably obtainable data on the loan portfolios of small 
servicers, so it is not possible to estimate the number of disclosure 
that small servicers would produce each year. The Bureau seeks comment 
on these estimates and asks interested parties to provide data, 
research, and other information that may inform the further 
consideration of these costs.
    The Bureau recognizes that certain financial benefits to consumers 
from the revised Sec.  1026.20(c) disclosure may have an associated 
financial cost to covered persons. The discussion of this point for the 
initial interest rate adjustment notice applies equally to the revised 
Sec.  1026.20(c) disclosure.
    Finally, as discussed above, the Bureau recognizes that there may 
be costs to covered persons from extending the minimum advance notice 
period to 60 days. Mortgages with short look-back periods may have 
certain cost advantages in certain interest rate

[[Page 57372]]

environments (e.g., when rates are rising quickly). The Bureau seeks 
comments on both the grandfathering provision and general requirement 
for compliance with the proposed time frame going forward.
3. New Periodic Statement Disclosure for Certain Mortgages
    Section 1420 of the Dodd-Frank Act requires the creditor, assignee, 
or servicer of any residential mortgage loan to transmit to the 
consumer, for each billing cycle, a periodic statement that sets forth 
certain specified information in a clear and conspicuous manner. The 
statute also gives the Bureau the authority to require servicers \135\ 
to include additional content to be included in the periodic statement. 
The statute provides an exception to the periodic statement requirement 
for fixed-rate loans where the consumer is given a coupon book 
containing substantially the same information as the statement.
---------------------------------------------------------------------------

    \135\ Reference in parts VII, VIII, and IX to ``servicers'' with 
regard to the proposed rule for the periodic statement, means 
creditors, assignees, and servicers.
---------------------------------------------------------------------------

    The proposed rule would require the periodic statement to include 
the content listed in the statute, as applicable, as well as billing 
information, payment application information, and information that may 
be helpful to distressed or delinquent consumers. In accordance with 
the statute, the proposed rule provides a coupon book exemption for 
fixed-rate loans when the consumer is given a coupon book with certain 
of the information required by the periodic statement. The proposed 
rule also has exemptions for small servicers, reverse mortgages, and 
timeshares.
    The proposed periodic statement disclosure would be provided to all 
consumers with a closed-end residential mortgage, unless one of the 
exemptions applies.
    Benefits to consumers. The Bureau does not have representative 
information on the extent to which servicers currently provide 
consumers with coupon books, billing statements, or periodic statements 
that may comply with the proposed rule. Servicers do have an incentive 
to provide consumers with basic billing information. This includes the 
payment due date, amount of any late payment fee, amount due, and 
current interest rate. This information also appears on the proposed 
periodic statement. While this basic information provides benefits to 
consumers, those benefits are already provided for by current 
disclosures. The proposed periodic statement will also contain 
information that could appear on a coupon book that does provide 
additional benefits to consumers, for example, the housing counselor 
information.
    There is other information that appears on billing statements and 
coupon books but is accurate only if the consumer always makes the 
scheduled payment on time and no other payment. This information is 
accurate because it follows a set formula. It includes the outstanding 
principal balance, total payments made since the beginning of the 
calendar year, and the breakdown of payments into principal, interest, 
and escrow. This information is not accurate, however, if the borrower 
makes an extra payment, provides a partial payment, or misses a payment 
entirely.
    All of this aforementioned information appears on the proposed 
periodic statement. However, on the proposed periodic statement, the 
information would be accurate even if the consumer makes an extra 
payment, provides a partial payment, or misses a payment entirely. 
Consumers generally benefit from having accurate information about 
payments in order to monitor the servicer, assert errors if necessary, 
and track the accumulation of equity. However, delinquent consumers may 
especially benefit from tracking the effects of delinquency on equity 
so they can effectively determine how to allocate income and consider 
options for refinancing. For these consumers, the proposed periodic 
statement may provide large benefits relative to coupon books or 
billing statements that do not provide the aforementioned information.
    Finally, there is information that simply cannot be provided on a 
coupon book or on a billing statement that provides the same 
information as a coupon book. This includes fees or charges imposed 
since the last periodic statement, partial payments, past due payments, 
and a wide range of delinquency information and information about loan 
modifications and foreclosure.
    Consumers who are more than 45 days delinquent will have a 
delinquency notice included on the periodic statement (or provided to 
them if their servicer is using a coupon book) providing specific 
information about the delinquency of their loan. This is one way the 
servicer may catch the attention of the consumer. The messages section 
provides an additional route. The only message the proposed rule 
requires the servicer to provide concerns partial payments; however, 
the proposal also seeks comment on other messages that should be 
required. Consumers who make partial payments may benefit from knowing 
what they must do to have the funds in a suspense or unapplied funds 
account applied to the outstanding balance.
    All of this information is useful to distressed or delinquent 
consumers who may need to assert an error and evaluate alternatives to 
paying the current mortgage. A consumer with past due amounts on a 
mortgage, car, and credit card would need information about the past 
due amounts and how the fees and charges accumulate in order to 
determine the most advantageous way of reducing total debt. The 
information generally benefits consumers who are managing a variety of 
debts and who want to know the least costly way of increasing their 
total debt or the most advantageous way of reducing their total debt.
    The Bureau is proposing grouping requirements in the format of the 
periodic statement. The grouping requirement presents the information 
in a logical format and may facilitate consumer understanding of the 
information in the different components of the disclosure. The General 
Design Principles discussed in the Macro Final Report, discussed in the 
section-by-section analysis, include grouping together related concepts 
and figures because consumers are likely to find it easier to absorb 
and make sense of financial forms if the information is grouped in a 
logical way. The Bureau also tested model periodic statement 
disclosures that satisfy the grouping requirements. As discussed above, 
while there is no formula for producing the ideal disclosure, the 
Bureau believes that disclosures that satisfy the grouping requirement 
are likely to provide greater benefits to consumers than disclosures 
that do not.
    There are two main exceptions to the proposed periodic statement 
requirement. The first, provided by statute, is an exception for 
consumers with fixed-rate mortgages and coupon books that contain 
certain information. As discussed above, the fixed or formulaic 
information on coupon books will be accurate for consumers who make 
only scheduled payments. Consumers with fixed-rate mortgages never have 
to manage a changed payment amount. However, the Bureau does not have 
ready access to data on whether they are less likely to make additional 
payments, partial payments or miss a payment and may obtain 
substantially reduced benefits because of the exception.

[[Page 57373]]

    The Bureau is also proposing an exception for small servicers. A 
small servicer would be defined as a servicer (i) who services 1,000 or 
fewer mortgage loans and (ii) that only services mortgage loans for 
which the servicer or an affiliate is the owner or assignee, or for 
which the servicer or an affiliate is the entity to whom the mortgage 
loan obligation was initially payable. Such small servicers will not 
have to provide the proposed periodic statement.
    As discussed in the section-by-section analysis on Sec.  
1026.41(e)(4), the Bureau believes that servicers that meet both 
conditions generally provide consumers with ready access to the 
information on the proposed periodic statement, but possibly through 
other channels. Servicers that meet the first condition face either a 
reduction in the value of an asset on its portfolio or the loss of an 
investment in the relationship with the consumer which was established 
by originating if they provide poor servicing. Servicers that also 
service relatively few loans have an incentive to commit to a ``high-
touch'' business model that offers highly responsive customer service. 
The Bureau believes that servicers that meet both conditions can and 
generally do provide their customers with ready access to comprehensive 
information about their payments, amounts due and other account 
information through a variety of channels. Thus, the Bureau believes 
that the proposed exemption would produce at most a minimal reduction 
in benefits to the customers of small servicers.
    Using regulatory filings, the Bureau roughly estimates that 
approximately 49 million consumers would receive the proposed periodic 
statement disclosure (even taking into account the small servicer 
exception). To illustrate the possible benefits of the disclosure, 
suppose 10% save 15 minutes each year because the proposed disclosure 
provides them with information about their loan or payments that their 
billing statements or coupon books may not provide (e.g., a past 
payment breakdown) and they would spend 15 minutes obtaining this 
information, say by contacting their servicer by phone, mail or some 
other means. This is a savings of 1.225 million hours per year, or 
almost $21 million at the median wage of $17 per hour.
    Benefits to covered persons. Providing the proposed content on a 
regular basis to consumers may reduce the frequency with which 
consumers contact the servicer for information and reduce the time 
servicers spend answering consumer questions. Servicers also benefit 
from reduced costs when they manage fewer partial payments and 
delinquencies and can resolve delinquencies sooner.
    Costs to covered persons. The proposed periodic statement 
disclosure will result in certain compliance costs to servicers. 
Servicers (or their vendors) may need to adapt their software and 
compliance systems to produce the new disclosure. The new proposed 
disclosure would also provide to borrowers information that is not 
currently disclosed to them, including information that is specific to 
each loan. Servicers (or their vendors) may not have ready access to 
all of this additional loan-level information; for example, if some of 
this additional information is stored in a database that is not 
regularly accessed by systems that produce the current disclosures. The 
Bureau solicits information about servicer and vendor operations 
regarding the storage of loan-level information and the costs of 
providing the proposed new loan-level information to consumers.
    The Bureau believes that, in general, servicers of all sizes will 
incur minimal one-time costs to learn about the proposed provision. 
Based on information provided by servicers and by software vendors, the 
Bureau believe that servicers will use vendors for one-time software 
and IT upgrades and for producing and distributing (i.e., mailing) the 
disclosure. Under existing vendor contracts, large servicers will not 
be charged for the upgrades and production but may be charged for 
distribution. Smaller servicers may be charged for all these costs, but 
they service relatively few loans so in aggregate these costs are 
small.
    The Bureau is not aware of any reasonably obtainable data that 
would allow an accurate calculation of the additional annual cost from 
the proposed disclosure per servicer. This calculation would depend 
critically on the number of servicers not covered by the exception and 
the number of adjustable-rate mortgages with coupon books that these 
servicers currently service. A plausible illustration is that 2,013 
servicers not covered by the exception begin providing 1 million 
consumers (i.e., those with coupon books and adjustable rate mortgages) 
twelve new disclosures per year at fifty cents per disclosure, for an 
average annual cost of $2,981 per servicer. This figure does not 
include the additional annual cost to these servicers of providing the 
information on the proposed periodic statement disclosure that is not 
currently provided on their existing billing statements. The Bureau 
welcomes comment on this estimate and asks interested parties to 
provide data, research, and other information that may inform the 
further consideration of the costs of the proposed periodic statement 
disclosure.
    The small servicer exemption in proposed Sec.  1026.41(e)(4) would 
benefit small servicers by providing an alternative, and potentially 
less expensive, means of compliance with the periodic statement 
requirement. The SBREFA panel stated that a periodic statement 
requirement would impose significant burdens on small servicers. The 
panel explained that while much of the information in the proposed 
periodic statement was already being provided through alternative means 
and most of the information is available on request, consolidating this 
information into a single monthly dynamic statement is difficult for 
small servicers.
    The SERs expressed that due to their small size, they would not be 
able to have in-house expertise and would generally use third-party 
vendors to develop periodic statements. Due to their small size, they 
believe they would have no control over these vendor costs. 
Additionally, the small servicers have a smaller portfolio over which 
to spread the fixed costs of producing periodic statements. Such 
servicers stated they are unable to gain cost efficiencies and cannot 
effectively spread the implementation costs of periodic statements 
across their loan portfolios. Finally, even the costs of mailing 
monthly statements could be significant to the extent that small 
servicers currently use alternative information methods (such as coupon 
books for adjustable-rate mortgages, or passbooks).
    For small servicers, the cost savings from the proposed exception 
equals the costs not incurred to begin providing periodic statements or 
to improve existing disclosures to consumers who would be required to 
receive the periodic statement under the proposal. The only consumers 
who need not receive the proposed disclosure are those with fixed-rate 
mortgages and coupon books. The Bureau believes that this is a 
relatively small fraction of the loans held on portfolio or sold with 
servicing retained by servicers with less than 1,000 loans. Thus, small 
servicers would have to increase the content of existing disclosures or 
begin providing the periodic statement disclosure to almost all of 
their consumers. However, many of these consumers receive billing 
statements, so there would not be additional distribution costs from 
the proposed disclosure, and the exception does not mitigate costs that 
would not be incurred.
    There is no reasonably available data with which the Bureau can 
accurately

[[Page 57374]]

estimate the number of these consumers or the mix of new disclosures 
and improved disclosures. However, based on regulatory data, the Bureau 
believes that approximately 10,800 small servicers service 2.3 million 
mortgages. Based on discussions with industry, the Bureau believes that 
each periodic statement would cost a range of 20-50 cents to provide. 
Thus, a reasonable estimate of the cost savings for small servicers 
from the proposed exception is $6 million-$14 million. The Bureau seeks 
data and other information with which it may further consider the 
question of the cost savings from the proposed small servicer 
exception.
4. Prompt Crediting of Payments and Response to Requests for Payoff 
Amounts
    DFA section 1464(a) codifies existing Regulation Z Sec.  
1026.36(c)(1)(i) on prompt crediting. The Bureau is proposing an 
additional requirement for the handling of partial payments (i.e., 
payments that are not full contractual payments). Under the proposal, 
if servicers hold partial payments in a suspense account, once the 
amount in the account equals a full contractual payment, the servicer 
must credit the payment to the most delinquent outstanding payment. The 
Bureau proposes to define a full contractual payment as a payment 
covering principal, interest and escrow (if applicable). A proposed 
alternative to the definition would include late fees.
    DFA section 1464(b) requires that a creditor or servicer of a home 
loan send an accurate payoff balance within a reasonable time, but in 
no case more than seven business days, after the receipt of a written 
request for such balance from or on behalf of the consumer. This 
generally codifies existing Regulation Z Sec.  1026.36(c)(1)(iii) on 
payoff statements.
    Benefits and costs to consumers. The proposed provision on prompt 
crediting generally ensures that consumers benefit from every effort 
that they make to pay their mortgage debt. The proposed provision helps 
consumers manage and reduce default by clarifying the rules servicers 
must follow when processing partial payments.
    As the statute largely codifies an existing regulation, the 
benefits and costs to consumers from a pre-statute baseline are small. 
However, the existing regulation does not specifically address the 
handling of partial payments. As discussed above, the proposed 
regulation would leave servicers significant flexibility in the 
handling of partial payments but would also ensure greater consistency 
in the handling of suspense accounts. The Bureau believes this proposed 
approach would clarify servicers' obligations in processing both full 
contractual payment and partial payments, as well as ensure all 
payments are properly applied. The proposed disclosures would help 
consumers understand the processing of their payments. Additionally, 
requiring application to the oldest outstanding payment when a full 
payment accumulates will provide protection to consumers, as well as 
reduce the outstanding principal balance on certain consumer loans. The 
Bureau requests comment on the benefits and costs to consumers of 
including late fees in the definition of a full contractual payment. 
Not including late fees in the definition of a full contractual payment 
would require servicers to credit a payment that covered principal, 
interest and escrow even if late fees were outstanding. Consumers who 
made such a payment would benefit from having that payment credited. 
While some servicers currently follow this practice, other servicers 
who hold such payments in suspense accounts until the fees are paid 
would be required to change their practices.
    Benefits and costs to covered persons. As the statute largely 
codifies an existing regulation, the benefits and costs to covered 
persons from a pre-statute baseline are small. The proposed provision 
on prompt crediting may cause certain covered persons with different 
crediting practices to forfeit some fee income or float income, but the 
Bureau has no data with which to determine whether this is the case. 
The Bureau requests comment on the benefits and costs to covered 
persons of including late fees in the definition of a full contractual 
payment.

E. Potential Specific Impacts of the Proposed Rule

1. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, as Described in Sec.  1026
    Overall, the impact of the rule on depository institutions and 
credit unions depends on a number of factors, including the 
institutions' current software and compliance systems and the current 
practices of third-party service providers. Based on discussions with 
industry, the Bureau believes that larger depositories and credit 
unions will incur only minimal costs from this rulemaking.
    The initial interest rate adjustment notice is a new disclosure, 
but the Bureau believes that the larger depository institutions and 
credit unions (of those with $10 billion or less in total assets) use 
third-party vendors who will, under current contracts, absorb the 
information collection and data processing costs. The Bureau believes 
that vendors do not absorb the costs of mailing disclosures, and based 
on discussions with industry the Bureau understands that 70-80% of 
consumers have not elected to receive disclosures electronically. 
Relatively few adjustable-rate mortgages have been originated in recent 
years, however, and so the number that will adjust for the first time 
in the near term will be small.
    The costs to the larger depositories and credit unions (of those 
with $10 billion or less in total assets) from the proposed changes to 
the two other proposed disclosures will also be minimal. The Bureau 
expects that the information collection and data processing costs of 
the periodic statement disclosure and the proposed changes in the Sec.  
1026.20(c) disclosure will largely be absorbed by third-party vendors. 
The Bureau believes that the mailing costs of the periodic statement 
disclosure are likely to be the same as those for billing statements 
that it would replace. The proposed provision on periodic statements 
would require consumers who use a coupon book for payments on an 
adjustable-rate mortgage to receive a periodic statement, but the 
number of such consumers is small. The mailing costs of the proposed 
Sec.  1026.20(c) disclosure would be the same as the mailing costs of 
the current disclosure.
    The Bureau believes that smaller depositories and credit unions may 
incur some additional costs from this rulemaking. Smaller depositories 
also use third-party vendors, but the Bureau believes that contracts 
with these vendors may allow them to pass along the information 
collection and data processing costs to the servicers. Even for smaller 
depository servicers, however, the additional costs from the two 
proposed disclosures for adjustable-rate mortgage are likely to be 
small. There will be few initial interest rate adjustments in the near 
term, and servicers currently are required to send the Sec.  1026.20(c) 
disclosure. Thus, most new costs will come from the one-time and 
ongoing costs of providing the periodic statement disclosure. As 
discussed above, the Bureau is proposing to exempt certain small 
servicers from the periodic statement disclosure requirement if they 
service fewer than 1,000 loans and either hold the loans in portfolio 
or originated them. Using Call Report data, the Bureau concludes that 
almost all servicers with under $175 million in

[[Page 57375]]

assets would qualify for this exemption, as would many servicers with 
greater assets. However, the Bureau will examine this question further 
and requests data and additional information on the small servicers who 
would qualify for the proposed exemption.
    Based on discussions with industry, the Bureau believes that the 
vast majority of depositories and credit unions, of any size, are 
already in compliance with the proposed provisions for prompt crediting 
of payments and response to requests for payoff amounts.
2. Impact of the Proposed Provisions on Consumers in Rural Areas
    Consumers in rural areas may experience benefits from the proposed 
rule that are different in certain respects from the benefits 
experienced by consumers in general. Consumers in rural areas may be 
more likely to obtain mortgages from small local banks and credit 
unions that either service the loans in portfolio or sell the loans and 
retain the servicing rights. These servicers may already provide most 
of the benefits to consumers that the proposed rule is designed to 
provide, including the benefits to consumers with adjustable-rate 
mortgages. On the other hand, it is also possible that a lack of 
alternatives for consumers in some rural areas regarding lenders who 
also service mortgages may cause the proposed rule to provide rural 
consumers with greater benefits than the rule may provide to other 
consumers.
    The Bureau will further consider the impact of the proposed rule on 
consumers in rural areas. The Bureau therefore asks interested parties 
to provide data, research results and other factual information on the 
impact of the proposed rule on consumers in rural areas.

F. Additional Analysis Being Considered and Request for Information

    The Bureau will further consider the benefits, costs, and impacts 
of the proposed provisions and additional proposed modifications before 
finalizing the proposal. As noted below, there are a number of areas 
where additional information would allow the Bureau to better estimate 
the benefits and costs of this proposal.
    In addition, the Bureau asks interested parties to provide general 
information, data, and research results on:
     How consumers might respond to the information proposed 
for inclusion in the new initial interest rate adjustment disclosure, 
the additional information proposed for inclusion in the revised 
Regulation Z Sec.  1026.20(c) disclosure, and the information proposed 
for inclusion in the new periodic statement disclosures;
     The coverage and format of these proposed disclosures;
     The benefits to consumers from the disclosures listed 
above; and
     The potential impact on servicers and on the functioning 
of the servicing market from the disclosures listed above and the 
prompt crediting requirement.
    The Bureau also requests specific information on the costs to 
covered persons of complying with the proposal, such as revising 
compliance software and systems.
    To supplement the information discussed in this preamble and any 
information that the Bureau may receive from commenters, the Bureau is 
currently working to gather additional data that may be relevant to 
this and other mortgage-related rulemakings. These data may include 
additional data from the National Mortgage License System (NMLS) and 
the NMLS Mortgage Call Report, loan file extracts from various lenders, 
and data from the pilot phases of the National Mortgage Database. The 
Bureau expects that each of these datasets will be confidential. This 
section now describes each dataset in turn.
    First, as the sole system supporting licensure/registration of 
mortgage companies for 53 regulatory agencies for states and 
territories and mortgage loan originators under the SAFE Act, NMLS 
contains basic identifying information for non-depository mortgage loan 
origination companies. Firms that hold a State license or State 
registration through NMLS are required to complete either a standard or 
expanded Mortgage Call Report (MCR). The Standard MCR includes data on 
each firm's residential mortgage loan activity including applications, 
closed loans, individual mortgage loan originator (MLO) activity, line 
of credit, and other data repurchase information by State. It also 
includes financial information at the company level. The expanded 
report collects more detailed information in each of these areas for 
those firms that sell to Fannie Mae or Freddie Mac.\136\ To date, the 
Bureau has received basic data on the firms in the NMLS and de-
identified data and tabulations of data from the MCR. These data were 
used, along with HMDA data, to help estimate the number and 
characteristics of non-depository institutions active in various 
mortgage activities. In the near future, the Bureau may receive 
additional data on loan activity and financial information from the 
NMLS including loan activity and financial information for identified 
lenders. The Bureau anticipates that these data will provide additional 
information about the number, size, type, and level of activity for 
non-depository lenders engaging in various mortgage origination and 
servicing activities. As such, it supplements the Bureau's current data 
for non-depository institutions reported in HMDA and the data already 
received from NMLS. For example, these new data will include 
information about the number and size of closed-end first and second 
loans originated, fees earned from origination activity, levels of 
servicing, revenue estimates for each firm, and other information. The 
Bureau may compile some simple counts and tabulations and conduct some 
basic statistical modeling to better model the levels of various 
activities at various types of firms. In particular, the information 
from the NMLS and the MCR may help the Bureau refine its estimates of 
benefits, costs, and impacts for each of the revisions to the RESPA 
Good Faith Estimate and settlement statement forms, changes to the 
HOEPA thresholds, changes to requirements for appraisals, updates to 
loan originator compensation rules, proposed new servicing 
requirements, and the new ability to repay standards.
---------------------------------------------------------------------------

    \136\ More information about the Mortgage Call Report can be 
found at http://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx.
---------------------------------------------------------------------------

    Second, the Bureau is working to obtain a random selection of loan-
level data from several lenders. The Bureau intends to request loan 
file data from lenders of various sizes and geographic locations to 
construct a representative dataset. In particular, the Bureau will 
request a random sample of RESPA, GFE, and RESPA settlement statement 
forms from loan files for closed-end loans. These forms include data on 
some or all loan characteristics including settlement charges, 
origination charges, appraisal fees, flood certifications, mortgage 
insurance premiums, homeowner's insurance, title charges, balloon 
payments, prepayment penalties, origination charges, and credit charges 
or points. Through conversations with industry, the Bureau believes 
that such loan files exist in standard electronic formats allowing for 
the creation of a representative sample for analysis. The Bureau may 
use these data to further measure the impacts of certain proposed 
changes. Calculations of various categories of settlement and 
origination charges may help the Bureau calculate the various impacts 
of

[[Page 57376]]

proposed changes to the definition of finance charge and other aspects 
of the proposal, including proposed changes in the number and 
characteristics of loans that exceed the HOEPA thresholds, loans that 
would meet the high rate or high risk definitions mandating additional 
consumer protections, and loans that meet the points and fees 
thresholds contained in the ability to repay provisions of the Dodd-
Frank Act.
    Third, the Bureau may also use data from the pilot phases of the 
National Mortgage Database (NMDB) to refine its proposals and/or its 
assessments of the benefits, costs, and impacts of these proposals. The 
NMDB is a comprehensive database, currently under development, of loan-
level information on first lien single-family mortgages. It is designed 
to be a nationally representative sample (1%) and contains data derived 
from credit reporting agency data and other administrative sources 
along with data from surveys of mortgage borrowers. The first two pilot 
phases, conducted over the past two years, vetted the data development 
process, successfully pretested the survey component and produced a 
prototype dataset. The initial pilot phases validated that sampled 
credit repository data are both accurate and comprehensive and that the 
survey component yields a representative sample and a sufficient 
response rate. A third pilot is currently being conducted with the 
survey being mailed to holders of 5,000 newly originated mortgages 
sampled from the prototype NMDB. Based on the 2011 pilot, a response 
rate of 50% or higher is expected. These survey data will be combined 
with the credit repository information of non-respondents, and then de-
identified. Credit repository data will be used to minimize non-
response bias, and attempts will be made to impute missing values. The 
data from the third pilot will not be made public. However, to the 
extent possible, the data may be analyzed to assist the Bureau in its 
regulatory activities and these analyses will be made publicly 
available.
    The survey data from the pilots may be used by the Bureau to 
analyze consumers' shopping behavior regarding mortgages. For instance, 
the Bureau may calculate the number of consumers who use brokers, the 
number of lenders contacted by borrowers, how often and with what 
patterns potential borrowers switch lenders, and other behaviors. 
Questions may also assess borrowers' understanding of their loan terms 
and the various charges involved with origination. Tabulations of the 
survey data for various populations and simple regression techniques 
may be used to help the Bureau with its analysis.
    The Bureau requests commenters to submit data and to provide 
suggestions for additional data to assess the issues discussed above 
and other potential benefits, costs, and impacts of the proposed rule. 
The Bureau also requests comment on the use of the data described 
above.

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by SBREFA, 
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. 5 U.S.C. 
601 et seq. 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. 5 U.S.C. 603, 604. The Bureau also is subject to certain 
additional procedures under the RFA involving the convening of a panel 
to consult with small business representatives prior to proposing a 
rule for which an IRFA is required. 5 U.S.C. 609.
    The Bureau has not certified that the proposed rule would not have 
a significant economic impact on a substantial number of small entities 
within the meaning of the RFA. Accordingly, the Bureau convened and 
chaired a SBREFA Panel to consider the impact of the proposed rule on 
small entities that would be subject to that rule and to obtain 
feedback from representatives of such small entities. The SBREFA Panel 
for this rulemaking is discussed below in part VIII.A.
    The Bureau is publishing an IRFA. Among other things, the IRFA 
estimates the number of small entities that will be subject to the 
proposed rule and describes the impact of that rule on those entities. 
The IRFA for this rulemaking is set forth below in part VIII.B.

A. Small Business Review Panel

    Under section 609(b) of the RFA, as amended by SBREFA and the Dodd-
Frank Act, the Bureau seeks, prior to conducting the IRFA, information 
from representatives of small entities that may potentially be affected 
by its proposed rules to assess the potential impacts of that rule on 
such small entities. 5 U.S.C. 609(b). Section 609(b) sets forth a 
series of procedural steps with regard to obtaining this information. 
The Bureau first notifies the Chief Counsel for Advocacy (Chief 
Counsel) of the SBA and provides the Chief Counsel with information on 
the potential impacts of the proposed rule on small entities and the 
types of small entities that might be affected. 5 U.S.C. 609(b)(1). Not 
later than 15 days after receipt of the formal notification and other 
information described in section 609(b)(1) of the RFA, the Chief 
Counsel then identifies the SERs, the individuals representative of 
affected small entities for the purpose of obtaining advice and 
recommendations from those individuals about the potential impacts of 
the proposed rule. 5 U.S.C. 609(b)(2). The Bureau convenes a SBREFA 
Panel for such rule consisting wholly of full-time Federal employees of 
the office within the Bureau responsible for carrying out the proposed 
rule, the Office of Information and Regulatory Affairs (OIRA) within 
the OMB, and the Chief Counsel. 5 U.S.C. 609(b)(3). The SBREFA Panel 
reviews any material the Bureau has prepared in connection with the 
SBREFA process and collects the advice and recommendations of each 
individual small entity representative identified by the Bureau after 
consultation with the Chief Counsel on issues related to sections 
603(b)(3) through (b)(5) and 603(c) of the RFA.\137\ 5 U.S.C. 
609(b)(4). Not later than 60 days after the date the Bureau convenes 
the SBREFA Panel, the panel reports on the comments of the SERs and its 
findings as to the issues on which the SBREFA Panel consulted with the 
SERs, and the report is made public as part of the rulemaking record. 5 
U.S.C. 609(b)(5). Where appropriate, the Bureau modifies the rule or 
the IRFA in light of the foregoing process. 5 U.S.C. 609(b)(6).
---------------------------------------------------------------------------

    \137\ As described in the IRFA in part VIII.B, below, sections 
603(b)(3) through (b)(5) and 603(c) of the RFA, respectively, 
require a description of and, where feasible, provision of an 
estimate of the number of small entities to which the proposed rule 
will apply; a description of the projected reporting, record 
keeping, and other compliance requirements of the proposed rule, 
including an estimate of the classes of small entities which will be 
subject to the requirement and the type of professional skills 
necessary for preparation of the report or record; an 
identification, to the extent practicable, of all relevant Federal 
rules which may duplicate, overlap, or conflict with the proposed 
rule; and a description of any significant alternatives to the 
proposed rule which accomplish the stated objectives of applicable 
statutes and which minimize any significant economic impact of the 
proposed rule on small entities. 5 U.S.C. 603(b)(3), 603(b)(4), 
603(b)(5), 603(c).
---------------------------------------------------------------------------

    On April 9, 2012, the Bureau provided the Chief Counsel with the 
formal notification and other information required under section 
609(b)(1) of the RFA. To obtain feedback

[[Page 57377]]

from small entity representatives to inform the SBREFA Panel pursuant 
to sections 609(b)(2) and 609(b)(4) of the RFA, the Bureau, in 
consultation with the Chief Counsel, identified five categories of 
small entities that may be subject to the proposed rule for purposes of 
the IRFA: Commercial banks/savings institutions, credit unions, non-
depositories engaged primarily in lending funds with real estate as 
collateral (included in NAICS 522292), non-depositories primarily 
engaged in loan servicing (included in NAICS 522390), and certain non-
profit organizations. Section 3 of the IRFA, in part VIII.B.3, below, 
describes in greater detail the Bureau's analysis of the number and 
types of entities that may be affected by the proposed rule. Having 
identified the categories of small entities that may be subject to the 
proposed rule for purposes of an IRFA, the Bureau then, in consultation 
with the Chief Counsel, selected 16 small entity representatives to 
participate in the SBREFA process. As described in chapter 7 of the 
SBREFA Final Report, described below, the SERs selected by the Bureau 
in consultation with the Chief Counsel included representatives from 
each of the categories identified by the Bureau and comprised a diverse 
group of individuals with regard to geography and type of locality 
(i.e., rural, urban, suburban, or metropolitan areas).
    On April 10, 2012, the Bureau convened the SBREFA Panel pursuant to 
section 609(b)(3) of the RFA. Afterwards, to collect the advice and 
recommendations of the SERs under section 609(b)(4) of the RFA, the 
SBREFA Panel held an outreach meeting/teleconference with the small 
entity representatives on April 24, 2012. To help the small entity 
representatives prepare for the outreach meeting beforehand, the SBREFA 
Panel circulated briefing materials prepared in connection with section 
609(b)(4) of the RFA that summarized the proposals under consideration 
at that time, posed discussion issues, and provided information about 
the SBREFA process generally.\138\ All 16 small entity representatives 
participated in the outreach meeting either in person or by telephone. 
The SBREFA Panel also provided the small entity representatives with an 
opportunity to submit written feedback until May 1, 2012. In response, 
the SBREFA Panel received written feedback from five of the 
representatives.\139\
---------------------------------------------------------------------------

    \138\ The Bureau posted these materials on its website and 
invited the public to email remarks on the materials. See http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-outlines-borrower-friendly-approach-to-mortgage-servicing/ 
(the materials are accessible via the links within this document).
    \139\ This written feedback is attached as appendix A to the 
SBREFA Final Report, discussed below.
---------------------------------------------------------------------------

    On June 11, 2012, the SBREFA Panel submitted to the Director of the 
Bureau, Richard Cordray, a written SBREFA Final Report that includes 
the following: Background information on the proposals under 
consideration at the time; information on the types of small entities 
that would be subject to those proposals and on the small entity 
representatives who were selected to advise the SBREFA Panel; a summary 
of the SBREFA Panel's outreach to obtain the advice and recommendations 
of those small entity representatives; a discussion of the comments and 
recommendations of the small entity representatives; and a discussion 
of the SBREFA Panel findings, focusing on the statutory elements 
required under section 603 of the RFA. 5 U.S.C. 609(b)(5).\140\
---------------------------------------------------------------------------

    \140\ SBREFA Final Report, supra note 22.
---------------------------------------------------------------------------

    In preparing this proposed rule and the IRFA, the Bureau has 
carefully considered the feedback from the small entity representatives 
participating in the SBREFA process and the findings and 
recommendations in the SBREFA Final Report. The section-by-section 
analysis of the proposed rule in part VI, above, and the IRFA discuss 
this feedback and the specific findings and recommendations of the 
SBREFA Panel, as applicable. The SBREFA process provided the SBREFA 
Panel and the Bureau with an opportunity to identify and explore 
opportunities to minimize the burden of the rule on small entities 
while achieving the rule's purposes. It is important to note, however, 
that the SBREFA Panel prepared the SBREFA Final Report at a preliminary 
stage of the proposal's development and that the SBREFA Final Report--
in particular, the SBREFA Panel's findings and recommendations--should 
be considered in that light. Also, any options identified in the SBREFA 
Final Report for reducing the proposed rule's regulatory impact on 
small entities were expressly subject to further consideration, 
analysis, and data collection by the Bureau to ensure that the options 
identified were practicable, enforceable, and consistent with TILA, the 
Dodd-Frank Act, and their statutory purposes. The proposed rule and the 
IRFA reflect further consideration, analysis, and data collection by 
the Bureau.

B. Initial Regulatory Flexibility Analysis

    Under RFA section 603(a), an IRFA ``shall describe the impact of 
the proposed rule on small entities.'' 5 U.S.C. 603(a). Section 603(b) 
of the RFA sets forth the required elements of the IRFA. Section 
603(b)(1) requires the IRFA to contain a description of the reasons why 
action by the agency is being considered. 5 U.S.C. 603(b)(1). Section 
603(b)(2) requires a succinct statement of the objectives of, and the 
legal basis for, the proposed rule. 5 U.S.C. 603(b)(2). The IRFA 
further must contain a description of and, where feasible, provision of 
an estimate of the number of small entities to which the proposed rule 
will apply. 5 U.S.C. 603(b)(3). Section 603(b)(4) requires a 
description of the projected reporting, recordkeeping, and other 
compliance requirements of the proposed rule, including an estimate of 
the classes of small entities that will be subject to the requirement 
and the types of professional skills necessary for the preparation of 
the report or record. 5 U.S.C. 603(b)(4). In addition, the Bureau must 
identify, to the extent practicable, all relevant Federal rules which 
may duplicate, overlap, or conflict with the proposed rule. 5 U.S.C. 
603(b)(5). The Bureau, further, must describe any significant 
alternatives to the proposed rule which accomplish the stated 
objectives of applicable statutes and which minimize any significant 
economic impact of the proposed rule on small entities. 5 U.S.C. 
603(b)(6). Finally, as amended by the Dodd-Frank Act, RFA section 
603(d) requires that the IRFA include a description of any projected 
increase in the cost of credit for small entities, a description of any 
significant alternatives to the proposed rule which accomplish the 
stated objectives of applicable statutes and which minimize any 
increase in the cost of credit for small entities (if such an increase 
in the cost of credit is projected), and a description of the advice 
and recommendations of representatives of small entities relating to 
the cost of credit issues. 5 U.S.C. 603(d)(1); DFA section 1100G(d)(1).
1. Description of the Reasons Why Agency Action Is Being Considered
    As discussed in the Overview, part I above, mortgage servicing has 
been marked by pervasive and profound consumer protection problems. As 
a result of these problems, Congress included a number of provisions in 
the Dodd-Frank Act specifically to address mortgage servicing. These 
provisions are DFA sections 1418 (initial rate adjustment notice for 
adjustable-rate

[[Page 57378]]

mortgages (ARMs)), 1420 (periodic statement), 1463 (amending RESPA), 
and 1464 (prompt crediting of mortgage payments and response to 
requests for payoff amounts). The Bureau also proposes to amend current 
rule Sec.  1026.20(c) to harmonize with DFA section 1418, although not 
required by statute.
    The Dodd-Frank Act and TILA authorize the Bureau to adopt 
implementing regulations for the statutory provisions provided by DFA 
sections 1418, 1420, and 1464. The Bureau is using this authority to 
propose regulations in order to provide servicers with clarity about 
their statutory obligations under these three provisions. The Bureau is 
also proposing to adjust servicers' statutory obligations, including 
the obligations of small servicers, in certain circumstances. The 
Bureau is taking this action in order to ease burden when doing so 
would not sacrifice adequate protection of consumers.
    Elsewhere in today's Federal Register, the Bureau is publishing a 
proposed rule issued under RESPA that would implement DFA section 1463, 
the 2012 RESPA Servicing Proposal, which addresses procedures for 
obtaining force-placed insurance; procedures for investigating and 
resolving alleged errors and responding to requests for information; 
reasonable information management policies and procedures; early 
intervention for delinquent borrowers; and continuity of contact for 
delinquent borrowers.
    The new statutory requirements take effect automatically on January 
21, 2013, as written in the statute, unless final rules are issued 
prior to that date. The Dodd-Frank Act provides the Bureau with limited 
authority to extend the effective date of statutory requirements when 
adopting implementing regulations. The Bureau will consider the time 
servicers need to come into compliance in determining the effective 
date.
    The Bureau's proposed rules under Regulation Z and X represent 
another important step towards establishing uniform minimum national 
standards. As discussed in part II above, other Federal regulatory 
agencies have issued guidance on mortgage servicing and loan 
modifications and taken enforcement actions against mortgage servicers 
(including that National Mortgage Settlement, discussed in part II.C 
above).
    These varied regulatory responses are understandable when viewed as 
a response to an unprecedented mortgage crisis and significant problems 
in the servicing of mortgage loans. Ultimately, however, both borrowers 
and mortgage servicers will be better served by having uniform national 
standards that govern mortgage servicing. When adopted in final form, 
the Bureau's rules will generally apply to all mortgage servicers, 
whether depository institutions or non-depository institutions, and to 
all segments of the mortgage market, regardless of the ownership of the 
loan.
2. Succinct Statement of the Objectives of, and Legal Basis for, the 
Proposed Rule
    DFA section 1418 requires servicers to provide a new disclosure to 
consumers who have hybrid ARMs. The disclosure concerns the initial 
interest rate adjustment and must be given either (a) between six and 
seven months prior to such initial interest rate adjustment or (b) at 
consummation of the mortgage if the initial interest rate adjustment 
occurs during the first six months after consummation. The Bureau 
proposes implementing TILA section 128A(b) by broadening the scope of 
the proposed rule generally to adjustable-rate mortgages, not just 
hybrid ARMs.
    The proposed new ARM disclosure for the initial interest rate 
adjustment provides the content listed in the statute and certain 
additional information. The disclosure provides, among other things, 
information about the terms of the loan, a description of the way the 
new rate and upcoming payment would be determined, a good faith 
estimate of the upcoming payment, and information that may be 
especially useful to distressed and delinquent borrowers. The proposed 
revisions to the Regulation Z Sec.  1026.20(c) disclosure would 
harmonize the timeframe and content requirements with those of the new 
ARM disclosure.
    The Bureau believes that the current era of declining interest 
rates has reduced the payment shock that can result from ARM interest 
rate adjustments. If interest rates increase quickly, however, then 
payment shock may also increase. Furthermore, the popularity of 
adjustable-rate mortgages, which provide the opportunity for reduced 
interest rates during an introductory period, likely would increase 
along with the advent of higher interest rates.
    The proposed rule is intended to mitigate the consequences of 
payment shock by ensuring that consumers have sufficient time to 
identify and execute the best course of action. As explained above, the 
proposed rule would implement DFA section 1418 requirements for the 
initial ARM interest rate adjustment notice, which generally will be 
provided to consumers between six and seven months prior to the initial 
interest rate adjustment. The Bureau also proposes to revise the 
timeframe of the Regulation Z Sec.  1026.20(c) disclosure for rate 
adjustments that result in an accompanying payment change, from the 
current 25 to 120 days before payment at a new level is due to 60 to 
120 days before payment at a new level is due.
    DFA section 1420 generally requires the creditor, assignee, or 
servicer of a residential mortgage loan to transmit to the borrower, 
for each billing cycle, a periodic statement that sets forth certain 
specified information in a clear and conspicuous manner. The statute 
also gives the Bureau the authority to require additional content to be 
included in the periodic statement. The statute provides an exception 
to the periodic statement requirement for fixed-rate loans where the 
consumer is given a coupon book containing substantially the same 
information as the statement.
    The proposed periodic statement disclosure would require the 
periodic statement to include the content listed in the statute, as 
well as additional loan information, billing information, and 
information that may be helpful to distressed or delinquent borrowers. 
In accordance with the statute, the proposed rule has a coupon book 
exemption for fixed-rate loans when the borrower is given a coupon with 
certain information required by the periodic statement and information 
to access other information included in the periodic statement. The 
proposed rule also has exemptions for certain small servicers, reverse 
mortgages, and timeshares.
    The proposed periodic statement is designed to serve a variety of 
purposes. These purposes include informing consumers of their payment 
obligation, providing consumers with information about their mortgage 
in an easily read and understood format, creating a record of the 
transaction to aid in error detection and resolution, and providing 
information to distressed or delinquent borrowers.
    The Bureau understands that most borrowers will need only some of 
the information in the disclosure on a regular basis. However, 
distressed and delinquent borrowers will likely need more information. 
The proposed periodic statement disclosure was subjected to three 
rounds of consumer testing and refinement to identify the content and 
format that best promote consumer understanding.
    DFA section 1464 generally codifies requirements for the prompt 
crediting of

[[Page 57379]]

mortgage payments received by servicers in connection with consumer 
credit transactions secured by a consumer's principal dwelling. The 
statute also generally codifies the requirement to provide an accurate 
and timely response to a borrower request for payoff amounts for home 
loans.
    The proposed rule would require that once funds in a suspense 
account equal a full contractual payment that the servicer must credit 
the payment to the most delinquent outstanding payment. The proposed 
rule also would require a servicer to send an accurate payoff balance, 
in no case more than seven business days, after the receipt of a 
written request for such balance from or on behalf of the consumer.
    The objective of the prompt crediting requirement is to ensure that 
consumers benefit from every effort that they make to pay their 
mortgage debt. However, the Bureau understands that requiring immediate 
crediting of partial payments might induce some servicers to return 
partial payments. The Bureau believes that this outcome would not serve 
the interests of consumers who have demonstrated that they are trying 
to pay their mortgage debt.
    The objective of the payoff statement provision is to ensure that 
consumers can obtain this basic information about their mortgage debt 
in a timely way. This information is generally useful to consumers but 
must be provided in a timely way for selling or refinancing a home or 
modifying a mortgage loan.
3. Description and, Where Feasible, Provision of an Estimate of the 
Number of Small Entities to Which the Proposed Rule Will Apply
    As discussed in the SBREFA Final Report, for purposes of assessing 
the impacts of the proposed rule on small entities, ``small entities'' 
is defined in the RFA to include small businesses, small nonprofit 
organizations, and small government jurisdictions. 5 U.S.C. 601(6). A 
``small business'' is determined by application of SBA regulations and 
reference to the North American Industry Classification System (NAICS) 
classifications and size standards.\141\ 5 U.S.C. 601(3). Under such 
standards, banks and other depository institutions are considered 
``small'' if they have $175 million or less in assets, and for other 
financial businesses, the threshold is average annual receipts (i.e., 
annual revenues) that do not exceed $7 million.\142\
---------------------------------------------------------------------------

    \141\ The current SBA size standards are found on SBA's Web site 
at http://www.sba.gov/content/table-small-business-size-standards.
    \142\ See id.
---------------------------------------------------------------------------

    During the SBREFA Panel process, the Bureau identified five 
categories of small entities that may be subject to the proposed rule 
for purposes of the RFA: Commercial banks/savings institutions \143\ 
(NAICS 522110 and 522120), credit unions (NAICS 522130), firms 
providing real estate credit (NAICS 522292), firms engaged in other 
activities related to credit intermediation (NAICS 522390), and small 
non-profit organizations. Commercial banks, savings institutions, and 
credit unions are small businesses if they have $175 million or less in 
assets. Firms providing real estate credit and firms engaged in other 
activities related to credit intermediation are small businesses if 
average annual receipts do not exceed $7 million.
---------------------------------------------------------------------------

    \143\ Savings institutions include thrifts, savings banks, 
mutual banks, and similar institutions.
---------------------------------------------------------------------------

    A small non-profit organization is any not-for-profit enterprise 
which is independently owned and operated and is not dominant in its 
field. Small non-profit organizations engaged in mortgage servicing 
typically perform a number of activities directed at increasing the 
supply of affordable housing in their communities. Some small non-
profit organizations originate and service mortgage loans for low and 
moderate income individuals while others purchase loans or the mortgage 
servicing rights on loans originated by local community development 
lenders. Servicing income is a substantial source of revenue for some 
small non-profit organizations while others receive most of their 
income from grants or investments.\144\
---------------------------------------------------------------------------

    \144\ The Bureau is continuing to refine its description of 
small non-profit organizations engaged in mortgage loan servicing 
and working to estimate the number of these entities, but it is not 
possible to estimate the number of these entities at this time. Non-
profits and small non-profits engaged in mortgage loan servicing 
would be included under real estate credit if their primary activity 
is originating loans and under other activities related to credit 
intermediation if their primary activity is servicing.
---------------------------------------------------------------------------

    The following table provides the Bureau's estimate of the number 
and types of entities that may be affected by the proposals under 
consideration:

          Table 1--Estimated Number of Affected Entities and Small Entities by NAICS Code and Engagement in Closed-End Mortgage Loan Servicing
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                             Entities     Small entities
                                                                                                                            engaged in      engaged in
              Category                     NAICS            Small entity threshold        Total entities  Small entities   mortgage loan   mortgage loan
                                                                                                                             servicing       servicing
--------------------------------------------------------------------------------------------------------------------------------------------------------
Commercial banks & savings            522110, 522120  $175,000,000 assets...............           7,724           4,250           7,502           4,098
 institutions.
Credit unions.......................          522130  $175,000,000 assets...............           7,491           6,568           5,190           4,270
Real estate credit..................          522292  $7,000,000 revenues...............           5,791           5,152
Other activities related to credit            522390  $7,000,000 revenues...............           5,494           5,319           1,388             800
 intermediation (includes loan
 servicing).
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For commercial banks, savings institutions, and credit unions, the 
number of entities and asset sizes were obtained from December 2010 
Call Report data as compiled by SNL Financial. Banks and savings 
institutions are counted as engaging in mortgage loan servicing if they 
hold closed-end loans secured by one to four family residential 
property or they are servicing mortgage loans for others. Credit unions 
are counted as engaging in mortgage loan servicing if they have closed-
end one to four family mortgages in portfolio, or hold real estate 
loans that have been sold but remain serviced by the institution.
    For firms providing real estate credit and firms engaged in other 
activities related to credit intermediation, the total number of 
entities and small entities comes from the 2007 Economic Census. The 
total number of these entities engaged in mortgage loan servicing is 
based on a special analysis of data from the Nationwide Mortgage

[[Page 57380]]

Licensing System and Registry and is current as of Q1 2011. The total 
equals the number of non-depositories that engage in mortgage loan 
servicing, including tax-exempt entities, except for those mortgage 
loan servicers (if any) that do not engage in any mortgage-related 
activities that require a State license. The estimated number of small 
entities engaged in mortgage loan servicing is based on predicting the 
likelihood that an entity's revenue is less than the $7 million 
threshold based on the relationship between servicer portfolio size and 
servicer rank in data from Inside Mortgage Finance.\145\
---------------------------------------------------------------------------

    \145\ The CFPB is continuing to refine its estimate of the 
number of firms providing real estate credit and engaging in other 
activities related to credit intermediation that are small and which 
engage in mortgage loan servicing.
---------------------------------------------------------------------------

4. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Proposed Rule, Including an Estimate of the Classes 
of Small Entities Which Will Be Subject to the Requirement and the Type 
of Professional Skills Necessary for the Preparation of the Report
    The proposed rule does not impose new reporting or recordkeeping 
requirements. The possible compliance costs for small entities from 
each major component of the proposed rule are presented below. The 
Bureau presents these costs against a pre-statute baseline. Benefits to 
consumers from the proposed rule are discussed in the DFA section 1022 
analysis in part VII above.
(i) ARM--Notice 6 Months Prior to Initial Interest Rate Adjustment
    DFA section 1418 amends TILA by adding a new requirement that a 
creditor or servicer provide a notice regarding the initial interest 
rate adjustment of a hybrid adjustable-rate mortgage at the end of the 
introductory period either (a) between six and seven months prior to 
the adjustment, or (b) at consummation of the mortgage if the first 
adjustment occurs during the first six months after consummation. The 
Bureau proposes to use the authority granted by TILA section 128A(b) to 
require this notice for hybrid as well as ARMs that are not hybrid (\1/
1\, \3/3\, \5/5\, etc.).\146\
---------------------------------------------------------------------------

    \146\ Conventional ARMs, unlike hybrid ARMs which have a period 
with a fixed rate of interest, start with an adjustable rate and 
that rate readjusts at even intervals.
---------------------------------------------------------------------------

    The proposed form would require the content listed in the statute. 
This includes, in part, a good faith estimate of the amount of the 
resulting payment; a list of alternatives that the consumer may pursue, 
including refinancing and loan modification; and information on how to 
contact housing counselors approved by HUD or a State housing finance 
authority. Additionally, the Bureau is proposing certain required 
additional information including details about the loan, key terms of 
the ARM, and information about the upcoming payment.
    The new disclosure may provide some benefit to servicers. 
Distressed borrowers who contact servicers well in advance of a 
possible increase in the interest rate and payment may have more time 
in which to pursue an alternative financing solution. Information about 
loss mitigation alternatives and the availability of housing counseling 
may prompt borrowers to work proactively and constructively with their 
servicers.
    The new disclosure will likely impose one-time and ongoing costs on 
servicers. Servicers will need to obtain system upgrades from vendors 
or make programming changes themselves. One SER reported the changes 
could take two to four days of IT support. These would be one-time 
costs. The Bureau is mitigating the one-time cost by providing 
servicers with tested model forms.
    SERs noted that producing and sending the new disclosures would 
impose new costs on them either directly or through vendor charges. The 
ongoing costs are mitigated somewhat since the disclosures can be 
provided to consumers in electronic form with consumer consent. One SER 
noted that vendors have not provided cost quotes at this point.
    A number of SERs expressed concern that the proposed initial ARM 
interest rate adjustment disclosure would confuse borrowers because it 
would only provide an estimate that would not accurately reflect the 
actual adjusted rate. The costs and benefits to consumers of the 
initial interest rate adjustment disclosure are discussed in the DFA 
section 1022 analysis in part VII above.
(ii) Revised 1026.20(c) Notice
    The Bureau is also proposing changes to existing Regulation Z Sec.  
1026.20(c). The existing provision applies to all ARMs and requires a 
disclosure prior to each interest rate adjustment that effects a change 
in payment and annually for interest rate adjustments that do not cause 
payment changes. The Bureau is proposing to eliminate the annual 
notice. The Bureau also proposes to amend the current disclosures 
requiring a notice each time an interest rate adjustment causes a 
corresponding change in payment.
    Regarding timing, the Bureau proposes changing the timeframe for 
providing the payment change notice to consumers from 25 to 120 days 
before payment at a new level is due to 60 to 120 days before payment 
at a new level is due. SERs did not identify any costs associated with 
this change and two reported they already provide the disclosure 60 to 
100 days before payment at a new level is due. One SER reported that 
the new rate is calculated 45 days prior to the rate change date. This 
SER provides the borrower with a notice a minimum of 25 days, and 
typically 42 days, prior to the new interest rate becoming effective. 
This SER stated that the new interest rate becomes effective 55-72 days 
prior to the due date of the new payment. Another SER reported 
substantially similar numbers. The timing of the disclosures reported 
by these SERs is consistent with the proposed new timeframe.
    Regarding content, the Bureau is considering proposing content for 
the revised 1026.20(c) notices that closely tracks the content it is 
proposing for the ARM initial interest rate adjustment notices pursuant 
to DFA section 1418. Servicers will need to obtain one-time system 
upgrades from vendors or make programming changes themselves. Given the 
substantial similarity of the revised 1026.20(c) form and the initial 
ARM interest rate adjustment notice, the Bureau believes that the 
additional ongoing cost of producing the revised form, on top of the 
initial ARM interest rate adjustment form, will be minimal.
(iii) Periodic Statements
    As discussed in the section-by-section analysis above, DFA section 
1420 amends TILA by adding a new requirement that a servicer of any 
residential mortgage loan provide a periodic statement to the consumer 
for each billing cycle. The Bureau tested a model periodic statement 
with consumers.
    The proposed rule has the following exemptions: Fixed-rate 
mortgages with coupon books, certain small servicers, reverse 
mortgages, and timeshares. These proposed provisions are discussed 
separately below.
    The proposed periodic statement requirement imposes one-time and 
ongoing costs on small servicers. The specific types of costs incurred 
by a servicer depend on whether the servicer produces the proposed 
periodic statement in-house or uses a third-party vendor.
    In-house one-time costs include the development of a new form, 
system reprogramming or acquisition, and

[[Page 57381]]

perhaps new or updated software. In-house ongoing costs for production 
include additional system use and staff time. In-house ongoing costs 
would also include paper, printing, and mailing costs for distributing 
the periodic statement to borrowers who do not give permission to 
receive the disclosure electronically.
    Vendors may also charge an initial one-time cost for developing a 
new form as well as ongoing costs for producing and distributing the 
statement. The SERs who use vendors stated that they did not know what 
their vendors would charge so they could comply with the new periodic 
statement requirement. The SERs agreed that the one-time charge would 
be different from what they would be charged if they were the only 
entity making the change. Vendors can spread the one-time costs of new 
regulatory requirements over many servicers.
    Small servicers reported a range of one-time costs of complying 
with the proposed provision. One non-depository SER estimated it would 
cost $150,000-$500,000 to convert to a new periodic statement system, a 
depository institution SER estimated a cost of $150,000-$200,000, and a 
credit union SER estimated a cost of $30,000-$40,000. Estimates of 
ongoing costs ranged from $11,000 per month from a non-depository SER 
to $2,200 per month from a depository SER; the latter estimated ongoing 
costs would be approximately $1 per statement. One depository SER 
estimated $5,000-$6,000 per month in production costs, before postage.
    The Bureau understands that the estimates of ongoing costs from the 
SERs did not exclude the costs of periodic statements, coupon books, or 
other payment mechanisms that they currently provide borrowers. Some of 
the SERs stated that they currently provide borrowers with a periodic 
statement that contains much of the information required under the 
proposal. However, none of the SERs stated that they include contact 
information for housing counseling agencies or programs of the type 
required by DFA section 1420. As explained above in the section-by-
section analysis, the Bureau is proposing to use authority under TILA 
sections 105(a) and (f) and DFA Section 1405(b) to require periodic 
statements to provide only information about where a borrower can 
access a complete list of housing counselors. The Bureau believes that 
the proposed provision will impose a substantially smaller burden than 
the statutory requirement.
    In accordance with DFA section 1420, the proposed rule would 
include a coupon book exemption for fixed-rate loans where the consumer 
is given a coupon book with certain of the information required by the 
periodic statement. It is not possible to estimate the share of 
residential mortgage loans serviced by small servicers that would 
qualify for this exception. If this provision is included in the final 
rule, it is possible that small servicers would provide coupon books to 
all borrowers with fixed-rate mortgages. Many of the SERs reported that 
they provide consumers with coupon books for ARMs. However, there is no 
data with which to estimate the fraction of small servicer portfolio 
loans that are in fixed-rate mortgages; in fact, the Bureau understands 
that many small servicer portfolio loans are adjustable-rate mortgages.
    The Bureau is also proposing a small servicer exemption. Servicers 
servicing 1,000 or fewer loans, all of which they must either own or 
have originated, would be eligible. A preliminary analysis indicates 
that all but 13 small insured depositories and credit unions would be 
covered by the exemption and would not have to provide the proposed 
periodic statement disclosure. The Bureau does not currently have the 
data necessary to estimate the number of small entity non-depositories 
that would be covered by the exemption. However, data from depositories 
suggests that approximately 584 small entity non-depositories (65% of 
the 800 small entity non-depositories) would be covered by the 
exemption.\147\ As discussed in the DFA section 1022 analysis in part 
VII.F, the Bureau is currently working to gather additional data that 
may be relevant to estimating the number of small non-depositories 
covered by the small servicer exemption. These data may include 
additional data from the National Mortgage License System (NMLS) and 
the NMLS Mortgage Call Report, loan file extracts from various lenders, 
and data from the pilot phases of the National Mortgage Database. The 
Bureau is also continuing its outreach efforts with industry and 
requests interested parties to provide data, research results, and 
other information relating to this issue.
---------------------------------------------------------------------------

    \147\ Roughly 35% of depositories that earn less than $7 million 
from servicing also have too many loans to qualify for the small 
servicer exemption. Extrapolating to non-depositories, roughly 35% 
of non-depositories that earn less than $7 million from servicing--
and are small entities--also service too many loans to qualify for 
the small servicer exemption.
---------------------------------------------------------------------------

    Finally, the proposed rule has exemptions for reverse mortgages and 
timeshares. Information that would be relevant and useful on a reverse 
mortgage statement differs substantially from the information required 
on the periodic statement; see the section-by-section analysis for 
further discussion. The proposed rule also exempts timeshares as these 
are not residential mortgage loans as defined in TILA.
(iv) Prompt Crediting and Request for Payoff Amounts
    DFA section 1464(a) generally codifies existing Regulation Z Sec.  
1026.36 on prompt crediting. The Bureau is further proposing a new 
requirement for the handling of partial payments (i.e., payments that 
are not full contractual payments). Under the proposal, if servicers 
hold partial payments in a suspense account, then once the amount in 
the account equals a full contractual payment, the servicer must credit 
the payment to the most delinquent outstanding payment.
    DFA section 1464(b) requires that a creditor or servicer of a home 
loan send an accurate payoff balance within a reasonable time, but in 
no case more than seven business days, after the receipt of a written 
request for such balance from or on behalf of the borrower. This 
essentially codifies existing Regulation Z Sec.  1026.36 on payoff 
statements, except that Regulation Z requires payoff statements to be 
sent within a reasonable time and creates a safe harbor for responses 
sent within five business days.
    The SERs generally reported that these provisions would have no 
impact on them as they are already in compliance. In correspondence, 
one SER suggested that the seven day maximum for payoff amounts should 
be even shorter, to prevent other servicers from delaying closings.
(v) Estimate of the Classes of Small Entities Which Will Be Subject to 
the Requirement and the Type of Professional Skills Necessary for the 
Preparation of the Report or Record
    Section 603(b)(4) of the RFA requires an estimate of the classes of 
small entities which will be subject to the requirement. The classes of 
small entities which will be subject to the reporting, recordkeeping, 
and compliance requirements of the proposed rule are the same classes 
of small entities that are identified above in part VIII.B.3.
    Section 603(b)(4) of the RFA also requires an estimate of the type 
of professional skills necessary for the preparation of the reports or 
records.

[[Page 57382]]

The Bureau anticipates that the professional skills required for 
compliance with the proposed rule are the same or similar to those 
required in the ordinary course of business of the small entities 
affected by the proposed rule. Compliance by the small entities that 
will be affected by the proposed rule will require continued 
performance of the basic functions that they perform today: Generating 
disclosure forms and crediting partial payments from borrowers either 
immediately or when they constitute a full payment.
5. Identification, to the Extent Practicable, of All Relevant Federal 
Rules Which May Duplicate, Overlap, or Conflict With the Proposed Rule
    The Dodd-Frank Act codified certain requirements contained in 
existing regulations and in some cases imposed new requirements that 
expand or vary the scope of existing regulations. The Bureau is working 
to eliminate conflicts and to harmonize the earlier rules with the new 
statutory requirements. In general, the existing and expanded 
regulations cover the following topics:
     New Regulation Z ARM disclosures, as required by DFA 
section 1418, will be provided six to seven months prior to the initial 
adjustment of interest rates. These disclosures will provide similar 
information to existing Regulation Z Sec.  1026.20(c) notices, however 
there are timing differences, and the new notice is required only for 
the first rate adjustment. The DFA section 1418 notice is intended to 
be sent early enough for the consumer to take action (i.e. refinance or 
apply for a loan modification) before the monthly payment increases.
     Regulation Z Sec.  1026.36(c)(1)(i) contains a prompt 
crediting provision that is generally codified by the prompt crediting 
provision in DFA section 1464(a).
     Regulation Z Sec.  1026.36(c) addresses the application of 
payments. The Bureau is proposing modifying this rule to mandate the 
application of funds to the most delinquent outstanding payment if a 
full contractual payment has accumulated in any suspense or unapplied 
funds account.
     Regulation Z 1026.36(c)(1)(iii) contains a provision 
regarding payoff amount requests that is generally codified by the Dodd 
Frank Act.
    Elsewhere in today's Federal Register, the Bureau is publishing a 
proposed rule that would implement DFA section 1463 and is issued under 
RESPA. The RESPA proposal addresses procedures for obtaining force-
placed insurance; procedures for investigating and resolving alleged 
errors and responding to requests for information; reasonable 
information management policies and procedures; early intervention for 
delinquent borrowers; and continuity of contact for delinquent 
borrowers.
    These regulations do not duplicate, overlap, or conflict and the 
Bureau is not aware of any other Federal regulations that currently 
duplicate, overlap, or conflict with the proposals under consideration.
6. Description of Any Significant Alternatives to the Proposed Rule 
Which Accomplish the Stated Objectives of Applicable Statutes and 
Minimize Any Significant Economic Impact of the Proposed Rule on Small 
Entities
(i) New Initial Interest Rate Adjustment Notice for Adjustable-Rate 
Mortgages
    As discussed above, DFA section 1418 requires servicers to provide 
a new disclosure to consumers who have hybrid ARMs regarding the 
initial interest rate adjustment. The Bureau is proposing to use its 
discretionary authority to require the initial interest rate adjustment 
notice for ARMs that are not hybrid (e.g., \1/1\, \3/3\, \5/5\, etc.) 
as well. Thus, the disclosure under the original statutory language 
would have a smaller economic impact on small entities.
    The Bureau opted for its current proposal because all ARMs, not 
just hybrid ARMs, may subject consumers to the same payment shock after 
the introductory period expires. Consumers with ARMs that are not 
hybrid would therefore also benefit from the protections provided by 
the new disclosure.
    The Bureau also considered whether to except small servicers from 
the proposed initial ARM interest rate adjustment notice. The SERs did 
express some concern about the one-time and ongoing costs of providing 
the proposed notice. They expressed concern that consumers would be 
confused by receiving estimates rather than their actual new interest 
rate and payment.
    The Bureau believes an exception would deprive certain consumers of 
the seven to eight months advance notice before payment at a new level 
is due provided by the disclosure. This advance notice is designed to 
allow consumers time to weigh their alternatives and pursue alternative 
actions. An exception would also deprive certain consumers of the 
information provided in the notice about alternatives and how to 
contact their State housing finance authority and counseling agencies 
and programs.
    The Bureau recognizes that the proposed initial ARM interest rate 
adjustment notice will impose some burden on small servicers, but it 
does not believe that it will impose a significant burden since it is a 
one-time notice. The Bureau seeks comment on whether the burden imposed 
on small entities by the requirements of the initial rate adjustment 
notice outweighs the consumer protection benefits it affords.
(ii) Regulation Z Sec.  1026.20(c) Disclosure for Adjustable-Rate 
Mortgages
    The Bureau is proposing to change the timing of the ARM payment 
change notice required under current Sec.  1026.20(c) to be provided to 
consumers from 25 to 120 days before payment at a new level is due to 
60 to 120 days before payment at a new level is due. The longer lead 
time is designed to give consumers time to refinance or take other 
ameliorative actions if they are not financially equipped to pay their 
mortgages at an increased adjusted rate. The Bureau recognizes that the 
longer lead time may impose a burden on small servicers.
    According to outreach conducted by the Bureau, small servicers 
often are able to send out the ARM payment change notices required by 
Sec.  1026.20(c) on the same day the index value is selected. In that 
case, for a loan with a 45-day look-back period, the notice is ready 45 
days before the change date and, with the 28 to 31 days between the 
change date and the date payment at the new level is due, the interest 
rate adjustment notice goes out to the consumer 73 to 76 days before 
the new payment is due. Under these circumstances, small servicers 
could provide the payment change notice within the 60 day minimum 
period. The Bureau is also proposing an alternative 25-day minimum 
period for certain existing adjustable-rate mortgages in which the 
mortgage note requires a look-back period of less than 45 days.
(iii) Periodic Statements
    As discussed above, DFA section 1420 requires servicers to provide 
a new periodic statement to the consumer for each billing cycle. The 
proposed rule would generally require both the content listed in the 
statute, additional billing information, and information about how to 
dispute and resolve errors. The Bureau is proposing to use its 
discretionary authority to require the additional information. Thus, 
the disclosure under the original statutory language would impose a 
smaller economic impact on small entities that must provide the 
periodic statement disclosure.

[[Page 57383]]

    The Bureau believes the additional information provides important 
consumer benefits. Only some of the information in the disclosure will 
be required to be provided to consumers on a regular basis. However, 
distressed or delinquent borrowers will likely need more information. 
The proposed periodic statement disclosure was the subject of three 
rounds of consumer testing and refinement to identify the form, 
content, headings, and format that best promotes consumer 
understanding.
    As discussed above, the Bureau is proposing a small servicer 
exemption. Servicers servicing 1,000 or fewer loans, all of which they 
must either own or have originated, would be eligible. As discussed 
above, the Bureau believes that almost all small insured depositories 
and credit unions would be covered by the exemption. The Bureau does 
not currently have the data necessary to estimate the number of small 
entity non-depositories that would be covered by the exemption. 
However, the Bureau is currently working to gather additional data that 
may be relevant to estimating the number of small non-depositories 
covered by the small servicer exemption.
(iv) Prompt Crediting and Request for Payoff Amounts
    As discussed above, the SERs generally reported that the proposed 
provisions regarding prompt crediting and payoff amounts would have no 
impact on them as they are already in compliance. In correspondence, 
one SER suggested that the seven day maximum for payoff amounts should 
be even shorter, to prevent other servicers from delaying closings.
7. Discussion of Impact on Cost of Credit for Small Entities
    Section 603(d) of the RFA requires the Bureau to consult with small 
entities regarding the potential impact of the proposed rule on the 
cost of credit for small entities and related matters. 5 U.S.C. 603(d). 
To satisfy these statutory requirements, the Bureau provided 
notification to the Chief Counsel on April 9, 2012 that the Bureau 
would collect the advice and recommendations of the same SERs 
identified in consultation with the Chief Counsel through the SBREFA 
Panel process concerning any projected impact of the proposed rule on 
the cost of credit for small entities as well as any significant 
alternatives to the proposed rule which accomplish the stated 
objectives of applicable statutes and which minimize any increase in 
the cost of credit for small entities.\148\ The Bureau sought to 
collect the advice and recommendations of the SERs during the SBREFA 
Panel outreach meeting regarding these issues because, as small 
financial service providers, the SERs could provide valuable input on 
any such impact related to the proposed rule.\149\
---------------------------------------------------------------------------

    \148\ See 5 U.S.C. 603(d)(2). The Bureau provided this 
notification as part of the notification and other information 
provided to the Chief Counsel with respect to the SBREFA Panel 
process pursuant to RFA section 609(b)(1).
    \149\ See 5 U.S.C. 603(d)(2)(B).
---------------------------------------------------------------------------

    At the time the Bureau circulated the SBREFA materials to the SERs 
in advance of the SBREFA Panel outreach meeting, it had no evidence 
that the proposals under consideration would result in an increase in 
the cost of business credit for small entities. Instead, the summary of 
the proposals stated that the proposals would apply only to mortgage 
loans obtained by consumers primarily for personal, family, or 
household purposes and the proposals would not apply to loans obtained 
primarily for business purposes.\150\
---------------------------------------------------------------------------

    \150\ See TILA section 104(1); RESPA section 7(a)(1).
---------------------------------------------------------------------------

    At the SBREFA Panel outreach meeting, the Bureau asked the SERs a 
series of questions regarding cost of business credit issues.\151\ The 
questions were focused on two areas. First, the SERs from commercial 
banks/savings institutions, credit unions, and mortgage companies were 
asked whether, and how often, they extend to their customers closed-end 
mortgage loans to be used primarily for personal, family, or household 
purposes but that are used secondarily to finance a small business, and 
whether the proposals then under consideration would result in an 
increase in their customers' cost of credit. Second, the Bureau 
inquired as to whether, and how often, the SERs take out closed-end, 
home-secured loans to be used primarily for personal, family, or 
household purposes and use them secondarily to finance their small 
businesses, and whether the proposals under consideration would 
increase the SERs' cost of credit.
---------------------------------------------------------------------------

    \151\ See SBREFA Final Report, supra note 22, at 154-55 
(appendix D, PowerPoint slides from the SBREFA Panel outreach 
meeting, ``Topic 7: Impact on the Cost of Business Credit'').
---------------------------------------------------------------------------

    The SERs had few comments on the impact on the cost of business 
credit. While they took this time to express concerns that these 
regulations would increase their costs, they said these regulations 
would have little to no impact on the cost of business credit. When 
asked, one SER mentioned that at times people may use a home-secured 
loan to finance a business, which was corroborated by a different SER 
based on his personal experience with starting a business. The Bureau 
is generally interested in the use of personal home-secured credit to 
finance a business and invites interested parties to provide data and 
other factual information on this issue.
    Based on the feedback obtained from SERs at the outreach meeting, 
the Bureau currently does not anticipate that the proposed rule will 
result in an increase in the cost of credit for small business 
entities. To further evaluate this question, the Bureau solicits 
comment on whether the proposed rule will have any impact on the cost 
of credit for small entities.

IX. Paperwork Reduction Act

    The Bureau's information collection requirements contained in this 
proposed rule, and identified as such, will be submitted to OMB for 
review under section 3507(d) of the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501 et seq.) (Paperwork Reduction Act'' or PRA). Under the 
Paperwork Reduction Act, the Bureau may not conduct or sponsor, and a 
person is not required to respond to, an information collection unless 
the information collection displays a valid OMB control number.
    The title of this information collection is 2012 Truth in Lending 
Act (Regulation Z) Mortgage Servicing. The frequency of response is on-
occasion. This proposed rule would amend Regulation Z. Regulation Z 
currently contains collections of information approved by OMB, and the 
Bureau's OMB control number for Regulation Z is 3170-0015 (Truth in 
Lending Act (Regulation Z) 12 CFR 1026). As described below, the 
proposed rule would amend the collections of information currently in 
Regulation Z.
    The information collection would be required to provide benefits 
for consumers and would be mandatory. See 15 U.S.C. 1601 et seq. 
Because the Bureau does not collect any information, no issue of 
confidentiality arises. The likely respondents would be federally-
insured depository institutions (such as commercial banks, savings 
banks, and credit unions) and non-depository institutions that service 
consumer mortgage loans.
    Under the proposed rule, the Bureau generally would account for the 
paperwork burden associated with Regulation Z for the following 
respondents pursuant to its administrative enforcement authority: 
Insured depository institutions with more than $10 billion in total 
assets, their depository institution affiliates (together, the Bureau 
depository

[[Page 57384]]

respondents), and certain non-depository servicers (the Bureau non-
depository respondents). The Bureau and the FTC generally both have 
enforcement authority over non-depository institutions under Regulation 
Z. Accordingly, the Bureau has allocated to itself half of its 
estimated burden to Bureau non-depository respondents. Other Federal 
agencies, including the FTC, are responsible for estimating and 
reporting to OMB the total paperwork burden for the institutions for 
which they have administrative enforcement authority. They may, but are 
not required to, use the Bureau's burden estimation methodology.
    Using the Bureau's burden estimation methodology, the total 
estimated burden under the proposed changes to Regulation Z for the 
roughly 12,813 institutions, including Bureau respondents,\152\ that 
are estimated to service consumer mortgages subject to the proposed 
rule would be approximately 25,000 one-time burden hours and 74,000 
ongoing burden hours per year. The aggregate estimates of total burdens 
presented in this part IX are based on estimates averaged across 
respondents. The Bureau expects that the amount of time required to 
implement each of the proposed changes for a given institution may vary 
based on the size, complexity, and practices of the respondent.
---------------------------------------------------------------------------

    \152\ For purposes of this PRA analysis, the Bureau's depository 
respondents under the proposed rule are 130 depository institutions 
and depository institution affiliates that service closed-end 
consumer mortgages. The Bureau's non-depository respondents are an 
estimated 1,388 non-depository servicers. Unless otherwise 
specified, all references to burden hours and costs for the Bureau 
respondents for the collection requirements under the proposed rule 
are based on a calculation of the burden from all of the Bureau's 
depository respondents and half of the burden from the Bureau's non-
depository respondents.
---------------------------------------------------------------------------

A. Information Collection Requirements

    The Bureau is proposing four changes to the information collection 
requirements in Regulation Z. First, as previously discussed, proposed 
Sec.  1026.20(d) regarding adjustable-rate mortgages would require 
creditors, assignees, and servicers to send a new initial rate 
adjustment disclosure at least 210, but not more than 240, days before 
the date the first payment is due after the initial rate adjustment. 
The new disclosure includes, among other things, information regarding 
the calculation of the new interest rate and information to assist 
consumers in the event the consumer requires alternative financing. 
Second, proposed Sec.  1026.20(c) regarding adjustable-rate mortgages 
would change the format, content, and timing of the existing rate 
adjustment disclosure. The proposed rule would change the minimum time 
for providing advance notice to consumers from 25 days to 60 days 
before payment at a new level is due. Servicers would be required to 
provide certain information that they may not currently disclose, but 
would no longer be required to notify consumers of a rate adjustment if 
the payment is unchanged.
    Third, proposed Sec.  1026.41 would require a new periodic 
statement disclosure. The required content would include billing 
information, such as the amount due, payment due date, and information 
on any late fees; information on recent transaction activity and how 
payments were applied; general loan information, such as the interest 
rate and when it may next adjustment, outstanding principal balance, 
etc.; and other information that may be helpful to troubled borrowers. 
Certain small servicers (those servicing less than 1,000 mortgages and 
own or originated all the loans they are servicing) would be exempt 
from this requirement. Fixed-rate mortgages would be exempt if the 
servicer provides the consumer with a coupon book that contained 
certain information, and makes other information available to the 
consumer.
    Fourth, proposed Sec.  1026.36 would make changes to the existing 
requirements on servicers to promptly credit borrower payments that 
satisfy payment rules specified by a servicer. Proposed Sec.  1026.36 
would also make changes to the existing requirements on creditors and 
servicers to provide an accurate payoff balance upon request. An 
information collection is created by the proposed requirement to 
provide accurate payoff statements.

B. Burden Analysis Under the Four Proposed Information Collection 
Requirements \153\
---------------------------------------------------------------------------

    \153\ Based on discussions with industry, the Bureau assumes 
that all depository respondents except for one large entity and 95% 
of non-depository respondents (100% of small non-depository 
respondents) use third-party vendors for one-time software and IT 
capability and for ongoing production and distribution activities 
associated with disclosures. The Bureau believes at this time that 
under existing mortgage servicing contracts, vendors would absorb 
the one-time software and IT costs and ongoing production costs of 
disclosures for large- and medium-sized respondents but pass along 
these costs to small respondents. The Bureau will further consider 
the extent to which respondents use third-party vendors and the 
extent to which third-party vendors charge various costs to 
different types of respondents, and the Bureau seeks data and other 
factual information from interested parties on these issues.
---------------------------------------------------------------------------

1. New Initial Rate Adjustment Notice for Adjustable-Rate Mortgages
    All CFPB respondents would have a one-time burden under this 
requirement associated with reviewing the regulation. Certain CFPB 
respondents would have a one-time burden from creating software and IT 
capability to produce the new disclosure. The Bureau estimates this 
one-time burden to be 140 hours for CFPB depository respondents and 
1,488 hours and $115,000 for CFPB non-depository respondents.\154\
---------------------------------------------------------------------------

    \154\ Dollar figures include estimated costs to vendors.
---------------------------------------------------------------------------

    Certain CFPB respondents would have ongoing burden associated with 
the IT used in producing the disclosure. All CFPB respondents would 
have ongoing costs associated with distributing (e.g., mailing) the 
disclosure. The Bureau estimates this ongoing burden to be 600 hours 
and $63,000 for CFPB depository respondents and 70 hours and $3,400 for 
CFPB non-depository respondents.
2. Changes in the Regulation Z Sec.  1026.20(c) Disclosure for 
Adjustable-Rate Mortgages
    All CFPB respondents would have a one-time burden under this 
requirement associated with reviewing the regulation. Certain CFPB 
respondents would have one-time burden from creating software and IT 
capability to provide the additional content in the disclosure. The 
Bureau estimates this one-time burden to be 165 hours for CFPB 
depository respondents and 600 hours and $58,000 for CFPB non-
depository respondents.
    Regarding ongoing burden, the Bureau is proposing to require the 
disclosure only when the interest rate adjustment results in a 
corresponding change in the required payment. The Bureau believes it 
would be usual and customary to provide consumers with a disclosure 
under these circumstances. Thus, the Bureau believes there is no burden 
from distribution costs for purposes of PRA from the proposed Sec.  
1026.20(c) disclosure. The Bureau recognizes that there is content in 
the proposed disclosure beyond what may be usual and customary to 
provide. Bureau respondents that do not use vendors and certain small 
respondents that use vendors will incur production costs associated 
with this extra content, and this is burden for purposes of PRA. The 
Bureau estimates the ongoing burden to be 1,400 hours for CFPB 
depository respondents and 110 hours and $8,000 for CFPB non-depository 
respondents.

[[Page 57385]]

3. New Periodic Statement
    All CFPB respondents that are not exempt would have a one-time 
burden under this requirement associated with reviewing the regulation. 
Certain CFPB respondents would have a one-time burden from creating 
software and IT capability to modify existing periodic disclosures or 
produce a new disclosure. The proposed disclosure incorporates all of 
the information in billing statements that many respondents already 
provide. However, the additional data fields and formatting 
requirements may not be usual and customary. The Bureau estimates this 
one-time burden to be 170 hours for CFPB depository respondents and 600 
hours and $20,000 for CFPB non-depository respondents.
    Regarding ongoing burden, consumers who currently receive a 
periodic statement or billing statement are receiving these disclosures 
in the normal course of business. The Bureau believes that most other 
consumers with mortgages receive a coupon book or other type of payment 
medium, such as a passbook. The statute provides that servicers do not 
have to provide the periodic statement disclosure to consumers who have 
both a fixed-rate mortgage and a coupon book. Thus, the only consumers 
who are not already receiving a billing statement or periodic 
disclosure to whom servicers will have to begin providing the periodic 
statement disclosure under the proposed rule are those with both an 
adjustable-rate mortgage and a coupon book. The burden of distributing 
the proposed periodic statement disclosure to these consumers is, for 
purposes of PRA, the ongoing burden from distribution costs from the 
proposed periodic statement disclosure. The Bureau recognizes that 
there is content in the proposed periodic statement disclosure beyond 
what may be usual and customary to provide in existing billing 
statements. The Bureau estimates the ongoing burden to be 52,000 hours 
and $5,600,000 for CFPB depository respondents and 6,300 hours and 
$300,000 for CFPB non-depository respondents.
4. Prompt Crediting of Payments and Response to Requests for Payoff 
Amounts
    All CFPB respondents would have a one-time burden under this 
requirement associated with reviewing the regulation. Certain CFPB 
respondents would have a one-time burden from creating software and IT 
costs associated with changes in the payoff statement disclosure. The 
Bureau estimates this one-time burden to be 110 hours for CFPB 
depository respondents and 500 hours and $115,000 for CFPB non-
depository respondents.
    Regarding ongoing burden, the Bureau understands that the proposed 
payoff statement will replace a pre-existing disclosure that 
respondents are currently providing in the normal course of business. 
The Bureau does not believe that proposed changes to the content and 
timing of the existing disclosure will significantly change the ongoing 
production or distribution costs of the notice currently provided in 
the normal course of business. The Bureau estimates the ongoing burden 
to be 1,650 hours and $178,000 for CFPB depository respondents and 200 
hours and $9,600 for CFPB non-depository respondents.

C. Summary of Burden Hours for CFPB Respondents

----------------------------------------------------------------------------------------------------------------
                                                    Disclosures    Hours burden    Total burden    Total vendor
                                    Respondents   per respondent  per disclosure       hours           costs
----------------------------------------------------------------------------------------------------------------
Ongoing:
    ARM 20(c) Notice............             824             700     0.002777778           1,000          $8,000
    ARM 20(d) Notice............             824             300     0.002881756           1,000          67,000
    Periodic Statements.........             564          35,800     0.002881756          58,000       5,914,000
    Prompt Crediting & Payoff                824             800     0.002881756           2,000         188,000
     Statements.................
One-Time:
    ARM 20(c) Notice............             824               1     0.93                  1,000          58,000
    ARM 20(d) Notice............             824               1     1.97                  2,000         115,000
    Periodic Statements.........             564               1     1.36                  1,000          20,000
    Prompt Crediting & Payoff                824               1     0.77                  1,000         115,000
     Statements.................
----------------------------------------------------------------------------------------------------------------

D. Comments

    Comments are specifically requested concerning: (i) Whether the 
proposed collections of information are necessary for the proper 
performance of the functions of the Bureau, including whether the 
information will have practical utility; (ii) the accuracy of the 
estimated burden associated with the proposed collections of 
information; (iii) how to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) how to minimize the burden of 
complying with the proposed collections of information, including the 
application of automated collection techniques or other forms of 
information technology. All comments will become a matter of public 
record. Comments on the collection of information requirements should 
be sent to the Office of Management and Budget (OMB), Attention: Desk 
Officer for the Consumer Financial Protection Bureau, Office of 
Information and Regulatory Affairs, Washington, DC 20503, or by the 
Internet to http://[email protected], with copies to the 
Bureau at the Consumer Financial Protection Bureau (Attention: PRA 
Office), 1700 G Street NW., Washington, DC 20552, or by the Internet to 
[email protected].

Text of the Proposed Revisions

    Certain conventions have been used to highlight the proposed 
changes to the text of the regulation and official interpretation. New 
language is shown inside [rtrif]bold-faced arrows[ltrif], while 
language that would be removed is set off with [lsqbb]bold-faced 
brackets[rsqbb].

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Credit, Credit unions, Mortgages, 
National banks, Reporting and recordkeeping requirements, Savings 
associations, Truth in lending.

Authority and Issuance

    For the reasons set forth above, the Bureau of Consumer Financial 
Protection proposes to amend 12 CFR part 1026, as follows:

PART 1026--TRUTH IN LENDING (REGULATION Z)

    1. The authority citation for part 1026 continues to read as 
follows: 12 U.S.C. 5512, 5581; 15 U.S.C. 1601 et seq.

[[Page 57386]]

Subpart C--Closed-End Credit

    2. Section 1026.17 is amended by revising paragraphs (a)(1) and (b) 
to read as follows:


Sec.  1026.17  General disclosure requirements.

    (a) Form of disclosures. (1) The creditor shall make the 
disclosures required by this subpart clearly and conspicuously in 
writing, in a form that the consumer may keep. The disclosures required 
by this subpart may be provided to the consumer in electronic form, 
subject to compliance with the consumer consent and other applicable 
provisions of the Electronic Signatures in Global and National Commerce 
Act (E-Sign Act) (15 U.S.C. 7001 et seq.). The disclosures required by 
Sec. Sec.  1026.17(g), 1026.19(b), and 1026.24 may be provided to the 
consumer in electronic form without regard to the consumer consent or 
other provisions of the E-Sign Act in the circumstances set forth in 
those sections. [rtrif]Except for Sec.  1026.20(d), which requires 
disclosures to be provided separate and distinct from all other 
correspondence, the[ltrif] [lsqbb]The[rsqbb] disclosures shall be 
grouped together, shall be segregated from everything else, and shall 
not contain any information not directly related to the disclosures 
required under Sec.  1026.18[rtrif], Sec.  1026.20(c),[ltrif] or Sec.  
1026.47. The disclosures may include an acknowledgment of receipt, the 
date of the transaction, and the consumer's name, address, and account 
number. The following disclosures may be made together with or 
separately from other required disclosures: The creditor's identity 
under Sec.  1026.18(a), the variable rate example under Sec.  
1026.18(f)(1)(iv), insurance or debt cancellation under Sec.  
1026.18(n), and certain security interest charges under Sec.  
1026.18(o). The itemization of the amount financed under Sec.  
1026.18(c)(1) must be separate from the other disclosures under Sec.  
1026.18, except for private education loan disclosures made in 
compliance with Sec.  1026.47.
* * * * *
    (b) Time of disclosures. The creditor shall make disclosures before 
consummation of the transaction. In certain residential mortgage 
transactions, special timing requirements are set forth in Sec.  
1026.19(a). In certain variable-rate transactions, special timing 
requirements for variable-rate disclosures are set forth in Sec.  
1026.19(b) and Sec.  1026.20(c)[rtrif]and (d)[ltrif]. For private 
education loan disclosures made in compliance with Sec.  1026.47, 
special timing requirements are set forth in Sec.  1026.46(d). In 
certain transactions involving mail or telephone orders or a series of 
sales, the timing of disclosures may be delayed in accordance with 
paragraphs (g) and (h) of this section.
* * * * *
    3. Section 1026.20 is amended by revising the section heading and 
paragraphs (c) and (d) to read as follows:


Sec.  1026.20  [lsqbb]Subsequent d[rsqbb][rtrif]D[ltrif]isclosure 
requirements[rtrif] regarding post-consummation events[ltrif].

* * * * *
    (c) [lsqbb]Variable-rate[rsqbb] [rtrif]Rate[ltrif] adjustments. 
[rtrif]The creditor, assignee, or servicer of an adjustable-rate 
mortgage shall provide disclosures to consumers, as described in Sec.  
1026.20(c), in connection with the adjustment of interest rates 
resulting in a corresponding adjustment to the payment. To the extent 
that other provisions of subpart C apply to the disclosures required by 
this section, those provisions apply to assignees and servicers as well 
as to creditors. The disclosures required under this section also shall 
be provided for an interest rate adjustment resulting from the 
conversion of an adjustable-rate mortgage to a fixed-rate transaction, 
if that interest rate adjustment results in a corresponding payment 
change.[ltrif] [lsqbb]Except as provided in paragraph (d) of this 
section, an adjustment to the interest rate with or without a 
corresponding adjustment to the payment in a variable-rate transaction 
subject to Sec.  1026.19(b) is an event requiring new disclosures to 
the consumer. At least once each year during which an interest rate 
adjustment is implemented without an accompanying payment change, and 
at least 25, but no more than 120, calendar days before a payment at a 
new level is due, the following disclosures, as applicable, must be 
delivered or placed in the mail:
    (1) The current and prior interest rates.
    (2) The index values upon which the current and prior interest 
rates are based.
    (3) The extent to which the creditor has foregone any increase in 
the interest rate.
    (4) The contractual effects of the adjustment, including the 
payment due after the adjustment is made, and a statement of the loan 
balance.
    (5) The payment, if different from that referred to in paragraph 
(c)(4) of this section, that would be required to fully amortize the 
loan at the new interest rate over the remainder of the loan 
term.[rsqbb]
    [rtrif](1) Coverage of rate adjustment disclosures. (i) In General. 
For purposes of Sec.  1026.20(c), an adjustable-rate mortgage or 
``ARM'' is a closed-end consumer credit transaction secured by the 
consumer's principal dwelling in which the annual percentage rate may 
increase after consummation.
    (ii) Exceptions. The requirements of Sec.  1026.20(c) do not apply 
to:
    (A) Construction loans with terms of one year or less; or
    (B) The first adjustment to an ARM if the first payment at the 
adjusted level is due within 210 days after consummation and the 
actual, not estimated, new interest rate was disclosed at consummation 
pursuant to Sec.  1026.20(d).
    (2) Timing and content of rate adjustment disclosures with a change 
in payment. Disclosures required by Sec.  1026.20(c) must be provided 
to consumers at least 60, but no more than 120 days before a payment at 
a new level is due. Disclosures must be provided to consumers at least 
25, but no more than 120 days before a payment at a new level is due 
for ARMs originated prior to July 21, 2013 in which the mortgage note 
requires the adjusted interest rate and payment to be calculated based 
on the index figure available as of a date that is less than 45 days 
prior to the adjustment date. Disclosures must be provided to consumers 
as soon as practicable, but not less than 25 days before a payment at a 
new level is due for the first adjustment to an ARM if it occurs within 
60 days of consummation and the actual, not estimated, new interest 
rate was not disclosed at consummation. The disclosures must provide 
the following information:
    (i) A statement providing:
    (A) An explanation that under the terms of the consumer's 
adjustable-rate mortgage, the specific time period in which the current 
interest rate has been in effect is ending and that the interest rate 
and mortgage payment will change;
    (B) The effective date of the interest rate adjustment, and when 
additional future interest rate changes are scheduled to occur; and
    (C) Any other changes to loan terms, features, or options taking 
effect on the same date as the interest rate adjustment, such as the 
expiration of interest-only or payment-option features;
    (ii) A table containing the following information:
    (A) The current and new interest rates;
    (B) The current and new payments and the date the first new payment 
is due; and

[[Page 57387]]

    (C) For interest-only or negatively-amortizing payments, the amount 
of the current and new payment allocated to principal, interest, and 
taxes and insurance in escrow, as applicable. The current payment 
allocation disclosed shall be based on the expected payment allocation 
for the last payment prior to the date of the disclosure. The new 
payment allocation disclosed shall be based on the expected payment 
allocation for the first payment for which the new interest rate will 
apply;
    (iii) An explanation of how the interest rate is determined, 
including:
    (A) The specific index or formula used in making adjustments and a 
source of information about the index or formula; and
    (B) Any adjustment to the index, including the amount of any margin 
and an explanation that the margin is the addition of a certain number 
of percentage points to the index;
    (iv) Any limits on the interest rate or payment increases at each 
adjustment and over the life of the loan, as applicable, including the 
extent to which such limits result in the creditor, assignee, or 
servicer foregoing any increase in the interest rate and the earliest 
date that such foregone interest may apply to additional future 
interest rate adjustments, subject to those limits;
    (v) An explanation of how the new payment is determined, including:
    (A) The index or formula used;
    (B) The amount of any adjustment to the index or formula, for 
example, by the addition of a margin or application of previously 
foregone interest increase;
    (C) The loan balance expected on the date of the interest rate 
adjustment; and
    (D) The length of the remaining loan term expected on the date of 
the interest rate adjustment. Any change in the term or maturity of the 
loan caused by the adjustment also shall be disclosed;
    (vi) For interest-only or negatively-amortizing loans, a statement 
that the new payment will not be allocated to pay loan principal. If 
negative amortization occurs as a result of the adjustment, the 
statement shall set forth the payment required to fully amortize the 
loan at the new interest rate over the remainder of the loan term or to 
fully amortize the loan without extending the loan term; and
    (vii) The circumstances under which any prepayment penalty, as 
defined in subpart E by Sec.  1026.41(d)(7)(iv), may be imposed when 
consumers fully repay their adjustable-rate mortgages, such as when 
selling or refinancing their principal residence, the time period 
during which the penalty may be imposed, and the maximum amount (in 
dollars) of the penalty possible during that time period.
    (3) Format of disclosures. (i) The disclosures required by Sec.  
1026.20(c) shall be provided in the form of the table and in the same 
order as, and with headings and format substantially similar to, Forms 
H-4(D)(1) and (2) in Appendix H to this part; and
    (ii) The disclosures required by paragraph (c)(2)(ii) shall be in 
the form of a table located within the table described in paragraph 
(c)(3)(i) of this section. These disclosures shall appear in the same 
order as, and with headings and format substantially similar to, the 
table inside the larger table in Forms H-4(D)(1) and (2) in Appendix H 
to this part.[ltrif]
    (d) [lsqbb]Information provided in accordance with variable-rate 
subsequent disclosure regulations of other Federal agencies may be 
substituted for the disclosure required by paragraph (c) of this 
section.[rsqbb][rtrif] Initial rate adjustments. The creditor, 
assignee, or servicer of an adjustable-rate mortgage shall provide 
disclosures to consumers, as described in Sec.  1026.20(d), in 
connection with the initial interest rate adjustment. To the extent 
that other provisions of subpart C apply to the disclosures required by 
this section, those provisions apply to assignees and servicers as well 
as to creditors. The disclosures shall be provided in writing, separate 
and distinct from all other correspondence. The disclosures shall be 
provided at least 210, but no more than 240, days before the first 
payment at the adjusted level is due. If the first payment at the 
adjusted level is due within the first 210 days after consummation, the 
disclosures shall be provided at consummation.
    (1) Coverage of initial rate adjustment disclosures. (i) In 
general. For purposes of Sec.  1026.20(d), an adjustable-rate mortgage 
or ``ARM'' is a closed-end consumer credit transaction secured by the 
consumer's principal dwelling in which the annual percentage rate may 
increase after consummation.
    (ii) Exceptions. The requirements of Sec.  1026.20(d) do not apply 
to construction loans with terms of one year or less.
    (2) Content of initial rate adjustment disclosures. If the new 
interest rate (or the new payment calculated from the new interest 
rate) is not known as of the date of the disclosure, an estimate shall 
be disclosed and labeled as such. This estimate shall be based on the 
index figure reported in the source of information described in 
paragraph (d)(2)(iv)(A) within fifteen business days prior to the date 
of the disclosure. The disclosures required by Sec.  1026.20(d) shall 
provide the following:
    (i) The date of the disclosure;
    (ii) A statement providing:
    (A) An explanation that under the terms of the consumer's 
adjustable-rate mortgage, the specific time period in which the current 
interest rate has been in effect is ending and that any change in the 
interest rate may result in a change in the mortgage payment;
    (B) The effective date of the interest rate adjustment and when 
additional future interest rate changes are scheduled to occur; and
    (C) Any other changes to loan terms, features, or options taking 
effect on the same date as the interest rate adjustment, such as the 
expiration of interest-only or payment-option features;
    (iii) A table containing the following information:
    (A) The current and new interest rates;
    (B) The current and new payments and the date the first new payment 
is due; and
    (C) For interest-only or negatively-amortizing payments, the amount 
of the current and new payment allocated to principal, interest, and 
taxes and insurance in escrow, as applicable. The current payment 
allocation disclosed shall be based on the expected payment allocation 
for the last payment prior to the date of the disclosure. The new 
payment allocation disclosed shall be based on the expected payment 
allocation for the first payment for which the new interest rate will 
apply;
    (iv) An explanation of how the interest rate is determined, 
including:
    (A) The specific index or formula used in making adjustments and a 
source of information about the index or formula; and
    (B) Any adjustment to the index, including the amount of any margin 
and an explanation that the margin is the addition of a certain number 
of percentage points to the index;
    (v) Any limits on the interest rate or payment increases at each 
adjustment and over the life of the loan, as applicable, including the 
extent to which such limits result in the creditor, assignee, or 
servicer foregoing any increase in the interest rate and the earliest 
date that such foregone interest may apply to additional future 
interest rate adjustments, subject to those limits;
    (vi) An explanation of how the new payment is determined, 
including:
    (A) The index or formula used;
    (B) The amount of any adjustment to the index or formula, for 
example, by the addition of a margin;
    (C) The loan balance expected on the date of the interest rate 
adjustment;

[[Page 57388]]

    (D) The length of the remaining loan term expected on the date of 
the interest rate adjustment. Any change in the term or maturity of the 
loan caused by the adjustment also shall be disclosed; and
    (E) If the new interest rate or new payment provided is an 
estimate, a statement that another disclosure containing the actual new 
interest rate and new payment will be provided to the consumer 2 to 4 
months prior to the date the first new payment is due for interest rate 
adjustments that result in a corresponding payment change, pursuant to 
Sec.  1026.20(c);
    (vii) For interest-only or negatively-amortizing loans, a statement 
that the new payment will not be allocated to pay loan principal. If 
negative amortization occurs as a result of the adjustment, the 
statement shall set forth the payment required to fully amortize the 
loan at the new interest rate over the remainder of the loan term or to 
fully amortize the loan without extending the loan term;
    (viii) A list of the following alternatives to paying at the new 
rate that consumers may pursue and a brief explanation of each 
alternative:
    (A) Refinancing the loan with the current or other lender;
    (B) Selling the property and using the proceeds to pay off the 
loan;
    (C) Modifying the terms of the loan with the lender; or
    (D) Arranging payment forbearance with the lender;
    (ix) The circumstances under which any prepayment penalty, as 
defined in subpart E by Sec.  1026.41(d)(7)(iv), may be imposed when 
consumers fully repay their adjustable-rate mortgages, such as when 
selling or refinancing their principal residence, the time period 
during which the penalty may be imposed, and the maximum amount (in 
dollars) of the penalty possible during that time period;
    (x) The telephone number of the creditor, assignee, or servicer for 
consumers to call if they anticipate not being able to make the new 
payment; and
    (xi) The mailing and Internet addresses and telephone number to 
access the State housing finance authority (as defined in Section 1301 
of the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989) for the State in which the consumer resides, and the Web site and 
telephone number to access either the Bureau list or the HUD list of 
homeownership counselors or counseling organizations.
    (3) Format of initial rate adjustment disclosures. (i) Except for 
the disclosures provided by paragraph (d)(2)(i), the disclosures 
required by Sec.  1026.20(d) shall be provided in the form of a table 
and in the same order as, and with headings and format substantially 
similar to, Forms H-4(D)(3) and (4) in Appendix H to this part;
    (ii) The disclosures required by paragraph (d)(2)(i) shall appear 
outside of and above the table required in paragraph (d)(3)(i); and
    (iii) The disclosures required by paragraph (d)(2)(iii) shall be in 
the form of a table located within the table described in paragraph 
(d)(3)(i) of this section. These disclosures shall appear in the same 
order as, and with headings and format substantially similar to, the 
table inside the larger table in Forms H-4(D)(3) and (4) in Appendix H 
to this part. [ltrif]

Subpart E--Special Rules for Certain Home Mortgage Transactions

    4. Section 1026.36 is amended by revising paragraph (c) to read as 
follows:


Sec.  1026.36  Prohibited acts or practices in connection with a credit 
secured by a dwelling.

* * * * *
    (c) Servicing practices. [rtrif] For purposes of this paragraph 
(c), the terms ``servicer'' and ``servicing'' have the same meanings as 
provided in 12 CFR 1024.2(b).
    (1) Payment Processing. In connection with a consumer credit 
transaction secured by a consumer's principal dwelling:
    (i) Full contractual payments. No servicer shall fail to credit a 
full contractual payment to the consumer's loan account as of the date 
of receipt, except when a delay in crediting does not result in any 
charge to the consumer or in the reporting of negative information to a 
consumer reporting agency, or except as provided in paragraph 
(c)(1)(iii) of this section. A full contractual payment is an amount 
sufficient to cover principal, interest, and escrow (if applicable) for 
a given billing cycle. A payment qualifies as a full contractual 
payment even if it does not include amounts required to cover late fees 
or other fees that have been assessed.
    (ii) Partial payments. Any servicer that retains a partial payment, 
meaning any payment less than a full contractual payment, in a suspense 
or unapplied funds account shall:
    (A) Disclose to the consumer the total amount of funds held in such 
suspense or unapplied funds account on the periodic statement required 
by Sec.  1026.41, if a periodic statement is required.
    (B) Promptly apply funds held in the suspense or unapplied funds 
account to the oldest outstanding payment when sufficient funds 
accumulate in such account to cover a full contractual payment.
    (iii) Non-conforming payments. If a servicer specifies in writing 
requirements for the consumer to follow in making payments, but accepts 
a payment that does not conform to the requirements, the servicer shall 
credit the payment as of 5 days after receipt.
    (2) No pyramiding of late fees. In connection with a consumer 
credit transaction secured by a consumer's principal dwelling, a 
servicer shall not impose any late fee or delinquency charge for a 
payment if:
    (i) Such a fee or charge is attributable solely to failure of the 
consumer to pay a late fee or delinquency charge on an earlier payment; 
and
    (ii) The payment is otherwise a full contractual payment received 
on the due date, or within any applicable grace period.
    (3) Payoff Statements. In connection with a consumer credit 
transaction secured by a consumer's dwelling, a creditor, assignee or 
servicer, as applicable, must provide an accurate statement of the 
total outstanding balance that would be required to pay the consumer's 
obligation in full as of a specified date. The statement shall be 
provided within a reasonable time, but in no case more than 7 business 
days, after receiving a written request from the consumer or any person 
acting on behalf of the consumer.[ltrif]
    [lsqbb](1) In connection with a consumer credit transaction secured 
by a consumer's principal dwelling, no servicer shall:
    (i) Fail to credit a payment to the consumer's loan account as of 
the date of receipt, except when a delay in crediting does not result 
in any charge to the consumer or in the reporting of negative 
information to a consumer reporting agency, or except as provided in 
paragraph (c)(2) of this section;
    (ii) Impose on the consumer any late fee or delinquency charge in 
connection with a payment, when the only delinquency is attributable to 
late fees or delinquency charges assessed on an earlier payment, and 
the payment is otherwise a full payment for the applicable period and 
is paid on its due date or within any applicable grace period; or
    (iii) Fail to provide, within a reasonable time after receiving a 
request from the consumer or any person acting on behalf of the 
consumer, an accurate statement of the total outstanding balance that 
would be required to satisfy

[[Page 57389]]

the consumer's obligation in full as of a specified date.
    (2) If a servicer specifies in writing requirements for the 
consumer to follow in making payments, but accepts a payment that does 
not conform to the requirements, the servicer shall credit the payment 
as of 5 days after receipt.
    (3) For purposes of this paragraph (c), the terms ``servicer'' and 
``servicing'' have the same meanings as provided in 12 CFR 1024.2(b), 
as amended.[rsqbb]
* * * * *
    5. Section 1026.41 is added to read as follows:


[rtrif]Sec.  1026.41   Periodic statements for residential mortgage 
loans.

    (a) In general. A servicer of a closed-end consumer credit 
transaction secured by a dwelling, must transmit to the consumer for 
each billing cycle a periodic statement meeting the requirements of 
paragraphs (b), (c), and (d) of this section, unless an exemption in 
paragraph (e) of this section applies. If a loan has a billing cycle 
shorter than a period of 31 days (for example, a bi-weekly billing 
cycle), a periodic statement covering an entire month may be used. For 
the purposes of this section, servicer is defined to mean creditor, 
assignee, or servicer, as applicable.
    (b) Timing of the periodic statement. The periodic statement must 
be delivered or placed in the mail within a reasonably prompt time 
after the payment due date or the end of any grace period provided for 
the previous billing cycle. The first periodic statement must be sent 
no later than 10 days before the first payment is due.
    (c) Form of the periodic statement. The creditor, assignee, or 
servicer must make the disclosures required by this section clearly and 
conspicuously in writing, or electronically if the consumer agrees, and 
in a form that the consumer may keep. Sample forms for periodic 
statements are provided in Appendix H-28. Proper use of these forms 
will be deemed in compliance with this section.
    (d) Content and layout of the periodic statement. The periodic 
statement shall contain the information in this paragraph (d), in the 
manner described below.
    (1) Amount due. The following disclosures must be grouped together 
in close proximity to each other, and be located at the top of the 
first page of the statement:
    (i) The payment due date;
    (ii) The amount of any late payment fee, and the date on which that 
fee will be imposed if payment has not been received; and
    (iii) The amount due. The amount due must be more prominent than 
other disclosures on the page. If a loan has multiple payment options, 
the amount due under each of the payment options must be listed.
    (2) Explanation of amount due. The following items must be grouped 
together in close proximity to each other and located on the first page 
of the statement:
    (i) The monthly payment amount, including a breakdown showing how 
much, if any, will be applied to principal, interest, and escrow. If a 
loan has multiple payment options, a breakdown of each of the payment 
options must be listed along with a statement whether the principal 
balance will increase, decrease or stay the same for each option 
listed;
    (ii) The total sum of any fees or charges imposed since the last 
statement; and
    (iii) Any payment amount past due.
    (3) Past Payment Breakdown. The following items must be grouped 
together in close proximity to each other and located on the first page 
of the statement:
    (i) The total of all payments received since the last statement, 
including a breakdown showing how much, if any, of those payments was 
applied to principal, interest, escrow, fees and charges, and any 
partial payment or suspense account; and
    (ii) The total of all payments received since the beginning of the 
current calendar year, including a breakdown of how much, if any, of 
those payments was applied to principal, interest, escrow, fees and 
charges, and the amount currently held in any partial payment or 
suspense account.
    (4) Transaction activity. A list of all the transaction activity 
that occurred since the last statement must be included on the periodic 
statement. For purposes of this paragraph (d)(4), transaction activity 
means any activity that credits or debits the outstanding account 
balance. The transaction activity must include the date of the 
transaction, a brief description of the transaction, and the amount of 
the transaction for each activity on the list.
    (5) Messages. If a statement reflects a partial payment that was 
placed in a suspense or unapplied funds account, the periodic statement 
must state what must be done for the funds to be applied. Such 
statement must be on the front page of the statement.
    (6) Contact information. The periodic statement must include a 
toll-free telephone number and, if applicable, an electronic mailing 
address that may be used by the consumer to obtain information about 
the mortgage, on the front page of the statement.
    (7) Account information. The following items must be provided on 
the statement:
    (i) The amount of the outstanding principal balance;
    (ii) The current interest rate in effect for the loan;
    (iii) The date on which the interest rate may next change; and
    (iv) The amount of any prepayment penalty that may be charged. For 
the purposes of this paragraph (d)(7)(iv), prepayment penalty means a 
charge imposed for paying all or part of a transaction's principal 
before the date on which the principal is due.
    (v) Housing counselor information. The periodic statement must 
include the website address, if applicable, and telephone number to 
access:
    (A) any State housing finance authority (as defined in Section 1301 
of the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989) for the State in which the property is located; and
    (B) Either the Bureau list or the HUD list of homeownership 
counselors or counseling organizations.
    (8) Delinquency information. If the consumer is more than 45 days 
delinquent, the following items must be grouped together in close 
proximity to each other and located on the first page of the statement:
    (i) The date on which the consumer became delinquent;
    (ii) A statement alerting the consumer to possible risks, such as 
foreclosure, and expenses that may be incurred if the delinquency is 
not cured;
    (iii) An account history showing the consumer, for the lesser of 
the past 6 months or the period since the last time the account was 
current, the amount due for each billing cycle, or if a payment was 
fully paid, the date on which it was considered fully paid;
    (iv) Notice of any loan modification programs (trial or permanent) 
to which the consumer has been accepted, if applicable;
    (v) Notice that the loan has been referred to foreclosure, if 
applicable;
    (vi) The total payment amount needed to bring the loan current; and
    (vii) A statement directing the consumer to the housing counselor 
information required by (d)(7)(v).
    (e) Exemptions. (1) Reverse Mortgages. Reverse mortgage 
transactions, as defined by Sec.  1026.33(a), are exempt from the 
requirements of this section.
    (2) Timeshare. Timeshare plans, as defined by 11 U.S.C. 101(53(D)), 
are exempt from the requirements of this section.

[[Page 57390]]

    (3) Coupon Book Exemption. The requirements of paragraph (a) do not 
apply to fixed-rate loans if the creditor, assignee, or servicer:
    (i) Provides the consumer with a coupon book that includes on each 
coupon the information listed in paragraph (d)(1) of this section;
    (ii) Provides the consumer with a coupon book that includes 
anywhere in the coupon book:
    (A) The account information listed in paragraph (d)(7) of this 
section;
    (B) The contact information for the servicer, listed in paragraph 
(d)(6) of this section; and
    (C) Information on how the consumer can obtain the information 
listed in paragraph (e)(3)(iii) of this section.
    (iii) Makes the following information available to the consumer by 
telephone, writing or electronically, if the consumer consents:
    (A) The information in Explanation of Amount Due, listed in 
paragraph (d)(2) of this section;
    (B) The past payment breakdown information, listed in paragraph 
(d)(3) of this section; and
    (C) The transaction activity information listed in paragraph (d)(4) 
of this section;
    (iv) Provides the consumer the information listed in paragraphs 
(d)(8) of this section in writing, for any billing cycle during which 
the borrower is more than 45 days delinquent.
    (4) Small Servicer Exemption. A creditor, assignee or servicer is 
exempt from the requirements of this section for loans serviced by a 
small servicer. To qualify as a small servicer, a servicer must meet 
all of the following requirements:
    (i) Service 1,000 or fewer mortgage loans. In determining whether a 
small servicer services 1,000 mortgage loans or fewer, a servicer is 
evaluated based on its size as of January 1 for the remainder of the 
calendar year. A servicer that, together with its affiliates, crosses 
the threshold will have six months or until the beginning of the next 
calendar year, whichever is later, to begin compliance other than as a 
small servicer.
    (ii) Only service mortgage loans for which the servicer (or an 
affiliate) is the owner or assignee or the servicer (or an affiliate) 
is the entity to whom the mortgage loan obligation was initially 
payable.[ltrif]
    6. Appendix H to Part 1026 is amended by removing the entry for H-
4(D) Variable-Rate Model Clauses (Sec.  1026.20(c)), adding entries for 
H-4(D)(1), H-4(D)(2), H-4(D)(3), and H-4(D)(4), adding entries for H-
28(A), H-28(B), H-28(C), and H-28(D), and removing and adding entries 
in the table of contents at the beginning of the appendix to read as 
follows:

Appendix H to Part 1026--Closed-End Model Forms and Clauses

* * * * *

[lsqbb]H-4(D) Variable-Rate Model Clauses (Sec.  1026.20(c))[rsqbb]

[rtrif]H-4(D)(1) Adjustable-Rate Mortgage Model Form (Sec.  1026.20(c))

H-4(D)(2) Adjustable-Rate Mortgage Sample Form (Sec.  1026.20(c))

H-4(D)(3) Adjustable-Rate Mortgage Model Form (Sec.  1026.20(d))

H-4(D)(4) Adjustable-Rate Mortgage Sample Form (Sec.  
1026.20(d))[ltrif]

* * * * *

[rtrif]H-28(A) Sample Form of Periodic Statement

H-28(B) Sample Form of Periodic Statement with Delinquency Box

H-28(C) Sample Form of Periodic Statement for a Payment-Options Loan

H-28(D) Sample Clause for Housing Counselor Contact Information[ltrif]

* * * * *
BILLING CODE 4810-AM-P
[GRAPHIC] [TIFF OMITTED] TP17SE12.000

H-4(D)(1) Model Form for Sec.  1026.20(c)

[[Page 57391]]

[GRAPHIC] [TIFF OMITTED] TP17SE12.001

H-4(D)(2) Sample Form for Sec.  1026.20(c)

[[Page 57392]]

[GRAPHIC] [TIFF OMITTED] TP17SE12.002

H-4(D)(3) Model Form for Sec.  1026.20(d)

[[Page 57393]]

[GRAPHIC] [TIFF OMITTED] TP17SE12.003


[[Page 57394]]


[GRAPHIC] [TIFF OMITTED] TP17SE12.004

H-4(D)(4) Sample Form for Sec.  1026.20(d)

[[Page 57395]]

[GRAPHIC] [TIFF OMITTED] TP17SE12.005


[[Page 57396]]


[GRAPHIC] [TIFF OMITTED] TP17SE12.006

* * * * *

[rtrif]H-28(A) Sample Form of Periodic Statement

[[Page 57397]]

[GRAPHIC] [TIFF OMITTED] TP17SE12.007

H-28(B) Sample Form of Periodic Statement With Delinquency Box

[[Page 57398]]

[GRAPHIC] [TIFF OMITTED] TP17SE12.008

H-28(C) Sample Form of Periodic Statement for a Payment-Options Loan

[[Page 57399]]

[GRAPHIC] [TIFF OMITTED] TP17SE12.009

BILLING CODE 4810-AM-C

H-28(D) Sample Clause for Housing Counselor Contact Information

    Housing Counselor Information: If you would like counseling or 
assistance, you can contact the following:
     U.S. Department of Housing and Urban Development (HUD): 
For a list of counseling agencies or programs in your area, go to 
http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm or call 800-569-4287.
     Tennessee Housing Development Agency, 404 James 
Robertson Pkwy, Ste 1200, Nashville, TN 37243-0900, 615-815-2200 or 
1-800-228-THDA, www.thda.org.
    [ltrif]

    7. In Supplement I to Part 1026:
    A. Under Section 1026.17--General Disclosure Requirements, revise 
paragraphs 17(a)(1)-2.ii and 17(c)(1)-1.
    B. Under Section 1026.18--Content of Disclosures, revise paragraph 
18(f)-1.
    C. Under Section 1026.19--Certain Mortgage and Variable-Rate 
Transactions, revise paragraphs 19(b)-4, 19(b)-5.i.C and 19(b)(2)(xi).

[[Page 57400]]

    D. Under Section 1026.20--Subsequent Disclosure Requirements:
    i. Revise the section heading.
    ii. Amend 20(c) Variable-Rate Adjustments by revising paragraphs 1. 
and 2. and removing paragraph 3.
    iii. Remove subheading Paragraph 20(c)(1) and remove paragraph 1. 
under this subheading.
    iv. New subheading Paragraph 20(c)(1)(i) is added and paragraph 1. 
under this subheading is added.
    v. New subheading Paragraph 20(c)(1)(ii) is added and paragraphs 
1., 2., and 3. under this subheading are added.
    vi. Amend Paragraph 20(c)(2) by revising paragraph 1.
    vii. New subheading Paragraph 20(c)(2)(ii)(A) is added and 
paragraph 1. under this subheading is added.
    viii. New subheading Paragraph 20(c)(2)(iv) is added and paragraph 
1. under this subheading is added.
    ix. New subheading Paragraph 20(c)(2)(v)(B) is added and paragraph 
1. under this subheading is added.
    x. New subheading Paragraph 20(c)(2)(vi) is added and paragraphs 1. 
and 2. under this subheading are added.
    xi. Remove subheading Paragraph 20(c)(3) and remove paragraph 1. 
under this subheading.
    xii. Remove subheading Paragraph 20(c)(4) and remove paragraph 1. 
under this subheading.
    xiii. Remove subheading Paragraph 20(c)(5) and remove paragraph 1. 
under this subheading.
    xiv. New subheading Paragraph 20(d) is added and paragraphs 1., 2., 
and 3. under this subheading are added.
    xv. New subheading Paragraph 20(d)(1)(i) is added and paragraph 1. 
under this subheading is added.
    xvi. New subheading Paragraph 20(d)(1)(ii) is added and paragraphs 
1. and 2. under this subheading are added.
    xvii. New subheading Paragraph 20(d)(2)(i) is added and paragraph 
1. under this subheading is added.
    xviii. New subheading Paragraph 20(d)(2)(iii)(A) is added and 
paragraph 1. under this subheading is added.
    xix. New subheading Paragraph 20(d)(2)(v) is added and paragraph 1. 
under this subheading is added.
    xx. New subheading Paragraph 20(d)(2)(vii) is added and paragraphs 
1. and 2. under this subheading are added.
    xxi. New subheading Paragraph 20(d)(2)(viii) is added and paragraph 
1. under this subheading is added.
    E. Under Section 1026.36(c)--Servicing Practices:
    i. Under subheading Paragraph 36(c)(1)(iii), remove paragraph 1.
    ii. New subheading Paragraph 36(c)(3) is added and paragraph 1. 
under this subheading is added.
    iii. Redesignate existing paragraphs 2., 3., and 4. under 
subheading Paragraph 36(c)(1)(iii) as new paragraphs 2., 3., and 4., 
respectively, under subheading Paragraph 36(c)(3).
    iv. Redesignate existing paragraphs 1., 2., and 3. under subheading 
Paragraph 36(c)(2) as new paragraphs 1., 2., and 3., respectively, 
under subheading Paragraph 36(c)(1)(iii).
    v. Redesignate existing paragraph 1 under subheading Paragraph 
36(c)(1)(ii) as paragraph 1 under subheading Paragraph 36(c)(2).
    vi. Under subheading Paragraph 36(c)(1)(ii), add new paragraph 1.
    vii. Under subheading Paragraph 36(c)(3), revise the first sentence 
of new paragraph 1 and the first sentence of new paragraph 2.
    F. Add new Section 1026.41--Periodic Statements for Residential 
Mortgage Loans:
    i. New section heading Section 41--Periodic Statements for 
Residential Mortgage Loans is added.
    ii. New subheading 41(a) In General is added and paragraphs 1., 2., 
3., and 4. under this subheading are added.
    iii. New subheading 41(b) Timing of the Periodic Statement is added 
and paragraph 1. under this subheading is added.
    iv. New subheading 41(c) Form of the Periodic Statement is added 
and paragraphs 1., 2., and 3. under this subheading are added.
    v. New subheading 41(d) Content and Format of the Periodic 
Statement is added and paragraphs 1., 2., and 3. under this subheading 
are added.
    vi. New subheading 41(d)(3) Past Payment Breakdown is added and 
paragraph 1. under this subheading is added.
    vii. New subheading 41(d)(4) Transaction Activity is added and 
paragraphs 1., 2., and 3. under this subheading are added.
    viii. New subheading 41(d)(6) Contact Information is added and 
paragraphs 1. and 2. under this subheading are added.
    ix. New subheading 41(d)(7)(iv) Prepayment Penalty is added and 
paragraphs 1. and 2. under this subheading are added.
    x. New subheading 41(e) Exemptions is added and paragraph 1. under 
this subheading is added.
    xi. New subheading 41(e)(3) Coupon Book Exemption is added and 
paragraphs 1., 2., 3., and 4. under this subheading are added.
    xii. New subheading 41(e)(4) Small Servicers is added and 
paragraphs 1., 2., 3., and 4. under this subheading are added.
    G. Under Appendices G and H--Open-End and Closed-End Model Forms 
and Clauses, revise paragraph 1.
    H. Under Appendix H--Closed-End Model Forms and Clauses, revise 
paragraph 7(i).
    The revisions and additions read as follows:

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart C--Closed-End Credit

* * * * *

Section 1026.17--General Disclosures Requirements

17(a) Form of Disclosures

Paragraph 17(a)(1)

* * * * *
    2. * * *
    (ii) The general segregation requirement described in this 
subparagraph does not apply to the disclosures required under 
[lsqbb]Sec.  [rsqbb]Sec.  1026.19(b) [lsqbb]and 1026.20(c)[rsqbb] 
although the disclosures must be clear and conspicuous.
* * * * *

17(c) Basis of Disclosures and Use of Estimates

Paragraph 17(c)(1)

    1. Legal obligation. The disclosures shall reflect the credit 
terms to which the parties are legally bound as of the outset of the 
transaction. In the case of disclosures required under Sec.  
1026.20(c) [rtrif]and (d)[ltrif], the disclosures shall reflect the 
credit terms to which the parties are legally bound when the 
disclosures are provided. The legal obligation is determined by 
applicable state law or other law. (Certain transactions are 
specifically addressed in this commentary. See, for example, the 
discussion of buydown transactions elsewhere in the commentary to 
Sec.  1026.17(c).) The fact that a term or contract may later be 
deemed unenforceable by a court on the basis of equity or other 
grounds does not, by itself, mean that disclosures based on that 
term or contract did not reflect the legal obligation.
* * * * *

Section 1026.18--Content of Disclosures

* * * * *

18(f)--Variable Rate

    1. Coverage. The requirements of Sec.  1026.18(f) apply to all 
transactions in which the terms of the legal obligation allow the 
creditor to increase the rate originally disclosed to the consumer. 
It includes not only increases in the interest rate but also 
increases in other components, such as the rate of required credit 
life insurance. The provisions, however, do not apply to increases 
resulting from delinquency (including late payment), default, 
assumption, acceleration or transfer of the collateral. Section 
1026.18(f)(1) applies to variable-rate transactions that are not 
secured by the consumer's principal dwelling and to those that are 
secured by the principal dwelling but have a term of one year or 
less.

[[Page 57401]]

Section 1026.18(f)(2) applies to variable-rate transactions that are 
secured by the consumer's principal dwelling and have a term greater 
than one year. Moreover, transactions subject to Sec.  1026.18(f)(2) 
are subject to the special early disclosure requirements of Sec.  
1026.19(b). (However, ``shared-equity'' or ``shared-appreciation'' 
mortgages are subject to the disclosure requirements of Sec.  
1026.18(f)(1) and not to the requirements of Sec. Sec.  
1026.18(f)(2) and 1026.19(b) regardless of the general coverage of 
those sections.) Creditors are permitted under Sec.  1026.18(f)(1) 
to substitute in any variable-rate transaction the disclosures 
required under Sec.  1026.19(b) for those disclosures ordinarily 
required under Sec.  1026.18(f)(1). Creditors who provide variable-
rate disclosures under Sec.  1026.19(b) must comply with all of the 
requirements of that section, including the timing of disclosures, 
and must also provide the disclosures required under Sec.  
1026.18(f)(2). [lsqbb]Creditors substituting Sec.  1026.19(b) 
disclosures for Sec.  1026.18(f)(1) disclosures may, but need not, 
also provide disclosures pursuant to Sec.  1026.20(c)[rsqbb]. 
(Substitution of disclosures under Sec.  1026.18(f)(1) in 
transactions subject to Sec.  1026.19(b) is not permitted.)
* * * * *

Section 1026.19--Certain Mortgage and Variable-Rate Transactions

19(b) Certain Variable-Rate Transactions

* * * * *
    4. Other variable-rate regulations. Transactions in which the 
creditor is required to comply with and has complied with the 
disclosure requirements of the variable-rate regulations of other 
Federal agencies are exempt from the requirements of Sec.  
1026.19(b), by virtue of Sec.  1026.19(d)[lsqbb], and are exempt 
from the requirements of Sec.  1026.20(c), by virtue of Sec.  
1026.20(d)[rsqbb]. The exception is also available to creditors that 
are required by State law to comply with the Federal variable-rate 
regulations noted above. Creditors using this exception should 
comply with the timing requirements of those regulations rather than 
the timing requirements of Regulation Z in making the variable-rate 
disclosures.
    5. * * * i. * * *
    A. * * *
    B. * * *
    C. ``Price-level-adjusted mortgages'' or other indexed mortgages 
that have a fixed rate of interest but provide for periodic 
adjustments to payments and the loan balance to reflect changes in 
an index measuring prices or inflation. The disclosures under Sec.  
1026.19(b)(1) are not applicable to such loans, nor are the 
following provisions to the extent they relate to the determination 
of the interest rate by the addition of a margin, changes in the 
interest rate, or interest rate discounts: Sec.  1026.19(b)(2)(i), 
(iii), (iv), (v), (vi), (vii), (viii), and (ix). (See comments 
20(c)[lsqbb]-2[rsqbb][rtrif](1)(ii)-3.ii, 20(d)(1)(ii)-
2.ii,[ltrif]and 30-1 regarding the inapplicability of variable-rate 
adjustment notices and interest rate limitations to price-level-
adjusted or similar mortgages.)
* * * * *

Paragraph 19(b)(2)(xi)

    1. Adjustment notices. A creditor must disclose to the consumer 
the type of information that will be contained in subsequent notices 
of adjustments and when such notices will be provided. (See the 
commentary to Sec.  1026.20(c) [rtrif]and (d)[ltrif] regarding 
notices of adjustments.) For example, the disclosure [rtrif]provided 
pursuant to Sec.  1026.20(d)[ltrif] might state, ``You will be 
notified [rtrif]at least 210, but not more than 240, days before the 
first payment at the adjusted level is due after the initial 
adjustment of the loan. This notice will contain information about 
the adjustment, including the interest rate, payment amount, and 
loan balance.'' The disclosure provided pursuant to Sec.  1026.20(c) 
might state, ``You will be notified[ltrif] at least 
[lsqbb]25[rsqbb][rtrif]60[ltrif], but no more than 120, days before 
the due date of a payment at a new level. This notice will contain 
information about the [rtrif]adjustment, including 
the[ltrif][lsqbb]index and[rsqbb] interest [lsqbb]rates[rsqbb] 
[rtrif]rate[ltrif], payment amount, and loan balance.'' [lsqbb]In 
transactions where there may be interest rate adjustments without 
corresponding payment adjustments in a year, the disclosure might 
read, ``You will be notified once each year during which interest 
rate adjustments, but no payment adjustments, have been made to your 
loan. This notice will contain information about the index and 
interest rates, payment amount, and loan balance.''[rsqbb]
* * * * *

Section 1026.20 [Subsequent] Disclosure Requirements 
[rtrif]Regarding Post-Consummation Events[ltrif]

20(c) [lsqbb]Variable-[rsqbb][rtrif]R[ltrif]ate adjustments

    1. [rtrif]Creditors, assignees, and servicers. Creditors, 
assignees, and servicers are subject to the requirements of Sec.  
1026.20(c), unless they no longer own the applicable adjustable-rate 
mortgage or the mortgage servicing rights. Creditors, assignees, and 
servicers are also subject to the requirements of any provision of 
subpart C that applies to Sec.  1026.20(c). For example, the form 
requirements of Sec.  1026.17(a) apply to Sec.  1026.20(c) 
disclosures and thus, assignees and servicers, as well as creditors, 
are subject to those requirements.
    2. Conversions. In addition to the disclosures required by this 
section for the interest rate adjustment of an adjustable-rate 
mortgage, Sec.  1026.20(c) disclosures are also required for an ARM 
converting to a fixed-rate transaction when the adjustment to the 
interest rate results in a corresponding payment change. When an 
open-end account converts to a closed-end adjustable-rate mortgage, 
Sec.  1026.20(c) disclosures are not required until the 
implementation of an interest rate adjustment post-conversion that 
results in a corresponding payment change. For example, for an open-
end account that converts to a closed-end 3/1 hybrid ARM, the first 
Sec.  1026.20(c) disclosure would not be required until three years 
after conversion, and only if that first adjustment resulted in 
payment change. [ltrif][lsqbb]Timing of adjustment notices. This 
section requires a creditor (or a subsequent holder) to provide 
certain disclosures in cases where an adjustment to the interest 
rate is made in a variable-rate transaction subject to Sec.  
1026.19(b). There are two timing rules, depending on whether payment 
changes accompany interest rate changes. A creditor is required to 
provide at least one notice each year during which interest rate 
adjustments have occurred without corresponding payment adjustments. 
For payment adjustments, a creditor must deliver or place in the 
mail notices to borrowers at least 25, but not more than 120, 
calendar days before a payment at a new level is due. The timing 
rules also apply to the notice required to be given in connection 
with the adjustment to the rate and payment that follows conversion 
of a transaction subject to Sec.  1026.19(b) to a fixed-rate 
transaction. (In cases where an open-end account is converted to a 
closed-end transaction subject to Sec.  1026.19(b), the requirements 
of this section do not apply until adjustments are made following 
conversion.)
    2. Exceptions. Section 1026.20(c) does not apply to ``shared-
equity,'' ``shared-appreciation,'' or ``price level adjusted'' or 
similar mortgages.
    3. Basis of disclosures. The disclosures required under this 
section shall reflect the terms of the parties' legal obligation, as 
required under Sec.  1026.17(c)(1).

Paragraph 20(c)(1)

    1. Current and prior interest rates. The requirements under this 
paragraph are satisfied by disclosing the interest rate used to 
compute the new adjusted payment amount (current rate) and the 
adjusted interest rate that was disclosed in the last adjustment 
notice, as well as all other interest rates applied to the 
transaction in the period since the last notice (prior rates). (If 
there has been no prior adjustment notice, the prior rates are the 
interest rate applicable to the transaction at consummation, as well 
as all other interest rates applied to the transaction in the period 
since consummation.) If no payment adjustment has been made in a 
year, the current rate is the new adjusted interest rate for the 
transaction, and the prior rates are the adjusted interest rate 
applicable to the loan at the time of the last adjustment notice, 
and all other rates applied to the transaction in the period between 
the current and last adjustment notices. In disclosing all other 
rates applied to the transaction during the period between notices, 
a creditor may disclose a range of the highest and lowest rates 
applied during that period.[rsqbb]

[rtrif]Paragraph 20(c)(1)(i)

    1. In general. An adjustable-rate mortgage, as defined under 
this section, is a variable-rate transaction as that term is used in 
subpart C, except as distinguished by commentary to Sec.  
1026.20(c)(1)(ii)-3. The requirements of this section are not 
limited to transactions financing the initial acquisition of the 
consumer's principal dwelling.

Paragraph 20(c)(1)(ii)

    1. Construction loans. In determining the term of a construction 
loan that may be permanently financed by the same creditor or 
assignee, the creditor or assignee may treat

[[Page 57402]]

the construction and the permanent phases as separate transactions 
with distinct terms to maturity or as a single combined transaction.
    2. First new payment due within 210 days after consummation. 
Section 1026.20(c) disclosures are not required for ARMs if the 
first payment at the adjusted level is due within 210 days after 
consummation, when the actual new interest rate (not an estimate) is 
disclosed at consummation pursuant to Sec.  1026.20(d). This 
exception is intended to avoid duplicative disclosures, since Sec.  
1026.20(d) requires disclosures at consummation if the first payment 
at the adjusted level is due within 210 days after consummation. For 
example, the creditor, assignee, or servicer would not be required 
to provide the disclosures required by Sec.  1026.20(c) for the 
first time the interest rate adjusts for an ARM if the first payment 
at the adjusted level was due 120 days after consummation and the 
actual adjusted interest rate was disclosed at consummation pursuant 
to Sec.  1026.20(d).
    3. Non-adjustable-rate mortgages. For purposes of this section, 
the following transactions, if structured as fixed-rate and not 
adjustable-rate mortgages, are not subject to Sec.  1026.20(c):
    i. Shared-equity or shared-appreciation mortgages;
    ii. Price-level adjusted or other indexed mortgages that have a 
fixed rate of interest but provide for periodic adjustments to 
payments and the loan balance to reflect changes in an index 
measuring prices or inflation;
    iii. Graduated-payment mortgages or step-rate transactions;
    iv. Renewable balloon-payment instruments; or
    v. Preferred-rate loans.[ltrif]

Paragraph 20(c)(2)

    1. [lsqbb]Current and prior index values. This section requires 
disclosure of the index or formula values used to compute the 
current and prior interest rates disclosed in Sec.  1026.20(c)(1). 
The creditor need not disclose the margin used in computing the 
rates. If the prior interest rate was not based on an index or 
formula value, the creditor also need not disclose the value of the 
index that would otherwise have been used to compute the prior 
interest rate.[rsqbb]
    [rtrif]Timing. The requirement that the disclosures must be 
provided between 60 to 120 days ``before a payment at the new level 
is due'' requires the creditor, assignee, or servicer to provide the 
notice to consumers 60 to 120 days prior to the due date, excluding 
any grace period, of the first payment calculated using the adjusted 
interest rate. For example, assume an ARM has a 45-day ``look-back'' 
period. In such an ARM, the most recent index figure available as of 
the date 45 days before a new interest rate goes into effect is used 
to determine the new interest rate. Because interest generally is 
paid in arrears, the first payment at the new level would not be due 
until the end of the billing cycle after the new interest rate goes 
into effect, typically a period of 28 to 31 days. Assume also that 
the creditor, assignee, or servicer has a 3-day verification period 
in which to verify the interest rate and perform other quality 
control measures before providing the notice to consumers. In this 
case, depending on the delivery method, the creditor, assignee, or 
servicer can provide the notice to consumers as early as 70 to 73 
days before payment at the new level is due.
    Because creditors, assignees, or servicers cannot comply with 
the disclosure timing requirements for ARMs adjusting for the first 
time within 60 days of consummation when the new interest rate is 
not known at consummation, the disclosures required under Sec.  
1026.20(c) for such loans must be provided as soon as practicable, 
but not less than 25 days before payment at a new level is due.

Paragraph 20(c)(2)(ii)(A)

    1. The current and new interest rates. The current interest rate 
is the interest rate that applies on the date the disclosure is 
provided to the consumer. The new interest rate is the actual 
interest rate that will apply on the date of the adjustment. The new 
interest rate is used to determine the new payment. The ``new 
interest rate'' has the same meaning as the ``adjusted interest 
rate.''

Paragraph 20(c)(2)(iv)

    1. Rate limits and unapplied index increases. The disclosures 
regarding foregone interest increases apply only to transactions 
permitting interest rate carryover. The amount of increase foregone 
at any adjustment is the amount that, subject to rate caps, can be 
added to future interest rate adjustments to increase, or offset 
decreases in, the rate determined by using the index or formula.

Paragraph 20(c)(2)(v)(B)

    1. Application of a previously foregone interest increase. The 
disclosures regarding foregone interest increases apply only to 
transactions permitting interest rate carryover. Foregone interest 
is any percentage added or carried over to the new interest rate 
because a rate cap prevented the increase at an earlier adjustment.

Paragraph 20(c)(2)(vi)

    1. Amortization statement. For interest-only loans, Sec.  
1026.20(c)(2)(vi) requires a statement that the new payment covers 
all of the interest but none of the principal, and therefore will 
not reduce the loan balance. For negatively-amortizing loans, Sec.  
1026.20(c)(2)(vi) requires a statement that the new payment covers 
only part of the interest and none of the principal, and therefore 
the unpaid interest will be added to the balance of the loan or will 
increase the term of the loan.
    2. Amortization payment. Disclosure of the payment needed to 
fully amortize the loan at the new interest rate is required only 
when negative amortization occurs as a result of the adjustment. The 
disclosure is not required simply because a loan has interest-only 
or partially-amortizing payments. For example, an ARM with a five-
year term and payments based on a longer amortization schedule, in 
which the final payment will equal the periodic payment plus the 
remaining unpaid balance, does not require disclosure of the payment 
necessary to fully amortize the loan in the remainder of the five-
year term. A disclosure is also not required when the new payment is 
sufficient to prevent negative amortization but the final loan 
payment will be a different amount due to rounding.[ltrif]

[lsqbb]Paragraph 20(c)(3)

    1. Unapplied index increases. The requirement that the consumer 
receive information about the extent to which the creditor has 
foregone any increase in the interest rate applies only to those 
transactions permitting interest rate carryover. The amount of 
increase that is foregone at an adjustment is the amount that, 
subject to rate caps, can be applied to future adjustments 
independently to increase, or offset decreases in, the rate that is 
determined according to the index or formula.

Paragraph 20(c)(4)

    1. Contractual effects of the adjustment. The contractual 
effects of an interest rate adjustment must be disclosed including 
the payment due after the adjustment is made whether or not the 
payment has been adjusted. A contractual effect of a rate adjustment 
would include, for example, disclosure of any change in the term or 
maturity of the loan if the change resulted from the rate 
adjustment. In transactions in which paying the periodic payments 
will not fully amortize the outstanding balance at the end of the 
loan term and where the final payment will equal the periodic 
payment plus the remaining unpaid balance, the amount of the 
adjusted payment must be disclosed if such payment has changed as a 
result of the rate adjustment. A statement of the loan balance also 
is required. The balance required to be disclosed is the balance on 
which the new adjusted payment is based. If no payment adjustment is 
disclosed in the notice, the balance disclosed should be the loan 
balance on which the payment disclosed under Sec.  1026.20(c)(5) is 
based, if applicable, or the balance at the time the disclosure is 
prepared.

Paragraph 20(c)(5)

    1. Fully-amortizing payment. This paragraph requires a 
disclosure only when negative amortization occurs as a result of the 
adjustment. A disclosure is not required simply because a loan calls 
for interest-only or partially amortizing payments. For example, in 
a transaction with a five-year term and payments based on a longer 
amortization schedule, and where the final payment will equal the 
periodic payment plus the remaining unpaid balance, the creditor 
would not have to disclose the payment necessary to fully amortize 
the loan in the remainder of the five-year term. A disclosure is 
required, however, if the payment disclosed under Sec.  
1026.20(c)(4) is not sufficient to prevent negative amortization in 
the loan. The adjustment notice must state the payment required to 
prevent negative amortization. (This paragraph does not apply if the 
payment disclosed in Sec.  1026.20(c)(4) is sufficient to prevent 
negative amortization in the loan but the final payment will be a 
different amount due to rounding.)[rsqbb]

[[Page 57403]]

[rtrif] Paragraph 20(d)

    1. Creditors, assignees, and servicers. Creditors, assignees, 
and servicers are subject to the requirements of Sec.  1026.20(d), 
unless they no longer own the applicable adjustable-rate mortgage or 
the mortgage servicing rights. Creditors, assignees, and servicers 
are also subject to the requirements of any provision of subpart C 
that applies to Sec.  1026.20(d). For example, the requirements of 
Sec.  1026.17(a) with regard to providing disclosures to consumers 
electronically, apply to Sec.  1026.20(d) disclosures and thus, 
assignees and servicers, as well as creditors, are subject to those 
requirements.
    2. Timing and form of initial rate adjustment. The requirement 
that the disclosures be provided in writing, separate and distinct 
from all other correspondence, means that the initial ARM interest 
rate adjustment notice must be mailed or delivered separately from 
any other material. For example, in the case of mailing the 
disclosure, there should be no material in the envelope other than 
the Sec.  1026.20(d) initial ARM interest rate adjustment notice. In 
the case of emailing the disclosure, the only attachment should be 
the initial ARM interest rate adjustment notice. The requirement 
that the disclosures be provided between 210 to 240 days ``before 
the first payment at the adjusted level is due'' means the creditor, 
assignee, or servicer must provide the notice to consumers 210 to 
240 days prior to the due date, excluding any grace period, of the 
first payment calculated using the adjusted interest rate. 
Creditors, assignees, or servicers may provide the initial ARM 
interest rate adjustment notices to consumers in electronic form if 
they comply with the electronic delivery requirements in Sec.  
1026.17(a)(1).
    3. Conversions. When an open-end account converts to a closed-
end adjustable-rate mortgage, Sec.  1026.20(d) disclosures are not 
required until the implementation of the initial interest rate 
adjustment post-conversion. For example, for an open-end account 
that converts to a closed-end 3/1 hybrid ARM, Sec.  1026.20(d) 
disclosures would not be required until three years after 
conversion, when the interest rate adjusts for the first time.

Paragraph 20(d)(1)(i)

    1. In general. An adjustable-rate mortgage, as defined under 
this section, is a variable-rate transaction as that term is used in 
subpart C, except as distinguished by commentary to Sec.  
1026.20(d)(1)(ii)-2. The requirements of this section are not 
limited to transactions financing the initial acquisition of the 
consumer's principal dwelling.

Paragraph 20(d)(1)(ii)

    1. Construction loans. In determining the term of a construction 
loan that may be permanently financed by the same creditor or 
assignee, the creditor or assignee may treat the construction and 
the permanent phases as separate transactions with distinct terms to 
maturity or as a single combined transaction.
    2. Non-adjustable-rate mortgages. For purposes of this section, 
the following transactions, if structured as fixed-rate and not 
adjustable-rate mortgages, are not subject to Sec.  1026.20(d):
    i. Shared-equity or shared-appreciation mortgages;
    ii. Price-level adjusted or other indexed mortgages that have a 
fixed rate of interest but provide for periodic adjustments to 
payments and the loan balance to reflect changes in an index 
measuring prices or inflation;
    iii. Graduated-payment mortgages or step-rate transactions;
    iv. Renewable balloon-payment instruments; or
    v. Preferred-rate loans.

Paragraph 20(d)(2)(i)

    1. Date of the disclosure. The date that appears on the 
disclosure is the date the creditor, assignee, or servicer generates 
the notice to be provided to the consumer.

Paragraph 20(d)(2)(iii)(A)

    1. The current and new interest rates. The current interest rate 
is the interest rate that applies on the date of the disclosure, 
pursuant to Sec.  1026.20(d)(2). The new interest rate is the 
interest rate used to calculate the new payment and may be an 
estimate pursuant to Sec.  1026.20(d)(2). The ``new interest rate'' 
has the same meaning as the ``adjusted interest rate.''

Paragraph 20(d)(2)(v)

    1. Rate limits and unapplied index increases. The disclosures 
regarding foregone interest increases apply only to transactions 
permitting interest rate carryover. The amount of increase foregone 
at the first interest rate adjustment is the amount that, subject to 
rate caps, can be added to future interest rate adjustments to 
increase, or offset decreases in, the rate determined by using the 
index or formula.

Paragraph 20(d)(2)(vii)

    1. Amortization statement. For interest-only loans, Sec.  
1026.20(d)(2)(vii) requires a statement that the new payment covers 
all of the interest but none of the principal, and therefore will 
not reduce the loan balance. For negatively-amortizing loans, Sec.  
1026.20(d)(2)(vii) requires a statement that the new payment covers 
only part of the interest and none of the principal, and therefore 
the unpaid interest will add to the balance of the loan or will 
increase the term of the loan.
    2. Amortization payment. Disclosure of the payment needed to 
fully amortize the loan at the new interest rate is required only 
when negative amortization occurs as a result of the adjustment. The 
disclosure is not required simply because a loan has interest-only 
or partially-amortizing payments. For example, an ARM with a five-
year term and payments based on a longer amortization schedule, in 
which the final payment will equal the periodic payment plus the 
remaining unpaid balance, does not require disclosure of the payment 
necessary to fully amortize the loan in the remainder of the five-
year term. A disclosure is also not required when the new payment is 
sufficient to prevent negative amortization but the final loan 
payment will be a different amount due to rounding.

Paragraph 20(d)(2)(viii)

    1. List of alternatives. The list of alternatives provided to 
consumers should avoid technical terms and explain the alternatives 
using the terms and explanations in Form H-4(D)(3) and (4) in 
Appendix H to this part. For the alternative ``payment 
forbearance,'' the disclosure should explain that payment 
forbearance temporarily gives the consumer more time to pay. [ltrif]
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Section 1026.36--Prohibited Acts or Practices in Connection With Credit 
Secured by a Dwelling

[rtrif]Paragraph 36(c)(1)(ii)

    1. Handling of Partial Payments. If a servicer receives a 
partial payment from a consumer, to the extent not prohibited by 
applicable law and the legal obligation between the parties, the 
servicer may take any of the following actions:
    (i) Credit the partial payment upon receipt; or
    (ii) Return the partial payment to the consumer; or
    (iii) Hold the payment in a suspense or unapplied funds account. 
If the payment is held in a suspense or unapplied funds account, 
this must be reflected on the periodic statement, in accordance with 
Sec.  1026.41. When sufficient funds accumulate to cover a full 
contractual payment, they must be applied to the oldest outstanding 
payment.

Paragraph 36(c)(1)(iii)

    1. Payment requirements. The servicer may specify reasonable 
requirements for making payments in writing, such as requiring that 
payments be accompanied by the account number or payment coupon; 
setting a cut-off hour for payment to be received, or setting 
different hours for payment by mail and payments made in person; 
specifying that only checks or money orders should be sent by mail; 
specifying that payment is to be made in U.S. dollars; or specifying 
one particular address for receiving payments, such as a post office 
box. The servicer may be prohibited, however, from requiring payment 
solely by preauthorized electronic fund transfer. (See Section 913 
of the Electronic Fund Transfer Act, 15 U.S.C. 1693k.)
    2. Payment requirements--limitations. Requirements for making 
payments must be reasonable; it should not be difficult for most 
consumers to make conforming payments. For example, it would be 
reasonable to require a cut-off time of 5 p.m. for receipt of a 
mailed check at the location specified by the servicer for receipt 
of such check.
    3. Implied guidelines for payments. In the absence of specified 
requirements for making payments, payments may be made at any 
location where the servicer conducts business; any time during the 
servicer's normal business hours; and by cash, money order, draft, 
or other similar instrument in

[[Page 57404]]

properly negotiable form, or by electronic fund transfer if the 
servicer and consumer have so agreed.[ltrif]

[lsqbb]Paragraph 36(c)(1)(ii)[rsqbb]

[rtrif]Paragraph 36(c)(2)[ltrif]

    1. Pyramiding of late fees. The prohibition on pyramiding of 
late fees in this subsection should be construed consistently with 
the ``credit practices rule'' of the Federal Trade Commission, 16 
CFR 444.4.

[lsqbb]Paragraph 36(c)(1)(iii)[rsqbb]

[rtrif]Paragraph 36(c)(3)[ltrif]

    [lsqbb]1. Reasonable time. The payoff statement must be provided 
to the consumer, or person acting on behalf of the consumer, within 
a reasonable time after the request. For example, it would be 
reasonable under most circumstances to provide the statement within 
five business days of receipt of a consumer's request. This time 
frame might be longer, for example, when the servicer is 
experiencing an unusually high volume of refinancing 
requests.[rsqbb]
    [rtrif]1. As Applicable. A creditor who no longer owns the 
mortgage loan or the mortgage servicing rights is not ``applicable'' 
and therefore is not subject to the requirements of this section to 
provide a periodic statement.[ltrif]
    2. Person acting on behalf of the consumer. For purposes of 
Sec.  1026.36(c)[lsqbb](1)(iii)[rsqbb][rtrif](3)[ltrif], a person 
acting on behalf of the consumer may include the consumer's 
representative, such as an attorney representing the individual, a 
non-profit consumer counseling or similar organization, or a 
creditor with which the consumer is refinancing and which requires 
the payoff statement to complete the refinancing. A servicer may 
take reasonable measures to verify the identity of any person acting 
on behalf of the consumer and to obtain the consumer's authorization 
to release information to any such person before the ``reasonable 
time'' period begins to run.
    3. Payment requirements. The servicer may specify reasonable 
requirements for making payoff requests, such as requiring requests 
to be [lsqbb]in writing and[rsqbb] directed to a mailing address, 
email address, or fax number specified by the servicer [lsqbb]or 
orally to a telephone number specified by the servicer,[rsqbb] or 
any other reasonable requirement or method. If the consumer does not 
follow these requirements, a longer time frame for responding to the 
request would be reasonable.
    4. Accuracy of payoff statements. Payoff statements must be 
accurate when issued.

[lsqbb]Paragraph 36(c)(2)

    1. Payment requirements. The servicer may specify reasonable 
requirements for making payments in writing, such as requiring that 
payments be accompanied by the account number or payment coupon; 
setting a cut-off hour for payment to be received, or setting 
different hours for payment by mail and payments made in person; 
specifying that only checks or money orders should be sent by mail; 
specifying that payment is to be made in U.S. dollars; or specifying 
one particular address for receiving payments, such as a post office 
box. The servicer may be prohibited, however, from requiring payment 
solely by preauthorized electronic fund transfer. (See Section 913 
of the Electronic Fund Transfer Act, 15 U.S.C. 1693k.)
    2. Payment requirements--limitations. Requirements for making 
payments must be reasonable; it should not be difficult for most 
consumers to make conforming payments. For example, it would be 
reasonable to require a cut-off time of 5 p.m. for receipt of a 
mailed check at the location specified by the servicer for receipt 
of such check.
    3. Implied guidelines for payments. In the absence of specified 
requirements for making payments, payments may be made at any 
location where the servicer conducts business; any time during the 
servicer's normal business hours; and by cash, money order, draft, 
or other similar instrument in properly negotiable form, or by 
electronic fund transfer if the servicer and consumer have so 
agreed.[rsqbb]
* * * * *

[rtrif]Section 41--Periodic Statements for Residential Mortgage 
Loans

41(a) In General

    1. Recipient of Periodic Statement. When two consumers are joint 
obligors with primary liability on a mortgage loan, the disclosures 
may be given to either one of them. For example, if a husband and 
wife jointly own a home, the servicer need not send statements to 
both the husband and the wife; a single statement may be sent.
    2. Billing Cycles Shorter than a 31-Day Period. If a loan has a 
billing cycle shorter than a period of 31 days (for example, a bi-
weekly billing cycle), a periodic statement covering an entire month 
may be used. Such statement should separately list the upcoming 
payment due dates and amounts due, as required by paragraph (d)(1), 
and list all transaction activity that occurred during the related 
time period, as required by paragraph (d)(4). Such statement may 
aggregate the information for the Explanation of Amount Due, as 
required by paragraph (d)(2), and Past Payment Breakdown, as 
required by paragraph (d)(3).
    3. One Statement per Billing Cycle. The periodic statement 
requirement applies to the ``creditor, assignee, or servicer as 
applicable.'' The creditor, assignee, or servicer are all subject to 
this requirement, however only one statement must be sent to the 
consumer each billing cycle. When two or more parties are subject to 
this requirement, they may decide among themselves who will send the 
statement.
    4. As Applicable. A creditor who no longer owns the mortgage 
loan or the mortgage servicing rights is not ``applicable'' and 
therefore is not subject to the requirements of this section to 
provide a periodic statement.

41(b) Timing of the Periodic Statement

    1. Reasonably Prompt Time. Delivering or placing the periodic 
statement in the mail within 4 days of close the grace period of the 
previous billing cycle would be considered reasonably prompt.

41(c) Form of the Periodic Statement

    1. Clear and Conspicuous Standard. The ``clear and conspicuous'' 
standard generally requires that disclosures be in a reasonably 
understandable form. Except where otherwise provided, the standard 
does not prohibit adding to the required disclosures, as long as the 
additional information does not overwhelm or obscure the required 
disclosures. For example, while certain information about the escrow 
account (such as the account balance) is not required on the 
periodic statement, this information may be included.
    2. Additional information; disclosures required by other laws. 
Nothing in this subpart prohibits a servicer from including 
additional information or combining disclosures required by other 
laws with the disclosures required by this subpart, unless such 
prohibition is expressly set forth in this subpart, such as the 
grouping requirements of paragraph 41(d) or other applicable law.
    3. Electronic Distribution. The periodic statement may be 
provided electronically if the consumer agrees. The consumer must 
give affirmative consent to receive statements electronically. Due 
to concerns about information security, if statements are provided 
electronically, the creditor, assignee or servicer may send the 
consumer a notification that their statement is available, with a 
link to where the statement can be accessed.

41(d) Content and Format of the Periodic Statement

    1. Close Proximity. Paragraph (d) requires several disclosures 
to be provided in close proximity. To meet this requirement, the 
items to be provided in close proximity must be grouped together, 
and set off from the other groupings of items. This could be 
accomplished in a variety of ways, for example, by presenting the 
information in boxes, or by arranging the items on the document and 
including spacing between the groupings. Items in close proximity 
may not have any intervening text between them.
    2. Not Applicable. If an item required by paragraph (d) or (e) 
of this section is not applicable to the loan, it may be omitted 
from the periodic statement or coupon book. For example, if there is 
no prepayment penalty associated with a loan, the prepayment penalty 
disclosures need not be provided on the periodic statement.
    3. Terminology. A servicer may use terminology other than that 
found on the sample periodic statement, so long as the new 
terminology is commonly understood. For example, servicers may take 
into consideration regional differences in terminology and refer to 
the account for the collection of taxes and insurance, commonly 
referred to as the ``escrow account,'' as an ``impound account.''

41(d)(3) Past Payment Breakdown

    1. Partial Payments. The disclosure of any portion of payments 
since the last statement that was applied to a partial payment or 
suspense account as required by (d)(3)(i) should reflect any funds 
that were received in the time period covered by the transaction 
activity of that statement and that were sent

[[Page 57405]]

to a suspense or unapplied funds account. The disclosure of any 
portion of payments since the beginning of the calendar year that 
was sent to a partial payment or suspense account as required by 
(d)(3)(ii) should reflect all funds that are currently held in a 
suspense or unapplied funds account. For example:
    (i) Suppose a payment of $1000 is due, but the consumer only 
sends in $600 on January 1, which is held in a suspense account. 
Further assume there are no fees charged on this account. Assuming 
there are no other funds in suspense account, the January statement 
should reflect: Unapplied funds since last statement--$600. 
Unapplied funds YTD--$600.
    (ii) Assuming the same facts as Example (i) above, except that 
during February the consumer sends in $300 and this too is held in 
the suspense account. The statement should reflect: Unapplied funds 
since last statement--$300. Unapplied funds YTD--$900.
    (iii) Assuming the same facts as Example (ii) above, except that 
during March the consumer sends in $400. Of this payment, $100 
completes a full contractual payment when added to the $900 in funds 
already held in the suspense account. This $1000 should be applied 
to the January payment, and the remaining $300 would be held in the 
suspense account. The statement should reflect: Unapplied funds 
since last statement--$300. Unapplied Funds YTD--$300.

41(d)(4) Transaction Activity

    1. Meaning. Transaction activity includes any activity that 
credits or debits the outstanding account balance. Examples of 
transactions include, without limitation:
    (i) Payments received and applied;
    (ii) Payments received and held in a suspense account;
    (iii) The imposition of any fees (for example late fees); and
    (iv) The imposition of any charges (for example, private 
mortgage insurance).
    2. Description of Late Fees. The description of any late fee 
charges includes the date of the late fee, the amount of the late 
fee, and the fact that a late fee was imposed.
    3. Partial Payments. If a partial payment is sent to a suspense 
or unapplied funds account, this fact must be in the transaction 
description along with the date and amount of the payment, an 
explanation of what must be done for the payments to be applied must 
be provided on the front of the statement, and the funds must be 
included as unapplied funds in the information required by (d)(3) 
Past Payment Breakdown.

41(d)(6) Contact Information

    1. A toll-free telephone number is required. Additional contact 
information, such as a web address, may also be provided at the 
servicer's option.
    2. If servicer has provided a telephone number for error 
resolution and inquiries pursuant to 12 CFR 1024.35 and Sec.  
1024.36, that number should be provided in the contact information 
section.

41(d)(7)(iv) Prepayment Penalty

    1. Examples of prepayment penalties. For purposes of Sec.  
1026.41(d)(7)(iv), the following are examples of prepayment 
penalties:
    i. A charge determined by treating the loan balance as 
outstanding for a period of time after prepayment in full and 
applying the interest rate to such ``balance,'' even if the charge 
results from interest accrual amortization used for other payments 
in the transaction under the terms of the loan contract. ``Interest 
accrual amortization'' refers to the method by which the amount of 
interest due for each period (e.g., month) in a transaction's term 
is determined. For example, ``monthly interest accrual 
amortization'' treats each payment as made on the scheduled, monthly 
due date even if it is actually paid early or late (until the 
expiration of any grace period). Thus, under the terms of a loan 
contract providing for monthly interest accrual amortization, if the 
amount of interest due on May 1 for the preceding month of April is 
$3,000, the loan contract will require payment of $3,000 in interest 
for the month of April whether the payment is made on April 20, on 
May 1, or on May 10. In this example, if the consumer prepays the 
loan in full on April 20 and if the accrued interest as of that date 
is $2,000, then assessment of a charge of $3,000 constitutes a 
prepayment penalty of $1,000 because the amount of interest actually 
earned through April 20 is only $2,000.
    ii. A fee, such as an origination or other loan closing cost, 
that is waived by the creditor on the condition that the consumer 
does not prepay the loan.
    iii. A minimum finance charge in a simple interest transaction.
    iv. Computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined 
by section 933(d) of the Housing and Community Development Act of 
1992, 15 U.S.C. 1615(d). For purposes of computing a refund of 
unearned interest, if using the actuarial method defined by 
applicable State law results in a refund that is greater than the 
refund calculated by using the method described in section 933(d) of 
the Housing and Community Development Act of 1992, creditors should 
use the State law definition in determining if a refund is a 
prepayment penalty.
    2. Fees that are not prepayment penalties. For purposes of Sec.  
1026.41(d)(7)(iv), fees which are not prepayment penalties include, 
for example:
    i. Fees imposed for preparing and providing documents when a 
loan is paid in full, if such fees are imposed whether or not the 
loan is prepaid. Examples include a loan payoff statement, a 
reconveyance document, or another document releasing the creditor's 
security interest in the dwelling that secures the loan.
    ii. Loan guarantee fees.

41(e) Exemptions

    1. Information made available. Information made available by the 
servicer may be obtained through the inquiry process in Sec.  
1024.36.

41(e)(3) Coupon Book Exemption

    1. Fixed Rate. ``Fixed rate'' is to be construed consistently 
with Sec.  1026.18(s)(7)(iii).
    2. Coupon Book. A coupon book is a booklet provided to the 
consumer with a page for each billing cycle during a set period of 
time (often covering one year). These pages are designed to be torn 
off and returned to the servicer with a payment for each billing 
cycle. Additional information about the loan is often included on or 
inside the front or back cover, or on filler pages in the coupon 
book.
    3. Information location. The information required by paragraph 
(e)(3)(ii) need not be provided on each coupon, but should be 
provided somewhere in the coupon book. Such information could be 
located e.g., on or inside the front or back cover, or on filler 
pages in the coupon book.
    4. Outstanding Principal Balance. Paragraph (e)(3)(ii)(A) 
requires the information listed in paragraph (d)(7) to be included 
in the coupon book. Paragraph (d)(7)(i) requires the disclosure of 
amount of the outstanding principal balance. For the purposes of the 
coupon book, the servicer need only disclose the principal balance 
at the beginning of the time period covered by the coupon book.

41(e)(4) Small Servicers

    1. Loans obtained by merger or acquisition. Any mortgage loans 
obtained by a servicer or an affiliate as part of a merger or 
acquisition, or as part of the acquisition of all of the assets or 
liabilities of a branch office of a lender should be considered 
mortgage loans for which the servicer or an affiliate are the lender 
to whom the mortgage loan is initially payable. A branch office 
means either an office of a depository institution that is approved 
as a branch by a Federal or state supervisory agency or an office of 
a for-profit mortgage lending institution (other than a depository 
institution) that takes applications from the public for mortgage 
loans.
    2. Threshold. In determining whether a small servicer services 
1,000 mortgage loans or less, a servicer is evaluated based on its 
size as of January 1 for the remainder of the calendar year. A 
servicer that, together with its affiliates, crosses the threshold 
will have six months or until the beginning of the next calendar 
year, whichever is later, to begin compliance other than as a small 
servicer. Examples:
    i. A servicer that crosses the loan threshold on October 1 would 
no longer be considered a small servicer on April 1 of the following 
year.
    ii. A servicer that crosses the loan threshold on February 1 
would no longer be considered a small servicer on January 1 of the 
following year.
    3. Small servicers that do not qualify for the exemption. A 
servicer that services any mortgage loans that are not owned by the 
servicer or an affiliate or for which the servicer or an affiliate 
were not the entity to whom the obligation was initially payable is 
not a small servicer. For example, if a servicer acquires mortgage 
servicing rights to service mortgage loans the servicer or an 
affiliate does not own and did not originate is not a small 
servicer.

[[Page 57406]]

    4. Master servicing responsibilities. The periodic statement 
requirements apply to master servicers. A subservicer that meets the 
small servicer definition cannot claim the benefit of any small 
servicer exemption for mortgage loans that are master serviced by an 
entity that does not qualify for the small servicer 
exemption.[ltrif]
* * * * *

Appendices G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. Although use of the model forms and 
clauses is not required, creditors using them properly will be 
deemed to be in compliance with the regulation with regard to those 
disclosures. [rtrif]For purposes of the model forms and samples in 
H-4(D), the term creditors refers to creditors, assignees, and 
servicers.[ltrif] Creditors may make certain changes in the format 
or content of the forms and clauses and may delete any disclosures 
that are inapplicable to a transaction or a plan without losing the 
Act's protection from liability, except formatting changes may not 
be made to model forms and samples in [rtrif]H-4(D),[ltrif]H-18, H-
19, H-20, H-21, H-22, H-23, G-2(A), G-3(A), G-4(A), G-10(A)-(E), G-
17(A)-(D), G-18(A) (except as permitted pursuant to Sec.  
1026.7(b)(2), G-18(B)-(C), G-19, G-20, and G-21, or to the model 
clauses in H-4(E), H-4(F), H-4(G), and H-4(H). Creditors may modify 
the heading of the second column shown in Model Clause H-4(H) to 
read ``first adjustment'' or ``first increase,'' as applicable, 
pursuant to Sec.  1026.18(s)(2)(i)(C). The rearrangement of the 
model forms and clauses may not be so extensive as to affect the 
substance, clarity, or meaningful sequence of the forms and clauses. 
Creditors making revisions with that effect will lose their 
protection from civil liability. Except as otherwise specifically 
required, acceptable changes include, for example:
    i. Using the first person, instead of the second person, in 
referring to the borrower.
    ii. Using ``borrower'' and ``creditor'' instead of pronouns.
    iii. Rearranging the sequences of the disclosures.
    iv. Not using bold type for headings.
    v. Incorporating certain State ``plain English'' requirements.
    vi. Deleting inapplicable disclosures by whiting out, blocking 
out, filling in ``N/A'' (not applicable) or ``0,'' crossing out, 
leaving blanks, checking a box for applicable items, or circling 
applicable items. (This should permit use of multipurpose standard 
forms.)
    vii. Using a vertical, rather than a horizontal, format for the 
boxes in the closed-end disclosures.
* * * * *

Appendix H--Closed Model Forms and [lsqbb]Clause[rsqbb]

* * * * *
    7. * * *
    i. Model H-4(D) illustrates the adjustment 
[lsqbb]notice[rsqbb][rtrif]notices[ltrif] required under Sec.  
1026.20(c)[rtrif]and (d)[ltrif], and provides examples of 
[rtrif]Sec.  1026.20(c)[ltrif]payment change notices and 
[rtrif]Sec.  1026.20(d) initial[ltrif][lsqbb]annual[rsqbb] notices 
of interest rate [lsqbb]changes[rsqbb] [rtrif]adjustments[ltrif].
* * * * *

    Dated: August 9, 2012.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.

[FR Doc. 2012-19977 Filed 9-7-12; 4:15 pm]
BILLING CODE 4810-AM-P