[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Rules and Regulations]
[Pages 10902-11021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-01241]



[[Page 10901]]

Vol. 78

Thursday,

No. 31

February 14, 2013

Part III





Bureau of Consumer Financial Protection





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





12 CFR Part 1026





Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z); 
Final Rule

  Federal Register / Vol. 78 , No. 31 / Thursday, February 14, 2013 / 
Rules and Regulations  

[[Page 10902]]


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

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

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


Mortgage Servicing Rules Under the Truth in Lending Act 
(Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Final rule; official interpretations.

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

SUMMARY: The Bureau of Consumer Financial Protection is amending 
Regulation Z, which implements the Truth in Lending Act and the 
official interpretation to the regulation, which interprets the 
requirements of Regulation Z. This final rule implements provisions of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding 
mortgage loan servicing. Specifically, this final rule implements Dodd-
Frank Act sections addressing initial rate adjustment notices for 
adjustable-rate mortgages, periodic statements for residential mortgage 
loans, prompt crediting of mortgage payments, and responses to requests 
for payoff amounts. This final rule also amends current rules governing 
the scope, timing, content, and format of disclosures to consumers 
regarding the interest rate adjustments of their variable-rate 
transactions. Concurrently with the issuance of this final rule, the 
Bureau is amending Regulation X, which contains companion rules 
implementing amendments to the Real Estate Settlement Procedures Act of 
1974.

DATES: This final rule is effective on January 10, 2014.

FOR FURTHER INFORMATION CONTACT: 
    Regulation Z (TILA): Whitney Patross, Attorney; Marta Tanenhaus or 
Mitchell E. Hochberg, Senior Counsels, Office of Regulations, at (202) 
435-7700.
    Regulation X (RESPA): Whitney Patross, Attorney; Jane Gao, Terry 
Randall or Michael Scherzer, Counsels; Lisa Cole or Mitchell E. 
Hochberg, Senior Counsels, Office of Regulations, at (202) 435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of the Final Rule

    The Bureau of Consumer Financial Protection (Bureau) is amending 
Regulation Z, which implements the Truth in Lending Act (TILA) and the 
official interpretation to the regulation (the 2013 TILA Servicing 
Final Rule). The final rule implements provisions of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act regarding mortgage loan 
servicing.\1\ Specifically, this final rule implements Dodd-Frank Act 
sections addressing initial interest rate adjustment notices for 
adjustable-rate mortgages (ARMs), periodic statements for residential 
mortgage loans, prompt crediting of mortgage payments, and responses to 
requests for payoff amounts. This final rule also amends current rules 
governing the scope, timing, content, and format of disclosures to 
consumers occasioned by the interest rate adjustments of their 
variable-rate transactions. Concurrently with the issuance of this 
final rule, the Bureau is amending Regulation X, which contains 
companion rules implementing amendments to the Real Estate Settlement 
Procedures Act of 1974 (the 2013 RESPA Servicing Final Rule).
---------------------------------------------------------------------------

    \1\ Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    On August 10, 2012, the Bureau issued proposed rules that would 
have amended Regulation X, which implements RESPA,\2\ as well as 
Regulation Z, which implements TILA,\3\ regarding mortgage servicing 
requirements.\4\ The Proposed Servicing Rules proposed to implement the 
Dodd-Frank Act amendments to TILA and RESPA with respect to, among 
other things, periodic mortgage statements, disclosures for ARMs, 
prompt crediting of mortgage loan payments, requests for mortgage loan 
payoff statements, error resolution, information requests, and 
protections relating to force-placed insurance. In the 2012 RESPA 
Servicing Proposal, the Bureau also proposed to use its authority to 
adopt requirements relating to servicer policies and procedures, early 
intervention with delinquent borrowers, continuity of contact, and 
procedures for evaluating and responding to loss mitigation 
applications.\5\ The proposals sought to address fundamental problems 
that underlie many consumer complaints and recent regulatory and 
enforcement actions, as set forth in more detail below.
---------------------------------------------------------------------------

    \2\ See Press Release, U.S. Consumer Fin. Prot. Bureau, Consumer 
Financial Protection Bureau Proposes Rules to Protect Mortgage 
Borrowers (Aug. 10, 2012) available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-proposes-rules-to-protect-mortgage-borrowers/. The proposal 
was published in the Federal Register on September 17, 2012. 77 FR 
57200 (Sept. 17 2012) (2012 RESPA Servicing Proposal).
    \3\ See Press Release, U.S. Consumer Fin. Prot. Bureau, Consumer 
Financial Protection Bureau Proposes Rules to Protect Mortgage 
Borrowers (August 10, 2012) available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-proposes-rules-to-protect-mortgage-borrowers/. This proposal 
was also published in the Federal Register on September 17, 2012. 77 
FR 57318 (Sept. 17, 2012) (2012 TILA Servicing Proposal; and, 
together with the 2012 RESPA Servicing Proposal, the Proposed 
Servicing Rules).
    \4\ The 2013 RESPA Servicing Final Rule and the 2013 TILA 
Servicing Final Rule are referred to collectively as the Final 
Servicing Rules.
    \5\ For ease of discussion, this notice uses the term 
``discretionary rulemakings'' to refer to a set of regulations 
implemented using the Bureau's authorities under section 6(j), 
6(k)(1)(E), or 19(a) of RESPA to expand requirements beyond those 
explicit in RESPA. The ``discretionary rulemakings'' include 
requirements relating to servicer policies and procedures, early 
intervention with delinquent borrowers, continuity of contact, and 
procedures for evaluating and responding to loss mitigation 
applications, as set forth in Sec. Sec.  1024.38-1024.41.
---------------------------------------------------------------------------

    The Bureau is finalizing the Proposed Servicing Rules with respect 
to nine major topics, as summarized below, as well as certain technical 
and streamlining amendments. The goals of the Final Servicing Rules are 
to provide better disclosure to consumers of their mortgage loan 
obligations and to better inform consumers of, and assist consumers 
with, options that may be available for consumers having difficulty 
with their mortgage loan obligations. The amendments also address 
critical servicer practices relating to, among other things, correcting 
errors, imposing charges for force-placed insurance, crediting mortgage 
loan payments, and providing payoff statements. The Bureau's final 
rules are set forth in two separate notices because some provisions 
implement requirements that Congress imposed under TILA while other 
provisions implement requirements Congress imposed under RESPA.\6\
---------------------------------------------------------------------------

    \6\ Note that TILA and RESPA differ in their terminology. 
Whereas Regulation Z generally refers to ``consumers'' and 
``creditors,'' Regulation X generally refers to ``borrowers'' and 
``lenders.''
---------------------------------------------------------------------------

A. Major Topics in the Final Servicing Rules

    1. Periodic billing statements (2013 TILA Servicing Final Rule). 
Creditors, assignees, and servicers must provide a periodic statement 
for each billing cycle containing, among other things, information on 
payments currently due and previously made, fees imposed, transaction 
activity, application of past payments, contact information for the 
servicer and housing counselors, and, where applicable, information 
regarding delinquencies. These statements must meet the timing, form, 
and content requirements provided in the rule. The rule contains sample 
forms that may be used. The periodic statement requirement generally 
does not apply to 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 specified in the rule is

[[Page 10903]]

made available to the consumer. The rule also includes an exemption for 
small servicers as discussed below.
    2. Interest rate adjustment notices (2013 TILA Servicing Final 
Rule). Creditors, assignees, and servicers must provide a consumer 
whose mortgage has an adjustable rate with a notice between 210 and 240 
days prior to the first payment due after the rate first adjusts. This 
notice may contain an estimate of the new rate and new payment. 
Creditors, assignees, and servicers also must provide a notice between 
60 and 120 days before payment at a new level is due when a rate 
adjustment causes the payment to change. The current annual notice that 
must be provided for ARMs for which the interest rate, but not the 
payment, has changed over the course of the year is no longer required. 
The rule contains model and sample forms that servicers may use.
    3. Prompt payment crediting and payoff statements (2013 TILA 
Servicing Final Rule). Servicers must promptly credit periodic payments 
from borrowers as of the day of receipt. A periodic payment consists of 
principal, interest, and escrow (if applicable). If a servicer receives 
a payment that is less than the amount due for a periodic payment, the 
payment may be held in a suspense account. When the amount in the 
suspense account covers a periodic payment, the servicer must apply the 
funds to the consumer's account. In addition, creditors, assignees, and 
servicers must provide an accurate payoff balance to a consumer no 
later than seven business days after receipt of a written request from 
the consumer for such information.
    4. Force-placed insurance (2013 RESPA Servicing Final Rule). 
Servicers are prohibited from charging a borrower for force-placed 
insurance coverage unless the servicer has a reasonable basis to 
believe the borrower has failed to maintain hazard insurance, as 
required by the loan agreement, and has provided required notices. An 
initial notice must be sent to the borrower at least 45 days before 
charging the borrower for force-placed insurance coverage, and a second 
reminder notice must be sent no earlier than 30 days after the first 
notice. The rule contains model forms that servicers may use. If a 
borrower provides proof of hazard insurance coverage, the servicer must 
cancel any force-placed insurance policy and refund any premiums paid 
for overlapping periods in which the borrower's coverage was in place. 
The rule also provides that charges related to force-placed insurance 
(other than those subject to State regulation as the business of 
insurance or authorized by Federal law for flood insurance) must be for 
a service that was actually performed and must bear a reasonable 
relationship to the servicer's cost of providing the service. Where the 
borrower has an escrow account for the payment of hazard insurance 
premiums, the servicer is prohibited from obtaining force-place 
insurance where the servicer can continue the borrower's homeowner 
insurance, even if the servicer needs to advance funds to the 
borrower's escrow account to do so. The rule against obtaining force-
placed insurance in cases in which hazard insurance may be maintained 
through an escrow account exempts small servicers, as discussed below, 
so long as any force-placed insurance purchased by the small servicer 
is less expensive to a borrower than the amount of any disbursement the 
servicer would have made to maintain hazard insurance coverage.
    5. Error resolution and information requests (2013 RESPA Servicing 
Final Rule). Servicers are required to meet certain procedural 
requirements for responding to written information requests or 
complaints of errors. The rule requires servicers to comply with the 
error resolution procedures for certain listed errors as well as any 
error relating to the servicing of a mortgage loan. Servicers may 
designate a specific address for borrowers to use. Servicers generally 
are required to acknowledge the request or notice of error within five 
days. Servicers also generally are required to correct the error 
asserted by the borrower and provide the borrower written notification 
of the correction, or to conduct an investigation and provide the 
borrower written notification that no error occurred, within 30 to 45 
days. Further, within a similar amount of time, servicers generally are 
required to acknowledge borrower written requests for information and 
either provide the information or explain why the information is not 
available.
    6. General servicing policies, procedures, and requirements (2013 
RESPA Servicing Final Rule). Servicers are required to establish 
policies and procedures reasonably designed to achieve objectives 
specified in the rule. The reasonableness of a servicer's policies and 
procedures takes into account the size, scope, and nature of the 
servicer's operations. Examples of the specified objectives include 
accessing and providing accurate and timely information to borrowers, 
investors, and courts; properly evaluating loss mitigation applications 
in accordance with the eligibility rules established by investors; 
facilitating oversight of, and compliance by, service providers; 
facilitating transfer of information during servicing transfers; and 
informing borrowers of the availability of written error resolution and 
information request procedures. In addition, servicers are required to 
retain records relating to each mortgage loan until one year after the 
mortgage loan is discharged or servicing is transferred, and to 
maintain certain documents and information for each mortgage loan in a 
manner that enables the servicers to compile it into a servicing file 
within five days. This section includes an exemption for small 
servicers as discussed below. The Bureau and prudential regulators will 
be able to supervise servicers within their jurisdiction to assure 
compliance with these requirements but there will not be a private 
right of action to enforce these provisions.
    7. Early intervention with delinquent borrowers (2013 RESPA 
Servicing Final Rule). Servicers must establish or make good faith 
efforts to establish live contact with borrowers by the 36th day of 
their delinquency and promptly inform such borrowers, where 
appropriate, that loss mitigation options may be available. In 
addition, a servicer must provide a borrower a written notice with 
information about loss mitigation options by the 45th day of a 
borrower's delinquency. The rule contains model language servicers may 
use for the written notice. This section includes an exemption for 
small servicers as discussed below.
    8. Continuity of contact with delinquent borrowers (2013 RESPA 
Servicing Final Rule). Servicers are required to maintain reasonable 
policies and procedures with respect to providing delinquent borrowers 
with access to personnel to assist them with loss mitigation options 
where applicable. The policies and procedures must be reasonably 
designed to ensure that a servicer assigns personnel to a delinquent 
borrower by the time a servicer provides such borrower with the written 
notice required by the early intervention requirements, but in any 
event, by the 45th day of a borrower's delinquency. These personnel 
should be accessible to the borrower by phone to assist the borrower in 
pursuing loss mitigation options, including advising the borrower on 
the status of any loss mitigation application and applicable timelines. 
The personnel should be able to access all of the information provided 
by the borrower to the servicer and provide that information, when 
appropriate, to those responsible for evaluating the borrower for loss 
mitigation options. This section includes an exemption for small 
servicers as discussed below. The

[[Page 10904]]

Bureau and the prudential regulators will be able to supervise 
servicers within their jurisdiction to assure compliance with these 
requirements but there will not be a private right of action to enforce 
these provisions.
    9. Loss Mitigation Procedures (2013 RESPA Servicing Final Rule). 
Servicers are required to follow specified loss mitigation procedures 
for a mortgage loan secured by a borrower's principal residence. If a 
borrower submits an application for a loss mitigation option, the 
servicer is generally required to acknowledge the receipt of the 
application in writing within five days and inform the borrower whether 
the application is complete and, if not, what information is needed to 
complete the application. The servicer is required to exercise 
reasonable diligence in obtaining documents and information to complete 
the application.
    For a complete loss mitigation application received more than 37 
days before a foreclosure sale, the servicer is required to evaluate 
the borrower, within 30 days, for all loss mitigation options for which 
the borrower may be eligible in accordance with the investor's 
eligibility rules, including both options that enable the borrower to 
retain the home (such as a loan modification) and non-retention options 
(such as a short sale). Servicers are free to follow ``waterfalls'' 
established by an investor to determine eligibility for particular loss 
mitigation options. The servicer must provide the borrower with a 
written decision, including an explanation of the reasons for denying 
the borrower for any loan modification option offered by an owner or 
assignee of a mortgage loan with any inputs used to make a net present 
value calculation to the extent such inputs were the basis for the 
denial. A borrower may appeal a denial of a loan modification program 
so long as the borrower's complete loss mitigation application is 
received 90 days or more before a scheduled foreclosure sale.
    The rule restricts ``dual tracking,'' where a servicer is 
simultaneously evaluating a consumer for loan modifications or other 
alternatives at the same time that it prepares to foreclose on the 
property. Specifically, the rule prohibits a servicer from making the 
first notice or filing required for a foreclosure process until a 
mortgage loan account is more than 120 days delinquent. Even if a 
borrower is more than 120 days delinquent, if a borrower submits a 
complete application for a loss mitigation option before a servicer has 
made the first notice or filing required for a foreclosure process, a 
servicer may not start the foreclosure process unless (1) the servicer 
informs the borrower that the borrower is not eligible for any loss 
mitigation option (and any appeal has been exhausted), (2) a borrower 
rejects all loss mitigation offers, or (3) a borrower fails to comply 
with the terms of a loss mitigation option such as a trial 
modification.
    If a borrower submits a complete application for a loss mitigation 
option after the foreclosure process has commenced but more than 37 
days before a foreclosure sale, a servicer may not move for a 
foreclosure judgment or order of sale, or conduct a foreclosure sale, 
until one of the same three conditions has been satisfied. In all of 
these situations, the servicer is responsible for promptly instructing 
foreclosure counsel retained by the servicer not to proceed with filing 
for foreclosure judgment or order of sale, or to conduct a foreclosure 
sale, as applicable.
    This section includes an exemption for small servicers as defined 
above. However, a small servicer is required to comply with two 
requirements: (1) A small servicer may not make the first notice or 
filing required for a foreclosure process unless a borrower is more 
than 120 days delinquent, and (2) a small servicer may not proceed to 
foreclosure judgment or order of sale, or conduct a foreclosure sale, 
if a borrower is performing pursuant to the terms of a loss mitigation 
agreement.
    All of the provisions in the section relating to loss mitigation 
can be enforced by individuals. Additionally, the Bureau and the 
prudential regulators can also supervise servicers within their 
jurisdiction to assure compliance with these requirements.

B. Scope of the Final Servicing Rules

    The Final Servicing Rules have somewhat different scopes, with 
respect to the types of mortgage loan transactions covered and the 
loans that are exempted. With respect to the 2013 TILA Servicing Final 
Rule, certain requirements, specifically the periodic statement and ARM 
disclosure requirements, only apply to closed-end mortgage loans, 
whereas other requirements, specifically the requirements for crediting 
of payments and providing payoff statements, apply to both open-end and 
closed-end mortgage loans. Reverse mortgage transactions and timeshare 
plans are exempt from the periodic statement requirement. ARMs with 
terms of one year or less are exempt from the ARM disclosure 
requirements.
    With respect to the 2013 RESPA Servicing Final Rule, certain 
requirements generally apply to federally related mortgage loans that 
are closed-end, with certain exemptions for loans on property of 25 
acres or more, business-purpose loans, temporary financing, loans 
secured by vacant land, and certain loan assumptions or conversions. 
Open-end lines of credit (home equity plans) are generally exempt from 
the requirements in the 2013 RESPA Servicing Final Rule. The general 
servicing policies, procedure, and requirements, early intervention, 
continuity of contact, and loss mitigation procedures provisions are 
generally inapplicable to servicers of reverse mortgage transactions or 
to servicers of mortgage loans for which the servicers are also 
qualified lenders under the Farm Credit Act of 1971.
    In the 2013 TILA Servicing Final Rule, the Bureau is exercising its 
authority under TILA to provide an exemption from the periodic 
statement requirement for small servicers, defined as servicers that 
service 5,000 mortgage loans or less and only service mortgage loans 
the servicer or an affiliate owns or originated (small servicers). In 
the 2013 RESPA Servicing Final Rule, the Bureau has elected not to 
extend to these small servicers most provisions of the Final Rule that 
are not being promulgated to implement specific mandates in the Dodd-
Frank Act but are, instead, being issued by the Bureau, in the exercise 
of its discretion, pursuant to its general rulemaking authority under 
RESPA, as amended by the Dodd-Frank Act. The exemptions from the 
discretionary rulemakings include those relating to general servicing 
policies, procedures, and requirements; early intervention with 
delinquent borrowers; continuity of contact; and most of the 
requirements for evaluating and responding to loss mitigation 
applications. Further, the Bureau is not restricting small servicers 
from purchasing force-placed insurance for borrowers with escrow 
accounts for the payment of hazard insurance, so long as the cost to 
the borrower of the force-placed insurance obtained by a small servicer 
is less than the amount the small servicer would be required to 
disburse from the borrower's escrow account to ensure that the 
borrower's hazard insurance premium charges were paid in a timely 
manner. Small servicers are required to comply with limited loss 
mitigation procedure requirements. These include (1) a prohibition on 
making the first notice or filing required for a foreclosure process 
unless a borrower is more than 120 days delinquent and (2) a 
prohibition on making the first notice or filing or moving for 
foreclosure judgment or order of sale, or conducting a

[[Page 10905]]

foreclosure sale, when a borrower is performing pursuant to the terms 
of a loss mitigation agreement. The exemptions applicable to small 
servicers in the 2013 TILA Servicing Rule and the 2013 RESPA Servicing 
Rule are also being extended to Housing Finance Agencies, without 
regard to the number of mortgage loans serviced by any such agency, and 
these agencies are included within the definition of small servicer.

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.\7\ 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.\8\ Over 
60 percent of mortgage loans are serviced by mortgage servicers for 
investors.
---------------------------------------------------------------------------

    \7\ Inside Mortg. Fin., Outstanding 1-4 Family Mortgage 
Securities, in 2 The 2012 Mortgage Market Statistical Annual 7 
(2012). For general background on the market and the recent crisis, 
see the 2012 TILA-RESPA Proposal available at http://www.consumerfinance.gov/knowbeforeyouowe/ (last accessed Jan. 10, 
2013).
    \8\ As of June 2012, approximately 36% of outstanding mortgage 
loans were held in portfolio; 54% of mortgage loans were owned 
through mortgage-backed securities issued by Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac), together referred to as the government-
sponsored enterprises (GSEs), as well as securities issued by the 
Government National Mortgage Association (Ginnie Mae); and 10% of 
loans were owned through private label mortgage-backed securities. 
Strengthening the Housing Market and Minimizing Losses to Taxpayers, 
Hearing Before the S. Comm. on Banking, Housing and Urban Affairs 
(2012)(Testimony of Laurie Goodman, Amherst Securities), available 
at http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=53bda60f-64c1-43d8-9adf-a693c31eb56b&Witness_ID=b06f2fb1-59dd-4881-86cb-1082464d3119. 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 questionable whether a secondary market for mortgage-
backed securities would exist in this country.\9\ Given the nature of 
their activities, servicers can have a direct and profound impact on 
borrowers.
---------------------------------------------------------------------------

    \9\ 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.'').
---------------------------------------------------------------------------

    Mortgage servicing is performed by banks, thrifts, credit unions, 
and non-banks 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.\10\
---------------------------------------------------------------------------

    \10\ See, e.g., Diane E. Thompson, Foreclosing Modifications: 
How Servicer Incentives Discourage Loan Modifications, 86 Wash. L. 
Rev. 755, 763 (2011) (``Thompson'').
---------------------------------------------------------------------------

    These different servicing structures can create difficulties for 
borrowers if a servicer makes mistakes, fails to invest sufficient 
resources in its servicing operations, or avoids opportunities to work 
with borrowers for the mutual benefit of both borrowers and owners or 
assignees of mortgage loans. Although the mortgage servicing industry 
has numerous participants, the industry is highly concentrated, with 
the five largest servicers servicing approximately 53 percent of 
outstanding mortgage loans in this country.\11\ 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.\12\
---------------------------------------------------------------------------

    \11\ See Top 100 Mortgage Servicers in 2012, Inside Mortg. Fin., 
Sept. 28, 2012, at 13 (As of the end of the fourth quarter of 2011, 
the top five largest servicers serviced $5.66 trillion of mortgage 
loans).
    \12\ Fitch Ratings, U.S. Residential and Small Balance 
Commercial Mortgage Servicer Rating Criteria, at 14-15 (Jan. 31, 
2011), available at http://www.fitchratings.com. (account required 
to access information).
---------------------------------------------------------------------------

    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 owners or assignees of mortgage loans can 
transfer servicing rights to a different servicer. Further, servicer 
contracts govern servicer requirements to advance payments to owners of 
mortgage loans, and to recoup advances made by servicers, including 
from ultimate recoveries on liquidated properties.
    Compensation structures vary somewhat for loans held in portfolio 
and securitized loans,\13\ but have tended to make pure mortgage 
servicing (where the servicer has no role in origination) a high-
volume, low-margin business. Such compensation structures incentivize 
servicers to ensure that investment in operations closely tracks 
servicer expectations of delinquent accounts, and an increase in the 
number of delinquent accounts a servicer must service beyond that 
projected by the servicer strains available servicer resources. A 
servicer will expect to recoup its investment in purchasing mortgage 
servicing rights and earn a profit primarily through a net servicing 
fee (which is typically expressed as a constant rate assessed on unpaid 
mortgage balances), 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 will have limited incentives to 
provide other customer service. Servicers greatly vary in the extent to 
which they invest in

[[Page 10906]]

customer service infrastructure. For example, servicer staffing ratios 
have varied between approximately 100 loans per full-time employee to 
over 4,000 loans per full time employee.\14\ Servicers are generally 
not subject to market discipline from consumers because consumers have 
little opportunity to switch servicers. Rather, servicers compete to 
obtain business from the owners of loans--investors, assignees, and 
creditors--and thus competitive pressures tend to drive servicers to 
lower the price of servicing and scale their investment in providing 
service to consumers accordingly.
---------------------------------------------------------------------------

    \13\ 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. Keefe, Bruyette & Woods, Inc., 
PowerPoint Presentation, KBW Mortgage Matters: Mortgage Servicing 
Primer (Apr. 2012).
    \14\ Richard O'Brien, High Time for High-Touch, Mortg. Banking, 
Feb. 1, 2009, at 39. Industry participants generally indicated to 
the Bureau that servicers targeted a loan to employee ratio of 
1,000-1,200 mortgage loans per full time employee for mortgage loans 
that are current, and 125--150 mortgage loans per full time employee 
for mortgage loans that are delinquent. Between 1992 and 2000, as 
servicers sought to make their operations more efficient, loans 
serviced per full time employee increased from approximately 700 
loans in 1992 to over 1,200 loans by 2000. Michael A. Stegman et 
al., Preventative Servicing is Good for Business and Affordable 
Homeownership Policy, 18 Housing Pol'y Debate 243, 274 (2007). As an 
example of current mortgage servicing staffing levels, Ocwen 
services 162 mortgage loans per servicing employee. See Morningstar 
Credit Ratings, LLC, Operational Risk Assessment--Ocwen Loan 
Servicing, LLC, at 7 (2012) available at http://www.ocwen.com/docs/Morningstar-Sept-2012.pdf.
---------------------------------------------------------------------------

    Servicers also earn revenue from fees assessed on borrowers, 
including fees on late payments, fees for obtaining force-placed 
insurance, and fees for services, such as responding to telephone 
inquiries, processing telephone payments, and providing payoff 
statements.\15\ As a result, servicers have an incentive to look for 
opportunities to impose fees on borrowers to enhance revenues.
---------------------------------------------------------------------------

    \15\ See, e.g., Bank of America, Mortgage Servicing Fees, 
available at https://www8.bankofamerica.com/home-loans/mortgage-servicing-fees.go (last accessed Jan. 11, 2013); Metro Credit Union, 
Mortgage Servicing Fee Schedule, available at http://www.metrocu.org/home/fiFiles/static/documents/Mortgage_Servicing_Fee_Schedule.pdf (last accessed Jan. 6, 2013); Acqura Loan 
Services, Mortgage Loan Servicing Fee Schedule, available at http://www.acqurals.com/feeschedule.html (last accessed Jan. 11, 2013); 
Sovereign Bank, FAQ--What are the Mortgage Loan Servicing Fees?, 
available at https://customerservice.sovereignbank.com/app/answers/
detail/a--id/22/~/what-are-the-mortgage-loan-servicing-fees%3F (last 
accessed Jan. 11, 2013).
---------------------------------------------------------------------------

    These attributes of the servicing market created problems for 
certain borrowers even prior to the financial crisis. For example, 
borrowers experienced problems with mortgage servicers even during 
regional mortgage market downturns that preceded the financial 
crisis.\16\ There is evidence that borrowers were subjected to improper 
fees that servicers had no reasonable basis to impose, improper force-
placed insurance practices, and improper foreclosure and bankruptcy 
practices.\17\
---------------------------------------------------------------------------

    \16\ See Problems in Mortgage Servicing from Modification to 
Foreclosure: Hearings Before the S. Comm. on Banking, Hous., & Urban 
Affairs, 111th Cong. 53-54 (2010) (statement of Thomas J. Miller, 
Iowa Att'y Gen.) (``Miller Testimony''). See also, Kurt Eggert, 
Limiting Abuse and Opportunism by Mortgage Servicers, 15 Housing 
Pol'y Debate 753 (2004), available at http://ssrn.com/abstract=992095.
    \17\ See Kurt Eggert, Limiting Abuse and Opportunism by Mortgage 
Servicers, 15 Housing Pol'y Debate 753 (2004), available at http://ssrn.com/abstract=992095 (collecting cases).
---------------------------------------------------------------------------

    When the financial crisis erupted, many servicers--and especially 
the larger servicers with their scale business models--were ill-
equipped to handle the high volumes of delinquent mortgages, loan 
modification requests, and foreclosures they were required to process. 
Mortgage loan delinquency rates nearly doubled between 2007 and 2009 
from 5.4 percent of first-lien mortgage loans to 9.4 percent of first-
lien mortgage loans.\18\ Many servicers lacked the infrastructure, 
trained staff, controls, and procedures needed to manage effectively 
the flood of delinquent mortgages they were forced to handle.\19\ One 
study of complaints to the HOPE Hotline reported that over half of the 
complaints (27,000 out of 48,000) were from borrowers who could not 
reach their servicers and obtain information about the status of 
applications they had submitted for options to avoid foreclosure.\20\
---------------------------------------------------------------------------

    \18\ U.S. Census Bureau, Table 1194: Mortgage Originations and 
Delinquency and Foreclosure Rates: 1990 to 2010, in The 2012 
Statistical Abstract of the United States, (2012), available at 
http://www.census.gov/compendia/statab/2012/tables/12s1194.pdf (last 
accessed Jan. 6, 2013).
    \19\ See U.S. Dep't of the Treasury, Making Contact: The Path to 
Improving Mortgage Industry Communication with Homeowners, at 3 
(2012), available at http://www.treasury.gov/initiatives/financial-stability/reports/Documents/SPOC%20Special%20Report_Final.pdf (last 
accessed Jan. 6, 2013).
    \20\ See U.S. Gov't Accountability Office, GAO-10-634, Troubled 
Asset Relief Program: Further Actions Needed To Fully and Equitably 
Implement Foreclosure Mitigation Programs, at 15 (2010).
---------------------------------------------------------------------------

    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 Board of 
Governors of the Federal Reserve System (Board), following on-site 
reviews of foreclosure processing at 14 federally regulated mortgage 
servicers, found significant deficiencies at each of the servicers 
reviewed. As a result, the OCC and the Board undertook formal 
enforcement actions against several major servicers for unsafe and 
unsound residential mortgage loan servicing practices.\21\ 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 oversee 
sufficiently outside counsel and other third-party providers handling 
foreclosure-related services.\22\
---------------------------------------------------------------------------

    \21\ Press Release, Office of the Comptroller of the Currency, 
NR 2011-47, OCC Takes Enforcement Action Against Eight Servicers for 
Unsafe and Unsound Foreclosure Practices (Apr. 13, 2011), available 
at http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html; Press Release, Fed. Reserve Bd., Federal Reserve Issues 
Enforcement Actions Related to Deficient Practices in Residential 
Mortgage Loan Servicing (April 13, 2011) (``Fed Press Release''), 
available at http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm. In addition to enforcement actions 
against major servicers, Federal agencies have also undertaken 
formal enforcement actions against major service providers to 
mortgage servicers.
    \22\ Press Release, Federal Reserve Bd., 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. 
None of the servicers admitted or denied the OCC's or Federal 
Reserve Board's findings.
---------------------------------------------------------------------------

    Other investigations of servicers have found similar problems. For 
example, the Government Accountability Office (GAO) has found pervasive 
problems in broad segments of the mortgage servicing industry impacting 
delinquent borrowers, such as servicers who have 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. It has been recognized in 
Inspector General reports, and the Bureau has learned from outreach 
with mortgage investors, that servicers may be acting to maximize their 
self-interests in the handling of delinquent borrowers, rather than the 
interests of owners or assignees of mortgage loans.\23\
---------------------------------------------------------------------------

    \23\ See, e.g., Jody Shenn, PIMCO: This is who's actually going 
to be punished by the mortgage fraud settlement, Bloomberg News, 
February 10, 2012; cf., Office of Inspector Gen., Fed. Hous. Fin. 
Agency, Evaluation of FHFA's Oversight of Fannie Mae's Transfer of 
Mortgage Servicing Rights from Bank of America to High Touch 
Servicers, at 12 (Sept. 18, 2012) (``FHA OIG MSR Report''). The 
Inspector General for FHFA observed that ``Fannie Mae may have had 
(what one of its executives described as) a `misalignment of 
interests' with its servicers. As guarantor or loan holder, Fannie 
Mae could face significant losses from a default. However, a 
servicer earns only a fraction of a percent of the unpaid balance of 
a mortgage it services and, thus, the fees derived from any 
particular loan may not--at least for the servicer--provide adequate 
incentive to undertake anything more than the bare minimum of effort 
in order to prevent a default. This will typically include sending 
out delinquency notices to borrowers who have not made timely 
payments, telephoning delinquent borrowers, and, ultimately, 
initiating foreclosure proceedings.''

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

[[Page 10907]]

    The mortgage servicing industry, however, is not monolithic. Some 
servicers provide high levels of customer service. Some of these 
servicers are compensated by investors in a way that incentivizes them 
to provide this level of service in order to optimize investor 
outcomes.\24\ Other servicers provide high levels of customer service 
because they are servicing loans of their own retail customers within 
their local community or (in the case of credit unions) membership 
base. These servicers seek to provide other products and services to 
consumers--and to others within the community or membership base--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 
the Small Business Regulatory Enforcement Fairness Act of 1996 (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.\25\
---------------------------------------------------------------------------

    \24\ For example, Fannie Mae rewards servicers that provide high 
levels of customer service by compensating them through (1) base 
servicing fees, (2) incentive payments for mortgage modifications, 
and (3) a performance payment based on the servicer's success as 
contrasted with that of a benchmark portfolio. See FHA OIG MSR 
Report at 12.
    \25\ 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 (Jun. 11, 2012) (``Small Business 
Review Panel Report''), available at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0033-0002.
---------------------------------------------------------------------------

B. The National Mortgage Settlement and Other Regulatory Requirements

    In response to the unprecedented financial 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.
    For example, the Federal government, joined by 49 State Attorneys 
General,\26\ entered into settlements with the nation's five largest 
servicers in February 2012 (the National Mortgage Settlement).\27\ 
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.
---------------------------------------------------------------------------

    \26\ Oklahoma elected not to participate in the National 
Mortgage Settlement and executed a separate settlement with the 
servicers that are parties to the National Mortgage Settlement. See 
State of Oklahoma, Oklahoma Mortgage Settlement Fact Sheet (Feb. 9, 
2012), available at http://www.oag.ok.gov/oagweb.nsf/0/
2737eec87426c427862579c10003c950/$FILE/
Oklahoma%20Mortgage%20Settlement%20FAQs.pdf (last accessed Jan. 10, 
2013).
    \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.
    \28\ See Attys. Gen., National Mortgage Settlement.
---------------------------------------------------------------------------

    Apart from the National Mortgage Settlement, Federal regulatory 
agencies have also 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\ Further, the Bureau and other Federal agencies have been 
engaged since spring 2011 in informal discussions about the potential 
development of national mortgage servicing standards through 
interagency regulations and guidance.
---------------------------------------------------------------------------

    \29\ See Press Release, Fed. Res. Bd., Federal Reserve Board 
releases action plans and engagement letter to correct deficiencies 
in residential mortgage loan servicing and foreclosure processing 
(May 24, 2012), available at http://www.federalreserve.gov/newsevents/press/enforcement/20120524a.htm; Press Release, Fed. Res. 
Bd., Federal Reserve Board releases action plans for supervised 
financial institutions to correct deficiencies in residential 
mortgage loan servicing and foreclosure processing (Feb. 27, 2012), 
available at http://www.federalreserve.gov/newsevents/press/enforcement/20120227a.htm; Press Release, Office of the Comptroller 
of the Currency, OCC Takes Enforcement Action Against Eight 
Servicers for Unsafe and Unsound Foreclosure Practices (Apr. 13, 
2011), available at http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html.
    \30\ See Fed. Res. Bd., Federal Reserve Board releases action 
plans and engagement letter to correct deficiencies in residential 
mortgage loan servicing and foreclosure processing (May 24, 2012), 
available at http://www.federalreserve.gov/newsevents/press/enforcement/20120524a.htm.
    \31\ See Press Release, Fed. Res. Bd., Federal Reserve Board 
releases action plans and engagement letter to correct deficiencies 
in residential mortgage loan servicing and foreclosure processing 
(May 24, 2012), available at http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm; Press Release, Fed. Res. 
Bd., Federal Reserve Board releases action plans for supervised 
financial institutions to correct deficiencies in residential 
mortgage loan servicing and foreclosure processing (Feb. 27, 2012), 
available at http://www.federalreserve.gov/newsevents/press/enforcement/20120227a.htm; Press Release, Office of the Comptroller 
of the Currency, OCC Takes Enforcement Action Against Eight 
Servicers for Unsafe and Unsound Foreclosure Practices (Apr. 13, 
2011), available at http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html.
---------------------------------------------------------------------------

    Servicers are currently required to navigate overlapping 
requirements governing their servicing responsibilities. Servicers must 
comply with requirements established by owners or assignees of mortgage 
loans. These include, as applicable, (1) servicing guidelines required 
by Fannie Mae, Freddie Mac, and 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.
    Servicers are also required to consider the impact of State and 
even local regulation on mortgage servicing. Significantly, New York, 
California, and Oregon have all adopted varying statutory or regulatory 
restrictions on mortgage servicers. For example, the Superintendent of 
Banks of the State of New York has repeatedly adopted short-term 
emergency regulations governing mortgage servicers on a continuous 
basis since July 2010.\32\ These regulations impose obligations on 
servicers with respect to, among other things, consumer complaints and 
inquiries, statements of accounts, crediting of payments, payoff 
balances, and loss mitigation procedures.\33\ The California Homeowner 
Bill of Rights, which was enacted in 2012, imposes requirements on 
servicers with respect to evaluations of borrowers for loss mitigation 
options before various foreclosure documents may be filed for 
California's non-judicial foreclosure

[[Page 10908]]

process.\34\ Further, Oregon implemented regulations on mortgage 
servicers not to engage in unfair or deceptive conduct by: assessing 
fees for payments made on or before a payment due date; assessing or 
collecting fees not authorized by a security instrument or mortgage, 
misrepresenting information relating to a loan modification or set 
forth in an affidavit, declaration, or other sworn statement detailing 
a borrower's default and the servicer's right to foreclose; failing to 
comply with certain provisions of RESPA; or failing to deal with a 
borrower in good faith.\35\ Further, Massachusetts has recently 
proposed new regulations to protect consumers with respect to mortgage 
servicing practices, including with respect to loss mitigation 
procedures.\36\
---------------------------------------------------------------------------

    \32\ New York State Department of Financial Services, 
Explanatory All Institutions Letter (October 7, 2012), available at 
http://www.dfs.ny.gov/legal/regulations/emergency/banking/ar419lt.htm (last accessed Dec. 7, 2012).
    \33\ 3 N.Y.C.R.R. 419.1 et seq.
    \34\ See Cal. Civ. Code Sec.  2923.6.
    \35\ OAR 137-020-0805. Notably, Oregon's regulations initially 
implemented mortgage servicing requirements with respect to open-end 
lines of credit (home equity plans) and, further, required servicers 
to comply with GSE guidelines for loan modifications. Oregon 
suspended these requirements and reissued the rule as OAR 137-020-
0805 on the basis that such suspension was necessary to facilitate 
compliance. See In the matter of: Suspension of OAR 137-020-0800 and 
Adoption of OAR 137-020-0805 (February 15, 2012), available at 
http://www.oregonmla.org/WebsiteAttachments/Misc%20Events%20Attachments/OAR%20137-020-0805%202%2015%2012%20AG%20Servicing%20Rules%20(00540177).pdf (last 
accessed Jan. 6, 2013).
    \36\ See Press Release, Massachusetts Division of Banks Proposes 
New Standards for Mortgage Servicing (Nov. 8, 2012), available at 
http://www.mass.gov/ocabr/docs/dob/standards-for-mort-servicing2012.pdf (last accessed Jan. 6, 2013).
---------------------------------------------------------------------------

C. TILA and Regulation Z

    In 1968, Congress enacted TILA, 15 U.S.C. 1601 et seq., based on 
findings that the informed use of credit resulting from consumers' 
awareness of the cost of credit would enhance economic stability and 
competition among consumer credit providers. One of the purposes of 
TILA is to promote the informed use of consumer credit by requiring 
disclosures about its costs and terms. TILA requires additional 
disclosures for loans secured by consumers' homes and permits consumers 
to rescind certain transactions secured by their principal dwellings 
when the required disclosures are not provided. Section 105(a) of TILA 
directs the Bureau (and formerly directed the Board) to prescribe 
regulations to carry out TILA's purposes and specifically authorizes 
the Bureau, among other things, to issue regulations that contain such 
additional requirements, classifications, differentiations, or other 
provisions, or that provide for such adjustments and exceptions for all 
or any class of transactions, that in the Bureau's judgment are 
necessary or proper to effectuate the purposes of TILA, facilitate 
compliance with TILA, or prevent circumvention or evasion thereof. See 
15 U.S.C. 1604(a).
    General rulemaking authority for TILA transferred to the Bureau in 
July 2011, other than for certain motor vehicle dealers in accordance 
with Dodd-Frank Act section 1029, 12 U.S.C. 5519. Pursuant to the Dodd-
Frank Act and TILA, as amended, the Bureau published for public comment 
an interim final rule establishing a new Regulation Z, 12 CFR part 
1026, implementing TILA (except with respect to persons excluded from 
the Bureau's rulemaking authority by section 1029 of the Dodd-Frank 
Act). 76 FR 79768 (Dec. 22, 2011). This rule did not impose any new 
substantive obligations but did make technical and conforming changes 
to reflect the transfer of authority and certain other changes made by 
the Dodd-Frank Act. The Bureau's Regulation Z took effect on December 
30, 2011. The Official Interpretation interprets the requirements of 
the regulation and provides guidance in applying the rules to specific 
transactions. See 12 CFR part 1026, Supp. I.
    Prior to the adoption of the Dodd-Frank Act, 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 impose certain limited requirements directly on servicers, 
such as requirements to credit payments timely and provide payoff 
balances, as well as a prohibition on pyramiding of late fees.\37\
---------------------------------------------------------------------------

    \37\ See 12 CFR 1026.36(c).
---------------------------------------------------------------------------

    ARM 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.\38\ 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 the first 
payment at the new level is due to track the rules of the OCC and to 
provide creditors with flexibility in giving adjustment notices for a 
variety of ARMs.\39\ 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.\40\
---------------------------------------------------------------------------

    \38\ 52 FR 48665 (Dec. 24, 1987).
    \39\ 74 FR 43232, 43269 (Aug. 26, 2009) (citing 52 FR 48665, 
48668 (Dec. 24, 1987)).
    \40\ 74 FR 43232, 43272.
---------------------------------------------------------------------------

    Prompt crediting and payoff statements. In 2008 the Board published 
a final rule amending Regulation Z to establish new regulatory 
protections for consumers in the residential mortgage market from 
unfair, abusive, or deceptive lending and servicing practices.\41\ 
Among other protections, this rule established 12 CFR 226.36(c), 
prohibiting certain practices of servicers of consumer credit 
transactions secured by a consumers principal dwelling. This rule 
provided that no servicer shall: (1) Fail to credit a consumer's 
periodic payment as of the date received; (2) impose a late fee or 
delinquency charge where the late fee or delinquency charge is due only 
to a consumer's failure to include in a current payment a late fee or 
delinquency charge imposed on earlier payments; or (3) fail to provide 
an accurate payoff statement within a reasonable time of request.
---------------------------------------------------------------------------

    \41\ 73 FR 44522 (July 30, 2008).
---------------------------------------------------------------------------

D. The Dodd-Frank Act

    The Dodd-Frank Act imposes certain new requirements related to 
mortgage servicing. As set forth above, some of these new requirements 
are amendments to TILA addressed in this final rule and others are 
amendments to RESPA, addressed in the 2013 RESPA Servicing Final Rule. 
Sections 1418, 1420, and 1464 amend TILA to include protections with 
respect to mortgage servicing. 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. 15 U.S.C. 1638a. TILA 
section 128A states that, for hybrid ARMs with a fixed interest rate 
for an introductory period that adjusts or resets to an adjustable 
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 consumer, for each billing 
cycle, a periodic statement that sets forth certain specified 
information in a conspicuous and prominent

[[Page 10909]]

manner. 15 U.S.C. 1638(f). The statute also gives the Bureau the 
authority to require additional content to be included in the periodic 
statement. The statute provides an exemption 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.
    Third, section 1464 of the Dodd-Frank Act adds sections 129F and 
129G to TILA, which generally codifies 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 and requirements for a creditor or servicer to send 
accurate and timely responses to consumer requests for payoff amounts 
for home loans. 15 U.S.C. 1639f, 1639g.
    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). TILA and title X of the Dodd-Frank Act are 
Federal consumer financial laws. Accordingly, the Bureau proposed to 
exercise its authority under section 1022(b) of the Dodd-Frank Act to 
prescribe rules to carry out the purposes of TILA and title X and 
prevent evasion of those laws.

III. Summary of the Rulemaking Process

A. Outreach and Consumer Testing

    The Bureau has conducted extensive outreach in developing the Final 
Servicing Rules. Prior to issuing the Proposed Servicing Rules on 
August 10, 2012, Bureau staff met with consumers, consumer advocates, 
mortgage servicers, force-placed insurance carriers, industry trade 
associations, other Federal regulatory agencies, and other interested 
parties to discuss various aspects of the statute, servicing industry 
operations, and consumer harm impacts. Outreach included meetings with 
numerous individual servicers to understand their operations and the 
potential benefits and burdens of the proposed mortgage servicing 
rules. 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 rules and the 
need for and potential contents of national mortgage servicing 
standards in general.
    Further, the Bureau solicited input from small servicers through a 
Small Business Review Panel (Small Business Review Panel) with the 
Chief Counsel for Advocacy of the Small Business Administration 
(Advocacy) and the Administrator of the Office of Information and 
Regulatory Affairs within the Office of Management and Budget 
(OMB).\42\ The Small Business Review Panel's findings and 
recommendations are contained in the Small Business Review Panel 
Report.\43\ The Bureau has adopted recommendations provided by the 
participants on the Small Business Review Panel and includes below a 
discussion of such recommendations in connection with the applicable 
requirement.
---------------------------------------------------------------------------

    \42\ The Small Business Regulatory Enforcement Fairness Act of 
1996 requires the Bureau to convene a Small Business Review Panel 
before proposing a rule that may have a significant economic impact 
on a substantial 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)).
    \43\ 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) (``Small Business 
Review Panel Final Report''), available at http://www.consumerfinance.gov.
---------------------------------------------------------------------------

    Further, prior to the issuing the Proposed Servicing Rules on 
August 10, 2012, 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 the ARM interest 
rate adjustment notices and the periodic statement disclosure set forth 
in this rule as well as the forced-placed insurance notices set forth 
in the 2013 RESPA Servicing Final Rule.
    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, 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, and how they would use the information presented in each 
of the disclosures. The disclosures were revised after each round of 
testing.
    After the Bureau issued the Proposed Servicing Rules, Macro 
conducted a fourth round of one-on-one cognitive interviews with eight 
participants in Philadelphia, Pennsylvania. Again, participants were 
consumers who held a mortgage loan and represented a range of ages and 
education levels. During the interviews, participants were asked to 
review two different versions of a servicing transfer notice and early 
intervention model clauses, which relate to requirements the Bureau is 
implementing under RESPA. Participants were asked specific questions to 
test their reaction to and understanding of the content of the 
servicing transfer notice and the early intervention model clauses. 
This process was repeated for each of the five clauses being tested. 
Specific findings from the consumer testing are discussed in detail 
throughout where relevant.\44\
---------------------------------------------------------------------------

    \44\ ICF Int'l, Inc., Summary of Findings: Design and Testing of 
Mortgage Servicing Disclosures (Aug. 2012) (``Macro Report''), 
available at http://www.regulations.gov/#!documentDetail;D=CFPB-
2012-0033-0003.
---------------------------------------------------------------------------

    One commenter, identifying itself as a research organization, 
observed that the consumer testing the Bureau has conducted with 
respect to the mortgage servicing disclosures follows the path of 
evidence-based decision-making. This commenter asserted, however, that 
the Bureau should consider undertaking steps in evaluating the proposed 
forms, including possibly undertaking additional testing because other 
consumer financial disclosures, including the forms the Bureau proposed 
with the 2012 TILA-RESPA Proposal, have gone through more testing. At 
the same time, however, the commenter observed that the decreased level 
of testing might be justified on various grounds, such as, for example, 
the fact that studies have found that small numbers of individuals can 
identify the vast majority of usability problems, the fact that the 
testing was done with participants familiar with mortgages, and the 
fact that the Bureau is working on a tight schedule to finalize rules 
by January 21, 2013 when statutory provisions would go into effect.
    The Bureau believes that the testing it conducted is appropriate. 
The Bureau observes that the forms the Bureau proposed as part of the 
2012 TILA-

[[Page 10910]]

RESPA Proposal contained significantly more complicated financial 
information than the forms finalized as part of the current 
rulemakings. Additionally, the 2012 TILA-RESPA Proposal, when 
finalized, would substantially change consumers' mortgage shopping 
experience; by contrast, the Final Mortgage Servicing Rules are 
intended to improve, but not substantially alter, consumers' experience 
with their mortgage servicers. These differences, in terms of level of 
complication and degree of change from current practice, justify the 
different levels of resources the Bureau allocated to the two different 
testing projects. Lastly, Macro's findings show that there was notable 
consistency across the different rounds of testing in terms of 
participant comprehension that, in combination with the Bureau's 
expertise and knowledge of consumer understanding and behavior, gave 
the Bureau confidence to rely on the forms that were developed and 
refined through testing as a basis for the model forms included in the 
Final Servicing Rules.
    The Bureau further emphasizes that it is not relying solely on the 
consumer testing to determine that any particular disclosure will be 
effective. The Bureau is also relying on its knowledge of, and 
expertise in, consumer understanding and behavior, as well as 
principles of effective disclosure design.

B. Small Business Regulatory Enforcement Fairness Act

    As required by SBREFA, the Bureau convened a Small Business Review 
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. Thus, on April 9, 2012, the Bureau provided Advocacy 
with the formal notification and other information required under 
section 609(b)(1) of the Regulatory Flexibility Act (RFA) to convene 
the panel.
    In order to obtain feedback from small servicers, the Bureau, in 
consultation with Advocacy, identified five categories of small 
entities that may be subject to the proposed rule: Commercial banks/
savings institutions, credit unions, non-depositories engaged primarily 
in lending funds with real estate as collateral, non-depositories 
primarily engaged in loan servicing, and certain non-profit 
organizations. The Bureau, in consultation with Advocacy, selected 16 
representatives to participate in the Small Business Review Panel 
process from the categories of entities that may be subject to the 
Proposed Servicing Rules. The participants 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), as 
described in chapter 7 of the Small Business Review Panel Report.
    On April 10, 2012, the Bureau convened the Small Business Review 
Panel. In order to collect the advice and recommendations of Small 
Entity Representatives, the Panel held an outreach meeting/
teleconference on April 24, 2012 (Panel Outreach Meeting). To help the 
Small Entity Representatives prepare for the Panel Outreach Meeting, 
the Panel circulated briefing materials that summarized the proposals 
under consideration at that time, posed discussion issues, and provided 
information about the SBREFA process generally.\45\ All 16 small 
entities participated in the Panel Outreach Meeting either in person or 
by telephone. The Small Business Review Panel also provided the Small 
Entity Representatives with an opportunity to submit written feedback 
until May 1, 2012. In response, the Small Business Review Panel 
received written feedback from five of the representatives.\46\
---------------------------------------------------------------------------

    \45\ The Bureau posted these materials on its Web site and 
invited the public to email remarks on the materials. Press Release, 
U.S. Consumer Fin. Prot. Bureau, Consumer Financial Protection 
Bureau Outlines Borrower-Friendly Approach to Mortgage Servicing 
(Apr. 9, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-outlines-borrower-friendly-approach-to-mortgage-servicing/ (last accessed 
Jan. 6, 2013).
    \46\ This written feedback is attached as appendix A to the 
Small Business Review Panel Report.
---------------------------------------------------------------------------

    On June 11, 2012, the Small Business Review Panel submitted to the 
Director of the Bureau the written Small Business Review Panel Report, 
which 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 
participants who were selected to advise the Small Business Review 
Panel; a summary of the Panel's outreach to obtain the advice and 
recommendations of those participants; a discussion of the comments and 
recommendations of the participants; and a discussion of the Small 
Business Review Panel findings, focusing on the statutory elements 
required under section 603 of the RFA, 5 U.S.C. 609(b)(5).
    In connection with issuing the Proposed Servicing Rules, the Bureau 
carefully considered the feedback from the small entities and the 
findings and recommendations in the Small Business Review Panel Report. 
The section-by-section analyses for the Final Servicing Rules discuss 
this feedback and the specific findings and recommendations of the 
Small Business Review Panel, as applicable. The SBREFA process provided 
the Small Business Review Panel and the Bureau with an opportunity to 
identify and explore opportunities to mitigate the burden of the rule 
on small entities while achieving the rule's purposes. It is important 
to note, however, that the Small Business Review Panel prepared the 
Small Business Review Panel Report at a preliminary stage of the 
proposal's development and that the report--in particular, the findings 
and recommendations--should be considered in that light. Any options 
identified in the Small Business Review Panel 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 RESPA, TILA, the Dodd-Frank Act, and 
their statutory purposes.

C. Summary of the Proposed Servicing Rule

    The 2012 TILA Servicing Proposal would have amended Regulation Z to 
implement requirements relating to interest rate adjustment 
disclosures, periodic mortgage statements, payoff statements, and 
prompt crediting of payments. The 2012 TILA Servicing Proposal would 
have amended current Sec.  1026.20(c) to revise the timeframe for 
providing the ARM adjustment notice from the current requirement of 
between 25 and 120 days before the first payment at a new level is due 
to between 60 and 120 days. The proposed rule also would have 
grandfathered 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. The proposed rule also would have required the disclosure 
required by current Sec.  1026.20(c) to include additional information. 
Such additional information would have included: (1) A statement that 
the consumer's interest rate is scheduled to adjust, a statement that 
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, (2) the date when the new payment is due after the 
adjustment, (3) any interest rate or payment limits; any unapplied 
carryover interest and the earliest date it could be applied, (4) 
additional amortization information for negatively-amortizing and 
interest-only

[[Page 10911]]

loans, and (5) the amount and expiration date of any prepayment 
penalty.
    The proposed rule would also have implemented section 1418 of the 
Dodd-Frank Act by requiring creditors, assignees, or servicers to 
provide a new one-time notice to consumers six to seven months prior to 
the first time the interest rate of their adjustable-rate mortgages 
adjusts. The initial interest rate adjustment notices proposed in Sec.  
1026.20(d) would have included much of the same information listed 
above for proposed Sec.  1026.20(c). The proposed notice in Sec.  
1026.20(d) would have disclosed additional information, including 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 proposed rule would have included 
model and sample forms for the requirements in Sec.  1026.20(c) and 
(d).
    The 2012 TILA Servicing Proposal further would have required 
creditors, assignees, and servicers to provide consumers with a 
periodic statement. The proposed rule would have established 
requirements for the timing, form, content, and layout of the 
statement. The proposed rule also would have included sample forms. The 
proposed rule would have required that certain related pieces of 
information must be grouped together on the periodic statement. 
Moreover, the proposed rule would have clarified how periodic 
statements should be disclosed in particular situations. For example, 
the proposed rule would have clarified the disclosure of partial 
payments, funds held in a suspense or unapplied funds account, and 
payments for payment-option loans. Further, the proposed rule would 
have required that delinquent consumers receive important information 
in several places on the periodic statement, such as information 
regarding the overdue amount and any fees applied to the consumer's 
account. Finally, the proposed rules would have exempted certain 
products and servicers from the periodic statement requirement. Fixed-
rate loans with coupon books that meet certain requirements, 
timeshares, and reverse mortgages would have been exempt from the 
periodic statement requirements. Further, small servicers as defined in 
the proposed rule (that is, servicers that service 1,000 mortgage loans 
or less and only service mortgage loans that the servicer or an 
affiliate owns or originated) would have been exempt from the periodic 
statement requirement.
    The 2012 TILA Servicing Proposal would have imposed requirements on 
servicers with respect to the handling of partial payments from 
consumers. The proposed rule would have limited the application of the 
current prompt crediting provision, existing Sec.  1026.36(c)(1)(i), to 
full contractual payments (as opposed to all payments). The proposed 
rule would have added a new provision, Sec.  1026.36(c)(1)(ii), to 
address the handing of partial payments (anything less than a full 
contractual payment). The proposed rule would have implemented 
requirements on servicers to provide payoff statements, with 
modifications relating to the scope and timing of the requirement, and 
a limitation to written requests for payoff statements. Further, the 
proposed rule would have reorganized the requirements in Sec.  
1026.36(c).

D. Overview of the Comments Received

    The Bureau received approximately 300 comments on the Proposed 
Servicing Rules. The comments came from individual consumers, consumer 
advocates, community banks, large bank holding companies, secondary 
market participants, credit unions, non-bank servicers, State and 
national trade associations for financial institutions in the mortgage 
business, local and national community groups, Federal and State 
regulators, academics, and others. Commenters provided feedback on all 
aspects of the Proposed Servicing Rules. Most commenters tended to 
focus on specific aspects of the proposals. Accordingly, in general, 
the comments are discussed below in the section-by-section analysis.
    The majority of comments were submitted by mortgage servicers, 
industry groups representing servicers and businesses involved in the 
servicing industry. Large banks, community banks and credit unions, 
non-bank servicers, and industry trade associations submitted nearly 
all of these comments. The Small Business Administration Office of 
Advocacy submitted a comment and the remaining comments were submitted 
by vendors and attorney's representing industry interests. The Bureau 
also received a significant number of comments from consumer advocacy 
groups. The record also includes a 49-page comment by the Cornell e-
Rulemaking Initiative synthesizing submissions of 144 registered 
participants to Cornell's Regulation Room project. Regulation Room is a 
pilot project designed 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. 
Finally, the Bureau also received comments from the Federal Housing 
Finance Agency, the GSEs, and from vendors and attorneys representing 
industry interests.
    Industry commenters and their trade associations also provided 
comments regarding the rulemaking process, and those comments are 
addressed here.\47\ In that regard, community banks and their trade 
associations stated that the Bureau should consider cumulative burden 
when writing regulations, setting comment deadlines, and effective 
dates. These commenters believed that the combination of the Bureau's 
rules as well as the impact of Basel III requirements with respect to 
accounting for mortgage servicing rights in Tier I capital may cause 
disruptions across all mortgage market segments. A community bank trade 
association indicated that community banks are likely to feel the 
impact of the rules more acutely, as they cannot take advantage of 
economies of scale in mitigating the compliance burden. A community 
bank trade association stated that the Bureau should consider the wide 
diversity among servicer business models and adapt regulations to 
preserve diversity within the servicing industry. The commenter 
emphasized that community banks have strong reputation and performance 
incentives to ensure that consumers are provided a high level of 
service.
---------------------------------------------------------------------------

    \47\ Some commenters provided comments strictly with respect to 
the rulemaking process. One trade association commented that small 
servicers that participated in the Small Business Review Panel 
process did not have adequate time to prepare for the panel 
discussion and provide appropriate data, while another trade 
association commented that because the Bureau's proposed rules are 
lengthy and because some rules have overlapping comment periods, 
each of which has been limited to 60 days, the trade association has 
had difficulty dedicating staff to comment on the Bureau's 
proposals. As set forth in this section, the Bureau has conducted 
the rulemaking process, including the SBREFA process and the public 
comment period, in a manner that provided as much flexibility as 
possible to receive feedback from the SBREFA participants and public 
commenters in light of the deadlines required for the rulemaking. 
The Bureau assisted the SBA in calls and outreach with small entity 
participants to obtain any comments not set forth during the panel 
outreach with the small entity representatives. Further, with 
respect to public comments, the Bureau believes that the public had 
a meaningful opportunity to comment, which is evidenced by the 
significant number of comments received and their length. The Bureau 
offered 61 days from August 10, 2012 through October 9, 2012, for 
comment; and 22 days after the proposal was published in the Federal 
Register on September 17.
---------------------------------------------------------------------------

    A large bank and a number of trade association commenters stated 
that the Bureau should be cognizant of imposing

[[Page 10912]]

requirements and standards potentially inconsistent with those required 
by settlement agreements, consent orders, and GSE or government 
insurance program requirements. One commenter stated that the Bureau 
should consider preempting State law mortgage servicing requirements to 
provide legal and regulatory certainty to industry participants that 
are evaluating the future desirability of maintaining servicing 
operations. A number of trade associations stated that the Bureau 
should not issue regulations that would impose requirements 
substantially similar to the National Mortgage Settlement on mortgage 
servicers that are not parties to the National Mortgage Settlement.
    The Bureau has considered each of these comments relating to the 
cumulative impact of mortgage regulation, including the mortgage 
servicing rules; the potential for inconsistent results with current 
servicing obligations, including State law and the National Mortgage 
Settlement; and comments regarding the diversity of servicing business 
models and servicer sizes. The Bureau's consideration of those comments 
is reflected below in the section-by-section analysis with respect to 
various determinations made in finalizing the 2012 TILA Servicing 
Proposal, including the determination to create clear requirements, the 
determination to maintain consistency with current servicing 
obligations, including those imposed by State law and the National 
Mortgage Settlement, and the consideration of exemptions for small 
servicers.
    With respect to preemption of state law, the Final Servicing Rules 
generally do not have the effect of prohibiting state law from 
affording borrowers broader consumer protections relating to mortgage 
servicing than those conferred under the Final Servicing Rules. 
However, in certain circumstances, the effect of specific requirements 
of the Final Servicing Rules is to preempt certain limited aspects of 
state law. Specifically, as set forth in the 2013 RESPA Servicing Final 
Rule, Sec.  1024.41(f) bars a servicer from making the first notice or 
filing required for a foreclosure process unless a borrower is more 
than 120 days delinquent, notwithstanding that state law may permit any 
such filing. Further, Sec.  1024.33(d) incorporates a pre-existing 
provision in Regulation X that implements RESPA with respect to 
preemption of certain state law disclosures relating to mortgage 
servicing transfers. In other circumstances, the Bureau explicitly took 
into account existing standards (both State and Federal) and either 
built in flexibility or designed its rules to coexist with those 
standards. For example, as discussed in the 2013 RESPA Servicing Final 
Rule, the Bureau took into account the loss mitigation timelines and 
``dual-tracking'' provisions in the National Mortgage Settlement and 
the California Homeowner Bill of Rights and designed timelines that are 
consistent with those standards. Similarly, in designing its early 
intervention provision the Bureau included a statement that nothing in 
that provision shall require a servicer to make contact with a borrower 
in a manner that would be prohibited under applicable law.
    A number of commenters provided comments regarding language access 
and community blight. Two national consumer groups urged the Bureau to 
take action to remove barriers borrowers with limited English 
proficiency face with respect to understanding the terms of their 
mortgages because such barriers might make these borrowers more 
vulnerable to bad servicing practices. One national consumer group 
urged the Bureau to mandate translation of all notices, documents, and 
bills going to borrowers. Another national consumer group urged the 
Bureau to consider requiring servicers to provide disclosures and 
services in a borrower's preferred language, noting that it represents 
a population that speaks more than 100 different dialects. Finally, one 
commenter suggests that the Bureau should not only mandate disclosures 
in other languages but also should require servicers to provide 
language-capable staff to assist borrowers with limited English skills. 
With respect to neighborhood blight, a coalition of consumer advocacy 
groups and a consumer advocate that participated in outreach with the 
Bureau commented that the Bureau should consider implementing 
regulations to manage neighborhood blight by requiring servicers to 
maintain real estate owned (REO) property to decent, safe, and sanitary 
standards capable of purchase by borrowers with FHA financing.
    Although some of these specific requests exceed the scope of the 
rulemaking, the Bureau takes seriously the important considerations of 
avoiding neighborhood blight and language access. The Bureau recognizes 
the challenges borrowers with limited English proficiency face in 
understanding the terms of their mortgage. The Bureau believes that 
servicers should communicate with borrowers clearly, including in the 
borrower's native language, where possible, and especially when lenders 
advertise in the borrower's native language. The Bureau conducted 
Spanish testing to support proposed rules and forms combining the TILA 
mortgage loan disclosure with the Good Faith Estimate (GFE) and 
statement required under RESPA. See 77 FR 54843. That testing 
underscores both the value of disclosures in other languages but also 
the challenges in translating forms using English terms of art into 
other languages to assure that the foreign-language version of the form 
effectively communicates the required information to its readers.
    Although the Bureau has tested the disclosures it is adopting, it 
has not had the opportunity to test the disclosures in other languages. 
Accordingly, the Bureau is not imposing mandatory foreign language 
translation requirements or other language access requirements at this 
time with respect to the mortgage servicing disclosures and other 
requirements the Bureau is adopting. Although the Bureau declines at 
this time to implement requirements regarding language access, other 
than those currently in TILA, the Bureau will continue to consider 
language access generally in connection with developing disclosures and 
will consider further requirements on servicer communication with 
borrowers if appropriate. With respect to REO properties, the Bureau 
continues to consider whether regulations are appropriate to address 
the maintenance of properties owned by lenders and any potential 
resulting harm from community blight.

E. Other Dodd-Frank Act Mortgage-Related Rulemakings

    In addition to the Final Servicing Rules, the Bureau is adopting 
several other final rules and issuing one proposal, all relating to 
mortgage credit, to implement requirements of title XIV of the Dodd-
Frank Act. The Bureau is also issuing a final rule and planning to 
issue a proposal jointly with other Federal agencies to implement 
requirements for mortgage appraisals in title XIV. Each of the final 
rules follows a proposal issued in 2011 by the Board or in 2012 by the 
Bureau alone or jointly with other Federal agencies. Collectively, 
these proposed and final rules are referred to as the Title XIV 
Rulemakings.
     Ability to Repay: The Bureau recently issued a rule, 
following a May 2011 proposal issued by the Board (the Board's 2011 ATR 
Proposal),\48\ to

[[Page 10913]]

implement provisions of the Dodd-Frank Act (1) requiring creditors to 
determine that a consumer has a reasonable ability to repay covered 
mortgage loans and establishing standards for compliance, such as by 
making a ``qualified mortgage,'' and (2) establishing certain 
limitations on prepayment penalties, pursuant to TILA section 129C as 
established by Dodd-Frank Act sections 1411, 1412, and 1414. 15 U.S.C. 
1639c. The Bureau's final rule is referred to as the 2013 ATR Final 
Rule. Simultaneously with the 2013 ATR Final Rule, the Bureau issued a 
proposal to amend the final rule implementing the ability-to-repay 
requirements, including by the addition of exemptions for certain 
nonprofit creditors and certain homeownership stabilization programs 
and a definition of a ``qualified mortgage'' for certain loans made and 
held in portfolio by small creditors (the 2013 ATR Concurrent 
Proposal). The Bureau expects to act on the 2013 ATR Concurrent 
Proposal on an expedited basis, so that any exceptions or adjustments 
to the 2013 ATR Final Rule can take effect simultaneously with that 
rule.
---------------------------------------------------------------------------

    \48\ 76 FR 27390 (May 11, 2011).
---------------------------------------------------------------------------

     Escrows: The Bureau recently issued a rule, following a 
March 2011 proposal issued by the Board (the Board's 2011 Escrows 
Proposal),\49\ to implement certain provisions of the Dodd-Frank Act 
expanding on existing rules that require escrow accounts to be 
established for higher-priced mortgage loans and creating an exemption 
for certain loans held by creditors operating predominantly in rural or 
underserved areas, pursuant to TILA section 129D as established by 
Dodd-Frank Act sections 1461. 15 U.S.C. 1639d. The Bureau's final rule 
is referred to as the 2013 Escrows Final Rule.
---------------------------------------------------------------------------

    \49\ 76 FR 11598 (Mar. 2, 2011).
---------------------------------------------------------------------------

     HOEPA: Following its July 2012 proposal (the 2012 HOEPA 
Proposal),\50\ the Bureau recently issued a final rule to implement 
Dodd-Frank Act requirements expanding protections for ``high-cost 
mortgages'' under the Homeownership and Equity Protection Act (HOEPA), 
pursuant to TILA sections 103(bb) and 129, as amended by Dodd-Frank Act 
sections 1431 through 1433. 15 U.S.C. 1602(bb) and 1639. The Bureau 
also is finalizing rules to implement certain title XIV requirements 
concerning homeownership counseling, including a requirement that 
lenders provide lists of homeownership counselors to applicants for 
federally related mortgage loans, pursuant to RESPA section 5(c), as 
amended by Dodd-Frank Act section 1450. 12 U.S.C. 2604(c). The Bureau's 
final rule is referred to as the 2013 HOEPA Final Rule.
---------------------------------------------------------------------------

    \50\ 77 FR 49090 (Aug. 15, 2012).
---------------------------------------------------------------------------

     Loan Originator Compensation: Following its August 2012 
proposal (the 2012 Loan Originator Proposal),\51\ the Bureau is issuing 
a final rule to implement provisions of the Dodd-Frank Act requiring 
certain creditors and loan originators to meet certain duties of care, 
including qualification requirements; requiring the establishment of 
certain compliance procedures by depository institutions; prohibiting 
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; and establishing restrictions on mandatory arbitration and 
financing of single premium credit insurance, pursuant to TILA sections 
129B and 129C as established by Dodd-Frank Act sections 1402, 1403, and 
1414(a). 15 U.S.C. 1639b, 1639c. The Bureau's final rule is referred to 
as the 2013 Loan Originator Final Rule.
---------------------------------------------------------------------------

    \51\ 77 FR 55272 (Sept. 7, 2012).
---------------------------------------------------------------------------

     Appraisals: The Bureau, jointly with other Federal 
agencies,\52\ is issuing a final rule implementing Dodd-Frank Act 
requirements concerning appraisals for higher-risk mortgages, pursuant 
to TILA section 129H as established by Dodd-Frank Act section 1471. 15 
U.S.C. 1639h. This rule follows the agencies' August 2012 joint 
proposal (the 2012 Interagency Appraisals Proposal).\53\ The agencies' 
joint final rule is referred to as the 2013 Interagency Appraisals 
Final Rule. As discussed in that final rule, the agencies plan to issue 
a supplemental proposal addressing potential additional exemptions to 
the appraisal requirements. In addition, following its August 2012 
proposal (the 2012 ECOA Appraisals Proposal),\54\ the Bureau is issuing 
a final rule to implement provisions of the Dodd-Frank Act requiring 
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, pursuant to section 701(e) 
of the Equal Credit Opportunity Act (ECOA) as amended by Dodd-Frank Act 
section 1474. 15 U.S.C. 1691(e). The Bureau's final rule is referred to 
as the 2013 ECOA Appraisals Final Rule.
---------------------------------------------------------------------------

    \52\ Specifically, the Board of Governors of the Federal Reserve 
System, the Office of the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the National Credit Union 
Administration, and the Federal Housing Finance Agency.
    \53\ 77 FR 54722 (Sept. 5, 2012).
    \54\ 77 FR 50390 (Aug. 21, 2012).
---------------------------------------------------------------------------

    The Bureau is not at this time finalizing proposals concerning 
various disclosure requirements that were added by title XIV of the 
Dodd-Frank Act, integration of mortgage disclosures under TILA and 
RESPA, or a simpler, more inclusive definition of the finance charge 
for purposes of disclosures for closed-end mortgage transactions under 
Regulation Z. The Bureau expects to finalize these proposals and to 
consider whether to adjust regulatory thresholds under the Title XIV 
Rulemakings in connection with any change in the calculation of the 
finance charge later in 2013, after it has completed quantitative 
testing, and any additional qualitative testing deemed appropriate, of 
the forms that it proposed in July 2012 to combine TILA mortgage 
disclosures with the good faith estimate (RESPA GFE) and settlement 
statement (RESPA settlement statement) required under the Real Estate 
Settlement Procedures Act, pursuant to Dodd-Frank Act section 1032(f) 
and sections 4(a) of RESPA and 105(b) of TILA, as amended by Dodd-Frank 
Act sections 1098 and 1100A, respectively (the 2012 TILA-RESPA 
Proposal).\55\ Accordingly, the Bureau already has issued a final rule 
delaying implementation of various affected title XIV disclosure 
provisions.\56\
---------------------------------------------------------------------------

    \55\ 77 FR 51116 (Aug. 23, 2012).
    \56\ 77 FR 70105 (Nov. 23, 2012).
---------------------------------------------------------------------------

Coordinated Implementation of Title XIV Rulemakings
    As noted in all of its foregoing proposals, the Bureau regards each 
of the Title XIV Rulemakings as affecting aspects of the mortgage 
industry and its regulations. Accordingly, as noted in its proposals, 
the Bureau is coordinating carefully the Title XIV Rulemakings, 
particularly with respect to their effective dates. The Dodd-Frank Act 
requirements to be implemented by the Title XIV Rulemakings 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. See Dodd-Frank Act section 1400(c), 15 U.S.C. 
1601 note. In addition, some of the Title XIV Rulemakings are required 
by the Dodd-Frank Act to take effect no later than one year after they 
are issued. Id.
    The comments on the appropriate effective date for this final rule 
are discussed in detail below in part VI of this notice. In general, 
however, consumer advocates requested that the Bureau put the 
protections in the Title XIV Rulemakings into effect as soon as

[[Page 10914]]

practicable. In contrast, the Bureau received some industry comments 
indicating that implementing so many new requirements at the same time 
would create a significant cumulative burden for creditors. In 
addition, many commenters also acknowledged the advantages of 
implementing multiple revisions to the regulations in a coordinated 
fashion.\57\ Thus, a tension exists between coordinating the adoption 
of the Title XIV Rulemakings and facilitating industry's implementation 
of such a large set of new requirements. Some have suggested that the 
Bureau resolve this tension by adopting a sequenced implementation, 
while others have requested that the Bureau simply provide a longer 
implementation period for all of the final rules.
---------------------------------------------------------------------------

    \57\ Of the several final rules being adopted under the Title 
XIV Rulemakings, six entail amendments to Regulation Z, with the 
only exceptions being the 2013 RESPA Servicing Final Rule 
(Regulation X) and the 2013 ECOA Appraisals Final Rule (Regulation 
B); the 2013 HOEPA Final Rule also amends Regulation X, in addition 
to Regulation Z. The six Regulation Z final rules involve numerous 
instances of intersecting provisions, either by cross-references to 
each other's provisions or by adopting parallel provisions. Thus, 
adopting some of those amendments without also adopting certain 
other, closely related provisions would create significant technical 
issues, e.g., new provisions containing cross-references to other 
provisions that do not yet exist, which could undermine the ability 
of creditors and other parties subject to the rules to understand 
their obligations and implement appropriate systems changes in an 
integrated and efficient manner.
---------------------------------------------------------------------------

    The Bureau recognizes that many of the new provisions will require 
creditors to make changes to automated systems and, further, that most 
administrators of large systems are reluctant to make too many changes 
to their systems at once. At the same time, however, the Bureau notes 
that the Dodd-Frank Act established virtually all of these changes to 
institutions' compliance responsibilities, and contemplated that they 
be implemented in a relatively short period of time. And, as already 
noted, the extent of interaction among many of the Title XIV 
Rulemakings necessitates that many of their provisions take effect 
together. Finally, notwithstanding commenters' expressed concerns for 
cumulative burden, the Bureau expects that creditors actually may 
realize some efficiencies from adapting their systems for compliance 
with multiple new, closely related requirements at once, especially if 
given sufficient overall time to do so.
    Accordingly, the Bureau is requiring that, as a general matter, 
creditors and other affected persons begin complying with the final 
rules on January 10, 2014. As noted above, section 1400(c) of the Dodd-
Frank Act requires that some provisions of the Title XIV Rulemakings 
take effect no later than one year after the Bureau issues them. 
Accordingly, the Bureau is establishing January 10, 2014, one year 
after issuance of the Bureau's 2013 ATR, Escrows, and HOEPA Final Rules 
(i.e., the earliest of the Title XIV Rulemakings), as the baseline 
effective date for most of the Title XIV Rulemakings. The Bureau 
believes that, on balance, this approach will facilitate the 
implementation of the rules' overlapping provisions, while also 
affording creditors sufficient time to implement the more complex or 
resource-intensive new requirements.
    The Bureau has identified certain rulemakings or selected aspects 
thereof, however, that do not present significant implementation 
burdens for industry. Accordingly, the Bureau is setting earlier 
effective dates for those final rules or certain aspects thereof, as 
applicable. Those effective dates are set forth and explained in the 
Federal Register notices for those final rules.

IV. Legal Authority

    The final rule was issued on January 17, 2013, in accordance with 
12 CFR 1074.1. The Bureau is issuing this final 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 is a Federal 
consumer financial law.\59\ Accordingly, the Bureau has authority to 
issue regulations pursuant to TILA, including implementing 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 RESPA), 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 rate resets 
or adjusts. Additionally, the savings clause in TILA section 128A(c) 
allows the Bureau, among other things, to require this notice for 
adjustable-rate mortgage loans that are not hybrid adjustable-rate 
loans. Dodd-Frank Act 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 
contains 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 include such other 
information as the Bureau may prescribe in regulations. Dodd-Frank Act 
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. The final rule, in addition 
to implementing these TILA provisions of the Dodd-Frank Act, amends the 
interest rate adjustment disclosures currently required by Sec.  
1026.20(c). The final 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 
therewith. 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 10915]]

    Historically, TILA section 105(a) has served as a broad source of 
authority for rules that promote the informed use of credit and the 
avoidance of 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 therewith. 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 adopting 
regulations to carry out TILA's purposes and 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 
therewith. In developing these aspects of the rule 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 consumer, including--(1) Any related financial 
arrangements of the consumer, as determined by the Bureau; (2) The 
financial sophistication of the consumer relative to the type of 
transaction; and (3) The importance to the consumer 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 exempting 
certain transactions from the requirements of TILA pursuant to its 
authority under TILA section 105(f). In developing this final rule 
under TILA section 105(f), the Bureau has considered the relevant 
factors and determined that the proposed exemptions may be appropriate.
    TILA section 122. Section 122 of TILA, 15 U.S.C. 1632, authorizes 
the Bureau to regulate, among other things, the form and content of 
disclosures for credit transactions made pursuant to Chapter 2 of TILA. 
Specifically, 122(a) requires that information required by this title 
must be disclosed clearly and conspicuously.
    For the reasons discussed in this notice, the Bureau is requiring 
the provision of disclosures to consumers in certain forms and with 
certain content pursuant to its authority under TILA section 122. In 
developing this final rule under TILA section 122, the Bureau has 
considered the relevant factors and determined that the form and 
content requirements are appropriate.

Title X of 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). TILA and 
title X of the Dodd-Frank Act are Federal consumer financial laws. 
Accordingly, in adopting this final rule, the Bureau is exercising its 
authority under Dodd-Frank Act section 1022(b) to prescribe rules to 
carry out the purposes of TILA and title X and prevent evasion of those 
laws.
    Dodd-Frank Act section 1032. Section 1032(a) of the Dodd-Frank Act 
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 Dodd-Frank Act 
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 Dodd-Frank Act 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 the final rule under Dodd-Frank Act 
section 1032(a), 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 issuing portions of this rule 
pursuant to its authority under Dodd-Frank Act section 1032(a).
    In addition, Dodd-Frank Act 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, uses a clear 
format and design, such as readable type font, and succinctly explains 
the information that must be communicated to the consumer.

[[Page 10916]]

Dodd-Frank Act section 1032(b)(2); 12 U.S.C. 5532(b)(2). As discussed 
in the section-by-section analysis of Sec. Sec.  1026.20(c) and (d) and 
1026.41, the Bureau is issuing model and sample forms for ARM interest 
rate adjustment notices and sample forms for periodic statements. As 
discussed in this notice, the Bureau is adopting these model forms 
pursuant to its authority under Dodd-Frank Act section 1032(b)(1). As 
required under Dodd-Frank Act section 1032(b)(3), the Bureau has 
validated model forms issued under Dodd-Frank Act section 1032(b) 
through consumer testing.
    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, section 1405(b) confers authority to ``modify or exempt 
from disclosure requirements,'' in whole or in part, applies to 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, and is not limited to a specific statute or statutes. 
Accordingly, Dodd-Frank Act section 1405(b) is a broad source of 
authority to modify or exempt the disclosure requirements of TILA.
    In developing rules for residential mortgage loans under Dodd-Frank 
Act section 1405(b), 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 issuing portions of this rule 
pursuant to its authority under Dodd-Frank Act section 1405(b). See the 
section-by-section analysis of each section of this final rule for 
further elaboration on legal authority.

V. 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 that govern many 
of the disclosures under subpart C of Regulation Z, including current 
ARM disclosures. The Bureau proposed revising the rule with regard to 
both the Sec.  1026.20(c) ARM interest rate adjustment payment change 
notices and the Sec.  1026.20(d) initial ARM interest rate adjustment 
notices.
    Section 1026.17(a)(1) requires, among other things, that certain 
disclosures contain only information directly related to that 
disclosure. Section 1026.20(c) is not included in the list of rules 
governed by this general segregation requirement and commentary to 
Sec.  1026.17(a)(1) confirms that Sec.  1026.20(c) is not subject to 
this requirement.
    The Bureau proposed revising Sec.  1026.17(a)(1) and comment 
17(a)(1)-2.ii to add Sec.  1026.20(c) to the list of disclosures 
required to contain only information directly related to the disclosure 
and to include Sec.  1026.20(c) among the subpart C disclosures 
required to be grouped together and segregated from other information. 
The Bureau stated that the purpose of the Sec.  1026.20(c) payment 
change notices is to inform consumers of upcoming changes to their 
interest rate and mortgage payments and to give them time to explore 
alternatives. The Bureau stated that it believed that the current form 
requirements to which the Sec.  1026.20(c) notices are subject were 
insufficient to highlight and emphasize important information consumers 
needed to make decisions about their adjustable-rate mortgages. The 
Bureau said that the revisions to Sec.  1026.17(a)(1) and comment 
17(a)(1)-2.ii would enhance consumers' awareness of this important 
information. The proposal also clarified that providers of Sec.  
1026.20(c) notices would have remained subject to the other Sec.  
1026.17(a)(1) form requirements, including that the disclosures be 
clear and conspicuous and in writing and that the disclosures could be 
provided electronically subject to compliance with Electronic 
Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 
7001 et seq.).
    Although the Bureau received comments opposed to the revision of 
Sec.  1026.20(c) in general, which are discussed below, the Bureau did 
not receive specific comments regarding its proposed changes to Sec.  
1026.17(a)(1). One bank did suggest that E-Sign Act not apply to the 
ARM disclosures such that they could be provided to consumers without 
their demonstrated consent, which the bank said was difficult to 
obtain. The Bureau notes that E-Sign Act requirements apply to current 
Sec.  1026.20(c) as well as to the other disclosures required under 
subpart C. Further, TILA section 128A specifically requires the ARM 
initial interest rate notices to be provided to consumers in written 
form. The Bureau believes these requirements can ensure that consumers 
receive the required disclosures and therefore declines to scale back 
this consumer protection. For the reasons discussed above, the Bureau 
is adopting as proposed revised Sec.  1026.17(a)(1) and comment 
17(a)(1)-2.ii. Thus, the disclosures required by Sec.  1026.20(c) must 
comply with the form requirements of Sec.  1026.17(a)(1) as revised.
    As with Sec.  1026.20(c) above, the proposal clarified that 
providers of the Sec.  1026.20(d) notices would have been subject to 
the same Sec.  1026.17(a)(1) form requirements, including that the 
disclosures be clear and conspicuous, in writing, and that they be 
permitted to be provided electronically subject to compliance with the 
E-Sign Act. However, the final rule revises Sec.  1026.17(a)(1) with 
respect to the delivery of the notices required by Sec.  1026.20(d). 
TILA section 128A, as added by Dodd-Frank Act section 1418 and 
implemented in Sec.  1026.20(d), requires that initial ARM interest 
rate adjustment notices be ``separate and distinct from all other 
correspondence to the consumer.'' Accordingly, the Bureau proposed that 
the Sec.  1026.20(d) ARM initial interest rate adjustment notices must 
be provided to consumers separate and distinct from all other 
correspondence and, thus, that they would not be subject to the general 
segregation requirements of Sec.  1026.17(a)(1). Proposed comment 
20(d)(1)-2 interpreted the ``separate and distinct'' requirement as 
requiring the Sec.  1026.20(d) notices to be provided to consumers in a 
separate envelope or as its own separate email apart from other 
servicer correspondence.
    For the reasons discussed in the section-by-section analysis of 
Sec.  1026.20(d) below, the Bureau is adopting comment 20(d)-3, which 
interprets the new TILA statutory language to require that Sec.  
1026.20(d)

[[Page 10917]]

notices be provided to consumers as a separate document, but permits it 
to be mailed in the same envelope or as a separate attachment in an 
email with other servicer correspondence. Accordingly, the final rule 
revises Sec.  1026.17(a)(1) to require that Sec.  1026.20(d) ARM 
notices be provided to consumers as a separate document, but not 
necessarily in a separate envelope or email. As a result of this 
change, both Sec.  1026.20(c) and (d) are subject to revised Sec.  
1026.17(a)(1) and comment 17(a)(1)-2.i.
Legal Authority
    The application of Sec.  1026.17(a)(1), as modified, to 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 final rule's 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 ARM notices.
    TILA section 128A(b), as established by Dodd-Frank Act section 
1418, specifically provides that the disclosures shall be in writing, 
separate and distinct from all other correspondence, which the Bureau 
interprets as consistent with the Regulation Z form requirements of 
Sec.  1026.17(a)(1), as amended. In addition, the Bureau believes, 
consistent with Dodd-Frank Act section 1032(a), that the application of 
Sec.  1026.17(a)(1) 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.
17(b) Time of Disclosures
    Section 1026.17(b) generally establishes timing requirements for 
certain Regulation Z disclosures, among them rules with special timing 
requirements. The Bureau proposed revising Sec.  1026.17(b) to add 
Sec.  1026.20(d) to the list of variable-rate disclosure provisions 
with special timing requirements. This amendment would have alerted 
creditors, assignees, and servicers that, as with the Sec.  1026.20(c) 
payment adjustment notices, there are timing requirements particular to 
the Sec.  1026.20(d) initial interest rate adjustment notices. The 
Bureau received no comments regarding this revision and is adopting 
revised 1026.17(b).
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 by 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 proposed revising comment 17(c)(1)-1 to make clear 
that the disclosures required by Sec.  1026.20(d), like those required 
by Sec.  1026.20(c), must reflect the credit terms to which the parties 
are legally bound when the disclosures are provided, rather than at the 
outset of the transaction. The Bureau received no comments regarding 
this revision and is adopting revised comment 17(c)(1)-1.
Section 1026.18 Content of Disclosures
18(f) Variable Rate
    Section 1026.18(f) sets forth the contents of disclosures required 
for certain variable-rate transactions. 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 Sec.  
1026.20(c). Under current Sec.  1026.20(c), disclosures are permissive 
in such cases because the Sec.  1026.19(b) substitution is permitted 
only for variable-rate transactions not secured by the consumer's 
principal dwelling or variable-rate transactions secured by the 
consumer's principal dwelling, with a term of one year or less. These 
types of transactions are not covered by current Sec.  1026.20(c). 
Thus, comment 18(f)-1 does not alter the legal requirements applicable 
to creditors. The clarification was included in the comment, however, 
because Sec.  1026.20(c) cross-references Sec.  1026.19(b) and applies 
to transactions covered by Sec.  1026.19(b).
    The Bureau proposed removing this reference to Sec.  1026.20(c) 
from comment 18(f)-1 because it would no longer have been helpful 
because proposed Sec.  1026.20(c) and (d) did not cross-reference Sec.  
1026.19(b) and defined their scope of coverage without reference to 
Sec.  1026.19(b). Moreover, Sec.  1026.20(c) and (d) would have applied 
to some ARMs with terms of one year or less, such that applying the 
current comment would have created an unwarranted exemption from the 
requirement to provide ARM notices to consumers with such ARMs. For 
these reasons, the Bureau proposed to remove the reference to Sec.  
1026.20(c) in comment 18(f)-1.
    The Bureau received no comments on this issue. However, as 
discussed below in the section-by-section analysis of Sec.  
1026.20(c)(1)(ii) and (d)(1)(ii), the final rule expands the 
construction loan exemption to all ARMs with terms of one year or less, 
thereby eliminating any need to revise comment 18(f)(1)-1. Thus, the 
Bureau is not adopting the proposed revision of comment 18(f)(1)-1.
Section 1026.19 Certain Mortgage and Variable-Rate Transactions
19(b) Certain Variable-Rate Transactions
    Section 1026.19(b) requires disclosures for consumers applying for 
certain variable-rate transactions. 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 Sec.  1026.20(d). Consistent with the 
proposed removal of current Sec.  1026.20(d), discussed below, which 
exempts creditors, assignees, and servicers from the requirements of 
Sec.  1026.20(c) if they have complied with disclosure requirements of 
other Federal agencies, the Bureau proposed revising comment 19(b)-4 to 
remove the reference to Sec.  1026.20(c) and (d). The Bureau is issuing 
this aspect of the final rule as proposed, having received no comment 
on this issue.
    The Bureau proposed revising comment 19(b)-5.i.C to cross-reference 
other commentary that makes clear that Sec.  1026.20(c) and (d) would 
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. Having received no comments on the above proposed change, 
the Bureau is issuing this aspect of the final rule as proposed.
    The Bureau proposed revising comment 19(b)(2)(xi)-1 to include a 
reference to Sec.  1026.20(d). 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

[[Page 10918]]

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 proposed adding to the 
comment a reference to Sec.  1026.20(d), because those disclosures also 
would have been provided to consumers under the Bureau's proposed rule. 
The proposed comment also made conforming changes to the text suggested 
for describing the ARM notices to reflect the timing and content of the 
Sec.  1026.20(c) and (d) disclosures. Having received no comments on 
this change, the Bureau is adopting comment 19(b)(2)(xi)-1 as proposed.
Section 1026.20 Disclosure Requirements Regarding Post-Consummation 
Events
20(c) Rate Adjustments with a Corresponding Change in Payment
Overview
    Section 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 non-payment change annual notice 
and the notices required each time the interest rate adjustment results 
in a corresponding payment change. Section 1026.20(c) also 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 amortize fully the loan at the new interest rate 
over the remainder of the loan term.
    The Bureau proposed two major changes to Sec.  1026.20(c). First, 
the Bureau proposed eliminating the non-payment change 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 stated that it believed that the 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 this annual notice, thereby 
greatly minimizing the need for its protections. Second, the Bureau's 
proposal would have amended current Sec.  1026.20(c) by adding 
disclosures that the Bureau stated it believed would enhance 
protections for consumers with ARMs. The revisions to Sec.  1026.20(c) 
also would have harmonized that section with the requirements the 
Bureau proposed for the initial ARM interest rate adjustment notice 
under Sec.  1026.20(d), thereby promoting consistency between the 
Regulation Z ARM provisions.
    The Bureau also would have revised the heading to Sec.  1026.20 
from ``Subsequent Disclosure Requirements'' to ``Disclosure 
Requirements Regarding Post-Consummation Events.'' The Bureau proposed 
revising the heading for clarification because interest rate 
adjustments occur post-consummation, but, under certain circumstances, 
the ARM notices required under Sec.  1026.20(d) may be provided at 
consummation and thus are not ``subsequent disclosures''. See the 
section-by-section analysis of Sec.  1026.20(d) below. The Bureau also 
proposed revising the heading to Sec.  1026.20(c) from ``Variable-Rate 
Adjustments'' to ``Rate Adjustments with a Corresponding Change in 
Payment'' to clarify that, pursuant to the proposed revision of Sec.  
1026.20(c), the disclosure would have been required only when the 
interest rate adjustment caused a change in the mortgage payment.
    Elimination of annual disclosure. The Bureau proposed to eliminate 
the Sec.  1026.20(c) annual notice required when an ARM's interest rate 
adjusts one or more times over the course of a year without any 
corresponding payment change. The Bureau noted that consumers who 
receive the current non-payment change annual notice, such as consumers 
with ARMs with payment caps, would receive much of the same information 
in the periodic statement under proposed Sec.  1026.41, discussed 
below. The periodic statement would have provided consumers with 
comprehensive information about their mortgages each billing cycle. The 
periodic statement would have included 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 have provided other information that might 
be useful to consumers receiving the Sec.  1026.20(c) annual notice, 
including information about any prepayment penalty; allocation of the 
consumer's payment by principal, interest, and escrow; the amount of 
the outstanding principal; contact information for the relevant State 
housing finance authority; and information to access a list of 
Federally-certified homeownership counselors.
    In light of the amount, type, and frequency of the information the 
Bureau proposed to provide in the periodic statement to consumers with 
ARMs subject to current Sec.  1026.20(c), the Bureau proposed to 
eliminate the non-payment change annual notice as duplicative and 
potentially contributing to information overload that could deflect 
consumer attention away from the information received in other required 
disclosures. The Bureau solicited comments on the need, value, or use 
of retaining this annual notice required by 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 also proposed to remove current comments 20(c)(1)-1 and 
20(c)(4)-1 which, among other things, address the content of the Sec.  
1026.20(c) non-payment change annual notice the Bureau proposed to 
eliminate. 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 period. 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 of the loan if the change resulted from the rate adjustment. The 
Bureau proposed removing these comments even though they also relate to 
the recurring disclosures that would have been required by proposed 
Sec.  1026.20(c) for interest rate adjustments resulting in a 
corresponding payment change. The Bureau proposed replacing these 
comments with new commentary discussed below.
    Many industry commenters, including a large bank and a national 
trade association, supported eliminating the Sec.  1026.20(c) annual 
notice, which they characterized as costly and time consuming. One non-
bank servicer, conversely, stated that the elimination of the annual 
notice did not provide any benefit for industry. A State enforcement 
agency and some consumer advocates supported discontinuation of the 
notice. Two comment letters from consumer groups recommended

[[Page 10919]]

retaining the annual notice but this was based on their understanding 
that the annual notice is required whether or not any interest rate 
adjustment over the course of the year caused a corresponding 
adjustment to the payment. The Bureau clarifies that the current rule 
requires an annual notice only when, over the course of a year, one or 
more interest rate adjustments have occurred without any payment 
change. These consumer groups pointed to payment-option ARMs, which one 
consumer group recommended be made illegal because they are inherently 
unfair, as a reason for retaining the annual notice. They said such 
loans can have multiple interest rate adjustments without a payment 
change and payment changes occur only when the loan resets, which can 
be infrequent (resets generally occur when the principal balance 
reaches some maximum, such as 125 percent of the original loan amount).
    For the reasons set forth in the proposal, the Bureau is adopting 
Sec.  1026.20(c) as proposed, with respect to the elimination of the 
non-payment change annual notice. With regard to concerns for consumers 
with payment-option ARMs, the Bureau believes that the comprehensive 
information that will be disclosed to consumers every billing cycle in 
the periodic statement the Bureau is adopting under Sec.  1026.41--most 
notably the consumer's current interest rate and the date after which 
the interest rate will adjust and payment allocation information--
provides information to such consumers that is superior to the 
information currently provided by the non-payment change annual notice 
under Sec.  1026.20(c). The Bureau believes that the costs of requiring 
industry to provide both notices would outweigh the benefits consumers 
would garner from receiving this annual notice in addition to the 
periodic statement. The Bureau also notes that comment 20(c)(3)-1 
recognizes that creditors, assignees, and servicers may provide 
consumers with the non-payment change annual notice voluntarily, in 
their own discretion.
    Amendment of payment change disclosure. The Bureau proposed 
amending existing Sec.  1026.20(c) as it relates to interest rate 
adjustments that result in a corresponding payment change. The proposed 
rule retained much of the content required in the current notice and 
added information that the Bureau stated it believed would help 
consumers better understand and manage their adjustable-rate mortgages. 
The revisions to current Sec.  1026.20(c) would have harmonized that 
section with the requirements for the initial ARM interest rate 
adjustment notices the Bureau proposed in Sec.  1026.20(d).\61\ In 
addition, the revisions would have required the interest rate 
adjustment notice be provided earlier than is currently required. The 
Bureau noted that promoting consistency between the ARM disclosures 
required by Sec.  1026.20(c) and (d) would reduce compliance burdens on 
industry and minimize consumer confusion.
---------------------------------------------------------------------------

    \61\ The Bureau worked with Macro to design and test model and 
sample forms (the model forms) for Sec.  1026.20(d), but did not 
specifically test Sec.  1026.20(c) model forms. Because of the 
similarity in the model forms for both rules, however, the results 
of the testing of Sec.  1026.20(d) forms is relevant for Sec.  
1026.20(c) as well. Thus, throughout the section-by-section analysis 
below of Sec.  1026.20(c), the Bureau refers to the testing results 
for Sec.  1026.20(d), as appropriate.
---------------------------------------------------------------------------

    A large servicer and several trade associations opposed the 
revision of Sec.  1026.20(c), except for, as stated above, the Bureau's 
proposal to eliminate the non-payment change annual notice. These 
industry commenters questioned the Bureau's basis for revising a 
regulation they believed was not in need of improvement. Moreover, they 
noted that TILA section 128A, as established by Dodd-Frank Act section 
1418, required the new Sec.  1026.20(d) disclosure but did not mandate 
a revision of the existing ARM rule. In response to the proposal's 
reference to the Board's sweeping 2009 Closed-End Proposal, which 
proposed similar revisions to Sec.  1026.20(c), these commenters 
pointed out that the Board never adopted a final rule. These commenters 
stated that the industry cost to revise the current disclosures, 
including compelling portfolio lenders to revise their proprietary 
product offerings, would outweigh the consumer benefits. They stated 
that the FHA, VA, and GSEs could not comply with the new timing 
requirements. One commenter stated that the current rule is superior to 
the one proposed by the Bureau. A few commenters stated that the ARM 
products that had contributed to the mortgage crisis have been largely 
removed from the market though refinancing or loan modification, 
thereby neutralizing any need to revise the current rule to provide 
heightened consumer protections. A research organization, a large bank, 
a trade association, and a credit union said that post-implementation 
testing was warranted to determine whether the Bureau's contention that 
consumers would be better informed as a result of receiving the revised 
Sec.  1026.20(c) disclosures is correct. Further, three small banks 
stated that the Bureau's efforts to harmonize the two disclosures would 
not alleviate industry burden because the disclosures differed enough 
to require customized programming for each. Three comment letters from 
consumer groups, on the other hand, recommended expanding the content 
of the proposed Sec.  1026.20(c) notice to include additional 
disclosures from the Sec.  1026.20(d) notice, particularly the loss 
mitigation information.
    The Bureau is adopting Sec.  1026.20(c), with modifications to the 
revisions proposed by the Bureau. For the reasons stated above and 
throughout this final rule, the Bureau believes revision of the current 
rule furthers the purposes of TILA. Specifically, the Bureau believes 
the revision is appropriate and beneficial because consumers will 
better understand the costs and terms of adjustable-rate mortgages if 
they receive the ARM disclosures required by Sec.  1026.20(c) and (d) 
in notices with consistent formatting and clear information. Further, 
consumers will be better able to make an informed use of credit if they 
receive this information with enough time to budget for any increase or 
to take appropriate action, such as pursuing refinancing or options 
offered by servicers relating to individual hardship. The Bureau 
believes that the additional time and clearer information provide 
benefits to consumers anticipating payment changes that outweigh the 
costs to servicers to implement these changes. Moreover, as discussed 
in the section-by-section analyses below, the Bureau believes that the 
Sec.  1026.20(c) notice, which consumers may receive periodically, 
strikes an appropriate balance between disclosure of key information 
and overloading consumers with additional information that may or may 
not be applicable to their situations, such as loss mitigation options. 
For these reasons, the reasons set forth in the proposed rule, and the 
reasons discussed below in the analysis of each section of the rule, 
the Bureau is issuing its revision of Sec.  1026.20(c).
    Creditors, assignees, and servicers. The Bureau also proposed 
amending Sec.  1026.20(c) to apply explicitly to creditors, assignees, 
and servicers. The Bureau stated that current Sec.  1026.20(c) applied 
to creditors and existing comment 20(c)-1 clarified that the 
requirements of Sec.  1026.20(c) also apply to subsequent holders, 
i.e., assignees. Under the Bureau's proposal, the requirements of Sec.  
1026.20(c) would have applied to servicers, as well as to creditors and 
assignees. Proposed comment 20(c)-1 clarified, among other things, that 
a creditor, assignee, or servicer that no longer owned the mortgage 
loan or the mortgage servicing

[[Page 10920]]

rights would not have been subject to the requirements of Sec.  
1026.20(c).
    In its proposal, the Bureau stated that it was appropriate to apply 
proposed Sec.  1026.20(c) to servicers, as well as to creditors and 
assignees. The Bureau pointed out that 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 mortgages 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 mortgages. 
Moreover, it can be difficult for consumers to ascertain the identity 
of the creditor or assignee, even though servicers would have been 
required to identify the owner of a mortgage under the 2012 RESPA 
Servicing Proposal, pursuant to Dodd-Frank Act section 1463. The Bureau 
stated a similar rationale for its proposal that the requirements of 
Sec.  1026.20(d) apply to assignees as well as to creditors and 
servicers.
    For the reasons discussed above, proposed Sec.  1026.20(c) would 
have required, as clarified by comment 20(c)-1, that any provision of 
subpart C governing Sec.  1026.20(c) also would have applied to 
creditors, assignees, and servicers--even where the other provisions of 
subpart C referred only to creditors. The proposal also would have 
removed current comment 20(c)-1, which, among other things, referred to 
``subsequent holders,'' in favor of consistent usage of the term 
``assignee'' in proposed Sec.  1026.20(c) and (d). It also would have 
removed 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.
    A trade association and a non-bank servicer commented on this 
portion of the proposed rule. They stated that civil liability for 
violations of TILA is determined by TILA sections 130 and 131 and that 
civil liability cannot be extended to servicers beyond the scope 
authorized under TILA. A State enforcement agency, in the other hand, 
commented that consumers should be able to seek relief against 
servicers for violations of Sec.  1026.20(c).
    The Bureau is adopting the rule as proposed. The Bureau is adopting 
comment 20(c)-1, with added language clarifying that, (1) creditors, 
assignees, and servicers that own either the applicable ARM or the 
applicable mortgage servicing rights, or both, are subject to the 
requirements of Sec.  1026.20(d) and (2) although the rule applies to 
creditors, assignees, and servicers, those parties may decide among 
themselves which of them will provide the required disclosures.
    The Bureau notes that current Sec.  1026.20(c) does not mention 
creditors, assignees, or servicers. Thus, although the commentary 
explicitly references creditors and subsequent holders, neither the 
existing rule nor its commentary expressly exclude servicers from its 
requirements. The Bureau believes it is logical and appropriate to 
apply the requirements of Sec.  1026.20(c) to servicers, as well as 
creditors and assignees of a mortgage loan. It is widely recognized 
that, since the implementation of Sec.  1026.20(c) approximately 25 
years ago, servicers have been providing the required disclosures to 
consumers with ARMs, as opposed to the creditors or assignees of those 
loans that are not otherwise considered servicers. As noted above, the 
servicer is the party with which consumers have contact on an ongoing 
basis regarding their mortgages. Servicers receive consumers' payments. 
Consumers communicate with their servicers regarding questions or 
problems 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. 
Thus, it is appropriate that servicers be included among the entities 
required to provide consumers with the disclosures under Sec.  
1026.20(c).
    The Bureau further notes that the rule would have required 
creditors, assignees, and servicers to provide consumers with the 
disclosures required by Sec.  1026.20(c) without referencing creditor, 
assignee, or servicer civil liability. Consistent with the proposal, 
the final rule and commentary set forth the obligations of creditors, 
assignees, and servicers but do not specifically address the issue of 
civil liability of any covered person in an action brought by a 
consumer. That issue is governed by TILA sections 130 and 131, and the 
Bureau's revisions do not purport to impose requirements inconsistent 
with TILA. For these reasons, and the reasons articulated in the 
proposal, the Bureau is adopting the final rule as proposed and comment 
20(c)-1 as modified with regard to the application of Sec.  1026.20(c) 
to creditors, assignees, and servicers.
    As discussed in the legal authority section below, including 
servicers as covered persons under the requirements of Sec.  1026.20(c) 
is authorized under, among other authorities, TILA section 105(a). 
Section 1026.20(c) is a servicing requirement and, as such, the Bureau 
believes that subjecting servicers to its requirements is 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. Also, TILA section 128(f), which applies to creditors, 
assignees, and servicers, provides authorization to include servicers 
within the scope of this rule. Finally, the Bureau notes that this 
revision of Sec.  1026.20(c) is consistent with the scope of Sec.  
1026.20(d), such that both Sec.  1026.20(c) and (d) now apply to 
creditors, assignees and servicers.
    Loan modifications. A large bank and a national trade association 
recommended that the Bureau exempt loan modifications for financially-
distressed consumers from the requirements of Sec.  1026.20(c). They 
said that, among other reasons, requiring the notices in the context of 
a loan modification would delay execution of the loan modification by 
the 60 to 120 days advance notice required under the rule and that the 
Sec.  1026.20(c) notice was not appropriate for loan modifications.
    The Bureau notes that current Sec.  1026.20(c) does not exempt loan 
modifications from its requirements. However, the Bureau agrees with 
this recommendation, and therefore, Sec.  1026.20(c) limits coverage to 
interest rate adjustments pursuant to the ARM contract. Because 
interest rate adjustments occurring pursuant to a loan modification do 
not occur pursuant to the loan contract, they will not be subject to 
this rule and thus, will not delay execution of loan modification 
agreements. See comment 20(c)-2, which the Bureau is adopting in the 
final rule. The Bureau believes that an interest rate adjustment 
causing a payment change pursuant to a loan modification in a loss 
mitigation context does not require the consumer protections 
contemplated by Sec.  1026.20(c). Such consumers have either agreed to 
the new interest rate prior to execution of the loan modification or 
are receiving the benefit of a lower rate and thus, are not at risk of 
payment shock. Because the loan modification is the actual result of 
pursuing alternatives to the payments otherwise required under their 
adjustable-rate mortgages, the advance notice afforded by the rule does 
not benefit such consumers.
    For these reasons, as adopted, Sec.  1026.20(c) exempts from its 
coverage interest rate changes occurring in the

[[Page 10921]]

context of a loan modification executed as a loss mitigation measure. 
Comment 20(c)-2 clarifies, however, that the requirements of Sec.  
1026.20(c) do apply to interest rate changes that occur subsequent to 
the execution of a loan modification agreement, if the interest rate 
changes occur pursuant to the terms of the ARM contract as modified.
    Conversions. In its proposal, the Bureau also stated that Sec.  
1026.20(c) would apply to ARMs converting to fixed-rate mortgages when 
the adjustment to the interest rate resulted in a corresponding payment 
change. Providing this notice would have alerted consumers to their new 
interest rate and payment following conversion from an ARM to a fixed-
rate mortgage. Proposed comment 20(c)-2 explained that, in the case of 
an open-end account converting to a closed-end adjustable-rate 
mortgage, Sec.  1026.20(c) disclosures would not be required until the 
implementation of the first interest rate adjustment that resulted in a 
corresponding payment change post-conversion. The Bureau analogized the 
conversion 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 have been required until the first interest 
rate adjustment following the conversion which resulted in a 
corresponding payment change. The proposed rule would have been 
consistent with existing comment 20(c)-1 and proposed Sec.  1026.20(d) 
regarding conversions.
    A large bank and a national trade association requested that the 
Bureau clarify that the requirement of Sec.  1026.20(c) to provide 
disclosures in the case of an ARM converting to a fixed-rate 
transaction does not apply to loan modifications made as part of loss 
mitigation efforts. Applying this measure to loan modifications, they 
stated, would harm the consumer by, among other things, needlessly 
delaying execution of the loan modification to comply with the rule. 
This recommendation is moot in view of the Bureau's decision to limit 
the scope of coverage of Sec.  1026.20(c) to ARMs adjusting pursuant to 
the loan contract, thereby exempting all loan modifications executed as 
a loss mitigation measure from the requirements of Sec.  1026.20(c).
    A credit union stated that providing this disclosure would be 
redundant and confusing to consumers. The Bureau believes that 
consumers whose interest rates will change as a result of such 
conversions would benefit from receiving the Sec.  1026.20(c) notice 
alerting them to the upcoming change, especially if the conversion 
occurs automatically under the loan contract. The Bureau is adopting 
proposed Sec.  1026.20(c) without modification. The Bureau also is 
adopting comment 20(c)-3, originally proposed as 20(c)-2, which 
interprets Sec.  1026.20(c) with regard to conversions. The final rule 
removes current comment 20(c)-1.
Legal Authority
    The Bureau amends Sec.  1026.20(c) pursuant to its authority under 
TILA section 105(a). For the reasons discussed in the section-by-
section analysis of each of the amendments to Sec.  1026.20(c), the 
Bureau believes that the amendments are necessary and proper to 
effectuate the purposes of TILA, including to assure a meaningful 
disclosure of credit terms, avoid the uninformed use of credit, and 
protect consumers against inaccurate and unfair credit billing 
practices, as well as to prevent circumvention or evasion of TILA. 
Section 1026.20(c) is further authorized under Dodd-Frank Act section 
1405(b), which permits the Bureau to modify disclosure requirements 
where such modification is in the interest of consumers and the public. 
For the reasons discussed above and below, the Bureau believes that its 
modification of 1026.20(c) serves the interests of both consumers and 
the public.
    Section 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.'' Although TILA section 128(f) authorizes the Bureau to 
require that the content of periodic disclosures, such as those 
required by Sec.  1026.20(c), be included in the periodic statement, 
for the reasons set forth above and below, the Bureau believes that 
providing this information as a separate disclosure would better serve 
consumers. Under Sec.  1026.17(a), as discussed above, the Sec.  
1026.20(c) ARM payment adjustment notice must be separate and distinct 
from the periodic statement but may be provided to consumers together 
with the periodic statement and, depending on the mode of delivery, in 
the same envelope or as an additional email attachment. The Bureau also 
believes that the interest of consumers and the public interest are 
better served by receiving the Sec.  1026.20(c) ARM notice, within the 
timeframe discussed below, each time ARM interest rate adjustments 
result in a corresponding payment change, rather than with each billing 
cycle of the periodic statement.
    Further, the Bureau believes, consistent with Dodd-Frank Act 
section 1032(a), that the formatting requirements ensure that the 
features of the ARM loans covered by Sec.  1026.20(c) 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.
20(c)(1) Coverage
20(c)(1)(i) In General
    Proposed Sec.  1026.20(c)(1)(i) defined an adjustable-rate mortgage 
or ARM, 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. The 
proposed rule used the wording from the definitions of ``adjustable-
rate'' and ``variable-rate'' mortgage in subpart C of Regulation Z to 
promote consistency within the regulation. Proposed comment 
20(c)(1)(i)-1 explained that the definition of ``ARM'' meant 
``variable-rate mortgage'' as that term is used elsewhere in subpart C 
of Regulation Z, except as would have been provided in proposed comment 
20(c)(1)(ii)-3. Having received no comment on this issue, the Bureau is 
adopting the final rule and comment 20(c)(1)(i)-1 is adopted as 
proposed.
    In its proposal, the Bureau noted that 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 proposed deleting the cross-
reference to Sec.  1026.19(b), which otherwise would have expanded the 
scope of Sec.  1026.20(c) to include loans with terms of one year or 
less. Current Sec.  1026.20(c) and comment 20(c)-1 would have been 
removed in favor of proposed Sec.  1026.20(c)(1)(i) with regard to 
which loans are subject to the interest rate adjustment disclosures. 
Having received no comment on the proposed elimination of the cross-
reference to Sec.  1026.19(b), the Bureau is adopting the final rule as 
proposed.
    The Bureau proposed 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 clarified that the 
term ``variable-rate transaction,'' as used in Sec.  1026.19(b) and 
elsewhere in Regulation Z, was

[[Page 10922]]

synonymous with the term ``adjustable-rate mortgage'' or ``ARM,'' 
except where specifically distinguished. The Bureau proposed this 
revision because ``adjustable-rate mortgage'' and ``ARM'' are the terms 
commonly used for mortgages covered by current and proposed Sec.  
1026.20(c) and (d). Having received no comments on this topic, the 
Bureau is adopting the final rule as proposed.
    Proposed comment 20(c)(1)(i)-1 also clarified that the requirements 
of Sec.  1026.20(c)(1)(i) would not be limited to transactions 
financing the initial acquisition of the consumer's principal dwelling, 
but 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). Having received no comments on this 
subject, the Bureau is adopting the final rule and comment 20(c)(1)(i)-
1 as proposed.
20(c)(1)(ii) Exemptions
In General
    Proposed Sec.  1026.20(c)(1)(ii) set forth two exemptions from the 
disclosure requirements of Sec.  1026.20(c). These exemptions applied 
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 
was 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 have been 
required by proposed Sec.  1026.20(d). Section 1026.20(d) also proposed 
the same construction loan exemption. Proposed comments 20(c)(1)(ii)-1 
and -2 provided clarification of these exemptions, and proposed comment 
20(c)(1)(ii)-3 clarified that certain loans are not ARMs if the 
interest rate or payment change is based on factors other than a change 
in the value of an index or a formula.
    In response to comments received from industry representatives, the 
final rule expands the construction loan exemption to all ARMs with 
terms of one year or less. Industry commenters requested other 
exemptions from Sec.  1026.20(c) that the Bureau declines to adopt, for 
the reasons discussed below.
Exemptions from the Rule
    ARMs with terms of one year or less. The proposed rule would have 
included an exemption for construction ARMs with terms of one year or 
less. As set forth in the proposal, the Bureau said it believed that 
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 the completion of construction and permanent financing 
can be put into place. The Bureau stated that consumers with 
construction ARMs were not at risk of payment shock as they may be with 
other ARMs where interest rates changed less frequently. Moreover, 
given the frequency of interest rate adjustments on construction loans, 
creditors, assignees, and servicers would have experienced difficulty 
complying with the proposed requirement to provide the notice to 
consumers between 60 and 120 days before the first payment at a new 
level was due for each adjustment that resulted in a corresponding 
payment change. The Bureau concluded that requiring Sec.  1026.20(c) 
notices for these loans would not have provided a meaningful benefit to 
the consumer nor would it have improved consumers' awareness and 
understanding of their construction ARMs with terms of one year or 
less.
    The Bureau solicited comments on whether there were other ARMs with 
terms of one year or less, and whether such ARMs should be exempt from 
the requirements of Sec.  1026.20(c). If the time period of the advance 
notice for consumers required by the Bureau's proposal was not 
appropriate for these short-term ARMs, the Bureau solicited comments on 
what period would have been appropriate that also would have provided 
consumers with sufficient notice of the upcoming interest rate 
adjustment and new payment.
    A number of commenters, including two large servicers, a home 
builder trade association, and a bank trade association, recommended 
that the Bureau expand the proposed short-term construction exemption 
to other short-term financing originated by consumers for consumer 
purposes. In addition to construction ARMs, such ARMs would include 
home improvement, bridge, and other short-term consumer loans. 
Commenters echoed the reasoning articulated above by the Bureau in 
favor of the construction loan exemption to support their 
recommendation to extend the exemption to all consumer ARMs with terms 
of one year or less. They reasoned that the short term and frequent 
creditor contact with consumers common to these loans insulates 
consumers from the payment shock risk occasioned by ARMs without these 
characteristics. Commenters also pointed out that the rate changes of 
such short-term ARMs are often tied to movement in an index, rather 
than a date certain, making compliance with the 60- to 120-day advance 
notice requirement virtually impossible to satisfy. One trade 
association also recommended the Bureau clarify that the exemption is 
restricted to ARMs taken out by consumers as opposed to those made 
directly to home builders and that the exemption extends to 
construction loans structured in a variety of ways.
    The Bureau is persuaded that, as in the case of 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 the consumer distinguish these 
additional forms of short-term consumer financing from other ARMs. For 
the same reasoning underpinning the Bureau's decision to adopt an 
exemption for construction ARMs with terms of one year of less, the 
final rule exempts from the requirements of Sec.  1026.20(c) all ARMs 
taken out by consumers with terms of one year or less. The Bureau notes 
that the ARM rules apply only to consumer loans and that comment 
20(c)(1)(ii)-1, which the Bureau is adopting as proposed, applies the 
standards in current comment 19(b)-1 for determining the term of a 
construction loan and adds clarification regarding what other types of 
loans qualify for the expanded short-term ARM exemption.
    New payment due for the first time within 210 days after 
consummation. The Bureau also proposed an exemption from the 
requirements of Sec.  1026.20(c) for the first ARM adjustment causing a 
change in payment, if the first payment at the adjusted level was due 
within 210 days after consummation. As clarified by proposed comment 
20(c)(1)(ii)-2, this exemption would have applied only if the exact 
interest rate, not an estimate, was disclosed at consummation. For ARMs 
adjusting within six months of consummation, which may be within 210 
days before the first payment was due at the new level, the disclosures 
proposed by Sec.  1026.20(d) would have been required at consummation. 
The Bureau reasoned that having received the exact amount of the new 
interest rate and payment at consummation and the recency of 
consummation would have obviated the need for the first Sec.  
1026.20(c) notice in this circumstance because consumers would have 
been apprised of the actual upcoming adjustment and payment change by 
receiving the Sec.  1026.20(d) notice just months prior to its 
occurrence. Thus, the Bureau reasoned, providing Sec.  1026.20(c) 
disclosures in these

[[Page 10923]]

circumstances would have been duplicative, would not have contributed 
to consumer awareness and understanding, and would not have provided a 
meaningful benefit to consumers. On the basis of this reasoning and in 
the absence of comments on this issue, the Bureau integrates this 
exemption in Sec.  1026.20(c) and is adopting comment 20(c)(1)(ii)-2.
    Non-ARM loans. Proposed comment 20(c)(1)(ii)-3 discussed other 
loans to which the rule would not have applied. Proposed comments 
20(c)(1)(ii)-3 and 20(d)(1)(ii)-2 were consistent with regard to the 
loans which would not have been 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 clarified that, for purposes of 
Sec.  1026.20(c), the following loans, if fixed-rate transactions, 
would not have been considered ARMs and therefore would not have been 
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 Bureau observed that the particular features 
of these types of loans might trigger interest rate or payment changes 
over the term of the loan or at the time the consumer pays off the 
final balance. However, the Bureau stated that these changes were based 
on factors other than a change in the value of an index or a formula. 
Because the enumerated loans would not have been ARMs under the 
proposed rule they would not have been covered by proposed Sec.  
1026.20(c) and, thus, would not have required disclosures.
    The Bureau stated that proposed and current Sec.  1026.20(c) were 
generally consistent with regard to the ARMs to which they would not 
apply. The principal difference was that current Sec.  1026.20(c) 
applied to renewable balloon-payment instruments and preferred-rate 
loans, even if structured as fixed-rate transactions, while proposed 
Sec.  1026.20(c) would not have applied 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) would not have applied to loans with terms of 
one year or less. This category included construction loans, which 
would have been exempted from coverage under proposed Sec.  1026.20(c). 
The Bureau also noted that its proposed exemption for certain initial 
Sec.  1026.20(c) ARM adjustments would have been inapplicable to the 
current rule because proposed Sec.  1026.20(d) would not yet have been 
implemented to replace at consummation the disclosures required by 
current Sec.  1026.20(c) for the first (and all ensuing) interest rate 
adjustments.
    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). Thus, these loans are not subject to current Sec.  
1026.20(c) nor would they have been subject to the proposed rule.
    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, under the Bureau's proposal, these loans would not 
have been considered adjustable-rate mortgages and therefore would not 
have been subject to the disclosures required in proposed Sec.  
1026.20(c). The Bureau explained that the particular features of these 
types of loans might trigger interest rate or payment changes over the 
term of the loan or at the time the consumer pays off the final balance 
but that these changes would have been based on factors other than a 
change in the value of an index or a formula. To illustrate that point, 
the Bureau explained that whether or when the interest rate would 
adjust for a preferred-rate loan with a fixed interest rate would 
likely not be knowable to the creditor, assignee, or servicer between 
60 and 120 days in advance of the due date for the first payment at a 
new level after the adjustment. The Bureau went on to explain that this 
was because the loss of the preferred rate would have been based on 
factors other than a formula or change in the value of an index agreed 
to at consummation. The Bureau pointed out the Board had 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.\62\ The Bureau received no comments on this topic and, thus, 
is adopting the rule and comment 20(c)(1)(ii)-3 as proposed.
---------------------------------------------------------------------------

    \62\ 74 FR 43232, 43264, 43387 (Aug. 26, 2009).
---------------------------------------------------------------------------

Requested Exemptions
    No small servicer exemption or integration of ARM notices into the 
periodic statement. The proposed and final rules do not exempt small 
servicers from the requirements of Sec.  1026.20(c) and (d), despite 
the recommendation for such an exemption from many community banks and 
credit unions and the trade associations representing them. Also, after 
considering comments received in response to its solicitation of 
whether Sec.  1026.20(c) and (d) disclosures should be permitted to be 
integrated into the periodic statement, the Bureau is not adopting this 
measure. For a full discussion of the Bureau's consideration of these 
issues for both Sec.  1026.20(c) and (d), see the section-by-section 
analysis of Sec.  1026.20(d)(1)(ii) below as well as the regulatory 
flexibility analysis in part VIII.
    Other exemptions requested. For a discussion of requests regarding 
payment-option ARMs and reverse mortgage ARMs, see the section-by-
section analysis of Sec.  1026.20(d)(1)(ii) below. One large bank 
recommended an exemption from the requirements of Sec.  1026.20(c) for 
consumers in bankruptcy, because it said the Sec.  1026.20(c) notice 
would be redundant and conflict with the timing of the interest rate 
adjustment required under Federal bankruptcy law 21 days in advance of 
the payment change. The Bureau declines to use its exception authority 
for this purpose. The Bureau notes that these ARMs are subject to the 
current rule and it does not agree that the requirements of Sec.  
1026.20(c) are redundant or conflict with bankruptcy law. On the 
contrary, providing the Sec.  1026.20(c) notice earlier than the 
timeframe required under the bankruptcy law enhances consumer 
protection by providing these consumers with additional time to adjust 
to an increase in their mortgage payments.
    A large bank requested exemption from the requirements of Sec.  
1026.20(c) when a consumer with an ARM has been referred to 
foreclosure, the servicer has determined that the consumer has 
abandoned the property at issue, or the servicer has received no 
payment nor had any contact with the consumer in more than six months. 
The Bureau notes that these ARMs are subject to the current rule and 
the commenter neither showed evidence of undue burden nor

[[Page 10924]]

otherwise set forth reasoning justifying scaling back existing consumer 
protections. The Bureau believes that even consumers who have ceased 
making payments or abandoned the property can benefit from being 
alerted to and understanding the rate at which interest is accruing. 
Further, in some cases, the disclosures may cause consumers to take 
action to mitigate their losses.
20(c)(2) Timing and Content
Rate Adjustment Disclosures
Timing
    Proposed Sec.  1026.20(c)(2) would have required ARM disclosures to 
be provided to consumers between 60 and 120 days before the first 
payment at the adjusted level was due. Under current Sec.  1026.20(c), 
notices must be provided to consumers between 25 and 120 days before 
the first payment at a new level is due. Thus, the proposed rule would 
have increased the minimum advance notice to consumers from 25 to 60 
days before a new payment amount was due for the first time. The two 
circumstances under which the rule proposed a timeframe that differed 
from the proposed general rule are discussed below. Proposed comment 
20(c)(2)-1 would have replaced current comment 20(c)-1 regarding 
timing.
    60 to 120 day advance notice. Current Sec.  1026.20(c) requires 
disclosure of the new interest rate and payment between 25 and 120 days 
before the first payment at the adjusted level is due. Under the 
proposed rule, the notice would have been required between 60 and 120 
days before the first payment at the new level is due. The longer 
timeframe under the proposal, the Bureau explained, was intended to 
give consumers more time to adjust their finances to the actual amount 
of the increase in their mortgage payments caused by a rise in interest 
rates. Further, for consumers who were not able to make the higher 
payment, the longer timeframe would have provided additional time to 
refinance or take other loss mitigating actions. The Bureau stated that 
the current minimum time of 25 days did not give consumers sufficient 
time either to adjust their finances or to pursue meaningful 
alternatives such as refinancing, home sale, loan modification, 
forbearance, or deed-in-lieu of foreclosure. The Bureau cited research 
conducted for the years 2004 through 2007 suggesting that a requirement 
to provide ARM adjustment disclosures 60, rather than 25, days before 
the first payment at the adjusted level is due more closely reflects 
the time needed for consumers to refinance a loan.\63\ In the current 
market, the Bureau said, the nation's biggest mortgage lenders take an 
average of more than 70 days to complete a refinance.\64\
---------------------------------------------------------------------------

    \63\ Robert B. Avery et al., The 2007 HMDA Data, Fed. Reserve 
Bull., Dec. 23, 2008, at A107.
    \64\ 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.
---------------------------------------------------------------------------

    The Bureau said that for most adjustable-rate mortgages, the 
proposed 60-day minimum timeframe would have provided sufficient time 
for creditors, assignees, and servicers to comply with the rule. 
Through outreach to servicers of adjustable-rate mortgages, the Bureau 
learned that, for most ARMs, servicers knew the index value from which 
the new interest rate and payment would be calculated at least 45 days 
before the date of the interest rate adjustment. Because interest on 
consumer mortgage credit generally is paid one month in arrears, this 
meant that, for most ARMs, servicers would 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 
began 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 would be selected which would serve as the basis 
for the new interest rate and payment. In general, the Bureau observed, 
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 would fall on the first of the month following the 
change date.
    Based on outreach conducted by the Bureau, it appeared that small 
servicers often sent out the payment change notices required by Sec.  
1026.20(c) on the same day the index value was selected. In that case, 
for a loan with a 45-day look-back period, the notice would be ready 45 
days before the change date and, with an approximately 30-day billing 
cycle between the change date and the date the first payment at the new 
level would be due, the interest rate adjustment notice could be 
provided to the consumer approximately 75 days before the new payment 
was 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 was due.
    On the other hand, the Bureau observed in the proposed rule that 
many large creditors, assignees, and 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 ensure the notices are correct.\65\ In 
these cases, for a loan with a 45-day look-back period, the payment 
change notices could be provided between approximately 42 and 35 days 
prior to the change date, which was either 70 to 73 or 63 to 66 days 
before the new payment was 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 13 days. For loans 
with the shortest verification period of three days, the payment change 
notice could be provided to consumers 70 days prior to payment due at a 
new level.
---------------------------------------------------------------------------

    \65\ The Bureau noted that no creditor, assignee, or servicer it 
contacted used a system employing an automatic feed of information 
from the publisher of an index source. All data was entered and 
verified manually.
---------------------------------------------------------------------------

    The Bureau therefore concluded that for most ARMs, creditors, 
assignees, and servicers could, consistent with their current 
practices, comply with the 60-day time period the Bureau proposed. The 
Bureau solicited comments about the proposed timing of the Sec.  
1026.20(c) notice, including the feasibility of applying the 60-day 
period to ARMs that have look-back periods of less than 45 days, 
whether a look-back period of 45 days or longer was feasible going 
forward for loan products that currently used shorter look-back periods 
and, if not, why not. The Bureau also solicited comments on the extent, 
if any, to which the relative length of the look-back period might 
affect the interest rate risk for the creditor, assignee, or servicer. 
It also queried about the operational changes that would be required to 
provide Sec.  1026.20(c) notices at least 60 days before the first 
payment at a new level was due. Comment was requested on any factors 
that would hinder compliance with this timeframe. In light of 
technological and other advances since the promulgation in 1987 of 
current Sec.  1026.20(c), the Bureau also solicited comments on 
whether, and if so why, lengthy verification periods were necessary and 
on the feasibility of reducing the length of these verification 
periods.

[[Page 10925]]

    Three consumer groups and a research organization suggested 
modifying the proposed rule to allow advance notice of at least 70 to 
90 days or more instead of the proposed 60 days advance notice. These 
entities stated that the proposed time was insufficient for consumers 
to take steps to ameliorate losses posed by a rise in ARM interest 
rates and payments. Because loan modifications and refinancings with 
existing lenders are likely to fail, said one consumer group, consumers 
should have additional advance warning to allow for consideration of 
additional loss mitigation applications with prospective lenders. The 
research organization noted that 60 days may be too short in a market, 
such as the current one, in which refinancing takes approximately 70 
days.
    The Bureau recognizes that longer advance notice provides consumers 
with more of an opportunity to adjust to an interest rate increase. The 
Bureau also realizes that, at least in today's market, certain types of 
transactions, such as refinancing or a home sale, often cannot be 
completed within 60 days. Nonetheless, the Bureau believes that the 
proposed 60-day notice effectively balances consumer protection 
considerations against the practical realities and costs that would be 
entailed in requiring even longer notice periods. Whether or not 
consumers can complete loss mitigating options pursued during this 60-
day period, they can advance towards that goal and take measures to 
financially prepare for the payment change. Further, the advance notice 
shortens the time period in which consumers would have to pay at a 
higher level before completing a refinancing or other alternative. 
Also, 45-day look-back periods are the norm for ARM contracts and, once 
the grandfather period expires, their dominance in the market likely 
will grow as look-back periods of less than 45 days become obsolete. As 
discussed above, many entities servicing ARMs with look-back periods of 
less than 45 days would not be able to meet even the 70-day, let alone 
the 90-day or longer, deadline recommended. For these reasons, the 
final rule requires that the Sec.  1026.20(c) ARM disclosures be 
provided to consumers at least 60, and not 70 or more, days in advance 
of the date the first payment at a new level is due after a rate 
adjustment. The portion of proposed comment 20(c)(2)-1 setting forth a 
scenario for providing the payment change notices for an ARM with a 
look-back periods of 45 days, is removed as unnecessary. The one 
industry commenter addressing the issue of verification periods, stated 
that no institution, large or small, should require a verification 
period in excess of three days.
    Many industry commenters opposed the new timeframe as unworkable--
even for ARMs with 45-day look-back periods. This opposition, however, 
appears to be based on the erroneous perception that the proposed rule 
would require them to provide the Sec.  1026.20(c) notice between 60 
and 120 days before the interest rate adjustment date, rather than 
before the date the first payment at a new level is due. As discussed 
above, in addition to an ARM's look-back period of 45 days, there is an 
additional 30 days before the new payment is due because interest for 
consumer mortgages generally is paid one month in arrears.
    One small bank requested clarification as to whether ``provided'' 
means the date the notice is produced or mailed. Comment 20(c)(2)-1 is 
modified in the final rule to clarify that the requirement that Sec.  
1026.20(c) disclosures be provided to consumers within a certain 
timeframe means that the disclosures must be delivered or placed in the 
mail within that timeframe. Thus, creditors, assignees, and servicers 
need not calculate delivery or mailing time into the 60- to 120-day 
timeframe and those servicing ARMs with look-back periods of 45 days or 
longer can comply with the proposed timeframe. The final comment also 
is modified to clarify that the timeframe excludes courtesy, as well as 
grace, periods.
    Some industry commenters opposed revision of Sec.  1026.20(c), in 
part, on the grounds that, in their view, the current rule provides for 
sufficient notice to consumers, the Bureau had not shown that consumers 
need lengthier advance warning, and the additional advance warning was 
an insignificant change or would not provide sufficient time for 
consumers to refinance in any event. Two national trade groups and a 
credit union opposed the revision of the rule because, among other 
things, they claimed that the cost of an ARM product increases with the 
length of its look-back period. They also stated that it would be 
difficult and costly to change from the current to the proposed notice.
    For the reasons articulated above in the proposed rule and for the 
following reasons, the Bureau is adopting Sec.  1026.20(c) as proposed 
with regard to the advance notice requirements. The Bureau also is 
adopting comment 20(c)(2)-1, with modification to clarify, that 
``provide'' means deliver or place in the mail and to clarify that the 
60- to 120-day timeframe excludes any courtesy, as well as grace, 
period.
    Through the first eight months of 2012, ARMs financed approximately 
10 percent of the outstanding balance of new home-purchase.\66\ Of the 
three million ARMs with outstanding balances at the end of October 
2012, the Bureau was able to ascertain the length of the look-back 
period for the 1.9 million ARMs guaranteed by Freddie Mac, Fannie Mae, 
or Ginnie Mae.\67\ Seventy-five percent of those ARMs have 45-day look-
back periods. Thus, creditors, assignees, and servicers can comply with 
the new 60- to 120-day timeframe without changing the look-back periods 
of their ARMs for 75 percent of the approximately 2/3s of all 
outstanding ARMs for which the length of the look-back period is known.
---------------------------------------------------------------------------

    \66\ CoreLogic, TrueStandings Service, available at http://www.corelogic.com/about-us/data.aspx#container-Mortgage (data 
service accessible only through paid subscription) (reflects first-
lien mortgage loans).
    \67\ Core Logic, TrueStandings Service.
---------------------------------------------------------------------------

    The commenters stating that the cost of an ARM increases with the 
length of the look-back period did not submit any data to support this 
point. The Bureau's research found no causal relationship between the 
level of an ARM's margin and a 15-, 30- or 45-day look-back period, 
when controlling for consumer characteristics such as Loan-to-Value 
(LTV), credit score, and Debt-to-Income (DTI) ratios.\68\ Thus, the 
Bureau believes it is unlikely that, for the minority of ARM products 
with look-back periods of 15 or 30 days, requiring that new ARMs 
incorporate a slightly longer look-back period will meaningfully impact 
the manner in which the product is priced. For example, it is unlikely 
that a creditor offering a 3/1 ARM could reasonably determine a 
substantial difference in valuation at origination between an interest 
rate adjustment 1,050 days in the future as opposed to 1,065 days in 
the future.
---------------------------------------------------------------------------

    \68\ Fed. Hous. Fin. Agency (dataset derived from FHFA's 
Historical Loan Performance (HLP), a confidential supervisory 
database).
---------------------------------------------------------------------------

    The Bureau disagrees with commenters stating that the current rule 
provides for sufficient notice to consumers, that the Bureau has not 
shown that consumers need lengthier advance warning, or that the 
additional advance warning would not provide sufficient time for 
consumers to pursue alternatives such as refinancing. Knowing the exact 
amount of their interest rate and payment between 60 and 120 days 
before the first new payment is due allows consumers more time to sell 
their homes or seek loss mitigating alternatives such as

[[Page 10926]]

refinancing, loan modification, or deed-in-lieu of foreclosure--or at 
least to adjust their finances to an upcoming increase in rate and 
payment. The Bureau believes the current rule does not provide 
consumers with sufficient time to pursue these loss mitigation options. 
While each consumer electing to pursue alternatives may not be able to 
finalize a loss mitigation option by the time the first payment at the 
new level is due, increasing the minimum advance notice from 25 to 60 
days provides consumers with enough time to at least make significant 
progress toward, if not complete, a refinancing or a loss mitigation 
option, or adjust their finances in anticipation of the increased 
payment. As a result, even for consumers who cannot complete an 
alternative within 60 days, the additional advance notice shortens the 
time period in which consumers would have to pay at a higher level 
before completing a refinancing or other alternative.
    25 to 120 day advance notice permitted for some ARMs. As discussed 
above, in putting forward its proposal, the Bureau recognized that some 
ARMs have look-back periods shorter than 45 days. Specifically, the 
Bureau noted that ARMs backed by the FHA and VA have look-back periods 
of 15 or 30 days. The Bureau also noted that for some ARMs the 
adjustment is based on the published index as of the first business day 
of the month preceding the effective date of the interest rate change. 
Because 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's proposal would have 
permitted a time period other than between 60 and 120 days.
    First, the Bureau proposed to alter the timing requirements for 
ARMs adjusting for the first time within 60 days of consummation where 
the new interest rate disclosed at consummation pursuant to Sec.  
1026.20(d) was an estimate, rather than the actual rate that would go 
into effect when the ARM adjusts. (Under the proposal, if the actual 
rate had been disclosed at consummation, such loans would have been 
exempt from the rule pursuant to Sec.  1026.20(c)(1)(ii)(B) The Bureau 
noted that compliance with the 60- to 120-day timeframe would not have 
been possible for such loans. For this reason, for such loans, the 
Bureau proposed that the Sec.  1026.20(c) payment change notice be 
provided to consumers as soon as practicable, but not less than 25 days 
before the first payment at a new level was due. The Bureau received no 
comments on this altered timeframe and is adopting the rule as 
proposed.
    Second, the Bureau proposed retention of the current timeframe of 
between 25 and 120 days before the first payment at the new level is 
due for ARMs with look-back periods of less than 45 days originated 
before July 21, 2013. The Bureau realized that the creditors, 
assignees, and servicers of existing ARMs with shorter look-back 
periods would not have been able to comply with the proposed timeframe 
and would need some time to adjust their products so that they could 
originate ARMs that could comply. Although this timeframe would have 
provided less advance notice to some consumers than generally provided 
under the proposed rule, the Bureau proposed to grandfather these ARMs 
to prevent altering existing contractual agreements regarding the look-
back period. The Bureau made clear that after July 21, 2013, new ARMs 
would have had to be structured to permit compliance with the 60- to 
120-day timeframe. The Bureau solicited comments regarding this 
proposed grandfather period. It also queried whether the proposed, or 
some other, expiration date for the grandfather time period would be 
preferable. Finally, the Bureau solicited comments on whether other 
ARMs should be allowed to comply with a 25- to 120-day notice period.
    Many industry entities commented on the proposed grandfather period 
for ARMs with look-back periods of less than 45 days and on the issue 
of an effective date for the final TILA mortgage servicing rules in 
general and the ARM rules in particular. Two credit unions recommended 
against grandfathering; one stated that it was unnecessary and the 
other that it would create dual procedures for Sec.  1026.20(c) 
notices. Two trade associations noted that their members would have to 
maintain bifurcated system functionalities for grandfathered versus 
non-grandfathered ARMs, which could lead to potential errors and 
reduced customer service. A large bank recommended allowing two 
timeframes for ARMs: the 60-day minimum advance notice for ARMs with 
look-back periods of 45 days or more and the 25-day minimum advance 
notice for ARMs with shorter look-back periods. That bank went on to 
say that no grandfather period was needed because, once government 
agencies no longer insured ARMs with look-back periods of less than 45 
days, ARMs with short look-back periods would disappear. A large non-
bank servicer agreed with the Bureau's proposed timing. One large bank 
recommended grandfathering ARMs where it would have to determine an 
index rate on a business day and thus, must look back 46 or 47 days. 
The Bureau notes that it received no other comments on this last point 
and refers to its analysis above illustrating how ARMs with look-back 
periods of 45 days or longer can comply with the proposed rule.
    Industry commenters generally recommended an implementation period 
longer than one year. They stressed the added burden of having to 
simultaneously implement other Bureau-mandated rules. Generally, 
commenters said that one year was insufficient for servicers to design, 
develop, and implement the required system enhancements to provide the 
capability to generate the new automated 60-day ARM notices and to 
permit time for necessary adjustments by other parties, such as 
lenders, technology and form vendors, and attorneys. A large bank 
reported that these system changes would include reprogramming 
origination and servicing systems to board loans originated after the 
grandfather period. In general, commenters recommended an 
implementation period of between 18 to 30 months after publication of 
the final rule.
    Many commenters recommended that the Bureau tie the grandfather 
period to the effective date of the final rule rather than impose a 
date certain. Several large- and medium-sized servicers and national 
industry trade groups recommended the Bureau grandfather all ARMs with 
look-back periods of less than 45 days until one year or longer after 
the GSEs, FHA, and VA issued final changes to their mortgage contracts. 
This way, they said, creditors could make the changes necessary to 
issue ARMs that could comply with requirements of Sec.  1026.20(c). 
Other commenters requested tying the grandfather deadline to when 
investors in GSEs and government mortgage programs have completed the 
required changes to their guidelines because creditors, in turn, have 
to revise their products and work with investors to update their 
documents and guidelines. One large bank recommended an 18 to 24 month 
phase-in period, taking into account any additional time necessary for 
the FHA, VA, and GSEs to adjust their loan contracts, with a minimum of 
at least 12 months for compliance after they finalize the required 
changes. This bank suggested the alternative of making compliance 
voluntary 12 months after publication of the final rule in the Federal 
Register and mandatory by July 2014.

[[Page 10927]]

    The Bureau understands that creditors originating loans insured by 
FHA and VA must satisfy the requirements established by those agencies. 
These creditors will not be able to originate FHA or VA ARMs with look 
back periods of 45 days or longer until those agencies modify their 
policies governing look-back periods. Based on discussions with those 
agencies, the Bureau has decided to grandfather ARMs with look-back 
periods of less than 45 days originated prior to one year after the 
effective date of the final rule. Thus, for such ARMs, the final rule 
provides a year beyond the one year implementation period for the 
transition to ARMs with look-back periods of 45 days or more.
    Consultation with government agencies that guarantee ARMs with 
look-back periods of less than 45 days revealed, in addition to there 
being no substantive reason to retain those specific look-back periods, 
an expectation that they could complete their processes, including any 
required rulemaking, well within the grandfather period. In addition, 
the Bureau expects that any other investors or guarantors will make 
conforming changes to the look-back periods of their loan products by 
the time the grandfather period expires. In light of this, the Bureau 
believes that establishing a date certain for the expiration of the 
grandfather period is preferable to adopting an indeterminate period 
and pinning consumer protections to the indefinite future date. To 
provide consumers with the protections contemplated by Sec.  1026.20(c) 
and for the reasons discussed above, the Bureau is extending the 
proposed grandfather period by 18 months such that Sec.  1026.20(c) 
grandfathers ARMs with look-back periods of less than 45 days 
originated prior to one year after the effective date of the final 
rule, i.e., such ARMs originated prior to January 10, 2015. See part VI 
below for a discussion of the effective date for the 2013 TILA 
Servicing Rule.
    Four trade associations and a credit union recommended 
grandfathering all ARMs originated prior to the effective date of the 
rule. The Bureau believes that, for all the reasons discussed 
throughout the section-by-section analysis, consumers with ARMs 
originated prior to the effective date of the rule but which, after 
that date, have an interest rate adjustment with a corresponding 
payment change can benefit from the consumer protections afforded by 
Sec.  1026.20(c) as much as consumers with ARMs originated after the 
effective date. In many of these cases, adjustments will occur a year 
or more after the effective date of the rule, exposing those consumers 
to the same risk of payment shock as those whose ARMs originate after 
the effective date. Therefore, once the final rule takes effect, except 
for ARMs with look-back periods of less than 45 days covered by the 
grandfather period, it applies to all ARMs with interest rate 
adjustments causing payment changes.
    A large bank affiliate originating mortgage loans to clients of its 
affiliated wealth management businesses submitted comments in favor of 
retaining the 25- to 120-day compliance period to preserve short-term 
index loans, i.e., ARMs with frequent interest rate adjustments. The 
commenter stated that these loans are in demand by certain sectors of 
the marketplace and offer benefits to those consumers. Because the 
interest rates of most short- term index loans adjust at least monthly, 
under the proposed 60- to 120-day timeframe, creditors would have no 
choice but discontinue such products.
    The Bureau agrees with the commenter's rationale for preserving 
these frequently adjusting ARMs. Unlike most ARMs with interest rates 
that adjust annually or every three, five, seven, or ten years, short-
term index loans adjust so often as to obviate the risk of payment 
shock. Consumers whose interest rates adjust monthly run little risk of 
surprise at a changed payment compared to consumers whose ARM interest 
rates have not adjusted for one, three, five, or seven years before the 
payment change. Moreover, each interest rate adjustment for such loans 
occurs only 30 days or so after the last adjustment, further insulating 
these consumers from the market fluctuations more likely to occur over 
the course of a year or more. In sum, short-term index ARMs are not the 
types of loans the Bureau intends to target with the requirement of 
Sec.  1026.20(c) to provide consumers with between 60 and 120 days of 
advance notice prior to the first due date of a new payment after an 
interest rate adjustment causing a payment change. For the above-stated 
reasons, the final rule permits the notice required by Sec.  1026.20(c) 
to be provided to consumers between 25 and 120 days before the first 
payment at new level is due after an interest rate adjustment for ARMs 
with a uniform schedule of interest rate adjustments occurring every 60 
days or less, which, as clarified in comment 20(c)(2)-1, means ARMs 
that adjust regularly at a maximum of every 60 days and that this time 
period excludes any grace or courtesy periods.
    The Bureau also proposed to alter the timing requirements for ARMs 
adjusting for the first time within 60 days of consummation where the 
interest rate disclosed at consummation was an estimate, rather than 
the actual interest rate. (Under the proposal, if the actual interest 
rate had been disclosed at consummation, such ARMs would have been 
exempted from the rule pursuant to proposed Sec.  1026.20(c)(1)(ii)(2). 
The Bureau noted that creditors, assignees, and servicers of such ARMs 
would not have been able to comply with the 60-day timeframe. For such 
loans, the disclosures proposed by Sec.  1026.20(c) would have had to 
be provided to consumers as soon as practicable, but not less than 25 
days before a payment at a new level was due. The Bureau received no 
comments on this topic and is adopting the rule as proposed.
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 have required 
creditors, assignees, and servicers to inform consumers that, under the 
terms of their adjustable-rate mortgage, the specific period in which 
their current interest rate has been in effect would end on a certain 
date and that their interest rate and mortgage payment will change on 
that date. This information, the Bureau stated, is similar to the pre-
consummation disclosures required by current Sec.  1026.19(b)(2)(i) and 
Sec.  1026.37(j) as proposed in the 2012 TILA-RESPA Proposal. Proposed 
comment 20(c)(2)(ii)(A)-1 clarified that the current interest rate was 
the interest rate that would be in effect on the date of the 
disclosure.
    Proposed Sec.  1026.20(c)(2)(i)(B) would have required the ARM 
payment change notices to include the dates of the impending and future 
interest rate adjustments. Proposed Sec.  1026.20(c)(2)(i)(C) also 
would have required disclosure of any other loan changes 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 Bureau explained that the first ARM model form it tested did 
not contain the 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 would adjust 
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

[[Page 10928]]

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.\69\ In the absence of 
comments regarding this provision, the Bureau is adopting the final 
rule as proposed.
---------------------------------------------------------------------------

    \69\ Macro Report, at vii.
---------------------------------------------------------------------------

20(c)(2)(ii)
Table With Current and New Interest Rates and Payments
    Proposed Sec.  1026.20(c)(2)(ii) would have required 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 new 
payment allocated to interest, principal, and property taxes and 
mortgage-related insurance, as applicable. The information in this 
table would have appeared within the larger table containing all the 
required disclosures.
    This table would have followed the same order as, and had headings 
and format substantially similar to, those in the table in model forms 
H-4(D)(1) and (2) in appendix H of subpart C. The Bureau stated that it 
confirmed through consumer testing that, when presented with 
information in a logical order, participants more easily grasped the 
complex concepts contained in the proposed Sec.  1026.20(c) notice. For 
example, the form would have begun by informing consumers of the basic 
purpose of the notice: Their interest rate was going to adjust, when it 
would adjust, and the adjustment would change their mortgage payment. 
This introduction would have been immediately followed by a visual 
illustration of this information in the form of a table comparing 
consumers' current and new interest rates. Based on its consumer 
testing, the Bureau stated it believed that the understanding of the 
consumers tested was 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 proposed that creditors, assignees, and 
servicers disclose the information in the table as set forth in model 
forms H-4(D)(1) and (2) in appendix H.
    Proposed Sec.  1026.20(c)(2)(ii) would have replaced current Sec.  
1026.20(c)(1) and (4), but would have retained the requirement 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 have required 
disclosure of the date when the consumer would have to start making the 
new payment and proposed comment Sec.  1026.20(c)(2)(ii)(A)-1 would 
have clarified that the new interest rate would have had to be the 
actual rate, not an estimate. Proposed Sec.  1026.20(c)(2)(ii) also 
replaced the language ``prior'' and ``current'' in the current rule 
with the terms ``current'' and ``new,'' respectively, and removed 
comment 20(c)(2)-1 which, among other things, used the terms ``prior'' 
and ``current.'' This change was designed to make clear that 
``current'' meant the interest rate and payment in effect prior to the 
interest rate adjustment and ``new'' meant the interest rate and 
payment resulting from the interest rate adjustment.
    Proposed comment 20(c)(2)(ii)(A)-1 defined the term ``current'' 
interest rate as the one in effect on the date of the disclosure. This 
more succinct definition replaced the lengthy definition of ``prior 
interest rates,'' which current comment 20(c)(1) defines 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 
were projected to increase as a result of the adjustment. All 
participants in all rounds of testing understood that their interest 
rate and payment were projected to increase and when these changes 
would occur.\70\
---------------------------------------------------------------------------

    \70\ Macro Report, at vii.
---------------------------------------------------------------------------

    Current ARM notices are not required to show the allocation of 
payments among principal, interest, and escrow accounts for any ARM. 
The Bureau proposed including this information in the table for 
interest-only and negatively-amortizing ARMs only. The Bureau stated it 
believed that providing the payment allocation would have helped 
consumers better understand the risk of these products by demonstrating 
that their payments would not have reduced the loan principal. The 
Bureau also said that providing the payment allocation would have 
helped 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. Because payment allocation 
might change over time, the rule would have required disclosure of the 
expected payment allocation for the first payment period during which 
the adjusted interest rate would have applied.
    The Bureau explained that the notice disclosing an allocation of 
payment for interest-only or negatively-amortizing ARMs was not tested 
until the third round of testing. The notice tested set forth the 
following scenario to consumers: The first adjustment of a 3/1 hybrid 
ARM--an ARM with a fixed interest rate for three years followed by 
annual interest rate 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 the 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.\71\
---------------------------------------------------------------------------

    \71\ Macro Report, at vii-viii. The allocation table for 
interest-only and negatively-amortizing ARMs was revised after the 
third and final round of testing and is identical in both Sec.  
1026.20(c) and (d).
---------------------------------------------------------------------------

    The Bureau recognized that certain Dodd-Frank Act amendments to 
TILA pose restrictions on the origination of non-amortizing and 
negatively-amortizing loans. For example, TILA section 129C requires 
creditors to determine that consumers have the ability to repay the 
mortgage loan before lending to them and that this assumes a fully-
amortizing payment. The Bureau thought it possible that this law and 
its implementing regulation would restrict the origination of risky 
mortgages such as interest-only and negatively-amortizing ARMs.
    The Bureau stated that other Dodd-Frank Act amendments to TILA, 
such as the proposed periodic statement provisions discussed below, 
would provide payment allocation information to consumers for each 
billing cycle. Thus, consumers with interest-only or negatively-
amortizing loans, or those who might obtain such loans in the

[[Page 10929]]

future, would receive information about the interest-only or 
negatively-amortizing features of their loans through the payment 
allocation information in the periodic statement. Also, as stated 
above, consumer testing showed that participants tested were confused 
by the allocation table. In view of these changes to the law and the 
outcome of consumer testing, the Bureau solicited comments on whether 
to include allocation information for interest-only and negatively-
amortizing ARMs in the proposed table described above.
    A trade association generally supported the tabular format, stating 
that consumer testing has repeatedly proven its effectiveness. A large 
bank recommended eliminating altogether the table with the current and 
new interest rates and payments because, it said, the table tested 
poorly with consumers and would confuse them as well as be duplicative 
of the proposed periodic statement. Other commenters recommended 
eliminating only the portion of the table disclosing allocation 
information for interest-only and negatively-amortizing ARMs while one 
large bank commended the Bureau for adding these disclosures to the 
Sec.  1026.20(c) notice. Those commenters in favor of eliminating 
allocation information for these ARMs said the information was not 
fully consumer tested, would be based on projections that would confuse 
and distract consumers, and would require costly software upgrades. 
Most of these commenters recommended substituting the statement for 
interest-only and negatively-amortizing ARMs required by Sec.  
1026.20(c)(2)(vi) in place of the allocation information; one large 
bank suggested expanding the language in these statements as a 
substitute for the allocation information. The large bank also said the 
allocation information would confuse consumers because, in the case of 
a negatively-amortizing ARM, the portion allocated to principal would 
have to be expressed as a negative number. One trade association 
recommended allowing estimated escrow payments for the new payment 
allocation table, which is what the rule proposed and the Bureau is 
adopting in Sec.  1026.20(c)(2)(ii)(C).
    The Bureau is adopting Sec.  1026.20(c)(2)(ii) as proposed for the 
reasons set forth in the proposal and those set forth below. The table 
is the centerpiece of the Sec.  1026.20(c) disclosure and contains some 
of the disclosure's most important information: The consumers' upcoming 
new interest rate and payment set forth next to their current rate and 
payment, such that consumers can make comparisons. This information 
informs consumers of the exact amount of the new mortgage payment the 
consumer must make starting in the next few months and the table allows 
easy comparison with their current charges, helping consumers decide on 
how best to proceed. Also, the periodic statement will provide 
consumers with only part of the information in the table: The date 
after which the interest rate will adjust and the amount of the next 
payment. Moreover, the periodic statement generally would provide 
consumers with a month warning before a payment increase, rather than 
the minimum 60-day advance notice required by Sec.  1026.20(c).
    Because interest-only and negatively-amortizing ARMs pose more 
potential risk to consumers than conventional ARMs, the Bureau believes 
that providing consumers with the specific payment allocations for when 
their interest rates adjust will provide a comprehensible snapshot of 
the consequences of the upcoming adjustments and better enable those 
consumers to manage their mortgages. The table itself tested well with 
consumers; the allocation breakdown for the new payment for interest-
only and negatively-amortizing ARMs did not test as well. As discussed 
above, the Bureau revised the model forms to address that problem. 
Moreover, the periodic statement contains a similar allocation table 
for the upcoming mortgage payment and testing of the periodic statement 
went well and raised no concerns regarding projected principal, 
interest, and escrow--including for payment-option loans.\72\ In 
addition, as set forth in the periodic statement sample form in 
appendix H-30(C), the allocation of principal for negatively-amortizing 
loans is zero, and not a negative number.
---------------------------------------------------------------------------

    \72\ Macro Report, at 15.
---------------------------------------------------------------------------

    Also, the proposed rule clearly set forth the bases upon which to 
make the projections for the allocation table for these ARMs, as well 
as for loan balances. See the section-by-section analysis of Sec.  
1026.20(c)(2)(v) below regarding loan balances. For certain consumers, 
such as those who are delinquent, who may choose to pay ahead, or who 
have payment-option ARMs, the projected amount may not prove to be the 
actual amount. However, servicers routinely project expected payment 
allocations and loan balances any time they provide consumers with a 
future payment amount, such as in the periodic statement. The Bureau 
also notes that the use of allocation tables showing projected payments 
is an established practice in Regulation Z, as illustrated, for 
example, in appendices H-4(E) and (F). Also, the Bureau expects the 
origination of these risky loans will continue to decline in light of 
the qualified mortgage rules implementing TILA section 129C, thereby 
reducing the burden on servicers to provide the Sec.  1026.20(c) 
allocation table. For these reasons and the reasons set forth in the 
proposed rule, the Bureau is adopting the final rule as proposed. The 
Bureau is adopting comment 20(c)(2)(ii)(A)-1 with the additional 
clarification that creditors, assignees, and servicers may round the 
interest rate, pursuant to the requirements of the ARM contract.
20(c)(2)(iii)
Explanation of How the Interest Rate Is Determined
    Proposed Sec.  1026.20(c)(2)(iii) would have required the ARM 
disclosures to explain how the interest rate was determined. Consumer 
testing revealed that participants generally had difficulty 
understanding the relationship of the index, margin, and interest 
rate.\73\ The Bureau said this was the reason it proposed a relatively 
brief and simple explanation that the new interest rate would be 
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) also would have required disclosure of the specific 
amount of the margin.
---------------------------------------------------------------------------

    \73\ Macro Report, at viii.
---------------------------------------------------------------------------

    The Bureau noted that the proposed explanation of how the 
consumer's new interest rate was determined, such as adjustment of the 
index by the addition of a margin, mirrored 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 paralleled the pre-consummation 
disclosure of the index and margin in the 2012 TILA-RESPA Proposal. 
Proposed Sec.  1026.20(c) also would have required disclosure of the 
index 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 have replaced current Sec.  1026.20(c)(2), 
which required disclosure of the index values upon which the 
``current'' and ``prior'' interest rates are based. The Bureau said 
that it believed that providing consumers with index values is less 
valuable than providing them with their

[[Page 10930]]

actual interest rates. The Bureau also proposed removal of current 
comment 20(c)(2)-1, which addressed the requirement to disclose current 
and prior interest rate.
    Consumer testing indicated that the explanation helped participants 
better understand the relationship between interest rate, index, and 
margin. As stated in the proposal, it also helped dispel the notion 
held by many consumers in the initial rounds of testing that creditors 
subjectively determined their new interest rate at each adjustment.\74\ 
The Bureau stated that it believed the proposed rule and forms struck 
an appropriate balance between providing consumers with key information 
necessary to understand the basis of their ARM interest rate adjustment 
without overloading consumers with complex and confusing technical 
information.
---------------------------------------------------------------------------

    \74\ Macro Report, at viii.
---------------------------------------------------------------------------

    The Bureau received one comment regarding the explanation of how 
the interest rate is determined. A large bank recommended including 
adjustments to the index other than the margin, such as the addition of 
previously unapplied carryover interest.\75\ The Bureau points out that 
the proposed rule contemplated including the addition of previously 
unapplied carryover interest increase in the explanation of how the new 
payment is calculated. The Bureau notes that, in the proposed rule, the 
new payment explanation came after the explanation of how the new 
interest rate is calculated. The Bureau agrees with the commenter that 
logically, and for accuracy and completeness, any previously unapplied 
carryover interest added to the index and margin to formulate the new 
interest rate should be disclosed to the consumer in the explanation of 
how the interest rate is calculated, rather than initially disclosing 
it in the later explanation of how the new payment is calculated.
---------------------------------------------------------------------------

    \75\ Carryover interest, or foregone interest rate increases, is 
the amount of interest rate increase foregone at any ARM interest 
rate adjustment that, subject to rate caps, can be added to future 
interest rate adjustments to increase, or to offset decreases in, 
the rate determined by using the index or formula.
---------------------------------------------------------------------------

    The Bureau also notes that proposed Sec.  1026.20(c)(2)(iv) would 
have required, among other things, disclosure of any previously 
unapplied carryover interest at each adjustment, as applicable. The 
Bureau solicited comments regarding this proposed requirement.\76\ A 
credit union and a State trade association recommended that the Bureau 
eliminate disclosure of carryover interest altogether, asserting that 
it is too complex and unnecessary for consumers to understand and it 
would distract consumers from other information contained in the Sec.  
1026.20(c)(2) notices. A large servicer suggested the alternative of 
including this information in the periodic statement instead of the ARM 
disclosure.
---------------------------------------------------------------------------

    \76\ Because the issue of carryover interest arose first in the 
context of the explanation of how the interest rate is determined, 
the Bureau addresses the issue in depth here rather than in the 
following section Sec.  1026.20(c)(2)(iv), Rate and Payment Limits 
and Unapplied Carryover Interest.
---------------------------------------------------------------------------

    The Bureau does not agree with these commenters. To provide 
consumers with candid and accurate information about the adjustments to 
their adjustable-rate mortgages, the Bureau has decided to issue the 
final rule including disclosure of applicable information regarding 
carryover interest. Excluding this information would present consumers 
with an incomplete and incorrect portrait of their loan. Complexity is 
inherent in a disclosure dealing with indices, margins, adjusting 
interest rates, and changing payments. The Bureau has attempted to 
distill these complex concepts into their simplest elements without 
compromising substance. The Bureau hopes that consumers confused by the 
disclosure of the application of previously foregone interest rate 
increases, or any of the other complex concepts addressed in the Sec.  
1026.20(c) disclosure, will consult with the servicer, homeownership 
counselors or other housing finance professionals, or knowledgeable 
personal contacts.
    Because the Bureau agrees with the large bank commenter that 
informing consumers of the application of carryover interest in the 
explanation of how their new interest rate is calculated is both 
logical and would improve the accuracy of the disclosure, the Bureau is 
adopting Sec.  1026.20(c)(2)(iii) with the addition of information 
regarding the adjustments to the index other than the margin, such as 
the application of previously unapplied carryover interest. The final 
rule modifies the proposed rule by requiring disclosure of the type and 
amount of any adjustment to the index including, in addition to any 
margin, the application of previously foregone interest rate increases. 
Because the final rule requires disclosure of this information in Sec.  
1026.20(c)(2)(iii), the Bureau removes as repetitive the proposed 
disclosure in Sec.  1026.20(c)(2)(v) of the amounts of the margin, 
applied carryover interest, or any other adjustment to the index. The 
Bureau also is issuing the rule with comment 20(c)(2)(v)(B)-1, which 
provides clarification about the application of previously foregone 
interest rate increases, or applied carryover interest.
20(c)(2)(iv)
Rate and Payment Limits and Unapplied Carryover Interest
    Proposed Sec.  1026.20(c)(2)(iv) would have required 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 have required 
disclosure of the extent to which the creditor, assignee, or servicer 
had 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 stated that it believed 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 pursuing alternatives. The Bureau gave the 
example that if an adjustment caused a significant increase in the 
consumer's payment, knowing how much more the interest rate or payment 
could increase would better inform the consumer's decision whether or 
not to seek alternative financing.
    The Bureau pointed out that proposed Sec.  1026.20(c)(2)(iv) would 
have required, as current Sec.  1026.20(c)(3) requires, disclosure of 
the extent to which the creditor, assignee, or servicer had foregone an 
increase in the interest rate due to a limit, called unapplied 
carryover interest, and the earliest date such foregone interest rate 
increase could be applied. Proposed comment 20(c)(2)(iv)-1 regarding 
unapplied interest rate increases closely paralleled, and would have 
replaced, current comment 20(c)(3)-1. The comment would have explained 
that disclosure of foregone interest rate increases would apply only to 
transactions permitting interest rate carryover. It further would have 
explained that the amount of the foregone interest rate increase was 
the amount that, subject to rate caps, could be added to future 
interest rate adjustments to increase, or offset decreases in, the rate 
determined according to the index or formula.
    The Bureau reported that the consumers tested had difficulty 
understanding the concept of interest rate carryover when it was 
introduced during the third round of testing. The Bureau attributed 
this difficulty 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. However, the Bureau also simplified the

[[Page 10931]]

explanation of carryover interest to address this possible 
confusion.\77\
---------------------------------------------------------------------------

    \77\ Macro Report, at viii-ix. ``If not for this rate limit, 
your estimated rate on [date] would be [x]% higher'' was replaced 
with ``We did not include an additional [x]% interest rate increase 
to your new rate because a rate limit applied.''
---------------------------------------------------------------------------

    In its proposed rule, the Bureau recognized that the disclosure of 
rate limits and unapplied carryover interest would have provided 
information that might help consumers better understand their ARMs. 
However, the Bureau stated that it was considering whether the 
assistance this information would have provided outweighed its 
potential distraction from other more key information. Also, as 
explained above, consumers had difficulty understanding the concept of 
carryover interest and the Bureau was concerned that this difficulty 
might diminish the effectiveness of its proposed Sec.  1026.20(c) 
disclosures. The Bureau solicited comments on whether to include rate 
limits and unapplied carryover interest in the proposed Sec.  
1026.20(c) disclosures.
    The Bureau received few comments regarding the proposed disclosure 
of rate limits and unapplied carryover interest. A credit union 
supported inclusion of the rate and payment limits in the Sec.  
1026.20(c) notice and a large bank servicer and a large non-bank 
servicer recommended against it. A large bank servicer commented that 
consumers do not need this information because they receive it at 
consummation and including it in the Sec.  1026.20(c) notice would 
distract and confuse them. The non-bank servicer and a trade 
association said the unapplied carryover interest was unrelated to the 
interest rate adjustment and would confuse consumers. See the section-
by-section analysis of Sec.  1026.20(c)(2)(iii) above for a discussion 
of disclosure of applying previously foregone carryover interest.
    In addition, a credit union and a State trade association 
recommended the Bureau eliminate disclosure of carryover interest 
altogether, asserting that it is too complex and unnecessary for 
consumers to understand and it would distract consumers from other 
information contained in the Sec.  1026.20(c) notices. A large servicer 
suggested the alternative of including this information in the periodic 
statement instead of in the Sec.  1026.20(c) notice.
    Because most ARMs covered by this rule will adjust a year or more 
after consummation, the Bureau disagrees that information provided at 
consummation suffices to adequately inform consumers about carryover 
interest and rate limits. Moreover, carryover interest is an essential 
element in the determination of the new interest rate and payment. For 
these reasons and the reasons in the Bureau's proposed rule, the Bureau 
is adopting the final rule as proposed. The Bureau also is adopting 
proposed comment 20(c)(2)(iv)-1, with slight modifications to clarify 
the definition of carryover interest.
20(c)(2)(v)
Explanation of How the New Payment Is Determined
    Proposed Sec.  1026.20(c)(2)(v) would have required ARM disclosures 
to explain how the new payment was 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 would have been consistent with the disclosures 
provided at the time of application pursuant to Sec.  
1026.19(b)(2)(iii). The Bureau also stated that it would have been 
consistent with the requirement in TILA section 128A to disclose the 
assumptions upon which the new payment is based, which the Bureau had 
proposed to implement in Sec.  1026.20(d), and thus would have promoted 
consistency among Regulation Z ARM disclosures.
    The current rule 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 
have required 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 explained that a disclosure regarding the application 
of previously foregone interest would have been required only for 
transactions that permitted interest rate carryover. The proposed 
comment further explained that foregone interest was 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 
stated that it believed that this explanation would have helped 
consumers better understand how the index or formula and margin would 
determine their new payment and would have dispelled the notion held by 
many consumers in the initial rounds of testing that the creditor 
subjectively determined their new interest rate, and thus the new 
payment, at each adjustment.
    The proposal would have required 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 of the balance 
differed 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 proposed 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 of the loan caused by 
the adjustment.
    The Bureau stated that disclosure of the four key assumptions upon 
which the new payment would be based would have provided a succinct 
overview of how the interest rate adjustment works. It also would have 
demonstrated that factors other than the index could increase 
consumers' interest rates and payments. Disclosures of these factors, 
the Bureau said, would have provided 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 clarifies that disclosure of certain 
information related to loans that are not fully amortizing is required. 
The Bureau proposed disclosure of similar information in Sec.  
1026.20(c)(2)(vi), discussed below.
    Two commenters voiced concern over having to project an estimate of 
the loan balance, as required in the proposed rule. For a discussion of 
the use of projections of scheduled payments for interest-only and 
negatively-amortizing ARMs, as well as for the loan balance, see the 
section-by-section analysis of Sec.  1026.20(c)(2)(ii) above. The 
Bureau did not receive any other specific comments regarding Sec.  
1026.20(c)(2)(v) apart from one community bank recommending against the 
inclusion of similar information in both the explanation of how the 
interest rate is calculated and the explanation of how the new payment 
is determined. The Bureau points out that the components of the 
interest rate calculation are also components of how the new payment is 
determined and therefore, the Bureau will retain these common 
components in Sec.  1026.20(c)(2)(v). However, to avoid redundancy, the 
final rule does not require reiteration of the amount of the

[[Page 10932]]

margin, applied carryover interest, or any other adjustment to the 
index.
    For these reasons and the reasons articulated in the proposed rule, 
the Bureau is issuing Sec.  1026.20(c)(2)(v) and comment 
20(c)(2)(v)(B)-1 as proposed, except the final rule does not require 
disclosure of the specific amount of any adjustment to the margin, 
because that data is provided in the final rule under Sec.  
1026.20(c)(2)(iii).
20(c)(2)(vi)
Interest-Only and Negative-Amortization Statement and Payment
    Proposed Sec.  1026.20(c)(2)(vi) would have required Sec.  
1026.20(c) notices to include a statement regarding the allocation of 
payments to principal and interest for interest-only or negatively-
amortizing ARMs. If negative amortization occurred as a result of the 
interest rate adjustment, the proposed rule would have required 
disclosure of the payment necessary to amortize fully such loans at the 
new interest rate over the remainder of the loan term. As the Bureau 
explained in proposed comment 20(c)(2)(vi)-1, for interest-only loans, 
the statement would have informed the consumer that the new payment 
would cover all of the interest but none of the principal owed and, 
therefore, would not reduce the loan balance. For negatively-amortizing 
ARMs, the statement would have informed the consumer that the new 
payment would cover only part of the interest and none of the 
principal, and therefore the unpaid interest would add to the balance. 
The current rule, clarified by current comment 20(c)(5)-1, requires 
disclosure of the payment necessary to amortize fully 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 have replaced 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 amortize fully those loans at 
the new interest rate over the remainder of the loan term. However, the 
Bureau pointed to countervailing considerations regarding whether to 
include this information in proposed Sec.  1026.20(c).
    The Bureau recognized that certain Dodd-Frank Act amendments to 
TILA pose restrictions on the origination of non-amortizing and 
negatively-amortizing loans. For example, TILA section 129C requires 
creditors to make a reasonable and good faith determination that 
consumers have the ability to repay the mortgage loan before lending to 
them, and that in making such a determination the creditor generally 
must assess the consumer's ability to repay based upon a fully-
amortizing payment. The Bureau thought it possible that this law and 
its implementing regulations would restrict the origination of risky 
mortgages such as interest-only and negatively-amortizing ARMs. The 
Bureau also noted that other Dodd-Frank Act amendments to TILA, such as 
TILA section 128(f), which, as implemented by proposed Sec.  1026.41, 
would have included information about non-amortizing and negatively-
amortizing loans in each billing cycle, such as an allocation of 
payments.
    Thus, consumers with interest-only and negatively-amortizing ARMs, 
or those who may obtain such loans in the future, would receive certain 
information about the interest-only or negatively-amortizing features 
of their loans in another disclosure, although this would not include 
the payment required to amortize fully negatively-amortizing loans. 
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 said it would weigh 
the value of disclosing specific information regarding amortization, 
such as the payment needed to amortize fully negatively-amortizing ARMs 
against possible confusion to consumers. In view of these changes to 
the law and the outcome of consumer testing, the Bureau solicited 
comments on whether to include the payment required to amortize ARMs 
that would become negatively amortizing as a result of an interest rate 
adjustment.
    Some industry commenters said that the statements regarding 
interest-only and negatively-amortizing ARMs should be disclosed 
instead of the proposed allocation information for these loans. See 
section-by-section analysis of Sec.  1026.20(c)(2)(ii). Several 
consumer groups commended the Bureau for requiring the amortization 
statements but recommended additional warning language for negatively-
amortizing ARMs, which they characterized as dangerous. The Bureau 
believes that the statements regarding amortization are clear and 
succinct and that additional warning language is not needed. Moreover, 
the Bureau points out that other new mortgage rules more directly 
address the risks posed by non-amortizing mortgage products.
    The Bureau is modifying the wording of Sec.  1026.20(c)(2)(vi) and 
comment 20(c)(2)(vi)-1 to clarify that Sec.  1026.20(c) notices for 
``interest-only ARMs'' as well as any other ARMs for which consumers 
are paying only interest, must include the statement discussed above 
regarding the amortization consequences of such payments. The Bureau 
also is modifying the language of Sec.  1026.20(c)(2)(vi) to conform 
with the proposed language in comment 20(c)(2)(vi)-1 and the section-
by-section analysis of the proposed rule regarding the amortization 
statements required for ARMs for which consumers pay only interest and 
for negatively-amortizing ARMs. The final rule requires Sec.  
1026.20(c) notices to disclose, for consumers whose ARM payments 
consist of only interest, that their payment will not be allocated to 
pay loan principal and will not reduce the loan balance or, for 
negatively-amortizing ARMs, that the new payment will not be allocated 
to pay loan principal and will pay only part of the interest, thereby 
adding to the balance of the loan. No comments were received regarding 
the Sec.  1026.20(c)(2)(vi) requirement to disclose the amount 
necessary to amortize negatively-amortizing ARMs. For these reasons and 
those stated in the proposed rule, the Bureau is adopting the rule and 
comments 20(c)(2)(vi)-1 and -2 with the addition of the amortization 
language discussed above.
20(c)(2)(vii)
Prepayment Penalty
    Proposed Sec.  1026.20(c)(2)(vii) would have required disclosure of 
the circumstances under which any prepayment penalty could be imposed, 
such as selling or refinancing the principal dwelling, the time period 
during which such penalty could apply, and the maximum dollar amount of 
the penalty. The proposed rule would have cross-referenced the 
definition of prepayment penalty in Sec.  1026.41(d)(7)(iv), the 
proposed periodic statements.
    The Bureau reasoned that interest rate adjustments might cause 
payment shock or require consumers to pay their mortgage at a rate they 
might no longer be able to afford, prompting them to consider 
alternatives such as refinancing. To fully understand the implications 
of such actions, the Bureau stated that consumers should know whether 
prepayment penalties might apply. Under the proposed rule, such 
information would have included the maximum penalty in dollars that 
might

[[Page 10933]]

apply and the time period during which the penalty might be imposed. 
The Bureau stated that the dollar amount of the penalty, as opposed to 
a percentage, would be more meaningful to consumers.
    The Bureau also proposed disclosure of any prepayment penalty in 
Sec.  1026.20(d) ARM initial rate adjustment notices and in the 
periodic statements in proposed 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.\78\ For this reason, the 
Bureau proposed to clarify the circumstances giving rise to a 
prepayment penalty which creditors, assignees, and servicers must 
disclose to the consumer in the payment change notice. The proposed 
forms included model language to alert consumers that a prepayment 
penalty might apply if they pay off their loan, refinance, or sell 
their home before the stated date.
---------------------------------------------------------------------------

    \78\ Macro Report, at vi.
---------------------------------------------------------------------------

    The Bureau recognized that Dodd-Frank Act amendments to TILA, such 
as TILA section 129C and its implementing regulations, would 
significantly restrict a lender's ability to impose prepayment 
penalties. Other Dodd-Frank Act amendments to TILA, such as TILA 
section 128(f) and its implementing regulations, would have provided 
consumers with information about prepayment penalties in the periodic 
statement they receive each billing cycle. Thus, consumers who have 
ARMs with prepayment penalty provisions or who might 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 solicited comments on whether to include 
information regarding prepayment penalties in Sec.  1026.20(c).
    A national trade association, a State trade association, a credit 
union, a large servicer, and a non-bank servicer recommended against 
inclusion of the prepayment penalty information. The primary reasons 
for their opposition was the onerousness of calculating the prepayment 
penalty and the burden of having dynamic information fields that would 
require calculating the prepayment penalty amount for each individual 
loan requiring a Sec.  1026.20(c) notice. These commenters recommended 
use of more standardized static language in place of the dynamic 
fields. These commenters stated variously that the amount of a 
prepayment penalty is determined by a number of dynamic factors and 
there are variations on how to calculate it, servicers do not currently 
include prepayment penalty information on the file they send to their 
print vendors because many servicing systems are unable to calculate 
and store this information as it may be stored in a separate system, 
and this information may be computed by hand. The non-bank servicer 
pointed out that prepayment penalties are vanishing as a result of 
market forces and new regulations. It recommended listing the minimum 
finance charges as an example and disclosing the dollar amount of the 
prepayment penalty on the periodic statement instead of on ARM 
disclosures.
    The Bureau is adopting the rule, with significant modification from 
the proposed rule. In the final rule, in place of requiring disclosure 
of the maximum dollar amount of the penalty, the consumer is directed 
by the required disclosure to contact the servicer for additional 
information, including the maximum amount of the prepayment penalty. 
Comment 20(c)(2)(vii)-1 clarifies that the creditor, assignee, or 
servicer has the option of either deleting this field entirely from the 
Sec.  1026.20(c) disclosure for consumers who do not have prepayment 
penalties or retaining the field and inserting a word such as ``None'' 
after the prepayment penalty heading. Thus, the final rule retains 
information crucial for consumers to make decisions regarding whether 
or not to retain their ARMs in the face of an interest rate and payment 
increase while reducing the burden on industry by eliminating a field 
that was both dynamic and particularly difficult to calculate. The 
Bureau believes that encouraging consumers to contact the servicer for 
the exact dollar amount of the maximum penalty or for other questions, 
rather than including that information in the disclosure, does not 
significantly compromise consumer protection because contacting the 
servicer should yield the most up-to-date information as well as 
encourage contact with the servicer for consumers facing financial 
distress. The Bureau also notes that the periodic statement required by 
the final rule likewise does not contain specific information about any 
prepayment penalty other than its existence, if applicable. The Bureau 
also is changing the cross-reference for the definition of prepayment 
penalty from the periodic statement regulation to the definition set 
forth in the ATR rule.\79\
---------------------------------------------------------------------------

    \79\ See Sec.  1026.32(b)(6)(i). NB: Certain provisions of the 
ATR definition apply specifically to FHA loans.
---------------------------------------------------------------------------

    The Bureau believes, for the reasons stated above and in the 
proposed rule, that information about the prepayment penalty is 
important for consumers to take into account when considering 
alternatives to an interest rate and payment increase. For this reason, 
the Bureau is adopting the final rule and comment 20(c)(2)(vii)-1 with 
the modifications set forth above.
20(c)(3) Format
Payment Change Rate Adjustment Disclosures
    See the section-by-section analysis of Sec.  1026.17(a)(1) above 
for a discussion of the form requirements governing Sec.  1026.20(c). 
The Bureau received no comments regarding its proposed changes to Sec.  
1026.17(a)(1) regarding form requirements governing Sec.  1026.20(c).
    A consumer group representing a constituency that speaks more than 
100 different dialects recommended that the Bureau require that ARM 
disclosures be provided in languages other than English to ensure 
comprehension by mortgagors with limited English proficiency. To this 
end, the commenter suggested requiring creditors, assignees, and 
servicers to send a simple, multilingual notice each month for the 
first three months of the ARM loan asking consumers to indicate their 
preferred language.
    While recognizing the value to consumers of limited English 
proficiency of receiving communications in their native language, the 
Bureau is issuing the final rule without this language requirement 
because the Bureau believes it would be difficult and costly to 
implement, particularly considering the number of languages in which 
creditors, assignees, and servicers would be required to provide Sec.  
1026.20(c) and (d) ARM notices. The Bureau notes that Regulation Z 
contemplates the use of languages other than English in Sec.  1026.27. 
Under this provision, disclosures may be in a language other than 
English, provided that the disclosures are made available in English at 
the consumer's request. Thus, a creditor, assignee, or servicer may 
provide ARM disclosures in languages other than English, but the Bureau 
declines revising Regulation Z to require that they do so.

[[Page 10934]]

20(c)(3)(i)
All Disclosures in Tabular Form
    Proposed Sec.  1026.20(c)(3)(i) would have required that the Sec.  
1026.20(c) 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 Bureau stated that 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.\80\ They also had difficulty with the concepts of amortization 
and interest rate carryover.\81\ 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.
---------------------------------------------------------------------------

    \80\ Macro Report, at viii.
    \81\ Macro Report, at viii-ix.
---------------------------------------------------------------------------

    The proposal explained that the Bureau's testing showed that the 
consumers tested more readily understood these concepts when the 
information was presented to them in a simple manner and in the 
groupings contained in the model forms. The Bureau also observed that 
the participants 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 its consumer testing, the Bureau stated that it believed 
understanding of participants was enhanced by presenting the 
information in this 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 proposed that 
creditors, assignees, and servicers disclose the information required 
by 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, the Bureau stated, participant 
comprehension improved with each successive iteration of the model 
form. As a result, the Bureau believes that displaying the information 
in tabular form can focus consumer attention and foster 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 the consumers 
tested both could understand and from which they could benefit.
    Although few industry commenters recommended specific changes to 
the order, headings, and format of the ARM model and sample forms, a 
large bank and a national trade association recommended that parties 
subject to the rule be permitted flexibility to account for loan 
products and customer situations not specifically addressed by the 
proposed rule and forms. These two commenters pointed to certain 
situations, including the following, as examples of circumstances in 
which flexibility to customize the forms would ensure accurate and full 
disclosure to the consumer: consumer bankruptcies and loans originated 
under certain State laws shielding consumers from personal liability; 
loans no longer having interest rate adjustments, such as ARMs 
converting to fixed-rate mortgages; creditors, assignees, and servicers 
choosing to send the annual Sec.  1026.20(c) interest rate disclosure 
no longer required by the final rule; and payment-option and payment-
rate ARMs. The national trade association stated that the proposed rule 
established rigid tables, configurations, substantive requirements, and 
order of presentation dictating the use of the sample and model forms 
in violation of TILA section 105(b) which, it said, specifically 
prohibits the Bureau from requiring use of a particular form. One 
commenter, a financial services compliance and risk management company, 
interpreted the proposed rule as mandating certain formatting 
requirements such as a reverse text data field and two-sided printing.
    The Bureau's response to these comments is two-fold. First, the 
proposed rule's requirement that Sec.  1026.20(c) disclosures be 
provided to consumers ``in the form of the table and in the same order 
as, and with headings and format substantially similar to'' the 
proposed model forms is consistent with established standards found 
throughout Regulation Z requiring tabular formatting as well as other 
conventions. For example, Sec.  1026.6(b)(1), entitled ``Form of 
disclosures; tabular format for open-end (not home-secured) plans,'' 
requires creditors to provide account-opening disclosures ``in the form 
of a table with headings, content, and format substantially similar 
to'' the tables in a particular model form. Moreover, Regulation Z's 
Appendices G and H--Open-End and Closed-End Model Forms and Clauses 
sets forth the permissible changes to model forms, including the Sec.  
1026.20(c) model forms. Thus, the proposed rule does not depart from 
established Regulation Z standards and does not violate TILA.
    Second, the proposed language referred to by commenters was not 
intended to strait-jacket creditors, assignees, and servicers into 
language inapplicable to non-standard customer situations and loan 
products. The ``substantially similar'' language was intended to allow 
disclosure providers the flexibility to develop, for example, forms 
that may be either one- or two-sided and that may, but need not, 
feature reverse text data fields.
    For these reasons and those articulated in the proposed rule, the 
Bureau is adopting Sec.  1026.20(c)(3)(i) and (ii) and comment 
20(c)(3)(i)-1. While, as stated above, the formatting conventions in 
the final Sec.  1026.20(c) disclosures do not depart from standard 
Regulation Z format requirements, the Bureau has added comment 
20(c)(3)(i)-1 clarifying that creditors, assignees, and servicers may 
modify the Sec.  1026.20(c) disclosures to account for certain 
circumstances or transactions that may not be addressed in the final 
rule or forms. Also, the final rule removes Sec.  1026.20(c) model and 
sample forms from the Regulation Z provision prohibiting formatting 
alterations. See Appendices G and H--Open-End and Closed-End Model 
Forms and Clauses.
20(c)(3)(ii)
Format of Interest Rate and Payment Table
    Proposed Sec.  1026.20(c)(3)(ii) would have required tabular format 
for ARM payment change notices for, among other things, interest rates, 
payments, and the allocation of payments for loans that are interest-
only and negatively-amortizing. This table would have been located 
within the table proposed by Sec.  1026.20(c)(3)(i). This table would 
have been substantially similar to the one tested by the Board for its 
2009 Closed-

[[Page 10935]]

End Proposal to revise Sec.  1026.20(c). The Bureau's proposal would 
have required the table to follow the same order as, and have headings 
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 them with the adjusted rate and new 
payment. Consumer testing revealed that nearly all participants were 
readily able to identify the table and understand the table and its 
content.\82\ The new interest rate and payment and date the first new 
payment is due is key information the consumer must know to commence 
payment at the new rate. For these reasons, the Bureau proposed 
locating this information prominently in the disclosure.
---------------------------------------------------------------------------

    \82\ Macro Report, at vii.
---------------------------------------------------------------------------

    The Bureau is issuing the final rule as proposed in Sec.  
1026.20(c)(3)(ii). See the section-by-section analysis of Sec.  
1026.20(c)(3)(ii) for a discussion of comments received and the 
Bureau's rationale for the proposed format in the interest rate and 
payment table and changes made in the final rule.
20(d) Initial Rate Adjustment
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 its 2009 Closed-End Proposal, the 
Board proposed amending the regulation that is now Sec.  1026.20, 
including deleting this provision regarding substitution. 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.'' \83\ The Board explained that when 
it originally adopted the provision in 1987, as footnote 45c of Sec.  
226.20(c) of Regulation Z,\84\ the regulations of other financial 
institution supervisory agencies--namely the OCC, the Federal Home Loan 
Bank Board (the FHLBB), and HUD--required subsequent disclosures for 
ARMs.\85\
---------------------------------------------------------------------------

    \83\ 74 FR 43232, 43272 (Aug. 26, 2009).
    \84\ 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 CFR 1026.
    \85\ 74 FR 43232, 43273 (citing 52 FR 48665, 48671 (Dec. 24, 
1987)).
---------------------------------------------------------------------------

    The Bureau proposed removing the current content of Sec.  
1026.20(d) because it was not aware of any other Federal financial 
institution supervisory agency rules requiring comprehensive disclosure 
requirements for ARMs. The Bureau solicited comments on whether there 
was any reason to retain this provision, including whether the removal 
had implications for rights under the Alternative Mortgage Transaction 
Parity Act.
    One non-bank servicer said that it opposed the elimination of the 
current content of Sec.  1026.20(d), but did not offer a reason why. 
Based on the lack of reasoned opposition to the Bureau's proposal and 
the above-stated rationale, the Bureau is adopting the proposal, 
thereby removing this text from the final rule.
Legal Authority
    For the reasons adduced above in the discussion of the legal 
authority underlying the Bureau's implementation of Sec.  1026.20(c), 
the Bureau removes current Sec.  1026.20(d) pursuant to its authority 
under TILA sections 105(a) and Dodd-Frank Act section 1405(b).
New Initial ARM Interest Rate Adjustment Disclosures
    In place of current Sec.  1026.20(d), the Bureau proposed to 
implement the initial ARM adjustment notice mandated by TILA section 
128A, as added by Dodd-Frank Act section 1418. Under proposed Sec.  
1026.20(d), approximately six months before the initial adjustment of 
adjustable-rate mortgages, creditors, assignees, and servicers would 
have been required to provide consumers with key information about 
their ARM adjustment. The information disclosed would have included the 
new rate, the new payment, and options for pursuing alternatives to 
their ARM. This initial ARM adjustment notice would have harmonized 
with proposed revisions to the Sec.  1026.20(c) ARM payment change 
notice. The Bureau stated its belief that promoting consistency between 
the ARM disclosure provisions of Sec.  1026.20(c) and (d) would have 
reduced compliance burdens on industry and minimized consumer 
confusion.
    Creditors, assignees, and servicers. Proposed Sec.  1026.20(d) 
would have applied to creditors, assignees, and servicers. Proposed 
comment 20(d)-1 clarified that a creditor, assignee, or servicer that 
no longer owned the mortgage loan or the mortgage servicing rights 
would not have been subject to the requirements of Sec.  1026.20(d). 
This language tracked, in part, the requirements of TILA section 128A 
that creditors and servicers must provide the initial ARM interest rate 
adjustment notices, but added assignees to the list of covered persons. 
The Bureau stated that applying the rule to creditors, but not 
assignees, would have resulted in inconsistent levels of consumer 
protection and differing obligations for similarly-situated owners of 
mortgage loans.
    The Bureau reasoned that it is a common practice for creditors to 
sell many or all of the loans they originate rather than hold them in 
portfolio. In those cases, without adding assignees as covered persons, 
assignees' obligation to provide consumers with the Sec.  1026.20(d) 
notice would be unclear. Thus, the Bureau reasoned, imposing 
requirements only on creditors or servicers might have particularly 
deleterious effects on consumers whose creditors assign their mortgage 
loans. The Bureau reasoned 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 proposed to make assignees, along with 
creditors and servicers, subject to the requirements Sec.  1026.20(d). 
For the same reasons, proposed Sec.  1026.20(d) would have required, as 
clarified by comment 20(d)-1 that any provision of subpart C governing 
Sec.  1026.20(d) also would have applied to creditors, assignees, and 
servicers--even where the other provisions of subpart C referred only 
to creditors.
    The Bureau received no comments specifically on the proposed 
inclusion of assignees as parties covered under Sec.  1026.20(d), 
although two commenters stated that servicers, as opposed to assignees, 
are not subject to civil liability under TILA. The Bureau points out 
that the proposed rule requires creditors, assignees, and servicers to 
provide consumers with the disclosures required by Sec.  1026.20(d) 
without referencing creditor, assignee, or servicer civil liability. 
Consistent with the proposal, the final rule and commentary set forth 
the obligation of creditors, assignees, and servicers but do not 
specifically address the issue of civil liability of any covered person 
in an action brought by a consumer. That issue is governed by TILA and 
the Bureau's revisions do not purport to impose requirements 
inconsistent with the statute. See the section-by-section analysis of 
Sec.  1026.20(c) above for further discussion of civil liability.
    For these reasons, and the reasons articulated in the proposal, the 
Bureau is adopting the rule as proposed. The

[[Page 10936]]

Bureau is adopting comment 20(d)-1, with added language clarifying 
that, (1) creditors, assignees, and servicers that own either the 
applicable ARM or the applicable mortgage servicing rights, or both, 
are subject to the requirements of Sec.  1026.20(d) and (2) although 
the rule applies to creditors, assignees, and servicers, those parties 
may decide among themselves which of them will provide the required 
disclosures.
    The extension of the requirement to assignees is authorized, among 
other authorities, 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 uses its 
authority under Dodd-Frank Act section 1405(b) to extend the 
applicability of the initial ARM adjustment notices under TILA section 
128A to assignees. As discussed above, this extension serves the 
interest of consumers and the public interest. Application of Sec.  
1026.20(d) to assignees is consistent with current Sec.  1026.20(c) 
commentary clarifying that those disclosure requirements apply to 
subsequent holders. Subjecting creditors, assignees, and servicers to 
the requirements of Sec.  1026.20(d) also promotes consistency with 
final Sec.  1026.20(c) and Sec.  1026.41 (the periodic statement), 
which likewise apply to creditors, assignees, and servicers.
    Loan modifications. A large bank and a national trade association 
recommended that the Bureau exempt loan modifications for financially-
distressed consumers from the requirements of Sec.  1026.20(d). They 
said that, among other reasons, requiring the notices in the context of 
a loan modification would delay execution of the loan modification by 
the 210 to 240 days advance notice required under the rule and that the 
Sec.  1026.20(d) notice was not appropriate for loan modifications.
    The Bureau notes that Sec.  1026.20(c), the existing Regulation Z 
rule regarding post-consummation ARM disclosures, does not exempt loan 
modifications from its requirements. However, the Bureau agrees with 
this recommendation, and therefore, Sec.  1026.20(d) limits coverage to 
initial interest rate adjustments pursuant to the ARM contract. Because 
initial interest rate adjustments occurring pursuant to a loan 
modification do not occur pursuant to the ARM contract, they will not 
be subject to this rule and thus, will not delay execution of loan 
modification agreements. See comment 20(d)-2, which the Bureau is 
adopting in the final rule. The Bureau believes that an initial 
interest rate adjustment pursuant to a loan modification agreement in a 
loss mitigation context does not require the consumer protections 
contemplated by Sec.  1026.20(d). Such consumers have either agreed to 
the new interest rate prior to execution of the loan modification or 
are receiving the benefit of a lower rate and thus, are not at risk of 
payment shock. Because the loan modification is the actual result of 
pursuing alternatives to the payments otherwise required under their 
adjustable-rate mortgages, the advance notice afforded by the rule does 
not benefit such consumers.
    For these reasons, as adopted, Sec.  1026.20(d) exempts from its 
coverage interest rate changes occurring in the context of a loan 
modification executed as a loss mitigation measure. Comment 20(d)-2 
clarifies, however, that the requirements of Sec.  1026.20(d) do apply 
to the initial interest rate adjustment that occurs subsequent to the 
execution of a loan modification agreement, if the interest rate 
adjustment occurs pursuant to the ARM contract as modified.
    Form of delivery. Proposed Sec.  1026.20(d) would have required 
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 explained that to satisfy this 
requirement, the notices would have had to be mailed or delivered 
separately from any other material. The proposed comment said that, in 
the case of mailing the disclosure, no material in the envelope other 
than the ARM notice would have been permitted. If provided 
electronically, the notice would have had to be the only content or 
attachment in the email. This proposed form of delivery would have 
contrasted with the Bureau's proposal for Sec.  1026.20(c), which was 
subject to the less stringent segregation requirements of Sec.  
1026.17(a)(1), as it would have been amended by the Bureau's proposal. 
The proposed comment further explained that the notice proposed by 
Sec.  1026.20(d) would have been allowed to be provided to consumers in 
electronic form with consumer consent, pursuant to the requirements of 
Sec.  1026.17(a)(1). However, in recognition of the ambiguity of the 
statutory language of TILA section 128A(b), the Bureau solicited 
comments on whether consumer protection would be compromised by 
providing Sec.  1026.20(d) notices as a separate document but in the 
same envelope or email correspondence with other messages from the 
creditor, assignee, or servicer.
    Consumer groups generally applauded the Bureau for its proposed ARM 
disclosures and none responded to the Bureau's request for comments on 
this issue of delivery form. One large servicer supported the proposed 
interpretation of ``separate and distinct from all other 
correspondence.'' On the other hand, many industry groups recommended 
that the Bureau permit inclusion of the ARM notice in the same envelope 
or email with other servicer communications. These commenters included 
a large bank, two national credit union trade associations, one 
national and one State trade association, three credit unions, and a 
large non-bank servicer. They stated that consumers would be more 
attentive to the ARM notice if it accompanied the monthly statement 
consumers were used to receiving from the servicer. They also noted the 
higher cost of mailing the notice separately.
    The Bureau is mindful of the ambiguity of the statutory language. 
``Separate and distinct from all other correspondence'' reasonably can 
be interpreted to require a creditor, assignee, or servicer to provide 
the ARM payment change notice (1) as a separate document from all other 
correspondence, but in the same envelope or email or (2) in an envelope 
or email that does not contain any other material. The former 
interpretation is consistent with the form requirements of revised 
Sec.  1026.17(a)(1), as discussed above in that section-by-section 
analyses of Sec.  1026.17(a)(1).
    The Bureau does not believe that consumer protection would be 
compromised by providing the Sec.  1026.20(d) notice as a separate 
document in the same envelope or email with other servicer 
communications. Consumers may be more likely to open a monthly periodic 
statement than a stand-alone communication from their servicer. 
Moreover, including the Sec.  1026.20(d) initial adjustment notice as a 
separate document and in the particular format required under the rule, 
sets it apart from the other materials. The Bureau also recognizes that 
requiring the notice to be sent separately would generate real 
incremental costs for industry without any clear benefit to consumers. 
Thus, the Bureau is issuing the final rule and comment 20(d)-3 with the 
adoption of this interpretation of the statutory language. However, 
Sec.  1026.17(a)(1) permits, but does not mandate, that disclosures 
subject to its requirements be provided to the consumer as a separate 
document. For this reason, the

[[Page 10937]]

Bureau revises Sec.  1026.17(a)(1) to require that the Sec.  1026.20(d) 
initial interest rate disclosures be provided to consumers as a 
separate document. Thus, in the final rule, both Sec.  1026.20(c) and 
(d) are subject to the requirements of Sec.  1026.17(a)(1).
    Timing. The Bureau's proposal for Sec.  1026.20(d) generally 
followed the statutory requirement in TILA section 128A to provide 
consumers with the initial interest rate adjustment notice during the 
one-month period that ends six months before the interest rate in 
effect during the introductory period expires. Thus, the disclosure 
would have had to be provided six to seven months before the initial 
interest rate adjustment. The Bureau stated that the Sec.  1026.20(d) 
disclosures were designed to avoid payment shock so as to put consumers 
on notice of upcoming adjustments to their adjustable-rate mortgages 
that may have resulted in higher payments. (The Sec.  1026.20(c) 
notice, among other things, would have provided consumers with the 
exact amount of any payment change caused by an adjustment.) The six to 
seven month advance notice would have allowed sufficient time for 
consumers to consider their alternatives if the notice indicated there 
could be an increase in payment they could not have afforded. The 
proposal suggested refinancing as one alternative that consumers might 
consider. As set forth in the proposed rule, average timelines to 
complete a refinancing exceed 70 days.
    The Bureau stated that, in the interest of consistency within 
Regulation Z, proposed Sec.  1026.20(d) tied its timing requirement to 
the date, expressed in days rather than months, the first payment at a 
new level would have been due, rather than the date of the interest 
rate adjustment. The Bureau proposed this to maintain consistency with 
both current and proposed Sec.  1026.20(c), which express time periods 
in days rather than months. Because interest on consumer mortgage 
credit generally is paid one month in arrears, for most ARMs, this 
would have added another approximately 30 days to the timeframe for 
delivery of the disclosures. Thus, the notices the Bureau proposed 
under Sec.  1026.20(d) would have had to 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 would have been 
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, the Bureau stated that proposed Sec.  1026.20(d) 
would have been more precise, because months can vary in length, and 
would have maintained consistency with the timing requirements of 
proposed Sec.  1026.20(c). Proposed comment 20(d)-2 explained that the 
timing requirements would exclude any grace period. It also clarified 
that the date the first payment at the adjusted level would be due is 
the same as the due date of the first payment calculated using the 
adjusted interest rate.
    Also, pursuant to TILA section 128A, consumers with ARMs adjusting 
for the first time within six months after consummation, must receive 
the Sec.  1026.20(d) initial interest rate adjustment notices at 
consummation. The proposed rule tied the timing of this requirement to 
days rather than months and to the date the new payment is due rather 
than the date of the adjustment to insure both internal consistency and 
consistency with Sec.  1026.20(c). Thus, the proposed rule required 
that consumers be provided with the initial interest rate adjustment 
notice at consummation if their ARMs would be adjusting for the first 
time within 210 days before the due date of the first adjusted payment.
    A national trade association asked the Bureau to clarify whether 
the requirements of Sec.  1026.20(d) are restricted to ARMs originated 
after the effective date of the final rule or whether they apply as 
well to existing ARMs that adjust for the first time after the 
effective date. Neither the proposal nor the final rule includes an 
exception or a grandfather period for ARMs originated prior to the 
effective date of the rule but which adjust for the first time after 
that date. Therefore, once the rule takes effect, it applies to all 
ARMs adjusting for the first time.
    One large bank recommended that the Sec.  1026.20(d) disclosures be 
provided to consumers 120 days, as opposed to at least 210 days, before 
the first payment at the adjusted level is due. Several commenters 
recommended limiting the notice to ARMs that adjust one, two, or more 
years after origination. As discussed above, the Dodd-Frank Act 
mandates the timeframe within which the disclosures must be provided to 
consumers, including specifically requiring the disclosures for ARMs 
adjusting soon after consummation. The Bureau believes the statutorily-
required timeframe is appropriate to remind consumers of the upcoming 
initial interest rate adjustments and, as applicable, to potentially 
stave off payment shock and provide consumers with the time necessary 
to effectively pursue alternatives to their current mortgage. Also, the 
Bureau notes that, for ARMs adjusting within 180 days of consummation, 
providing the notice directly to consumers at consummation is less of a 
burden than mailing or delivering it at a later date. For the reasons 
set forth above, with regard to timing, the Bureau is adopting the 
final rule as proposed. The Bureau is adopting comment 20(d)-3, which 
was proposed comment 20(d)-2, with modification to clarify that 
``provide'' means deliver or place in the mail and to clarify that the 
timeframe excludes any courtesy, as well as grace, periods.
    Commenters recommending against adoption of proposed Sec.  
1026.20(d). A large number of industry commenters, including many small 
banks and national and State trade associations, recommended that the 
Bureau remove entirely the initial ARM interest rate notice from the 
final rule. In the alternative, some suggested providing a generic 
reminder warning consumers of the upcoming interest rate adjustment. 
Some commenters suggested adding to that general warning notice one or 
more of the following: the maximum interest rate and payment, an 
explanation of how the interest rate and payment is determined, and a 
statement encouraging consumers to direct any questions or concerns to 
their servicer. A large bank recommended a generic notice emphasizing 
and reminding consumers of the details of the adjustable-rate feature 
and referring them to their loan contracts for specific information. A 
credit union recommended eliminating the notice because, for some ARMs, 
it would come mere months after consummation. A few others suggested 
integrating the interest rate information into the periodic statement 
or escrow statement, although other commenters opposed this. See the 
discussion below of including the ARM interest rate adjustment 
information in the periodic statement. A research organization, a large 
bank, a trade association, and a credit union stated that post-
implementation testing was warranted to determine if the Bureau's 
contention that consumers will be better informed as result of 
receiving the Sec.  1026.20(d) disclosures is correct. A non-bank 
servicer recommended that the Bureau analyze statements and consumer 
responses post-implementation to ensure the relevance of all the 
information required to be provided to consumers.
    Many of the commenters recommending against the adoption of the 
Sec.  1026.20(d) requirements claimed that the cost of the Sec.  
1026.20(d) notices would outweigh its benefits. They said

[[Page 10938]]

that reprogramming their origination and servicing systems would be 
expensive and time consuming. Small banks expressed concern that their 
systems could not accommodate certain changes, such as distinguishing 
between initial and subsequent rate adjustments and maintaining 
different timeframes for both Sec.  1026.20(c) and (d). Some stated 
that the Sec.  1026.20(d) notice was unnecessary because consumers were 
informed at origination about interest rate adjustments. They also 
thought the Sec.  1026.20(c) notice or the periodic statement was 
sufficient to warn consumers of upcoming interest rate changes. They 
said that those disclosure requirements or other Bureau measures, such 
as the qualified mortgage rule implementing TILA section 129C, would 
limit the amount an ARM could adjust. Other commenters said that 
providing the notice seven to eight months before the new payment is 
due is too early to have an effect on consumers. A trade association 
representing credit unions recommending combining the Sec.  1026.20(c) 
and (d) notices and providing the unified notice between three and four 
months in advance of the initial interest rate adjustment.
    A key concern among commenters was the use of estimates in the 
Sec.  1026.20(d) notice. See immediately below, the small servicer 
discussion, regarding these same issues. Use of estimates, they 
predicted, would create confusion and lead to increased customer 
inquiries, inaccurate and late payments, unnecessary refinancings, and 
strategic defaults. A large bank stated that emphasizing that the 
calculation is an estimate risks diminishing the effectiveness of the 
notice. The large bank recommended the Bureau undertake more testing to 
ensure that the inclusion of estimates in Sec.  1026.20(d) notice does 
not lead to consumer confusion, dissatisfaction, and frustration. One 
credit union said that its attempt to provide an estimated early 
warning disclosure resulted in customer confusion but a non-bank 
servicer said that its early warning notice achieved significant 
results and response rates. Some industry commenters also stated that 
estimates would be a poor predictor in a changing interest rate 
environment. A few commenters stated that providing estimates to 
consumers would create a legal risk, claiming there was no safe harbor 
if the estimates turn out to be less than the actual interest rate 
adjustment. Many commenters said that that the volume of information, 
especially inclusion of data not required by the Dodd-Frank Act and the 
number of dynamic fields required by the notice, would unreasonably 
burden industry and overload consumers.
    In enacting TILA section 128A, Congress made a deliberate judgment 
that the first time an ARM interest rate adjusts poses particular risk 
to consumers, such that consumers need significant advance notice of 
those risks in order to be prepared to handle the anticipated mortgage 
payment. The Bureau observes that it is not uncommon for ARMs to have 
one interest rate for several or more years before the first 
adjustment, after which adjustments may occur on an annual basis. Thus, 
the initial interest rate adjustment is different in kind for consumers 
than subsequent adjustments which consumers are more likely to 
anticipate. The Bureau also notes that during the years prior to the 
financial crisis, a significant number of ARMs were originated with the 
underwriting predicated only on the initial monthly payments. While the 
Dodd-Frank Act ability-to-repay provisions address this by requiring 
that ARMs be underwritten based upon the ``fully-indexed rate,'' 
consumers are still subject to payment shock at the first adjustment if 
interest rates have risen since consummation. Thus, the Bureau 
concludes that the new initial interest rate disclosure can provide 
significant benefits for consumers. For these reasons, the Bureau 
rejects the suggestion that it create an exemption that would override 
TILA section 128A in its entirety. However, as discussed in the 
proposal, the Bureau has evaluated whether individual elements of the 
Sec.  1026.20(d) notice further consumer protection compared to their 
potential burden on creditors, assignees, and servicers. In light of 
the comments received and further evaluation, the Bureau is modifying 
certain of the proposed requirements to alleviate burden, as discussed 
throughout the section-by-section analysis of this final rule.
    With respect to the use of an estimated interest rate and payment 
in the Sec.  1026.20(d) notice, the Bureau believes providing consumers 
with concrete amounts and an expected real-life scenario could benefit 
them significantly more than a generic warning that fails to give 
consumers an idea of what to expect when their interest rate adjusts 
for the first time. Consumer testing has underscored the participants 
tested understanding of the impact on them of a concrete amount as 
opposed to a generic assumption.
    It is therefore appropriate to include estimates in the Sec.  
1026.20(d) disclosures. TILA section 128A(b)(3) explicitly contemplates 
the use of good faith estimates. The language and formatting of the 
Sec.  1026.20(d) model forms clearly denote when the new payment amount 
and interest rate are estimates, and the disclosure informs consumers 
that the actual amounts will be provided to consumers two to four 
months before the date the first new payment is due, if the new payment 
will be different from the current payment. In light of the comments 
expressing concern about the potential to confuse or mislead consumers, 
the Bureau has reviewed the requirements and emphasized that those 
disclosures are estimates. Consumer testing confirmed that participants 
understood the use of estimates in the model forms. Creditors, 
assignees, and servicers should not expect liability resulting from 
consumer confusion as the use of estimates is clearly contemplated 
under the statute and regulation.
    In addition, the Bureau believes that the goal of achieving greater 
consumer protection is potentially furthered by exercising its 
authority to modify certain aspects of the notice required by TILA 
section 128A. For example, the final rule does not require dynamic 
fields for contact information for specific homeownership counselors 
and counseling organizations and State housing finance authorities, as 
the statute mandates. The final rule also removes most of the 
information and all dynamic fields from the prepayment penalty 
disclosures. The Bureau also is exercising its exception authority to 
exempt from the requirements of Sec.  1026.20(d) consumer ARMs with 
terms of one year or less. Moreover, the final rule clarifies the 
flexibility available to creditors, assignees, and servicers using the 
model forms. With these changes, and others, the Bureau believes that 
the requirements in Sec.  1026.20(d) can provide protections for 
consumers consistent with the goals of TILA section 128A while avoiding 
imposing requirements that may have unintended consequences with 
respect to the cost or availability of credit. For these reasons, the 
Bureau is adopting the final rule with certain adjustments to the 
proposed Sec.  1026.20(d) ARM initial interest rate adjustment notices, 
as set forth below.
    Conversions. Proposed comment 20(d)-3 explained that, in the case 
of an open-end account converting to a closed-end adjustable-rate 
mortgage, Sec.  1026.20(d) disclosures would not be required until the 
implementation of the initial interest rate adjustment post-conversion. 
The Bureau analogized the conversion to consummation. Thus, like other 
ARMs subject to the requirements

[[Page 10939]]

of proposed Sec.  1026.20(d), disclosures for these types of converted 
ARMs would not have been required until the first interest rate 
adjustment following the conversion. The proposed rule would have been 
consistent with the Sec.  1026.20(c) proposal for open-end accounts 
converting to closed-end adjustable-rate mortgages. The Bureau did not 
receive comments on the topic of open-end accounts converting to 
closed-end ARMs and is adopting the proposed rule and proposed comment 
20(d)-3, renumbered as comment 20(d)-4, without change.
20(d)(1) Coverage
20(d)(1)(i) In General
Scope
    Adjustable-rate mortgages defined. Proposed Sec.  1026.20(d)(1)(i) 
defined an adjustable-rate mortgage or ARM, for purposes of Sec.  
1026.20(d), 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 used the wording from 
the definitions of ``adjustable-rate'' and ``variable-rate'' mortgage 
in subpart C of Regulation Z to promote consistency within the 
regulation. Proposed comment 20(d)(1)(i)-1 explained that the 
definition of ``ARM'' meant ``variable-rate mortgage'' as that term is 
used elsewhere in subpart C of Regulation Z, except as would have been 
provided in proposed comment 20(d)(1)(ii)-2. Having received no 
comments on this issue, the Bureau is adopting the final rule and 
comment 20(d)(1)(i)-1 as proposed.
    Proposed comment 20(d)(1)(i)-1 also clarified that the requirements 
of Sec.  1026.20(d)(1)(i) would not be limited to transactions 
financing the initial acquisition of the consumer's principal dwelling, 
but 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)(1)(i). Having received no comments on 
this subject, the Bureau is adopting the final rule and comment 
20(d)(1)(i)-1 as proposed.
    Applicable to closed-end transactions. In its proposal, the Bureau 
stated that it believed that TILA section 128A and the implementing 
disclosures in proposed 1026.20(d) primarily benefited consumers with 
closed-end adjustable-rate mortgages. In contrast, the Bureau said, 
open-end credit transactions secured by a consumer's dwelling (home 
equity plans) with adjustable-rate features were 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 proposed to use its authority 
under TILA section 105(a) and (f) to exempt adjustable-rate home equity 
plans from the requirements of TILA section 128A and proposed Sec.  
1026.20(d).
    The Bureau stated that 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.\86\ The required account opening disclosures for home equity 
plans also must include information about any variable- or adjustable-
rate features, including the circumstances under which rates may 
increase, limitations on the increase, and the effect of any 
increase.\87\
---------------------------------------------------------------------------

    \86\ See Sec.  1026.40(d)(12).
    \87\ See Sec.  1026.6(a)(1)(ii) and (a)(3)(vii).
---------------------------------------------------------------------------

    Thus, the Bureau concluded, Regulation Z already contained a 
comprehensive scheme for disclosing to consumers the variable- or 
adjustable-rate features of home equity plans. The Bureau stated 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 have been largely duplicative 
of the current disclosure regime and would have been confusing and 
unhelpful for consumers. Moreover, the Bureau reasoned, 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 have 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.
    Two other factors also supported the Bureau's use of the TILA 
section 105(a) exception 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 supported 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 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.'' \88\ Because Regulation Z uses the term 
``consummation'' in connection with closed-end credit transactions, use 
of the word ``consummation'' in Dodd-Frank Act section 1418 supported 
the Bureau's proposed exemption for open-end home equity plans from the 
requirements of Sec.  1026.20(d). Second, the Bureau stated that Dodd-
Frank Act section 1418 places TILA section 128A adjacent to the 
similarly numbered provision, TILA section 128, which is limited to 
``Consumer Credit not under Open-End Credit Plans.'' In its proposal, 
the Bureau stated that Congress's placement of the new ARM disclosure 
requirement in a segment of TILA that applies only to closed-end credit 
transactions further supported the Bureau's proposal to exempt open-end 
credit transactions, in this case variable- or adjustable-rate home 
equity plans, from the requirements of that section.
---------------------------------------------------------------------------

    \88\ Compare Sec.  1026.17(b) with Sec.  1026.5(b)(1)(i).
---------------------------------------------------------------------------

    The Bureau received no comments on this issue. For the reasons 
discussed in the proposal, the Bureau is adopting the final rule 
restricting the scope of Sec.  1026.20(d) to closed-end transactions.
    Savings clause. In the proposed rule, the Bureau noted that the 
statute's provisions applied to hybrid ARMs, defined 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.'' \89\ The 
proposal discussed the statute's ``savings clause,'' permitting the 
Bureau to require the initial interest rate adjustment notices set 
forth in TILA 128A(b) or ``other notices'' for ARMs other than hybrid 
ARMs. The Bureau proposed to use this

[[Page 10940]]

authority generally to extend the disclosure requirements of proposed 
Sec.  1026.20(d) to ARMs that were not hybrid. The Bureau stated that 
it believed this approach was necessary because both hybrid ARMs and 
those that are not hybrid would subject consumers to the same payment 
shock that the advance notice of the first interest rate adjustment was 
designed to address. As an example, the Bureau pointed out that 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 
interest rate adjusts every three years, both adjust for the first time 
after three years and present the same potential payment shock to 
consumers holding either loan. The Bureau also pointed out that the 
same was 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.
---------------------------------------------------------------------------

    \89\ 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 commence with a rate that adjusts at set uniform 
intervals, such as 3/3 (adjusts every three years), 5/5 (adjusts 
every five years), etc.
---------------------------------------------------------------------------

    Many industry commenters, including large and small bank servicers 
and national and State trade associations, recommended against 
broadening the scope of Sec.  1026.20(d) to ARMs that are not hybrid. A 
chief reason for their opposition was that including non-hybrid ARMs 
would go beyond the scope of the statute. However, they failed to 
mention that TILA section 128A(c) explicitly bestows authority on the 
Bureau to ``require the notice in 128A(b) or other notice consistent 
with this Act for adjustable-rate mortgage loans that are not hybrid 
adjustable-rate mortgage loans.''
    Many small bank servicers and their trade associations recommended 
limiting the scope of the rule to hybrid ARMs. These commenters 
indicated that, because they viewed the notice required by TILA section 
128A as confusing and unimportant to consumers, it would be advisable 
to limit it to as small a set of ARMs as possible. Other reasons these 
commenters opposed the expansion of the scope to ARMs that are not 
hybrid included the burden on industry to provide additional consumers 
with the initial ARM adjustment notice and that hybrid ARMs are 
considered riskier than other ARMs and typically have extended fixed-
rate periods, thereby justifying the need for heightened consumer 
protection.
    The Bureau believes it is appropriate to apply the requirements of 
Sec.  1026.20(d) to all ARMs, not just hybrid ARMs. As discussed above, 
the Bureau has the authority to extend the requirements to all ARMs, 
pursuant to the savings clause in TILA section 128A. Further, the 
Bureau believes that consumers of non-hybrid ARMs may benefit from the 
same protections afforded to consumers of hybrid ARMs. Consumers 
experience the same payment shock at one, three, five, seven or ten 
years regardless of whether the interest rate calculation classifies it 
as a hybrid ARM or non-hybrid ARM. Accordingly, the Bureau believes 
that the underlying rationale for the requirements is equally 
applicable to all ARMs, whether hybrid or non-hybrid, and should be 
extended to all ARM consumers. Commenters have not demonstrated why 
consumers of hybrid ARMs, as opposed to consumers of non-hybrid ARMs, 
should receive uniquely greater protections or why the consumer 
benefits for non-hybrid ARMs would not exceed the costs of providing 
the notice. Nor have these commenters suggested why, once systems are 
put into place to provide the notice to consumers with hybrid ARMs, it 
would be burdensome to require the same notices for consumers with ARMs 
that are not hybrid. Rather, these commenters offer only general 
opposition to the requirements of Sec.  1026.20(d) and, accordingly 
recommend a scope for the rule as prescribed and limited as possible. 
As set forth above, the Bureau is not persuaded by these comments and 
is adopting the final rule as proposed with regard to the application 
of Sec.  1026.20(d) to all ARMs.
Legal Authority
    For the reasons discussed above, the final rule's exemption of home 
equity plans from the requirements of TILA 128A and Sec.  1026.20(d) is 
necessary and proper under TILA section 105(a) to further the consumer 
protection purposes of and facilitate compliance with TILA. As 
discussed above, the Bureau believes that the information contained in 
the Sec.  1026.20(d) notice 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 is adopting 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, such 
transactions are not structured in such a way as to garner benefit from 
the Sec.  1026.20(d) disclosures 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 Sec.  1026.20(d) notices for open-end 
accounts that have adjustable-rate features would not provide a 
meaningful benefit to consumers.
20(d)(1)(ii) Exemptions
In General
    Proposed Sec.  1026.20(d)(1)(ii) would have exempted construction 
loans with terms of one year or less from the disclosure requirements 
of Sec.  1026.20(d). Section 1026.20(c) proposed the same exemption. 
Proposed comments 20(d)(1)(ii)-1 and -2 provided clarification, 
including clarifying that certain loans are not ARMs if the interest 
rate or payment change is based on factors other than a change in the 
value of an index or formula.
    In response to comments received from industry representatives, as 
discussed below, the final rule expands the construction loan exemption 
to all ARMs with terms of one year or less. Industry commenters 
requested other exemptions from Sec.  1026.20(d) that the Bureau 
declines to adopt.
No Small Servicer Exemption
    In its proposed rule, the Bureau considered small servicer 
exemptions for both Sec.  1026.20(c) and (d) and reached the 
preliminary conclusion that an exemption was not appropriate. The final 
rule reaffirms this conclusion and thus, small servicers are subject to 
the requirements of both Sec.  1026.20(c) and (d).
    Before issuing its proposed rules, the Bureau considered the 
arguments of small servicers in favor of a small servicer exemption 
from both Sec.  1026.20(c) and (d). Small community banks and credit 
unions expressed their views to the Bureau in the context of the Small 
Business Review Panel convened in advance of the issuance of the 2012 
TILA Servicing Proposal. In its proposed rule, the Bureau explained 
that the Small Entity Representatives which participated in the Small 
Business Review Panel expressed opposition to the requirement to 
provide Sec.  1026.20(c) and (d) disclosures altogether. Specifically, 
they doubted the value of disclosing certain information in the ARM 
notices, such as the maximum interest rate and payment and the 
explanation of how the interest rate and payment are determined. The 
Small Entity Representatives also felt strongly that consumers would be 
confused by the Sec.  1026.20(d) notices because consumers would 
receive the notice so far in advance that the

[[Page 10941]]

disclosure would contain estimates, rather than the actual amounts, of 
the interest rate and mortgage payment.\90\ The Small Entity 
Representatives noted that, in addition to the requirement to provide 
initial interest rate adjustment notices under Sec.  1026.20(d), they 
would be required to provide the actual interest rate and payment in 
the later Sec.  1026.20(c) notice, if the initial interest rate 
adjustment resulted in a payment change. They expressed concerns about 
the one-time development costs and on-going costs associated with 
providing both the initial ARM adjustment notices and the potentially 
recurring notices under Sec.  1026.20(c).\91\
---------------------------------------------------------------------------

    \90\ See Small Business Review Panel Report, at 20-21, 29-30.
    \91\ See Small Business Review Panel Report, at 20-21, 29-30.
---------------------------------------------------------------------------

    After considering the views of the Small Entity Representatives and 
the recommendation of the Small Business Review Panel, the Bureau 
decided not to include a small servicer exemption from these sections 
of its proposed rule. The Bureau reasoned that small servicers were 
already subject to the requirement to provide notices pursuant to Sec.  
1026.20(c), so that continuing this requirement would not add 
incremental cost (other than the one-time cost of development to 
implement the changes proposed by the Bureau). The Bureau stated that 
the initial interest rate adjustment notice required by Sec.  
1026.20(d) served related but distinct purposes, such that eliminating 
it could harm consumers. The Bureau said that the Sec.  1026.20(d) 
notice was designed to provide consumers with very early warning of 
their interest rate adjustment, so that consumers could begin exploring 
other options. Receiving the Sec.  1026.20(c) notice with the actual 
interest rate and payment closer to the adjustment date, the Bureau 
said, would be valuable to the consumer both as a second warning and as 
a budgeting tool.
    The Bureau also considered exempting small servicers from the 
requirements of Sec.  1026.20(c) for an initial interest rate 
adjustment that caused a change in payment. To this end, the Bureau 
considered including the information required by proposed Sec.  
1026.20(c) in the periodic statement proposed by the Bureau in Sec.  
1026.41. The Bureau concluded that this option was unworkable in light 
of (1) the proposed exemption for small servicers from the periodic 
statement requirements and (2) the increased burden of the resulting 
programming complexity in the periodic statement.
    The Bureau also pointed out that the amount of burden reduction 
from a Sec.  1026.20(c) exemption from an initial interest rate 
adjustment would have been extremely minimal, given that small 
servicers still would have had to maintain systems to generate Sec.  
1026.20(c) notices for any subsequent interest rate adjustment 
resulting in a corresponding payment change. Thus, the Bureau 
concluded, exempting small servicers from providing a Sec.  1026.20(c) 
notice for the first interest rate adjustment would not have provided 
significant burden reduction.
    The Bureau also considered whether to exempt small servicers, 
creditors, and assignees from the requirements of Sec.  1026.20(d). As 
discussed above, the Small Entity Representatives expressed concern 
that consumers would be confused by receiving estimates, rather than 
their actual new interest rate and payment.\92\ However, the Bureau 
stated in its proposal that it believed the best approach to address 
this concern was to clarify the contents of the notice, rather than to 
eliminate it entirely. Congress had made a specific policy judgment 
that the early notice would benefit consumers. Moreover, the Bureau 
agrees that this measure poses important potential benefits to 
consumers. The Bureau went on to say that creating an exemption for 
small creditors, assignees, and servicers could have deprived certain 
consumers of the benefits that Congress had intended, specifically 
advance notice seven to eight months before the first payment at a new 
level would have been due reminding consumers of the upcoming 
adjustment and giving them time to weigh the potential impacts of a 
rate change and to explore alternative actions. An exemption also would 
have deprived those consumers who may become financially distressed due 
to the upcoming interest rate change from the loss mitigation 
information disclosed in the Sec.  1026.20(d) notice.
---------------------------------------------------------------------------

    \92\ See Small Business Review Panel Report, at 21.
---------------------------------------------------------------------------

    The Bureau stated that, on balance, it did not believe that the 
Sec.  1026.20(d) notice would have imposed a significant burden on 
small entities because of its one-time occurrence. Moreover, the notice 
was designed to be consistent with the Sec.  1026.20(c) notice to, 
among other things, reduce the burden on industry. For these reasons 
and those stated above regarding the consumer benefits of proposed 
Sec.  1026.20(d), the Bureau's proposed rule did not exempt small 
servicers from its requirements. The Bureau sought comments, in 
addition to the comments it received through the Small Business Review 
Panel process, on whether the burden imposed on small entities by the 
ARM requirements would outweigh its consumer protection benefits.
    Many industry commenters echoed the rationales offered by the Small 
Entity Representatives in favor of a small servicer exemption from the 
ARM rules. These commenters included three national and four State 
trade associations with small servicers as constituents and two credit 
unions. Non-profit servicers and State housing finance authorities also 
requested exemption from the proposed ARM rules. A consumer group 
recommended against such exemptions, stating that small servicer 
failures have the same effect on consumers as those of large servicers. 
Many industry commenters did not address this issue.
    Advocates of a small servicer exemption offered general arguments 
in favor of their position. These commenters requested the exemption in 
light of the ``high touch'' and personalized service business model 
used by small servicers. They pointed to Bureau representations that 
small bank servicers might be exempted from mortgage servicing rules 
aimed at correcting abuses in the market perpetrated by other 
servicers. Subjecting small servicers to the ARM rules, they predicted, 
would lead to the discontinuation of certain types of loans they hold 
in portfolio and increase the cost of credit, to the detriment of 
consumers in general and specifically to rural, minority, and middle 
class consumers. Existing rules are adequate, one commenter said, 
because refinancing and loan modifications have resolved the problems 
caused by the offending ARM products. Some commenters said that rules 
against unfair and abusive practices would provide adequate incentives 
for small servicers in place of the ARM rules.
    In the final rule, for the reasons set forth above, the Bureau 
declines to exempt small servicers from the requirements of Sec.  
1026.20(c) and (d). In addition to the above-cited reasons, the Bureau 
notes that small servicers currently are subject to Sec.  1026.20(c) 
and it sees no justification for scaling back existing consumer 
protections. Also, the Bureau is revising current Sec.  1026.20(c), 
which is less burdensome to industry than if the Bureau was 
implementing a new rule. The Bureau also notes that the Sec.  
1026.20(c) notice is a limited notice, required only in the case of an 
interest rate adjustment causing a payment change. Moreover, the 
Bureau's final rule reduces industry burden by eliminating the annual 
notice small servicers currently are required to provide to all ARM 
holders whose interest rates change over the course of

[[Page 10942]]

a year without effecting a payment change. Thus, the Bureau's final 
rule reduces the burden of compliance on small servicers in this 
respect, even absent an exemption. Also, as stated above, creditors, 
assignees, and servicers will have to provide the Sec.  1026.20(c) 
payment change notice in any case, to inform consumers of the actual 
amount of their upcoming new mortgage payment. Due to the small 
servicer exemption from the periodic statement, their customers will 
otherwise not receive this information or be informed of their new 
mortgage payment.
    As stated above, the Sec.  1026.20(d) notice is a one-time notice 
and therefore, imposes less burden on small servicers than notices that 
may be more frequent, such as the Sec.  1026.20(c) payment change 
notice. Moreover, the Bureau's efforts to make both ARM notices 
consistent with one another were intended to reduce the implementation 
burden on servicers, as well as to ease the burden on consumers to 
digest two forms that differ greatly from one another. For the reasons 
discussed above in the proposed rule and in the immediately preceding 
discussion titled Commenters recommending against adoption of proposed 
Sec.  1026.20(d), the Bureau declines to extend an exemption from Sec.  
1026.20(d) for small creditors, assignees, and servicers.
Information Required by ARM Disclosures May Not Be Provided Instead in 
the Periodic Statement
    In its proposal, the Bureau also solicited comments on whether 
creditors, assignees, and servicers should be permitted, or even 
required, to provide the information required by Sec.  1026.20(c) and 
(d) in the periodic statement, in lieu of providing the ARM disclosures 
as separate notices. A large bank servicer, a non-bank servicer, and a 
State trade association opposed allowing or requiring combining the ARM 
disclosures with the periodic statements, asserting that the ARM 
interest rate adjustment information was too important to merge with or 
attach to the information in the periodic statement. They also warned 
about the challenge posed by complying with the timing requirements of 
the periodic statement and Sec.  1026.20(c) and (d) in one combined 
disclosure. A credit union trade association supported the idea but 
requested that the Bureau provide a model form. Two credit unions and a 
large non-bank servicer supported the idea, citing decreased cost to 
industry and the higher likelihood of consumers reading the ARM 
information as reasons for their support.
    The final rule does not permit integrating the ARM Sec.  1026.20(c) 
and (d) notices into the periodic statement. The Dodd-Frank Act 
requires that the Sec.  1026.20(d) notice be provided to consumers as a 
separate notice. Moreover, industry comments on the utility of 
combining these disclosures were sharply divided. Further, the Bureau 
is concerned that the volume and complexity of the information in the 
combined statement could overwhelm consumers and create greater 
programming burden on industry. Also, this measure would provide no 
benefit to small servicers exempt from the periodic statement. Finally, 
the Bureau does not believe that providing separate notices creates an 
appreciably greater burden on creditors, assignees, and servicers than 
providing them as an integrated notice, especially because the final 
rule permits Sec.  1026.20(d) notices to be provided to consumers in 
the same envelope or email with other disclosures, pursuant to 
revisedSec.  1026.17(a)(1). See the section-by-section analysis of 
Sec.  1026.17(a)(1) and Sec.  1026.20(d) above for discussion of the 
form of delivery requirements for Sec.  1026.20(d).
    Accordingly, the Bureau declines to permit servicers to provide the 
information required by Sec.  1026.20(c) and (d) in the periodic 
statement in lieu of providing the ARM disclosures. However, in the 
interest of ensuring that its disclosure rules and model forms are 
based on the best empirical data available, pursuant to its authority 
under Dodd-Frank Act section 1032(e), the Bureau invites interested 
creditors, assignees, and servicers to consider proposing a trial 
disclosure program to test the hypothesis that the disclosures required 
by Sec.  1026.20(c) and (d) could be effectively integrated into the 
periodic statement without compromising consumer protections. The 
Bureau's proposed Policy to Encourage Trial Disclosure Programs sets 
forth how the Bureau intends to exercise its authority under Dodd-Frank 
Act section 1032(e) to permit creditors, assignees, and servicers, 
among others, to test alternative disclosures designed to improve 
consumer understanding.\93\
---------------------------------------------------------------------------

    \93\ See 77 FR 74625 (Dec. 17, 2012), https://www.federalregister.gov/articles/2012/12/17/2012-30159/policy-to-encourage-trial-disclosure-programs-information-collection.
---------------------------------------------------------------------------

Exemptions From the Rule
    ARMs with terms of one year or less. For the same reasons already 
discussed with respect to the payment change notices required by 
proposed Sec.  1026.20(c), proposed Sec.  1026.20(d) would have 
included an exemption for construction ARMs with terms of one year or 
less (except that that timeframe within which creditors, assignees, and 
servicers would have had difficulty complying was 210 to 240 days 
before the first payment is due after the initial adjustment). See 
section-by-section analysis of Sec.  1026.20(c)(1)(ii). On the basis of 
the same comments and for the same reasons set forth in the section-by-
section analysis of Sec.  1026.20(c)(1)(ii), the Bureau concluded that 
requiring notices under Sec.  1026.20(d) for construction as well as 
other ARMs with terms of one year or less would not provide a 
meaningful benefit to the consumer nor would it have improved 
consumers' awareness and understanding of their ARMs with terms of one 
year or less. Thus, the Bureau is adopting the rule with an exemption 
for all ARMs taken out by consumers with terms of one year or less. The 
Bureau notes that the ARM rules apply only to consumer loans and that 
proposed comment 20(d)(1)(ii)-1, which the Bureau is adopting as 
proposed, applies the standards in current comment 19(b)-1 for 
determining the term of a construction loan and adds clarification 
regarding what other types of loans qualify for the expanded short-term 
ARM exemption.
    Non-ARM loans. Proposed comment 20(d)(1)(ii)-2 discussed other 
loans to which the rule would not have applied. Proposed comments 
20(c)(1)(ii)-2 and 20(d)(1)(ii)-3 were consistent with regard to the 
loans which would not have been 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 clarified that, for purposes of 
Sec.  1026.20(d), the following loans, if fixed-rate transactions, 
would not have been considered ARMs and therefore would not have been 
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 Bureau observed that the particular features 
of these types of loans might trigger interest rate or payment changes 
over the term of the

[[Page 10943]]

loan or at the time the consumer pays off the final balance. However, 
the Bureau stated that these changes were based on factors other than a 
change in the value of an index or a formula. For example, whether or 
when the interest rate would adjust for the first time for a preferred-
rate loan with a fixed interest rate would likely not be knowable six 
to seven months in advance of the adjustment. This was because the loss 
of the preferred rate would have been based on factors other than a 
formula or change in the value of an index agreed to at consummation. 
The Bureau received no comments on this topic and, thus, is adopting 
the rule and commentary 20(d)(1)(ii)-2 as proposed.
Other Requested Exemptions
    A payment-option ARM is one in which consumers may select among 
several payments each billing period, some of which may not amortize 
principal or may cause negative amortization. Typically, the loan 
contract allows for the ARM to ``recast'' or to require an increase in 
the mortgage payment upon reaching a certain negative amortization 
limit. A few commenters asked the Bureau either to exempt payment-
option ARMs from the requirements of both Sec.  1026.20(c) and (d) or 
to apply the 25- to 120-day advance notice requirement with regard to 
Sec.  1026.20(c). One large bank asked for this exemption based on the 
difficulty of closely monitoring such loans to assess whether the next 
minimum periodic payment, which typically results in negative 
amortization because it does not cover all accrued interest, would 
cause the principal balance to exceed a contractual limit and trigger a 
recast of the periodic payment. That commenter indicated that it 
believed in certain circumstances the recast of the payment would also 
cause an interest rate adjustment.
    The Bureau notes that payment option ARMs are subject to current 
Sec.  1026.20(c) and the commenter's rationale does not justify scaling 
back existing consumer protections. Further, the Bureau understands 
from outreach with industry that the amount of unpaid principal 
triggers the reamortization of a payment-option loan without requiring 
an adjustment to the interest rate. Because there is no interest rate 
adjustment, Sec.  1026.20(c) and (d) do not impose a requirement on 
creditors, assignees, and servicers to closely monitor such loans as 
presumed by the commenter. For these reasons, the payment-option ARMs 
are subject to the requirements of Sec.  1026.20(c) and (d).
    A number of industry commenters recommended exempting ARMs 
originated prior to the effective date of the rule. The Bureau believes 
that, for all the reasons discussed throughout the section-by-section 
analysis, consumers with ARMs originated prior to the effective date of 
the rule which adjust for the first time after that date could benefit 
from the consumer protections afforded by Sec.  1026.20(d) as much as 
consumers with ARMs originated after the effective date. In many of 
these cases, the initial rate adjustment will occur a year or more 
after the effective date of the rule, exposing those consumers to the 
same risk of payment shock as those whose ARMs originate after the 
effective date. Therefore, once the final rule takes effect, it applies 
to all ARMs which have not yet adjusted for the first time.
    Finally, a national trade association representing the reverse 
mortgage industry recommended an exemption from the requirements of 
both Sec.  1026.20(c) and (d) for reverse mortgage ARMs. The trade 
association stated that most, if not all, reverse mortgages with a 
variable rate of interest are structured as open-end credit 
transactions. Because current Sec.  1026.20(c) and final Sec.  
1026.20(c) and (d) apply only to closed-end transactions, those 
regulations are not applicable to most reverse mortgage ARMs. However, 
the trade association stated, applying the new ARM rules to reverse 
mortgages would stifle the industry's current efforts to develop a 
``hybrid'' ARM reverse mortgage, which could be structured as a closed-
end credit transaction. They articulated the same concerns raised by 
other industry commenters that the 210- to 240-day advance notice 
required by Sec.  1026.20(d) would require disclosure of an estimate 
that will be inaccurate by the time the rate adjusts and, thus, will 
result in consumer confusion. They also questioned whether Sec.  
1026.20(d) notices would be required for closed-end reverse mortgages 
because they do not carry regular monthly payment obligations and that 
such a requirement would be meaningless to consumers with closed-end 
variable-rate reverse mortgages.
    The Bureau believes that, if the reverse mortgage industry chooses 
to create a closed-end adjustable-rate product, consumers with those 
reverse mortgages, like those with other types of ARMs, would benefit 
from advance warning of interest rate adjustments to help them better 
manage their mortgages. For the reasons set forth in the section-by-
section analysis of Sec.  1026.20(d) below, the Bureau further believes 
that providing consumers with an estimate of their upcoming new 
interest rate, pursuant to Sec.  1026.20(d), provides the important 
consumer protection benefit of alerting consumers to a potential 
interest rate increase and to provide sufficient time to pursue other 
alternatives. Finally, the Bureau notes that creditors, assignees, and 
servicers are permitted to modify the notices required by Sec.  
1026.20(c) and (d) to accommodate credit transactions outside of the 
norm covered by the rule, such as reverse mortgages. For the reasons 
discussed above and throughout this rule, the Bureau declines providing 
an exemption for reverse mortgage ARMs subject to the requirement of 
Sec.  1026.20(c) and (d).
Legal Authority
    The Bureau uses its authority under TILA section 105(a) to exempt 
short-term consumer ARMs with terms of one year or less from the 
requirements of TILA section 128A and 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 
consumer loan. Thus, exempting such loans is necessary and proper under 
TILA section 105(a) to further the consumer protection purposes of TILA 
and facilitate compliance. The Bureau further exempts these 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 
consumer 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 consumer (including related financial arrangements, 
financial sophistication, and the importance to the consumer of the 
loan). Finally, the non-ARM loans listed above, because they are not 
ARMs, are not subject to TILA section 128A or proposed Sec.  1026.20(d) 
and therefore require no disclosures under the rule.
20(d)(2) Content
Initial Rate Adjustment Disclosures
In General
    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

[[Page 10944]]

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, as well as descriptions of 
actions the consumer must take to pursue these alternatives; (5) 
contact information for HUD- or State housing finance authority 
approved housing counselors or programs reasonably available; and (6) 
contact information for the State housing finance authority for the 
State where the consumer resides. In its proposal, the Bureau 
interpreted the explanation mandated by (2) above to require disclosure 
of any adjustment to the applicable index, including 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 of 
the loan caused by the interest rate adjustment.
    Good faith estimate. TILA section 128A requires that Sec.  
1026.20(d) interest rate adjustment disclosures 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.'' In the proposed rule, the Bureau interpreted this statutory 
standard to require disclosure to consumers of the index rate or 
formula; any adjustment to the index or formula, such as the addition 
of a margin or carryover interest; the loan balance; and the remaining 
loan term because each of these elements are used to calculate the new 
payment.
    The proposal also reasoned that most ARM contracts base the 
calculation of the new interest rate and payment on an index value 
published far closer to the date of the interest rate adjustment than 
those available during the 210 to 240 days before the first payment at 
a new level is due after an interest rate adjustment. See the section-
by-section analysis of Sec.  1026.20(c)(2) above for the discussion in 
the Bureau's proposal of the timeframe it generally would have required 
for ascertaining the index rate used to calculate the adjusted interest 
rate and new payment for the proposed ARM payment change notices. The 
Bureau thus concluded that it was unlikely creditors, assignees, and 
servicers would be able to disclose the actual new interest rate and 
payment in the initial ARM interest rate notices. The Bureau reasoned 
that, consistent with the language of the statute regarding estimates, 
proposed Sec.  1026.20(d)(2) would have required estimates, labeled as 
such, if the new interest rate or any other calculation using the new 
interest rate were not known as of the date of the disclosure. See also 
proposed comment 20(d)(2)(iii)(A)-1.
    The Bureau also interpreted 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. The Bureau concluded 
that, because the notice was designed to alert consumers to upcoming 
changes to their mortgages 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, if it were 
known, would benefit consumers. The Bureau stated that, 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 the first payment at a new 
level was due.\94\
---------------------------------------------------------------------------

    \94\ Macro Report, at viii.
---------------------------------------------------------------------------

    Proposed Sec.  1026.20(d) also would have required that any 
estimate be calculated using the index figure disclosed in the source 
of information described in Sec.  1026.20(d)(2)(iii)(A) within 15 
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, the Bureau reasoned, would have prevented 
confusion as to the recency of the index value. Pursuant to the 
timeframe discussion above in the section-by-section analysis of Sec.  
1026.20(c)(2), the 15-day period would have allowed 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.
    The Bureau received no comments on these aspects of the good faith 
estimate requirement and is adopting the final rule as proposed. See 
also the section-by-section analysis of Sec.  1026.20(d) above for a 
discussion of industry opposition to the use of estimates in the Sec.  
1026.20(d) notice.
    Additional content. In addition to the content explicitly required 
under the statute, the Bureau proposed, as discussed in more detail 
below, to require the ARM initial interest rate adjustment 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 was scheduled to adjust pursuant to the terms 
of the loan, that the adjustment might effect a change in the mortgage 
payment, the specific time period the current interest rate had been in 
effect, the dates of the upcoming and future interest rate adjustments, 
and any other changes to loan terms, features, or options that would 
take 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 amortize fully an ARM that became 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 was an estimate, a statement that another disclosure 
containing the actual new interest rate and payment would be provided 
within a specified time period if the actual interest rate adjustment 
resulted in a corresponding payment change; and the amount and 
expiration date of any prepayment penalty.
    Many industry commenters recommended that the Bureau eliminate 
certain of the content required by the Dodd-Frank Act and refrain from 
including other content not statutorily-required. The Bureau directs 
readers to the specific content sections below for discussion of 
comments received and the Bureau's decisions with regard to the final 
rule. The Bureau notes that it is exercising its exception authority in 
the final rule to modify the proposed requirements regarding contact 
information for homeownership counselors and counseling organizations 
and State housing finance authorities and the prepayment penalty.
Legal Authority
    As discussed above, TILA section 128A(b) expressly requires much of 
the content included in the initial interest rate disclosures. The 
Bureau is implementing these statutory requirements pursuant to its 
authority under TILA section 105(a). The additional content is likewise 
authorized under TILA section 105(a). As further discussed below, the 
additional content is necessary and

[[Page 10945]]

proper to assure that consumers understand the consequences of the 
upcoming ARM interest 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 additional content is further authorized under 
Dodd-Frank Act 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 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 Dodd-Frank Act section 
1405(b), that the additional content improves consumer awareness and 
understanding of their residential ARM loans and is thus in the 
interest of consumers and in the public interest. The 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.
20(d)(2)(i)
Date of the Disclosure
    Proposed Sec.  1026.20(d)(2)(i) would have required inclusion of 
the date of the disclosure in the initial ARM adjustment notices. To 
group together all data directly related to the ARM itself, proposed 
Sec.  1026.20(d)(3)(ii) would have required 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 explained that the date on the 
notice would have been the date the creditor, assignee, or servicer 
generated the notice. Proposed Sec.  1026.20(d)(2) would have required 
that date to be within 15 business days after publication of the index 
level used to calculate the adjusted interest rate and new payment, if 
it was an estimated and not actual adjusted interest rate and new 
payment. Because, under the proposal, consumers would have received the 
disclosures so far in advance, the Bureau expected estimates would have 
been used in most cases. As stated above, tying the date of the 
disclosure to the publication date of the index level, the Bureau 
concluded, would prevent consumer confusion as to the recency of the 
index value upon which the estimated interest rate and new payment was 
based.
    The Bureau received no comment on this topic. The Bureau is 
adopting the final rule as proposed.
20(d)(2)(ii)
Statement Regarding Changes to Interest Rate and Payment
    Proposed Sec.  1026.20(d)(2)(ii)(A) would have required 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 current interest rate has been in effect 
would end on a certain date, that their interest rate might change on 
that date, and that any change in their interest rate might result in a 
change to their mortgage payment. This information, the Bureau said, is 
similar to the pre-consummation disclosures required by current Sec.  
1026.19(b)(2)(i) and Sec.  1026.37(j) as proposed in the 2012 TILA-
RESPA Proposal. Proposed comment 20(d)(2)(iii)(A)-1 clarified that the 
current interest rate was the interest rate that would be in effect on 
the date of the disclosure.
    Proposed Sec.  1026.20(d)(2)(ii)(B) would have required the initial 
ARM interest rate adjustment notices to include the dates of the 
impending and future interest rate adjustments. Proposed Sec.  
1026.20(d)(2)(ii)(C) also would have required disclosure 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 Bureau explained that the first ARM model form tested did not 
contain the 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 would adjust 
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.\95\ In the absence of comments regarding this 
provision, the Bureau is adopting the final rule as proposed.
---------------------------------------------------------------------------

    \95\ Macro Report, at vii.
---------------------------------------------------------------------------

20(d)(2)(iii)
Table With Current and New Interest Rates and Payments
    Proposed Sec.  1026.20(d)(2)(iii) would have required 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 new 
payment allocated to interest, principal, and property taxes and 
mortgage-related insurance, as applicable. The information in this 
table would have appeared within the larger table containing the other 
required disclosures, except for the date of the disclosure. Proposed 
comment 20(d)(iii)(A)-1 would have clarified the difference between the 
current and new interest rate.
    This table would have followed the same order as, and had headings 
and format substantially similar to, those in the table in model forms 
H-4(D)(3) and (4) in appendix H of subpart C. The Bureau stated that it 
confirmed through its consumer testing that, when presented with 
information in a logical order, participants more easily grasped the 
complex concepts contained in the proposed Sec.  1026.20(d) notice. For 
example, the form would have begun by informing consumers of the basic 
purpose of the notice: Their interest rate was going to adjust, when it 
would adjust, and the adjustment could change their mortgage payment. 
This introduction would have been immediately followed by a visual 
illustration of this information in the form of a table comparing 
consumers' current and new interest rates. Based on its consumer 
testing, the Bureau stated that it believed that the understanding of 
the consumers tested was 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 proposed that creditors, assignees, and 
servicers disclose the information in the table as set forth in model 
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 
were projected to increase as a result of the adjustment. All 
participants in all rounds of testing understood that their interest 
rate and payment were

[[Page 10946]]

projected to increase and when these changes would occur.\96\
---------------------------------------------------------------------------

    \96\ Macro Report, at vii.
---------------------------------------------------------------------------

    The Bureau proposed including allocation information in the table 
for interest-only and negatively-amortizing ARMs only. The Bureau 
stated it believed that providing the payment allocation information 
would have helped consumers better understand the risk of these 
products by demonstrating that their payments would not have reduced 
the loan principal. The Bureau also said that providing the payment 
allocation would have helped consumers understand the effect of the 
interest rate adjustment, especially in the case of a change in the 
ARM's features coinciding with the first interest rate adjustment, such 
as the expiration of an interest-only or payment-option feature. 
Because payment allocation might change over time, the rule would have 
required disclosure of the expected payment allocation for the first 
payment period during which the adjusted interest rate would have 
applied.
    The Bureau explained that the notice disclosing an allocation of 
payment for interest-only or negatively-amortizing ARMs was not tested 
until the third round of testing. The notice tested set forth the 
following scenario to consumers: The first adjustment of a 3/1 hybrid 
ARM--an ARM with a fixed interest rate for three years followed by 
annual interest rate 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 the 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.\97\
---------------------------------------------------------------------------

    \97\ Macro Report, at vii-viii. The allocation table for 
interest-only and negatively-amortizing ARMs was revised after the 
third and final round of testing and is identical in the final rule 
in Sec.  1026.20(c) and (d).
---------------------------------------------------------------------------

    The Bureau recognized that certain Dodd-Frank Act amendments to 
TILA pose restrictions on the origination of non-amortizing and 
negatively-amortizing loans. For example, TILA section 129C requires 
creditors to determine that consumers have the ability to repay the 
mortgage loan before lending to them and that this assumes a fully-
amortizing payment. The Bureau thought it possible that this law and 
its implementing regulations would restrict the origination of risky 
mortgages such as interest-only and negatively-amortizing ARMs.
    The Bureau stated that other Dodd-Frank Act amendments to TILA, 
such as the proposed periodic statement provisions discussed below, 
would provide payment allocation information to consumers for each 
billing cycle. Thus, consumers with interest-only or negatively-
amortizing loans, or those who might obtain such loans in the future, 
would receive information about the interest-only or negatively-
amortizing features of their loans through the payment allocation 
information in the periodic statement. Also, as stated above, consumer 
testing showed that participants tested were confused by the allocation 
table. In view of these changes to the law and the outcome of consumer 
testing, the Bureau solicited comments on whether to include allocation 
information for interest-only and negatively-amortizing ARMs in the 
proposed table described above.
    A trade association generally supported the tabular format, stating 
that consumer testing has repeatedly proven its effectiveness. A large 
bank recommended eliminating altogether the table with the current and 
new interest rates and payments because, it said, the table tested 
poorly with consumers and would confuse them as well as be duplicative 
of the proposed periodic statement. Other commenters recommended 
eliminating only the portion of the table disclosing allocation 
information for interest-only and negatively-amortizing ARMs while one 
large bank commended the Bureau for adding these disclosures to the 
Sec.  1026.20(c) notice. Those commenters in favor of eliminating 
allocation information for these ARMs said the information was not 
fully consumer tested, would be based on projections that would confuse 
and distract consumers, and would require costly software upgrades. 
Most of these commenters recommended substituting the statement for 
interest-only and negatively-amortizing ARMs required by Sec.  
1026.20(d)(2)(vii) in place of the allocation information; one large 
bank suggested expanding the language in these statements as a 
substitute for the allocation information. This large bank also said 
the allocation information would confuse consumers because, in the case 
of a negatively-amortizing ARM, the portion allocated to principal 
would have to be expressed as a negative number. One trade association 
recommended allowing estimated escrow payments for the new payment 
allocation table, which is what the rule proposed and the Bureau is 
adopting in Sec.  1026.20(d)(2)(iii)(C).
    The Bureau is adopting Sec.  1026.20(d)(2)(iii) as proposed for the 
reasons set forth in the proposal and those set forth below. The table 
is the centerpiece of the Sec.  1026.20(d) disclosure and contains some 
of the disclosure's most important information: The consumers' upcoming 
new interest rate and payment set forth next to their current rate and 
payment, such that consumers can make comparisons. This information 
informs consumers of the exact or estimated amount of the new mortgage 
payment they must pay starting in seven to eight months and the table 
allows easy comparison with their current charges, helping consumers 
decide on how best to proceed. Also, the periodic statement will 
provide consumers with only part of the information in the table: The 
date after which the interest rate will adjust and the amount of the 
next payment. Moreover, the periodic statement generally would provide 
consumers with a month warning before a payment increase, rather than 
the minimum 210-day advance notice required by Sec.  1026.20(d).
    Because interest-only and negatively-amortizing ARMs pose more 
potential risk to consumers than conventional ARMs, the Bureau believes 
that providing consumers with the actual or estimated payment 
allocations for when their interest rates adjust will provide a 
comprehensible snapshot of the projected consequences of the upcoming 
adjustments and better enable those consumers to manage their 
mortgages. The table itself tested well with consumers; the allocation 
breakdown for the new payment for interest-only and negatively-
amortizing ARMs did not test as well. As discussed above, the Bureau 
revised the model forms to address that problem. Moreover, the periodic 
statement contains a similar allocation table for the upcoming mortgage 
payment and testing of the periodic statement went well and raised no 
concerns regarding projected principal, interest, and escrow--including 
for payment-option loans.\98\ In addition, as set forth in the periodic 
statement sample form in appendix H-30(C), the allocation of principal 
for negatively-amortizing loans is zero, and not a negative number.
---------------------------------------------------------------------------

    \98\ Macro Report, at 15.
---------------------------------------------------------------------------

    Also, the proposed rule clearly set forth the bases upon which to 
make the projections for the allocation table for

[[Page 10947]]

these ARMs, as well as for loan balances. See the section-by-section 
analysis of Sec.  1026.20(d)(2)(vi) below regarding loan balances. For 
certain consumers, such as those who are delinquent, who may choose to 
pay ahead, or who have payment-option ARMs, the projected amount may 
not prove to be the actual amount. However, servicers routinely project 
expected payment allocations and loan balances any time they provide 
consumers with a future payment amount, such as in the periodic 
statement. The Bureau also notes that the use of allocation tables 
showing projected payments is an established practice in Regulation Z, 
as illustrated, for example, in appendices H-4(E) and (F). Also, the 
Bureau expects the origination of these risky loans will continue to 
decline in light of the qualified mortgage rules implementing TILA 
section 129C, thereby reducing the burden on servicers to provide the 
Sec.  1026.20(d) allocation table. For these reasons and the reasons 
set forth in the proposed rule, the Bureau is adopting the final rule 
as proposed. The Bureau is adopting comment 20(d)(2)(iii)(A)-1 with the 
additional clarification that the new payment, if calculated from an 
estimated interest rate, will also be an estimate and that creditors, 
assignees, and servicers may round the interest rate, pursuant to the 
requirements of the ARM contract.
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 have required disclosure of the index and 
published source of the index or formula. This disclosure requirement 
mirrored the pre-consummation disclosure required around the time of 
application by current rule Sec.  1026.19(b)(2)(iii). Section 
1026.37(j), proposed in 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 any adjustment 
to the index, such as by the addition of a margin. Proposed Sec.  
1026.20(d)(2)(iv) would have required Sec.  1026.20(d) notices to 
include an explanation of how the new interest rate would have been 
determined. The Bureau noted that this disclosure requirement was 
consistent with the pre-consummation disclosure requirements of current 
rule Sec.  1026.19(b)(2)(iii). The 2012 TILA-RESPA Proposal's 
1026.37(j) likewise would require disclosure prior to consummation of 
the amount of the margin expressed as a percentage.
    Consumer testing revealed that participants generally had 
difficulty understanding the relationship of the index, margin, and 
interest rate.\99\ The Bureau said this was the reason it proposed a 
relatively brief and simple explanation that the new interest rate 
would be 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 would have required disclosure of the 
specific amount of the margin.
---------------------------------------------------------------------------

    \99\ Macro Report, at viii.
---------------------------------------------------------------------------

    Consumer testing indicated that the explanation helped participants 
better understand the relationship between the interest rate, index, 
and margin. As stated in the proposal, it also helped dispel the notion 
held by many of the consumers in the initial rounds of testing that 
creditors subjectively determined their new interest rate at each 
adjustment.\100\ The Bureau stated that it believed the proposed rule 
and forms struck an appropriate balance between providing consumers 
with key information necessary to understand the basis of their ARM 
interest rate adjustments without overloading consumers with complex 
and confusing technical information.
---------------------------------------------------------------------------

    \100\ Macro Report, at viii.
---------------------------------------------------------------------------

    Other than a comment regarding the application of previously 
unapplied carryover interest, or applied carryover interest, to the 
calculation of the new interest rate, which is relevant to Sec.  
1026.20(c) and not (d), the Bureau did not receive any comments on the 
explanation of how the interest rate is determined. In response to that 
comment, the Bureau modified the proposed rule to include the type and 
amount, rather than just the type, of any adjustment to the index and 
removed disclosure of the amount of any adjustment from the ensuing 
requirement to explain how the new payment is determined. In this way, 
consumers are informed of the existence and amounts of all elements 
used to calculate their new interest rates, rather than learning about 
the amount further on in the disclosure. See the section-by-section 
analysis of Sec.  1026.20(c)(2)(iii) above for further discussion of 
this modification.
20(d)(2)(v)
Rate and Payment Limits and Unapplied Carryover Interest
    Proposed rule Sec.  1026.20(d)(2)(v) would have required the 
disclosure of any limits on the interest rate or payment increases at 
each adjustment and over the life of the loan. The Bureau stated that 
it believed 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 have been disclosed under proposed Sec.  
1026.20(d)(2)(viii). The Bureau gave the example that if an adjustment 
caused a significant increase in the consumer's payment, knowing how 
much more the interest rate or payment could increase would better 
inform the consumer's decision on whether or not to seek alternative 
financing.
    Proposed Sec.  1026.20(d)(2)(v) also would have required disclosure 
of the extent to which the creditor, assignee, or servicer had foregone 
any increase in the interest rate due to a limit, called unapplied 
carryover interest, and the earliest date such foregone interest could 
be applied. Proposed comment 20(d)(2)(v)-1 would have explained that 
disclosure of foregone interest rate increases would apply only to 
transactions permitting interest rate carryover. It further would have 
explained that the amount of foregone interest rate increase at the 
initial adjustment was the amount that, subject to rate caps, could be 
added to future interest rate adjustments to increase, or offset 
decreases in, the rate determined according to the index or formula.
    The Bureau reported that the consumers tested had difficulty 
understanding the concept of interest rate carryover when it was 
introduced during the third round of testing. The Bureau attributed 
this difficulty 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 simplified the explanation of carryover 
interest to address this possible confusion.\101\
---------------------------------------------------------------------------

    \101\ Macro Report, at viii-ix. ``If not for this rate limit, 
your estimated rate on [date] would be [x]% higher'' was replaced 
with ``We did not include an additional [x]% interest rate increase 
to your new rate because a rate limit applied.''
---------------------------------------------------------------------------

    In its proposed rule, the Bureau recognized that the disclosure of 
rate

[[Page 10948]]

limits and unapplied carryover interest would have provided information 
that might help consumers better understand their ARMs. However, the 
Bureau stated that it was considering whether the assistance this 
information would have provided outweighed its potential distraction 
from other more key information. Also, as explained above, consumers 
had difficulty understanding the concept of carryover interest and the 
Bureau was concerned that this difficulty might diminish the 
effectiveness of the proposed Sec.  1026.20(d) disclosures. The Bureau 
solicited comments on whether to include rate limits and unapplied 
carryover interest in the proposed Sec.  1026.20(d) disclosures.
    The Bureau received few comments regarding the proposed disclosure 
of rate limits and unapplied carryover interest. A credit union 
supported inclusion of the rate and payment limits in the Sec.  
1026.20(d) notice and a large bank servicer and a large non-bank 
servicer recommended against it. A large bank servicer commented that 
consumers do not need this information because they receive it at 
consummation and including it in the Sec.  1026.20(d) notice would 
distract and confuse them. The non-bank servicer and a trade 
association said the unapplied carryover interest was unrelated to the 
interest rate adjustment and would confuse consumers. See the section-
by-section analysis of Sec.  1026.20(c)(2)(iii) and 20(c)(2)(iv) above 
for a discussion of unapplied interest rate increases.
    In addition, a credit union and a State trade association 
recommended the Bureau eliminate disclosure of carryover interest 
altogether, asserting that it is too complex and unnecessary for 
consumers to understand and it would distract consumers from other 
information contained in the Sec.  1026.20(d) notices. A large servicer 
suggested the alternative of including this information in the periodic 
statement instead of the Sec.  1026.20(d) notice.
    Because most ARMs covered by this rule will adjust a year or more 
after consummation, the Bureau disagrees that information provided at 
consummation suffices to adequately inform consumers about carryover 
interest and rate limits. Moreover, carryover interest is an essential 
element in the determination of the new interest rate and payment. For 
these reasons and the reasons in the Bureau's proposed rule, the Bureau 
is adopting the final rule as proposed. The Bureau also is adopting 
proposed comment 20(d)(2)(v)-1, with slight modifications to clarify 
the definition of carryover interest.
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 have implemented this statutory provision by requiring the 
content discussed below. The proposed disclosure would have been 
consistent with the disclosures required at the time of application 
pursuant to current Sec.  1026.19(b)(2)(iii). The Bureau also stated 
that its proposal was consistent with content proposed in Sec.  
1026.20(c) and thus would have promoted consistency in Regulation Z ARM 
disclosures.
    Proposed Sec.  1026.20(d)(2)(vi) would have required ARM 
disclosures to explain how the new payment was determined, including 
(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 was an estimate, a statement that another disclosure 
containing the actual new interest rate and new payment would be 
provided to the consumer between two and four months prior to the date 
the first new payment would be due, if the interest rate adjustment 
would cause a corresponding change in payment, pursuant to Sec.  
1026.20(c).
    The proposal would have required 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 have required 
disclosure of any change in the term of the loan caused by the 
adjustment. As discussed in proposed Sec.  1026.20(d)(2)(iv) above, the 
Bureau stated its belief that this explanation would have helped 
consumers better understand how these factors determine their new 
payment and would have dispelled the notion held by many consumers in 
the initial rounds of testing that, at each adjustment, the creditor 
subjectively determined their new interest rate, and thus the new 
payment. The Bureau stated that disclosure of the four key assumptions 
upon which the new payment would be based would have provided a 
succinct overview of how the interest rate adjustment works. It also 
would have demonstrated that factors other than the index could 
increase consumers' interest rates and payments. Disclosures of these 
factors, the Bureau said, would have provided 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. As set forth above, if an estimated 
new interest rate and new payment were used, consumers would have been 
informed by a statement in the Sec.  1026.20(d) notice that they would 
receive another disclosure containing their actual new interest rate 
and new payment between two and four months in advance of the due date 
of their first new payment--if the interest rate adjustment would 
result in a corresponding payment change.
    Two commenters voiced concern over having to project an estimate of 
the loan balance, as required in the proposed rule. For a discussion of 
the use of projections of scheduled payments for interest-only and 
negatively-amortizing ARMs, as well as for the loan balance, see the 
section-by-section analysis of Sec.  1026.20(d)(2)(iii) above. The 
final rule adds emphasis regarding the use of estimates in the Sec.  
1026.20(d) model forms to further alert consumers to their use, 
including that a recent index rate is used in the calculation of the 
new interest rate and payment and underlining of the word ``estimate.'' 
The Bureau did not receive other specific comments regarding Sec.  
1026.20(d)(2)(vi) apart from one community bank recommending against 
the inclusion of similar information in both the explanation of how the 
interest rate is calculated and the explanation of how the new payment 
is determined. The Bureau points out that the components of the 
interest rate calculation are also components of how the new payment is 
determined and therefore, the Bureau will retain these common 
components in Sec.  1026.20(d)(2)(vi). However, to avoid redundancy, 
the final rule does not require reiteration of the amount of the margin 
or any other adjustment to the index.
    For these reasons and the reasons articulated in the proposed rule, 
the Bureau is adopting Sec.  1026.20(d)(2)(vi) and comment 
20(d)(2)(vi)-1 as proposed, except the final rule does not require 
disclosure of the specific amount of any adjustment to the margin, 
because that data is provided in the final rule under Sec.  
1026.20(d)(2)(iv).
20(d)(2)(vii)
Interest-Only and Negative-Amortization Statement and Payment
    Proposed Sec.  1026.20(d)(2)(vii) would have required Sec.  
1026.20(d) notices to include a statement regarding the

[[Page 10949]]

allocation of payments to principal and interest for interest-only or 
negatively-amortizing ARMs. If negative amortization occurred as a 
result of the interest rate adjustment, the proposed rule would have 
required disclosure of the payment necessary to amortize fully such 
loans at the new interest rate over the remainder of the loan term. As 
the Bureau explained in proposed comment 20(d)(2)(vii)-1, for interest-
only loans, the statement would have informed the consumer that the new 
payment would cover all of the interest but none of the principal owed 
and, therefore, would not reduce the loan balance. For negatively-
amortizing ARMs, the statement would have informed the consumer that 
the new payment would cover only part of the interest and none of the 
principal, and therefore the unpaid interest would add to the balance.
    See the section-by-section analysis of Sec.  1026.20(c)(2)(vi) 
above for a discussion of the Board's 2009 Closed-End Proposal to 
revise current Sec.  1026.20(c) with regard to non-amortizing and 
negatively-amortizing loans and Dodd-Frank amendments to TILA that pose 
restrictions on the origination of non-amortizing and negatively-
amortizing loans. In view of these changes to the law and the outcome 
of its consumer testing, the Bureau solicited comments on whether to 
include the payment required to amortize ARMs that would become 
negatively amortizing as a result of an interest rate adjustment.
    Some industry commenters said that the statements regarding 
interest-only and negatively-amortizing ARMs should be disclosed 
instead of the proposed allocation information for these loans. See 
section-by-section analysis of Sec.  1026.20(d)(2)(iii). Several 
consumer groups commended the Bureau for requiring the amortization 
statements but recommended additional warning language for negatively-
amortizing ARMs, which they characterized as dangerous. The Bureau 
believes that the statements regarding amortization are clear and 
succinct and that additional warning language is not needed. Moreover, 
the Bureau points out that other new mortgage rules more directly 
address the risks posed by non-amortizing mortgage products.
    The Bureau is modifying the wording of Sec.  1026.20(d)(2)(vii) and 
comment 20(d)(2)(vii)-1 to clarify that Sec.  1026.20(d) notices for 
``interest-only ARMs'' as well as any other ARMs for which consumers 
are paying only interest, must include the statement discussed above 
regarding the amortization consequences of such payments. The Bureau 
also is modifying the language of Sec.  1026.20(d)(2)(vii) to conform 
with the proposed language in comment 20(d)(2)(vii)-1 and the section-
by-section analysis of the proposed rule regarding the amortization 
statements required for ARMs for which consumers pay only interest and 
for negatively-amortizing ARMs. The final rule requires Sec.  
1026.20(d) notices to disclose, for consumers whose ARM payments 
consist of only interest, that their payment will not be allocated to 
pay loan principal and will not reduce the loan balance or, for 
negatively-amortizing ARMs, that the new payment will not be allocated 
to pay loan principal and will pay only part of the interest, thereby 
adding to the balance of the loan. No comments were received regarding 
the Sec.  1026.20(d)(2)(vii) requirement to disclose the amount 
necessary to amortize negatively-amortizing ARMs. For these reasons and 
those stated in the proposed rule, the Bureau is adopting the rule and 
comments 20(d)(2)(vii)-1 and -2 with the addition of the amortization 
language discussed above.
20(d)(2)(viii)
Prepayment Penalty
    Proposed Sec.  1026.20(d)(ix) would have required disclosure of the 
circumstances under which any prepayment penalty could be imposed, such 
as selling or refinancing the principal dwelling, the time period 
during which such penalty could apply, and the maximum dollar amount of 
the penalty. The proposed rule would have cross-referenced the 
definition of prepayment penalty in Sec.  1026.41(d)(7)(iv), the 
proposed rule for periodic statements.
    The Bureau reasoned that interest rate adjustments might cause 
payment shock or require consumers to pay their mortgage at a rate they 
might no longer be able to afford, prompting them to consider 
alternatives such as refinancing. To fully understand the implications 
of such actions, the Bureau stated that consumers should know whether 
prepayment penalties might apply. Under the proposed rule, such 
information would have included the maximum penalty in dollars that 
might apply and the time period during which the penalty might be 
imposed. The Bureau stated that the dollar amount of the penalty, as 
opposed to a percentage, would be more meaningful to consumers.
    The Bureau also proposed disclosure of any prepayment penalty in 
Sec.  1026.20(c) ARM payment change 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.\102\ For this reason, the Bureau 
proposed to clarify the circumstances giving rise to a prepayment 
penalty which creditors, assignees, and servicers must disclose to the 
consumer in the initial rate adjustment notice. The proposed forms 
included model language to alert consumers that a prepayment penalty 
might apply if they pay off their loan, refinance, or sell their home 
before the stated date.
---------------------------------------------------------------------------

    \102\ Macro Report, at vi.
---------------------------------------------------------------------------

    See the section-by-section analysis of Sec.  1026.20(c)(2)(vii) for 
a discussion of Dodd-Frank Act amendments to TILA that would 
significantly restrict a lender's ability to impose prepayment 
penalties. In view of these changes to the law, the Bureau solicited 
comments on whether to include information regarding prepayment 
penalties in Sec.  1026.20(d). See the section-by-section analysis of 
Sec.  1026.20(c)(2)(vii) for a discussion of comments received 
regarding the proposed prepayment penalty disclosure.
    The Bureau is adopting the rule, with significant modification from 
the proposed rule. The final rule is renumbered as Sec.  
1026.20(d)(2)(viii). In the final rule, in place of requiring 
disclosure of the maximum dollar amount of the penalty, the consumer is 
directed by the required disclosure to contact the servicer for 
additional information, including the maximum amount of the prepayment 
penalty. Comment 20(d)(2)(viii)-1 clarifies that the creditor, 
assignee, or servicer has the option of either deleting this field 
entirely from the Sec.  1026.20(d) disclosure for consumers who do not 
have prepayment penalties or retaining the field and inserting a word 
such as ``None'' after the prepayment penalty heading. Thus, the final 
rule retains information crucial for consumers to make decisions 
regarding whether or not to retain their ARMs in the face of an 
interest rate and payment increase while reducing the burden on 
industry by eliminating a field that was both dynamic and particularly 
difficult to calculate. The Bureau believes that encouraging consumers 
to contact the

[[Page 10950]]

servicer for the exact dollar amount of the maximum penalty or for 
other questions, rather than including that information in the 
disclosure, does not significantly compromise consumer protection 
because contacting the servicer should yield the most up-to-date 
information as well as encourage contact with the servicer for 
consumers facing financial distress. The Bureau also notes that the 
periodic statement required by the final rule likewise does not contain 
specific information about any prepayment penalty other than its 
existence, as applicable. The Bureau also is changing the cross-
reference for the definition of prepayment penalty from the periodic 
statement regulation to the ATR rule.\103\
---------------------------------------------------------------------------

    \103\ See Sec.  1026.32(b)(6)(i), published in a separate final 
rule (CFPB-2012-0037). NB: Certain provisions of the ATR definition 
apply specifically to FHA loans.
---------------------------------------------------------------------------

    The Bureau believes, for the reasons stated above and in the 
proposed rule, that information about the prepayment penalty is 
important for consumers to take into account when considering 
alternatives to an interest rate and payment increase. For this reason, 
the Bureau is adopting the final rule and comment 20(d)(2)(viii)-1 with 
the modifications set forth above.
20(d)(2)(ix)
Telephone Number of Creditor, Assignee, or Servicer
    Proposed Sec.  1026.20(d)(2)(x) would have required disclosure of 
the telephone number of the creditor, assignee, or servicer for 
consumers to call if they anticipated having problems affording the new 
payment. The Bureau received no comments on this topic and is issuing 
the final rule as proposed, renumbered as Sec.  1026.20(d)(2)(ix).
20(d)(2)(x)
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 are 
refinancing, renegotiation of loan terms, payment forbearance, and pre-
foreclosure sales. Proposed Sec.  1026.20(d)(2)(viii) would have 
required disclosure in Sec.  1026.20(d) initial ARM interest rate 
notices of the four alternatives set forth in the statute. Proposed 
comment Sec.  1026.20(d)(2)(viii)-1 interpreted the rule to require 
simple, commonly used terms when possible in the model forms to 
describe the alternatives.
    The proposed model forms presented the list as possibilities for 
consumers seeking alternatives to the projected upcoming changes to 
their interest rate and payment. The proposed forms also explained that 
the alternatives may be possible and that most of them were subject to 
approval by the lender. All consumers tested in the first and second 
rounds of testing were able to identify the list of alternatives.\104\
---------------------------------------------------------------------------

    \104\ Macro Report, at viii.
---------------------------------------------------------------------------

    In its proposal, the Bureau said that the list of alternatives 
generally and concisely described the actions consumers would have to 
take to pursue these alternatives, such as contacting their lender or 
another lender. The Bureau proposed to require disclosure of this 
concise list of alternatives in lieu of a more detailed account of 
actions consumers could take to maximize the effectiveness of the 
disclosure without weighing it down with information that may not add 
significant value.
    A national trade association and a non-bank servicer recommended 
eliminating the loss mitigation options in their entirety from the 
Sec.  1026.20(d) disclosure. The trade association recommended that the 
Bureau exercise its exception authority to reverse the statutory 
mandate requiring inclusion of the loss mitigation options in the 
disclosure. In the alternative, the trade association recommended the 
Bureau remove proposed Sec.  1026.20(d)(2)(viii) in favor of a 
provision encouraging consumers facing financial difficulty to contact 
the servicer to discuss possible loan modification and forbearance 
options or to permit servicers to include disclaimers about the 
accuracy of the required information. Chief among the reasons fueling 
the national trade association's opposition to including proposed Sec.  
1026.20(d)(2)(viii) in the final rule was its concern that the 
conditional and disclaimer language \105\ of the provision would be 
insufficient to prevent the false impression that some or all of these 
loss mitigation options would be available to consumers or that they 
could choose among the options. Both commenters suggested the proposed 
language could create a moral hazard encouraging consumers to default. 
The trade association concluded that the provision will encourage 
unnecessary defaults, unfulfilled expectations, and dissatisfaction 
with the servicer. The non-bank servicer also stated that it would be 
insulting to consumers to assume that the interest rate adjustment 
would cause financial distress.
---------------------------------------------------------------------------

    \105\ The proposed Sec.  1026.20(d) model forms stated: ``The 
following options may be possible (most are subject to lender 
approval).''
---------------------------------------------------------------------------

    The Bureau declines to remove the loss mitigation options from the 
final rule. Disclosure of the loss mitigation options is expressly 
required by TILA section 128A(b)(4) and the Bureau believes presenting 
consumers with concrete and constructive possible responses to payment 
shock and financial distress, as set forth in the statute, could 
significantly benefit consumers. However, the Bureau believes that the 
proposed forms may have given unwarranted prominence to four 
alternatives. The Bureau believes that it is logical and may be 
beneficial to consumers to consolidate all of the loss mitigation 
information, including information about homeownership counselors and 
counselor organizations, State housing finance authorities, and the 
four alternatives, in one place in the disclosure. The Bureau is 
mindful that the information on alternatives will benefit only the 
portion of the consumers receiving the Sec.  1026.20(d) disclosure that 
anticipate financial problems in the face of the higher payment that 
may occur with their first ARM adjustment. The Bureau also believes 
that the conditional and cautionary language the proposed model forms 
used in presenting those alternatives that require lender approval and 
that may not be available to consumers is sufficient and meets its goal 
of providing consumers with clear and succinct disclosures. The Bureau 
is adding emphasis to the conditional language in the final model forms 
by printing the word ``may'' in bold font.
    To enhance consumer understanding, the Bureau is modifying the 
final rule by requiring that the alternatives be expressed in simple 
and clear terms. Because of this addition to the final rule, the Bureau 
is removing proposed comment 20(d)(2)(viii)-1 interpreting the rule to 
require the non-technical language in the model forms describing the 
alternatives.
    For these reasons and the reasons articulated by the Bureau in the 
proposed rule, the Bureau is adopting Sec.  1026.20(d)(2)(viii) as the 
final rule, with some modification and renumbered as Sec.  
1026.20(d)(2)(x). As an alternative to prominently locating the four 
options in the middle of the disclosure, in the Sec.  1026.20(d) model 
forms, the Bureau places them at the end of the disclosure, co-located 
with the other loss mitigation information disclosed in the forms, 
i.e., the homeownership counselor and State housing finance authority 
access information and contact information to call the servicer in case 
of anticipated

[[Page 10951]]

problems paying at the estimated new rate.
20(d)(2)(xi)
Contact Information for Government Agencies and Counseling Agencies or 
Programs
State Housing Finance Authorities
    TILA section 128A(b)(6) requires the initial interest rate 
adjustment notices to include the mailing and internet addresses, and 
telephone number of the State housing finance authority,\106\ as 
defined in section 1301 of Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA), for the State in which the consumer 
resides. Proposed Sec.  1026.20(d)(2)(xi) would have implemented this 
statutory mandate by requiring inclusion of this information in the 
initial interest rate adjustment notices. 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 have required contact information for 
the State housing finance authority. However, those proposals would 
have required the contact information for the State in which the 
property is located rather than in which the consumer resides, because 
the scope of those proposed rules is not limited to a consumer's 
principal dwelling. The Bureau sought comment on how to address any 
compliance difficulties posed by this inconsistency. The Bureau did not 
believe this inconsistency of language would be problematic because, 
logically, the consumer's principal dwelling would be located in the 
State in which the property is located.
---------------------------------------------------------------------------

    \106\ NB: The statutory language refers to ``State housing 
finance authorities'' but these entities may be named ``authority'' 
or ``agency.'' The Bureau views these terms as interchangeable for 
purposes of this discussion.
---------------------------------------------------------------------------

    Commenters addressing this inconsistency recommended that the 
Bureau provide the contact information for the State in which the 
property is located to maintain consistency among the Regulation Z and 
Regulation X mortgage rules. The Bureau agrees with this recommendation 
because, as stated above, TILA section 128A applies to consumer credit 
transactions secured by the consumer's principal residence, such that 
the State in which the property is located and the consumer's State of 
residence are the same. However, this issue of consistency is mooted by 
the Bureau's decision to use its exception authority to issue the final 
rule requiring Sec.  1026.20(d) notices to direct consumers to a Bureau 
Web site from which they can locate contact information for the 
appropriate State housing finance authority, in place of including the 
specific contact information in the notice itself. See the Legal 
Authority discussion below for the bases for this modification of the 
rule.
    Those who commented on the statutory requirement to include contact 
information for State housing finance authorities recommended that the 
Bureau issue the final rule removing this information entirely from the 
Sec.  1026.20(d) notice. Alternatively, commenters recommended (1) 
modifying the model forms to clarify that these entities may not 
provide homeownership counseling or (2) directing consumers to a Web 
site where they could find contact information for the appropriate 
State housing finance authority.
    State housing finance authorities (SHFAs) and the organizations 
representing them uniformly recommended against the statutory mandate 
to include SHFA contact information in the Sec.  1026.20(d) notice. 
While always willing to help distressed homeowners, they said, not all 
SHFAs provide counseling and they expressed concern that the referral 
might misdirect consumers away from entities more likely to provide the 
appropriate assistance. SHFAs voiced concern that the increase in 
consumer inquiries expected as a result of including their contact 
information in the Sec.  1026.20(d) notices would tax their already 
limited resources. Industry commenters pointed out the cost burden of 
this dynamic field, which would require customization of the form by 
State and constant monitoring of changes to this information.
    The Bureau believes that issuing its final rule requiring Sec.  
1026.20(d) notices to refer consumers to the Bureau Web site to find 
contact information for the appropriate SHFA, rather than including 
specific contact information in the disclosure itself, does not 
compromise consumer protection. The unanimity of SHFA commenters and 
their representatives favoring elimination of SHFA contact information 
from the notice provides sufficient proof to the Bureau that consumer 
protection would be better served by this modification of the proposed 
rule. The Bureau also notes that no consumer advocacy organizations 
commented on this issue and that the final rule resolves industry 
concerns on this topic.
Counseling Agencies or Programs
    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. The 
2013 HOEPA Final Rule, which implements the Dodd-Frank Act protections 
for ``high-cost'' mortgage loans, requires, among other things, that 
consumers get homeownership counselors and counseling organizations 
prior to obtaining a high-cost mortgage.\107\ It also implements other 
housing-counseling-related requirements unrelated to HOEPA that are 
included in the Dodd-Frank Act, such as requiring lenders to provide a 
list of homeownership counselors to applicants for federally related 
mortgage loans.\108\
---------------------------------------------------------------------------

    \107\ See Sec.  1026.34(a)(5).
    \108\ The list provided to consumers pursuant to this 
requirement must be obtained through a Bureau Web site or data made 
available by the Bureau or HUD. See Sec.  1024.20(a)(1)(i).
---------------------------------------------------------------------------

    The Bureau proposed the alternative approach, with regard to the 
initial ARM interest rate adjustment notices, of using its exception 
authority to require creditors, assignees, and servicers simply to 
provide the Web site address and telephone number to access either the 
Bureau list or the HUD list of homeownership counselors and counseling 
organizations instead of requiring contact information for a list of 
specific counseling agencies or programs.\109\ For the reasons set 
forth in the proposal and below, the Bureau is adopting this proposed 
measure with regard to the Web site access to homeownership counselor 
resources. In addition, the Bureau is issuing the final rule modifying 
the proposed requirement to include both HUD and Bureau telephone 
numbers to access homeownership counselor information in favor of 
requiring disclosure only of the HUD telephone number because the 
Bureau believes the HUD telephone number provides adequate access to 
approved counseling resources.
---------------------------------------------------------------------------

    \109\ The HUD list is available at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm and the HUD toll-free number is 800-569-4287. 
The Bureau list will be available by the effective date of this 
final rule at http://www.consumerfinance.gov/.
---------------------------------------------------------------------------

    The ARM notice required by proposed Sec.  1026.20(d) contains, in a 
limited amount of space, a significant amount of important technical 
information about the upcoming initial interest rate adjustment of the 
consumer's ARM and the potential implications of that

[[Page 10952]]

adjustment. 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 and upkeep burden than simply 
listing one of the agencies' Web sites and the HUD telephone number.
    Providing consumers with the Web site address for either the Bureau 
or HUD list of homeownership counselors and counseling organization and 
the HUD telephone number would streamline the disclosure and present 
clear and concise information for the consumer to use. Directing 
consumers to the actual list would allow them to choose a conveniently-
located program or agency and find other programs or agencies if those 
contacted initially could not help the consumer. The Bureau sought 
comment on whether this proposal struck an appropriate balance, and on 
the benefits and burdens to both consumers and industry of requiring 
inclusion of a list of several individual homeownership counselors in 
the initial ARM interest rate adjustment notice.
    Industry commenters uniformly supported the provision to provide 
information for consumers on how to access homeownership counselor 
information rather than requiring inclusion of the contact information 
for specific homeownership counselors in the Sec.  1026.20(d) 
disclosure and the Bureau received no comments from other sectors. A 
few servicers stated that a distressed consumer's first action should 
be to call the servicer and, in response, the Bureau notes that the 
first entry in the loss mitigation portion of the model form encourages 
consumers to call their servicer.
    The Bureau is adopting the final rule as proposed with regard to 
homeownership counselors and counseling organizations, except that it 
also is removing the requirement to include both a HUD and Bureau 
telephone number to access contact information for homeownership 
counselors and counseling information in favor of requiring disclosure 
only of the HUD telephone number. The Bureau believes that its approach 
regarding the homeownership counselor disclosures appropriately 
balances consumer and industry interests.
Legal Authority
    The Bureau is relying on its authority under TILA sections 105(a) 
and (f) and Dodd-Frank Act section 1405(b) to exempt creditors, 
assignees, and servicers from the requirement in TILA section 128A to 
include contact information for SHFAs and specific government-certified 
counseling agencies or programs reasonably available to the consumer in 
the initial ARM interest rate adjustment notice. TILA section 105(a) 
and Dodd-Frank Act section 1405(b) also authorize the Bureau to instead 
require that the initial ARM interest rate adjustment notice contain 
information directing consumers to the Bureau list or HUD list of 
homeownership counselors and counseling organizations, the HUD 
telephone number, and the Bureau Web site from which consumers can 
locate the appropriate State housing finance authority. For the reasons 
discussed above, the Bureau believes that the exemption 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 in the Sec.  
1026.20(d) notice of the contact information for SHFAs and 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 consumer (including related financial arrangements, 
financial sophistication, and the importance to the consumer of the 
loan). Moreover, in the estimation of the Bureau, the exemptions would 
simplify the initial ARM adjustment notice, provide consumers with the 
appropriate information to locate homeownership counselors and 
counseling organizations, if needed, and improve the 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 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
Initial Rate Adjustment Disclosures
    See the section-by-section analysis of Sec.  1026.17(a)(1) above 
for a discussion of the form requirements governing Sec.  1026.20(d). 
The Bureau received no comments regarding its proposed changes to Sec.  
1026.17(a)(1) regarding form requirements governing Sec.  1026.20(d), 
but it did receive significant response to the proposed implementation 
of the ``separate and distinct'' standard. In the final rule, the 
Bureau interprets the ``separate and distinct'' standard as permitting 
the initial interest rate adjustment notices to be provided in the same 
envelope or email with other servicer material, but only if it is a 
stand-alone document. See further discussion in the section-by-section 
analysis of Sec.  1026.20(d) above. The Bureau is issuing Sec.  
1026.17(a) with conforming changes. See the discussion in the section-
by-section analysis of Sec.  1026.17(c). See the section-by-section 
analysis of Sec.  1026.20(c)(3) above for a discussion regarding ARM 
disclosures in languages other than English.
Legal Authority
    In addition, as described below, Sec.  1026.20(d)(3) imposes 
additional form requirements for initial ARM adjustment notices. For 
the reasons described below, these requirements are authorized under 
TILA section 105(a) and Dodd-Frank Act sections 1032(a) and 1405(b). As 
discussed in the section-by-section analysis of each of the sections of 
Sec.  1026.20(d)(3), the Bureau believes, consistent with TILA section 
105(a), that the 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 Dodd-Frank Act section 
1032(a), that the formatting requirements ensure that the features of 
the ARM loans covered by 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 Dodd-Frank Act section 1405(b), the Bureau believes 
that modification of the disclosure requirements of TILA section 
128A(b) to require the format discussed below will improve consumer 
awareness and understanding of residential mortgage loans transactions 
involving ARMs, and

[[Page 10953]]

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 have required 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.
    See the section-by-section analysis of Sec.  1026.20(c)(3)(i) for a 
discussion of the rationale in the proposed rule for providing the 
Sec.  1026.20(c) and (d) disclosures in tabular form to consumers and 
of the comments the Bureau received regarding the required tabular 
format. The Bureau's response to these comments is two-fold. First, the 
proposed rule's requirement that Sec.  1026.20(d) disclosures be 
provided to consumers ``in the form of the table and in the same order 
as, and with headings and format substantially similar to'' the 
proposed model forms is consistent with established standards found 
throughout Regulation Z requiring tabular formatting as well as other 
conventions. For example, Sec.  1026.6(b)(1), entitled ``Form of 
disclosures; tabular format for open-end (not home-secured) plans,'' 
requires creditors to provide account-opening disclosures ``in the form 
of a table with headings, content, and format substantially similar 
to'' the tables in a particular model form. Moreover, Regulation Z's 
Appendices G and H--Open-End and Closed-End Model Forms and Clauses 
sets forth the permissible changes to model forms, including the Sec.  
1026.20(d) model forms. Thus, the proposed rule does not depart from 
established Regulation Z standards and does not violate TILA.
    Second, the proposed language referred to by commenters was not 
intended to strait-jacket creditors, assignees, and servicers into 
language inapplicable to non-standard customer situations and loan 
products. The ``substantially similar'' language was intended to allow 
disclosure providers the flexibility to develop, for example, forms 
that may be either one- or two-sided and that may, but need not, 
feature reverse text data fields.
    For these reasons and those articulated in the proposed rule, the 
Bureau is adopting 1026.20(d)(3)(i), (ii), and (iii) and comment 
20(d)(3)(i)-1. While, as stated above, the formatting conventions in 
the final Sec.  1026.20(d) disclosures do not depart from standard 
Regulation Z format requirements, the Bureau has added comment 
20(d)(3)(i)-1 clarifying that creditors, assignees, and servicers may 
modify the Sec.  1026.20(d) disclosures to account for certain 
circumstances or transactions that may not be addressed in the final 
rule or forms. Also, the final rule removes Sec.  1026.20(d) model and 
sample forms from the Regulation Z provision prohibiting formatting 
alterations. See Appendices G and H--Open-End and Closed-End Model 
Forms and Clauses.
20(d)(3)(ii)
Format of Date of Disclosure
    Proposed Sec.  1026.20(d)(3)(ii) would have required that the date 
of the disclosure appear outside of and above the table required by 
Sec.  1026.20(d)(3)(i). As discussed above with respect to paragraph 
20(d)(2)(i), the date would have been segregated because it is not 
information specific to the consumer's adjustable-rate mortgage. Having 
received no comments on this topic, the Bureau is adopting the rule as 
proposed.
20(d)(3)(iii)
Format of Interest Rate and Payment Table
    Proposed Sec.  1026.20(d)(3)(iii) would have required tabular 
format for initial ARM interest rate adjustment notices for, among 
other things, interest rates, payments, and the allocation of payments 
for loans that are interest-only or are negatively amortizing. This 
table would have been located within the table proposed by Sec.  
1026.20(d)(3)(i). This table would have been substantially similar to 
the one tested by the Board for its 2009 Closed-End Proposal to revise 
Sec.  1026.20(c). The Bureau's proposal would have required 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 identify and understand the table 
and its contents.\110\ The estimated or actual new interest rate and 
payment and date the first new payment is due is key information the 
consumer must know to commence payment at the new rate. For these 
reasons, the Bureau proposed locating this information prominently in 
the disclosure.
---------------------------------------------------------------------------

    \110\ Macro Report, at vii.
---------------------------------------------------------------------------

    The Bureau is issuing the final rule as proposed in Sec.  
1026.20(d)(3)(iii). See the section-by-section analysis of Sec.  
1026.20(c)(iii) for a discussion of comments received and the Bureau's 
rationale for the proposed format in the interest rate and payment 
table and changes made in the final rule.
Section 1026.36 Prohibited Acts or Practices in Connection With Credit 
Secured by a Dwelling
36(c) Servicing Practices
    Section 1464 of the Dodd-Frank Act generally codified provisions in 
existing Regulation Z with respect to the crediting of consumer 
payments and providing payoff statements. The Bureau proposed to 
implement these statutory requirements through relatively minor changes 
to Regulation Z as discussed below. Pursuant to the Dodd-Frank Act and 
current Sec.  1026.36(c), a servicer must promptly credit payments, 
must not engage in the pyramiding of late fees, and must provide a 
consumer with a payoff statement at the consumer's request. The Bureau 
proposed amending Regulation Z to implement the new statutory 
requirements, and to address the related issue of the handling of 
partial payments.
36(c)(1)(i) Periodic Payments
    Section 1464(a) of the Dodd-Frank Act established new TILA section 
129F(a), which essentially codified 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 Sec.  1026.36(c)(1)(i) would have required a servicer to 
promptly credit a ``full contractual payment.'' A full contractual 
payment would have been defined to mean the amount owed for 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.
    In general, commenters supported the prompt crediting of full 
payments; however commenters expressed concerns over the definition of 
a full payment and requested clarification

[[Page 10954]]

regarding the implication of this rule in certain circumstances.
    Several industry commenters and one State Attorney General's office 
commented that a definition of ``full contractual payment'' that 
excluded late fees would encourage consumers to ignore payment of late 
fees, would purport to redefine the terms of the underlying security 
instrument, and would potentially impact the servicer's ability to 
collect fees to which they were contractually entitled. An industry 
commenter indicated that the proposed rule reflected industry practice 
and was not necessary, whereas another suggested that if late fees were 
not included in the definition of full contractual payment, there 
should be a message reminding consumers of their late fee obligation.
    Several commenters also sought clarification regarding the 
implications of the requirement in certain circumstances. Specifically, 
a consumer advocate commenter requested clarification regarding the 
impact on non-payment of escrowed amounts for force-placed insurance 
and property taxes. Several industry commenters requested clarification 
regarding the application of the rule when a mortgage loan has been 
accelerated or is in foreclosure, and urged an exemption for such 
scenarios. In addition, the Bureau received one comment expressing 
concern about posting payments on weekends, and one comment requesting 
that payments only be posted on the same business day, not the same 
calendar day. Finally, a number of community banks, credit unions, 
small servicers and their trade associations requested an exemption for 
small servicers from all provisions of the proposed rules.
    As stated in the proposal, the Bureau believes that if a consumer 
submits sufficient funds to cover principal, interest and escrow, those 
funds should be applied regardless of whether there are outstanding 
late fees. The rule was not intended to redefine existing contractual 
terms of the underlying security. While servicers must apply full 
payments that are sufficient to cover principal, interest and escrow, 
servicers may still charge and collect late fees if such payments are 
not timely made. The Bureau initially proposed to define the amount due 
in any period for principal, interest, and escrow as a ``full 
contractual payment'' to reflect the amount due in a period pursuant to 
the contractual obligation. However, in light of the concern that the 
regulation may be interpreted as redefining a consumer's contractual 
obligation, the Bureau is adopting instead the term ``periodic 
payment'' in place of ``full contractual payment'' to refer to the 
amount owed by the consumer for principal, interest, and escrow during 
any billing cycle. Thus, if a consumer submits an amount sufficient to 
constitute a periodic payment (that is, enough to cover the amounts due 
for principal, interest, and escrow), that payment must be promptly 
credited to a consumer's account.
    Because the definition of ``periodic payment'' is intended to 
reflect the consumer's contractual obligation, to the extent a 
consumer's mortgage loan has been accelerated (such that the periodic 
payment constitutes the total amount owed for all principal and 
interest), or that certain obligations for force-placed insurance or 
delinquent taxes have been paid through the escrow account, those 
amounts may be appropriately accounted for within this definition of a 
periodic payment. With regard to defining the periodic payment, the 
Bureau believes it is appropriate to include amounts owed for escrow in 
the periodic payment. The 2013 RESPA Servicing Final Rule imposes 
greater requirements on servicers with respect to advances for 
maintaining insurance for escrowed borrowers and the Bureau believes it 
is appropriate and consistent with most security instruments to include 
escrow in the periodic payment.
    The Bureau does not believe the rule will prevent collection of 
late fees or impose operational challenges on servicers regarding the 
timing for crediting payments. Although a servicer may not delay 
crediting of a payment until a late fee has been paid, nothing in the 
rule prevents a servicer from charging and collecting a late fee where 
appropriate. The Bureau does not believe it is appropriate to mandate a 
statement to the consumer regarding the consumer's obligation to pay a 
late fee; however, a servicer may undertake appropriate actions, 
including potentially through a message on the periodic statement, to 
collect late fees.\111\ With respect to comments regarding operational 
difficulties of crediting payments on a specific day, the Bureau 
observes that payment must be credited on the day 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. The Bureau believes this allows servicers sufficient 
flexibility because, if it is operationally infeasible to post a 
payment on the day received, payments may be processed on a later day 
so long as that later posting does not result in a charge to the 
consumer or in the reporting of negative information to a consumer 
reporting agency. Accordingly, the Bureau finalizes the rule as 
proposed, with a minor adjustment to replace the term ``full 
contractual payment'' with the term ``periodic payment.'' Additionally, 
to dispel any impression that existing comment 36(c)(1)(i) 2 is 
inconsistent with the final rule, the Bureau is amending the comment to 
clarify that it concerns the method in which payments are credited.
---------------------------------------------------------------------------

    \111\ See Sec.  1026.41 and comment 1026.41(c)-2.
---------------------------------------------------------------------------

Small Servicers
    Finally, the Bureau does not believe an exemption for small 
servicers from the prompt crediting requirement is appropriate. Small 
servicers are already required to promptly credit payments under the 
current requirements of Regulation Z. Outreach with small servicers 
indicates that such servicers are generally already in compliance with 
the prompt crediting requirements. Further, in the course of the 
Bureau's outreach efforts, small servicers told the Bureau that they do 
not use suspense accounts, choosing instead to credit partial payments 
or return the payments. These practices continue to be allowed, as 
clarified in comment 36(c)(1)(ii)-1.
36(c)(1)(ii) Partial Payments
    Section 1464 of the Dodd-Frank Act and existing Regulation Z do not 
define what constitutes a ``payment'' for purposes of the prompt 
crediting requirement. Outreach to consumer and industry stakeholders 
revealed that partial payments are currently handled in a variety of 
ways: Some servicers do not accept partial payments, some servicers 
apply partial payments, and some servicers send partial payments to a 
suspense or unapplied funds account. Previously, there were no Federal 
regulations that governed such accounts; thus, the Bureau proposed to 
address partial payments in proposed Sec.  1026.36(c)(1)(ii).
    Proposed Sec.  1026.36(c)(1)(ii) provided specific rules regarding 
the handling of partial payments and suspense accounts. New paragraph 
36(c)(1)(ii) would have required, 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. Additionally, proposed Sec.  1026.36(c)(1)(ii) 
would have provided that if a servicer were to hold

[[Page 10955]]

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 would have had to apply those funds to the oldest 
outstanding payment due.
    The proposed regulation would have left 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 also would have ensured greater 
consistency in the handling of suspense accounts by requiring certain 
procedures around partial payments.
    The Bureau believed this proposed approach would have clarified 
servicers' obligations in processing both full payments and partial 
payments, as well as ensured that all payments would be properly 
applied. The proposed disclosures would have helped consumers 
understand that their partial payments are being held in a suspense 
account rather than having been applied, as well as when those partial 
payments would be applied. Additionally, requiring application when a 
full payment accumulates would have provided protection to consumers, 
as well as reduced the outstanding principal balance on certain 
consumer loans.
    The majority of commenters appreciated the rule's flexibility in 
handling partial payments; however, some consumer-advocate commenters 
felt that all payments, including partial payments, should be 
immediately credited to the consumer's account. Two of these commenters 
felt this was particularly important in the case of daily accrual 
loans. Comments also revealed there was some confusion about the 
proposed rule; in particular, there was confusion about whether the use 
of suspense accounts would have been permitted or required.
    Consumer advocate commenters requested that the Bureau require 
further procedures for the handling of partial payments to avoid 
arbitrariness in the handling and crediting of these payments, and to 
ensure there is no ambiguity or uncertainty for either consumers or 
institutions. The Bureau also received comments directly addressing the 
question of whether, if payments are returned (rather than placed in a 
suspense account or applied), they must be returned within a specific 
period of time. Some commenters suggested a specific period of time, 
and one commenter felt that further regulation on this topic is not 
required. Additionally, the Bureau received one comment requesting 
clarification on how the periodic statement exemptions would affect the 
partial payments disclosure, one comment requesting confirmation that 
the new provisions addressing suspense accounts would not be in 
conflict with existing Regulation Z Sec.  226.21, and several comments 
requesting an exemption from the prompt crediting provisions when a 
consumer is in bankruptcy.
    Finally, commenters disagreed on the provision requiring 
application to the oldest outstanding delinquency--some agreed with 
this provision because they felt it would advance the date of 
delinquency one cycle, while other consumer advocate commenters felt it 
would be more consumer-friendly to mandate that servicers apply the 
payment to the most recent payment due. These commenters also stated 
the proposed provision would conflict with certain State laws.
    The Bureau is adopting as the final rule all the proposed 
provisions addressing partial payments, except for the clause requiring 
to which outstanding payment an accumulated complete periodic payment 
must be applied. The Bureau is clarifying in the final rule that if 
sufficient funds accrue in any suspense or unapplied funds account to 
cover a periodic payment, such funds must be treated as a periodic 
payment received.
    The Bureau has carefully considered the comments suggesting that 
all payments, including partial payments and particularly partial 
payments for daily accrual loans, should be promptly credited. The 
Bureau recognizes that the statutory language does not address partial 
payments, but the Bureau also notes that the statute codified existing 
language from Regulation Z, which has been widely interpreted to allow 
partial payments to be sent to suspense accounts.
    The Bureau also considered the burden that requiring prompt 
crediting of partial payments could impose on servicers. Requiring 
servicers to credit every payment that a consumer sends in during the 
month could create problems in payment processing operations. 
Additionally, this could create immense accounting difficulties; for 
example, if a consumer were to send in a few dollars the servicer would 
have to determine the proper allocation of those funds. Finally, this 
would create complications for servicers when consumers are severely 
delinquent. Certain State laws require a period of time between the 
last accepted payment and foreclosure. Constant application of partial 
payments could prevent servicers from being able to foreclose on 
property, even when such foreclosure would otherwise be appropriate. 
The Bureau also considered the potential benefit to consumers. While 
the Bureau agrees that holding payments in a suspense account rather 
than applying them could increase the cost of interest for daily 
interest accrual loans, the Bureau notes that this cost to consumers is 
limited due to the requirement to apply the funds once a full payment 
has accrued. Thus, requiring application of partial payments would 
provide at best only a limited benefit to consumers. In light of the 
small benefit to consumers, and larger burden on servicers, the Bureau 
does not believe it is appropriate to require prompt application of 
partial payments. The Bureau notes that while the final rule allows 
servicers to place partial payments received into a suspense account, 
it does not require servicers to place partial payments in suspense 
accounts.\112\ The Bureau believes that suspense accounts are best 
addressed by allowing services discretion as to whether to use such 
accounts but requiring that funds held in any such account be disclosed 
in the periodic statement, and, when sufficient funds accrue for a full 
payment, that they be promptly applied, as in the proposed rule. The 
Bureau believes many of the more detailed aspects of suspense accounts 
are already addressed by existing law and contracts (for example, the 
Bureau observes that the order of application of funds is often 
determined by the contract between the parties), and does not believe 
it is necessary to impose additional regulation on suspense accounts at 
this time.
---------------------------------------------------------------------------

    \112\ See comment 36(c)(1)(ii)-1: A servicer may take any of the 
following actions when a partial payment is received: They may 
credit the partial payment on receipt, they may hold the payment in 
a suspense or unapplied funds account, or they may return the 
payment.
---------------------------------------------------------------------------

    In response to the request for clarification as to how the periodic 
statement exemptions (see Sec.  1026.41(e)) affect the partial payments 
disclosure, the Bureau notes that, under both proposed and final Sec.  
1026.36(c)(1)(ii)(A), the disclosure is required only ``if a periodic 
statement is required.'' Thus, servicers not required to send periodic 
statements are exempt from the provision requiring disclosure of the 
amount of funds held in the suspense account on the periodic statement. 
Further, the Bureau does not believe there would be a conflict between 
the provisions addressing suspense accounts and existing Sec.  1026.21. 
Section 1026.21 requires the creditor to take certain actions when a

[[Page 10956]]

credit balance in excess of $1 is created. Because funds are only sent 
to a suspense account when a partial payment is received (and funds 
must be applied when a full payment occurs), a suspense account would 
not be used if there was a credit balance. Thus, the Bureau believes 
there is no conflict between these provisions.
    The Bureau believes the prompt crediting provisions should remain 
in effect, even when a consumer is in a bankruptcy or trial 
modification scenario. While the Bureau understands the requirement 
that the pre-petition and post-petition accounts must be kept separate 
during a bankruptcy, the Bureau believes that if sufficient funds 
accrue in either account to make a periodic payment due, those funds 
should be applied. Further, the Bureau believes that consumers in the 
bankruptcy scenario should have full payments promptly credited. 
Similarly, the Bureau believes that if a consumer makes a payment 
sufficient to cover the principal, interest and escrow due under a 
trial modification plan, these funds should be applied. If a consumer 
were to make a payment insufficient to cover these expenses, the 
servicer would also have the options of returning the payment, or 
sending the payment to a suspense account.
    The Bureau carefully considered the concerns about the requirement 
that a full payment must be applied to the oldest outstanding 
delinquency may cause conflict with certain State law requirements. 
This provision was intended to prevent extended delinquencies and 
collection of multiple late fees. However, further research has shown 
this problem is mitigated through other means, including the 
prohibition on pyramiding of late fees. Further, the Bureau has become 
aware that requiring application to the oldest outstanding delinquency 
may indeed conflict with State law. In light of these factors, the 
Bureau believes this provision would provide only minimal benefits; 
thus the Bureau is removing the language that would have required to 
which outstanding time period full payments would have been applied be 
applied. Thus, Sec.  1026.36(c)(1)(ii) is adopted as proposed, except 
for the provision requiring to which outstanding payment an accumulated 
periodic payment must be applied.
Legal Authority
    The required disclosures on the periodic statement are authorized 
under TILA section 128(f), which requires creditors, assignees, and 
servicers to send statements for each billing cycle that includes 
certain information, including ``[s]uch other information as the Bureau 
may prescribe in regulations.''
    In addition, 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 requirement that partial 
payments held in suspense accounts be credited when a full periodic 
payment accumulates. Failure to credit such payments 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 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 
when sufficient funds accumulate in such an account to cover a full 
periodic payment.
36(c)(1)(iii) Non-Conforming Payments
    TILA section 129F(b) codified the treatment of non-conforming 
payments in current Sec.  1026.36(c)(2). The proposal did not make any 
substantive changes to this provision, but redesignated the section as 
new Sec.  1026.36(c)(1)(iii).
    The Bureau noted 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 proposal, partial payments retained in 
suspense or unapplied funds accounts would be treated as payments that 
have not been accepted and thus are not subject to Sec.  
1026.36(c)(1)(iii); as opposed to non-conforming payments that have 
been accepted that are subject to proposed Sec.  1026.36(c)(1)(iii), 
and thus must be credited within five days of receipt.
    Two commenters expressed concern about non-conforming payments, 
stating that prompt crediting should be contingent on consumers making 
payments to the servicer's proper address or through authorized 
channels (e.g., payment by phone, online or ACH). The Bureau agrees, 
but believes this concern is adequately addressed by the existing 
provisions on non-conforming payments, which remain unchanged. The 
final rule adopts the provisions on non-conforming payments as 
proposed.
36(c)(2) No Pyramiding of Late Fees
    The proposed rule would have prohibited a servicer from assessing a 
late fee or delinquency charge for a payment if (1) 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 (2) the payment is 
otherwise a periodic payment received on the due date, or within any 
applicable grace period. This requirement is substantially similar to 
existing paragraph 36(c)(1)(ii) and the Bureau did not propose any 
substantive changes to the existing requirement but rather simply 
redesignated the requirement as new paragraph 36(c)(2). A consumer 
advocate commented that, in addition to prohibiting pyramiding of late 
fees, the regulation should prohibit assessing a late fee for 
nonpayment of any other fee owed. The Bureau observes that because the 
proposal was not intended to enact any substantive changes to the 
prohibition on pyramiding late fees and the Bureau accordingly did not 
solicit comment on how the prohibition might be altered, the comment 
exceeds the scope of the rulemaking. Accordingly, the rule is finalized 
as proposed.
36(c)(3) Payoff Statements
    Dodd-Frank Act section 1464(b) established TILA section 129G, which 
requires that a creditor or servicer send an accurate payoff balance 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 codified 
existing Sec.  1026.36(c)(1)(iii) of Regulation Z regarding provision 
of payoff statements, but with four substantive changes. First, while 
existing Regulation Z only applies the requirement to servicers, the 
statute applies the requirement to both servicers and creditors. The 
Bureau proposed extending the requirement to assignees as well. Second, 
the statute applies the prompt response requirement to ``home loans,'' 
rather than consumer credit transactions secured by the consumer's 
principal dwelling. The Bureau proposed to interpret use of the term 
``home loans'' to expand the scope of the Regulation Z requirement from 
consumer credit transactions secured by principal dwellings to consumer 
credit transactions secured by any dwelling.\113\

[[Page 10957]]

Third, the statute and the proposed rule limit the reasonable time for 
responding to a request for a payoff balance to not more than seven 
business days; by contrast, existing comment 36(c)(1)(iii)-1 generally 
created a five business day safe harbor for responding, but noted that 
it might be reasonable to take longer to respond in certain 
circumstances. Fourth, consistent with TILA section 129G, the proposed 
rule would have required a prompt response only to written requests for 
payoff amounts, while the existing regulation requires a prompt 
response to all such requests, including, for example, oral requests.
---------------------------------------------------------------------------

    \113\ The statute requires a payoff balance be provided in 
response to a borrower's request, the Bureau interprets ``borrower'' 
(a term not used elsewhere in TILA) to have the same meaning as 
``consumer.''
---------------------------------------------------------------------------

    Comments on the proposed rule on payoff balances focused on the 
scope, timing and procedures for requesting a payoff balance. With 
respect to the scope of the proposed rule, a credit union trade 
association urged that the Bureau retain the limitation to loans 
secured by a principal dwelling because of the potential impact of the 
application of the rule to home equity lines of credit (HELOCs).
    Numerous industry commenters indicated that the requirement that a 
payoff balance must be provided no more than seven business days after 
the request was problematic because additional time may be needed to 
provide payoff statements in a variety of situations, such as for 
reverse mortgages; loans in delinquency, bankruptcy or foreclosure; 
loans that have shared appreciation features; loans with payoff 
requests from unverified third parties; and circumstances in which an 
act of God makes compliance within seven business days impossible. One 
credit union commenter stated that the seven business day requirement 
is unreasonable in light of the volume of mail processed by that 
institution. Further, a trade association requested flexibility where 
the creditor, assignee or servicer relies on a payment that was later 
dishonored or that the consumer reversed. A number of commenters also 
requested clarification regarding the seven business day requirement in 
light of the 2012 HOEPA Proposal for a payoff statement to be provided 
within five business days.
    Finally, commenters disagreed regarding whether a creditor, 
assignee or servicer should only be required to provide a payoff 
statement in response to a written request. Some consumer advocate 
commenters felt that an oral request should still be sufficient to 
require a payoff balance; however, an industry commenter strongly 
supported limiting the payoff statement requirements to written 
requests. One credit union trade association commenter requested 
standardized requirements regarding submission of payoff balance 
requests and a housing finance agency commenter questioned whether the 
information requests provision of the 2012 RESPA Servicing Proposal 
could be used to submit a payoff request. Finally, three commenters 
asked the Bureau to consider how the payoff statement provisions would 
interact with timelines of State and local law.
    The Bureau is adopting the proposed rule as the final rule, with 
modifications to the timing requirements. Specifically, the Bureau 
believes it is appropriate in certain scenarios to allow creditors, 
assignees or servicers more time than seven business days to respond to 
a request for a payoff balance.
    The Bureau believes the requirements of the rule regarding the 
scope and procedures for requesting a payoff statement are necessary 
and appropriate to implement the statutory provisions. With respect to 
the scope, Congress reviewed the prior regulation, which defined the 
scope as ``a consumer credit transaction secured by a principal 
dwelling.'' \114\ Congress chose to require prompt crediting of 
payments only ``in connection with a consumer credit transaction 
secured by a consumer's principal dwelling'' but expanded the payoff 
provisions to apply to any ``home loan.'' \115\ For these reasons, the 
Bureau believes it is appropriate to interpret TILA section 129G to 
include HELOCs and other open-ended lines of credit secured by a 
consumer's dwelling in the payoff statement requirement.
---------------------------------------------------------------------------

    \114\ See existing Regulation Z Sec.  1026.36 (c)(1).
    \115\ See TILA section 129G.
---------------------------------------------------------------------------

    Similarly, limitations on the requirement to provide a payoff 
statement only in response to written requests reflects Congress's 
clear change in the language from the existing regulation. Creditors, 
assignees or servicers are permitted, however, to continue providing 
payoff statements in response to an oral request, even if such requests 
do not trigger the regulatory payoff statement request requirements.
    The Bureau carefully considered the comments requesting more time 
in certain scenarios, and recognizes that it may not always be feasible 
to provide a payoff statement within seven days. Thus, the final rule 
includes the following exemption: When it is not feasible to provide a 
payoff statement because a loan is in bankruptcy or foreclosure, 
because the loan is a reverse mortgage or shared appreciation mortgage, 
or because of the occurrence of natural disasters or other similar 
circumstances, the payoff statement must be provided within a 
reasonable time. Regarding third party authorization, the Bureau 
believes that the seven day timeline does not begin until a request is 
received from a verified party. Thus, if a creditor, assignee or 
servicer must verify authorization for a third party, they will have 
seven days from when a verified request is received to provide the 
payoff statement, and the need for verification should not cause a 
problem with providing the payoff balance within the allotted time 
line.
    Finally, the Bureau acknowledges there may be State or local laws 
addressing the timeline for payoff statements which allow 3 to 21 days; 
however the Bureau does not believe this will cause a direct conflict 
with the timeline of the final rule. The timeline for payoff statements 
states the maximum time within which a payoff statement must be 
provided, so creditors, assignees or servicers could comply with both 
State law timelines and this rule's timelines by providing the payoff 
statement within the shorter of the two timelines. The Bureau believes 
that State laws allowing a longer period of time do not prohibit the 
creditor, assignee or servicer from providing a payoff statement within 
seven business days. Thus, there is no direct conflict with State law 
on this issue, and any inconsistency with State or local laws should 
not present a problem.
    The Bureau does not believe further regulation on procedures around 
payoff balances is necessary. A payoff balance request is any request 
from a consumer, or appropriate party acting on behalf of the consumer, 
which inquires into the total amount outstanding on the loan, or the 
amount needed to pay off the loan. While such requests are most often 
made when a consumer is refinancing their loan, payoff balance requests 
are not limited to this context. If a request is sent to the wrong 
address and not received by the creditor, assignee or servicer, they 
would not be required to respond. Upon receipt of a payoff balance 
request, the creditor, assignee or servicer must provide the amount 
required to pay off the mortgage loan; such information must be 
provided within seven business days. The payoff statement may be sent 
electronically or by fax in place of physical delivery. Finally, an 
issue was raised about whether a payoff statement was accurate when a 
payoff statement relied on a payment that was later dishonored. The 
Bureau is not making any changes to the requirements of the accuracy of 
the

[[Page 10958]]

statement. The Bureau believes payoff statements should be issued 
according to the best information available at the time, and if a 
payment is later dishonored, recovery of that amount by adding the 
amount to the payoff balance should not be barred by the issuance of a 
payoff statement which assumed that the payment would be honored.
    The Bureau received comments on interactions between the proposed 
rule on payoff statements and other rules on mortgage servicing. First, 
the Bureau considered if requests for payoff balances are subject to 
the oral information request obligation contained in the 2012 RESPA 
Servicing Proposal. Although a payoff balance request is essentially a 
request for information, there are subtle distinctions between the two, 
including that consumers may request payoff statements through a 
variety of channels, and servicers have been able to charge a fee for a 
payoff statement. The Bureau has decided to maintain a separate payoff 
balance request rule, and exempt payoff balance requests from the 
information request provision of the 2013 RESPA Final Rule.
    Second, the Bureau acknowledges that the timeline for payoff 
balance requests required under HOEPA is shorter than the timeline for 
payoff requests required under proposed Sec.  1026.36(c)(3). However, 
the Bureau has decided that this difference does not warrant reducing 
the length of the timeline required under the final rule. Congress made 
a clear decision to require payoff statements under general 
circumstances within seven business days, as indicated by their 
changing the timeline from the existing regulation text when that text 
was codified in Dodd-Frank Act section 1464. Congress likewise made a 
clear decision that payoff statements for loans under HOEPA should be 
provided within five business days, as indicated by the language in 
Dodd-Frank Act section 1433(d). Additionally, the Bureau notes these 
different timelines are not in conflict--any creditor, assignee or 
servicer could comply with both by providing the payoff balance within 
five business days. Because of the clear intent of Congress and the 
lack of direct conflict between the timelines, the Bureau has decided 
to finalize the provision as proposed.
    Although the statute requires a creditor or servicer to send the 
payoff statement, the final rule uses the term ``provide'' in place of 
``send.'' The Bureau believes the terms have the same meaning in this 
context, but ``provide'' conforms with existing language in Regulation 
Z.
    The Bureau is finalizing the rule as proposed, with the addition of 
the following clause: when a creditor, assignee, or servicer, as 
applicable, is not able to provide the statement within seven business 
days of such a request because a loan is in bankruptcy or foreclosure, 
because the loan is a reverse mortgage or shared appreciation mortgage, 
or because of natural disasters or other similar circumstances, the 
payoff statement must be provided within a reasonable time.
Small Servicers
    A number of community banks, credit unions, small servicers and 
their trade associations requested an exemption for small servicers 
from all the proposed provisions in the 2012 TILA Servicing Proposal. 
The Bureau considered if a small servicer exemption would be 
appropriate for the requirement on payoff statements. The Bureau noted 
that the final rule is very similar to the existing rule, which small 
servicers are already in compliance with, as evidenced by Small Entity 
Representative comments in the Small Business Review Panel.\116\ In 
light of this, the Bureau does not believe a small servicer exemption 
to the payoff statement provision would be appropriate.
---------------------------------------------------------------------------

    \116\ See Small Business Review Panel Report, at 27, 32.
---------------------------------------------------------------------------

Legal Authority
    The extension of the requirement to assignees is authorized, among 
other authorities 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 uses its 
authority under Dodd-Frank Act section 1405(b) to extend the 
applicability of the payoff statement requirements under TILA section 
129G to assignees. As discussed above, this extension serves the 
interest of consumers and the public interest. Subjecting creditors, 
assignees, and servicers to the requirements of Sec.  1026.36(c)(3) 
also promotes consistency with final Sec.  1026.20(c) and Sec.  
1026.20(d) (ARMs disclosures), which likewise apply to creditors, 
assignees, and servicers.
    The exemption to the payoff statement requirement, which allows 
payoff statements to be provided within a reasonable time when seven 
business days is not feasible due to certain circumstances, is 
necessary and proper under TILA section 105(a) to facilitate 
compliance. For the reasons discussed above, under certain 
circumstances it would not be feasible to provide a payoff statement 
within seven business days. In addition, the Bureau believes, in light 
of the factors set forth in TILA section 105(f), that this exemption 
will have minimal effect on the consumer protection benefits of the 
payoff statement provision. Specifically, the Bureau considers that the 
exemption is proper irrespective of the amount of the loan, the status 
of the consumer (including related financial arrangements, financial 
sophistication, and the importance to the consumer of the loan), or 
whether the loan is secured by the principal residence of the consumer.
Section 1026.41 Periodic Statements for Residential Mortgage Loans
    Section 1420 of the Dodd Frank Act established TILA section 128(f) 
requiring periodic statements for mortgage loans. The Bureau proposed 
implementing the requirements on periodic statements in Sec.  1026.41. 
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 homeownership 
counselor information), as well as such other information as the Bureau 
may prescribe in regulations.\117\ In developing the proposed rule, the 
Bureau believed 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 proposed pursuant to TILA section 
128(f)(1)(H) that each periodic statement also include this additional 
information. Additionally, the proposed regulation set forth 
requirements regarding the timing and form of the periodic statement 
and established exemptions to the requirement to provide a periodic 
statement.
---------------------------------------------------------------------------

    \117\ TILA section 128(f)(1).
---------------------------------------------------------------------------

    Under TILA section 128(f)(1), the requirement to provide a periodic 
statement applies to creditors, assignees, and servicers of residential 
mortgage loans. The Bureau interprets this to mean that the consumer 
must only receive one periodic statement each billing cycle, but 
creditors, assignees,

[[Page 10959]]

and servicers would all be responsible for ensuring that the consumer 
receives a periodic statement that meets the requirements of Sec.  
1026.41. To increase readability, proposed Sec.  1026.41 used the term 
``servicer'' to describe the entities covered by the proposed 
requirement, and defined ``servicer'' to mean creditors, assignees, or 
servicers for the purposes of Sec.  1026.41. This terminology was also 
used in the section-by-section analysis of proposed Sec.  1026.41. 
Proposed comment 41(a)-3 clarified 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 send the 
statement. The Bureau's interpretation of the statute would not apply 
the ongoing 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.
    The proposed periodic statement carefully balanced the need to 
provide consumers with sufficient information against the risk of 
overwhelming consumers with too much information. The proposed 
requirements were designed to make the statement easy to read, whether 
provided in a paper form or electronically. The Bureau believed that 
imposing a requirement that information be grouped into defined 
categories would present the information in a logical format, while 
allowing servicers flexibility in customizing the statement. Thus, the 
proposed regulations discussed below required 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 and 
information on the late fee were 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 have also included 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 homeownership 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.
41(a) In general
    Proposed Sec.  1026.41(a) stated 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.
Periodic Statements Overall
    While many commenters were supportive of the periodic statements, 
some commenters had concerns about certain requirements, and some 
commenters requested the Bureau not require periodic statements at all. 
Such industry commenters felt that some of the information was 
unnecessary, and the rest of the information was available through 
other channels, including the original loan documents, Web sites with 
information on the loan, existing disclosures, formal information 
request procedures, and informal channels. These commenters also 
expressed concern that the Bureau was expanding the required content of 
the periodic statement beyond that which was specifically required in 
the Dodd-Frank Act, and that there was too much information on the 
periodic statement, resulting in a disclosure that was too busy and 
confusing to the consumer.
    Commenters sought clarification about the periodic statement in the 
context of loans that have been accelerated, sent to foreclosure, or 
that are in the bankruptcy process. Several commenters contended that 
statements should not be required when loans have been accelerated or 
sent to foreclosure. Commenters presented opposing views about loans in 
bankruptcy--some consumer advocate commenters felt it was essential 
that statements be provided to consumers in bankruptcy to ensure they 
are kept informed on the status of their loan and have a record of the 
account, while other industry commenters insisted that providing 
statements for loans in bankruptcy might cause confusion or violate 
court orders or the Fair Debt Collection Practices Act (FDCPA). One 
commenter added that if statements must be provided to consumers in 
bankruptcy, the statement should be allowed to contain any information 
disclosures or messaging required under bankruptcy rules or court 
orders. Finally, commenters suggested other triggers for when the 
periodic statement should not be required, including if the consumer 
has vacated the premise, if mail has been returned due to a bad 
address, or if the consumer has not sent any payments nor responded to 
the servicer's attempts to contact them in six months.
    The Bureau carefully considered the concerns expressed about the 
periodic statement overall. Congress clearly mandated that consumers 
receive on a periodic basis a statement that summarizes certain key 
loan terms (such as the interest rate) and contact information both for 
servicers and homeownership counselors and counseling organizations. 
Congress also authorized the Bureau to require additional information. 
The Bureau continues to believe, for the reasons listed in the 
discussion of the proposed rule, as well as for the reasons set forth 
below, that including the information required beyond that specifically 
listed in the Dodd-Frank Act will allow the periodic statement to serve 
a variety of important purposes, including informing consumers of their 
payment obligations, providing information about the mortgage loan, 
creating a record of transactions that increase or decrease the 
outstanding balance, providing information needed to identify and 
assert errors, and providing information when consumers are delinquent. 
Indeed, the Bureau believes that consumers likely would be perplexed if 
they were to receive, on a periodic basis, statements which contained 
information about their loan terms and outstanding balance but did not 
include any information about payments. Each item of information 
required by the periodic statement is discussed below in the section-
by-section analysis of the content of the periodic statements.
    The Bureau acknowledges that some of the information on the 
periodic statement may be available through other channels; however, 
the Bureau notes that Congress clearly determined certain information 
should be required to be provided to consumers in a single statement on 
a periodic basis. The Bureau appreciates the concern about potentially 
confusing the consumer or obscuring important information by

[[Page 10960]]

providing too much on the periodic statement. The Bureau believes the 
periodic statement should be a snapshot of the present account, and not 
a recital of servicer policies. The Bureau believes that requiring 
certain information to be on the front page will ensure important 
information is highlighted. Further, the Bureau has mandated the 
grouping requirements discussed in Sec.  1026.41(d) below. The Bureau 
believes the final periodic statement balances the need to present a 
significant amount of important information and documentation on the 
loan, with the need to present information in a format the consumer 
will be able to understand and process.
    The Bureau also carefully considered the concerns expressed about 
circumstances in which periodic statements should not be required. 
While the Bureau acknowledges that circumstances such as acceleration 
could make providing a periodic statement more complicated, the Bureau 
notes that such circumstances are often precisely when a consumer most 
needs the periodic statement. The Bureau believes an important role of 
the periodic statement is to document fees and charges to the consumer; 
as long as such charges may be assessed, the consumer is entitled to 
receive a periodic statement. The Bureau understands the concerns about 
the periodic statement being provided when a consumer is in bankruptcy, 
and addresses these concerns in the section-by-section analysis of 
Sec.  1026.41(d)(2) (Explanation of Amount Due) below.
Scope
    Under TILA section 128(f), the periodic statement requirement 
applies to residential mortgage loans. The term ``residential mortgage 
loan'' is defined in TILA section 103(cc)(5) to generally 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 Sec.  1026.41(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.
    One industry trade association commenter suggested periodic 
statements should be limited to first lien loans secured by the 
consumer's principal dwelling, because consumers obtaining subordinate 
lien loans and loans secured by non-principal residences (such as 
vacation homes) are typically experienced successful homeowners, as 
evidenced by the fact that such consumers qualified for these loans. 
One commenter asked for clarification as to whether HELOCs should 
receive periodic statements, and one commenter sought clarity on simple 
interest closed-end home equity loans.
    The Bureau believes that Congress clearly specified the scope of 
the periodic statement requirement by using the defined term 
``residential mortgage loans.'' This scope is not limited to first lien 
loans secured by the consumer's principal dwelling, but covers all 
closed-end consumer transactions secured by a dwelling. However, open-
end transactions are not included in the scope of this rule. The scope 
of the rule is finalized as proposed.
Transmit to the Consumer
    Proposed Sec.  1026.41(a) would have required 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 must 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 clarified that joint obligors need not receive 
separate statements; a single statement addressed to both of them would 
satisfy the periodic statement requirement.
    All comments on this topic were in relation to electronic 
statements, which are discussed in Sec.  1026.41(c) below. The final 
rule uses the term ``provide'' in place of ``transmit.'' The Bureau 
believes the terms have the same meaning in this context, but 
``provide'' conforms with existing language in Regulation Z. This 
provision is otherwise adopted as proposed.
Billing Cycles
    Proposed Sec.  1026.41(a) would have required 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 under the mortgage note and any subsequent modifications. 
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-than-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 realized 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, proposed Sec.  1026.41(a) provided 
that, if a loan has a billing cycle shorter than a period of 31 days 
(for example, a bi-weekly billing cycle), a single periodic statement 
may be used to cover the entire month. Proposed comment 41(a)-2 
clarified how such a single statement would aggregate information from 
multiple billing cycles. All comments on this topic were in relation to 
timing of the periodic statement, discussed in the section-by-section 
analysis of Sec.  1026.41(b) below. The rule is otherwise adopted as 
proposed.
Legal Authority
    Section 1026.41(a) implements 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 is using 
its authority under TILA section 105(a) and (f) and Dodd-Frank Act 
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 a 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 exception 
is necessary

[[Page 10961]]

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 consumer 
(including related financial arrangements, financial sophistication, 
and the importance to the consumer 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 Dodd-Frank Act section 
1405(b), the exemption will prevent consumer confusion that might 
result from receiving multiple periodic statements in close sequence, 
thus furthering the consumer protection purposes of the statute.
41(b) Timing of the Periodic Statement
    Proposed Sec.  1026.41(b) provided 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 provided 
that four days after the close of any grace period would be considered 
reasonably prompt.
Initial Statement
    The proposal would have required that the initial periodic 
statement be sent no later than 10 days before this first payment is 
due. This adjustment was proposed because there is no previous billing 
cycle from which to time the sending of the first statement.
    Commenters expressed concern both about the usefulness and the 
feasibility of the provision, highlighting that information on the 
first payment is often included in the closing documents, and that it 
may not be possible to obtain the documents and transmit the 
information into the servicer's system in the proposed timeline.
    The Bureau determined that the initial periodic statement would 
provide minimal benefit to consumers, as the initial payment 
information is provided at closing, and information on the application 
of that payment, as well as any transaction activity, would be included 
in the next periodic statement. Additionally, the Bureau acknowledged 
the extra costs of implementation and the difficulties of providing an 
initial statement on the proposed timeline. Due to these factors, the 
Bureau has decided not to finalize the proposed requirement that an 
initial periodic statement be provided 10 days before the first payment 
is due.
Ongoing Statements
    The periodic statement serves the dual purposes of giving an 
accounting of payments received since the previous 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.
    Commenters emphasized that because of the tight timeframe between 
the close of the grace period and the due date of the next payment, 
sending the statements within four days was not consistent with current 
practices and may not be operationally feasible. Commenters suggested 
seven or ten days may be a more reasonable timeframe, or that 
statements should be allowed to be sent earlier in the month.
    Multiple industry commenters also cited their current practice of 
``staggering'' statements throughout the month-although their loans 
have a due date of the first of the month, batches of statements are 
sent out at various times during the month. Some servicers explained 
that it is helpful for a servicer to spread the related workload across 
the month, while others explained that staggered statements allowed 
consumers the convenience and flexibility of choosing which day of the 
month their payments will be due.
    Many credit union commenters noted that the timing requirements 
would prevent servicers from providing combined statements-a common 
practice among credit unions of combining mortgage statements with 
other account statements. These commenters requested that the proposed 
rule be modified to allow combined statements. In contrast, a consumer 
advocate commenter expressly requested the Bureau prohibit the practice 
of combining statements on the ground that this creates confusion for 
consumers.
    Regarding situations in which a consumer makes more than one 
payment during the month, commenters asked if they would be allowed to 
send more than one statement per month (following the ``Bill and 
Receipt'' system). Commenters also asked for clarification on billing 
cycles of less than one month and sought clarification about the four 
day period after the close of the grace period.
    The Bureau acknowledges that use of the term ``grace period'' in 
the proposal may have caused unnecessary confusion. The term ``grace 
period'' is defined in relation to open-ended credit, in Sec.  
1026.5(b)(2)(ii)(B)(3), as a period within which any credit extended 
may be repaid without incurring a finance charge due to a periodic 
interest rate. The Bureau believes a periodic statement should be sent 
no later than four days after the close of the period of time when no 
late fee is imposed, a time more appropriately described as a 
``courtesy period'' in comment 7(b)(11)-1. In light of this, the final 
rule replaces the term ``grace period'' with ``courtesy period'', and 
adds comment 41(b)-2 to provide further guidance in this regard. 
Further, if a mortgage loan has no courtesy period, the periodic 
statement must be sent no later than four days after the payment is 
due.
    The Bureau acknowledges it may be difficult to process a large 
number of statements in the short period of time between the close of 
the courtesy period and four days later, and understands the difficult 
balance between providing accurate and up-to-date information (which 
may require not sending a periodic statement until after the 15th of a 
month), and the importance of notifying the consumer in a timely manner 
of the amount of their upcoming payment. The Bureau notes that while 
the rule requires a periodic statement to be sent no later than four 
days after the close of any courtesy period, there is no restriction on 
sending the periodic statement earlier in the month. That is, there is 
no requirement in the rule that the servicer must wait until the close 
of the courtesy period to send the periodic statement. This gives 
servicers the flexibility to send statements earlier in the month. The 
Bureau notes this would be particularly appropriate in certain 
scenarios-for example, if a consumer makes a payment on the first of 
the month (rather than waiting until the end of the courtesy period), 
or a consumer has an ``auto-debit'' arrangement to make payments 
earlier in the month. The Bureau believes this flexibility will address 
concerns about timing difficulties for combined statements. Other 
concerns about combining statements are discussed below in the section-
by-section analysis of paragraph 41(d) concerning layout.
    To clarify the rule on timing, the Bureau notes that, if a consumer 
makes more than one payment during the month, servicers who have not 
yet sent the periodic statement for that time period may include all 
payments as separate transaction items in the transaction activity 
section. Alternatively, if a servicer has already sent the periodic 
statement, the

[[Page 10962]]

subsequent payments could be reflected in the next periodic statement. 
Finally, if a servicer wishes to send an extra periodic statement 
reflecting additional payments, nothing in the regulation would prevent 
this practice.
    If a servicer and a consumer have agreed to an alternative billing 
cycle from that reflected in the underlying security (for example, if a 
servicer arranges a bi-weekly payment plan to correspond to a 
consumer's paychecks), the servicer has the option of sending either 
periodic statements that reflect the underlying obligation (the payment 
plan in the original note), or periodic statements that reflect the 
modified payment arrangement (the agreed-on payment plan). If this, or 
any payment plan, requires payments that are more frequent than on a 
monthly basis, the servicer has the option of combining statements and 
sending one aggregated statement that covers the entire month in place 
of multiple statements during that month. The periodic statement must 
be delivered or placed in the mail no later than a reasonably prompt 
time after the payment due date or the end of any courtesy period 
provided for the previous billing cycle.
Legal Authority
    The Bureau interprets the requirement in TILA section 128(f) that a 
periodic statement be transmitted for ``each billing cycle'' to 
authorize the timing requirements in Sec.  1026.41(b). In addition, the 
timing requirements are authorized under TILA section 105(a) and Dodd-
Frank Act sections 1032(a) and 1405(b). For the reasons noted above, 
the Bureau concludes, pursuant to TILA section 105(a), that the 
requirements are necessary and proper to effectuate the purposes of 
TILA. Specifically, Sec.  1026.41(b) promotes the meaningful disclosure 
of credit terms and protects consumers against inaccurate and unfair 
credit billing practices by ensuring that consumers receive the 
periodic statement at a time that is useful to them. In addition, 
consistent with Dodd-Frank Act section 1032(a), the Bureau believes 
that the 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 Dodd-Frank Act section 
1405(b), the Bureau believes that the timing requirements improve 
consumer awareness and understanding of their residential mortgage 
loans by ensuring that consumers receive the periodic statements at a 
meaningful time, before their next payment is due, and that the timing 
requirements are thus in the interest of consumers.
41(c) Form of the Periodic Statement
    Proposed Sec.  1026.41(c) provided that the periodic statement 
disclosures required by 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. 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.
Additional Information Allowed
    Proposed comment 41(c)-1 clarified the clear and conspicuous 
standard, stating that it generally requires that disclosures be in a 
reasonably understandable form, and explained 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 servicers customarily provide in their periodic 
statements, but is not required by the 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. Proposed comment 41(c)-2 stated that nothing in subpart C 
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 other applicable law.
    One commenter requested further clarification on the comment that 
additional information may be included so long as it does not overwhelm 
or obscure the required disclosures. This commenter cited concerns that 
this clarification would be used by consumer lawyers in frivolous 
litigation, and urged that the commentary include several examples. 
Another commenter noted that allowing other information without 
requiring prescriptive content minimizes unnecessary regulatory burdens 
and accommodates different systems that servicers use. The Bureau 
believes the guidance given in the proposed commentary is sufficient, 
and that the clear and conspicuous standard allows an appropriate 
amount of flexibility. Thus, comments 41(c)-1 and 41(c)-2 are adopted 
as proposed.
Electronic Distribution: E-Statements, Notifications and Opt-Outs
    TILA section 128(f)(2) provides that periodic statements ``may be 
transmitted in writing or electronically.'' Consistent with this 
provision, proposed Sec.  1026.41(c), as clarified by proposed comment 
41(c)-3, would have allowed statements to be provided electronically, 
if the consumer agrees. Commenters were generally in favor of allowing 
electronic statements (e-statements) in place of paper statements, but 
expressed a few concerns about consent of the consumer and the 
notification process.
    E-statements. Comments were generally in favor of allowing e-
statements in place of paper statements, but only if the consumer has 
given consent. The final rule requires servicers to send a periodic 
statement each month to consumers. Under certain circumstances, a 
servicer may send e-statements in place of paper statements. No 
servicer is required to send e-statements. If a servicer prefers to 
send e-statements (rather than paper statements), they may do so, 
provided that the consumer consents. The issue of consent is discussed 
below. Once a consumer consents to receiving e-statements, the servicer 
may send statements electronically in place of paper statements. A 
servicer must continue to send paper statements to a consumer unless 
the consumer has consented to receiving e-statements.
    E-Sign Act. The proposed rule would have provided that if a 
servicer prefers to provide statements electronically, they may do so 
if the consumer consents. The proposal would have required only 
affirmative consent by the consumer to receive statements 
electronically, not full compliance with E-Sign Act verification 
procedures. Comments indicated some confusion about this provision. 
Some commenters argued that meeting the E-Sign Act requirements should 
be considered consent, and some commenters stated that the proposal's 
provision not requiring E-Sign verification procedures appeared to be 
in conflict with E-Sign Act requirements. Other commenters praised this 
aspect of the proposal, stating that the E-Sign verification procedures 
are too cumbersome and a lesser standard would be more appropriate. One 
commenter suggested this should be addressed by amending the E-Sign 
Act.
    As the proposal explained, the Bureau believes the E-Sign Act's 
higher level of confirming consent is not mandated by the statute nor 
required in this situation. The E-sign Act generally provides that if 
information must be provided or

[[Page 10963]]

made available in writing, such info must be provided electronically if 
certain verification procedures are met. The Bureau notes that TILA 
section 128(f) does not require a ``writing''; thus, the Bureau does 
not believe this provision triggers the E-Sign Act.\118\ The Bureau 
believes that only consumer consent, not the full E-Sign verification 
procedures are required before a servicer may provide a statement 
electronically in place of paper. If a servicer would like to follow 
the E-Sign Act procedures to obtain consumer consent, that would be 
allowed, but servicers may also obtain consent through a simpler 
process. The Bureau is adopting the comment as proposed.
---------------------------------------------------------------------------

    \118\ Additionally, the Bureau notes that TILA section 128(f)(2) 
requires the Bureau to take into account that statements may be 
transmitted electronically. This further suggests the periodic 
statement disclosure is not a ``writing'' which would trigger the E-
Sign Act requirements.
---------------------------------------------------------------------------

    Consent. Commenters also discussed what should be presumed to be 
``consent.'' Some industry commenters suggested that if a consumer has 
auto-debit set up to pay their mortgage automatically, they should be 
presumed to have consented to e-statements. Others suggested that 
consumers who are currently receiving e-statements, or who have 
consented to electronic disclosures in the past should be deemed as 
having consented to receiving e-statements.
    The Bureau suggested, and commenters agreed, that anyone who is 
currently receiving certain information electronically from their 
servicer shall be deemed to have consented to receiving e-statements in 
place of paper statements. Such consumers have demonstrated their 
ability and willingness to receive information electronically. This is 
clarified in comment 41(c)-4. The Bureau does not believe that 
consumers who pay their mortgage through auto-debit, but who have not 
consented and are not currently receiving information electronically, 
shall be deemed to have consented to e-statements. Such consumers must 
receive paper statements until the servicer obtains some form of 
consent from the consumer that they are willing to receive information 
electronically. The Bureau is adopting the rule as proposed, with the 
addition of comment 41(c)-4 clarifying presumed consent.
    Notification. In light of information security concerns, the 
proposal stated the requirement to transmit a periodic statement to the 
consumer may be met by sending the consumer an email notification that 
the statement is available electronically, rather than emailing the 
statement itself. Two commenters expressed concern about information 
security.
    The Bureau recognizes that, due to concerns about information 
security, servicers may not want to send periodic statements 
electronically. Thus, instead of emailing a statement, servicers may 
make the statement available on a Web site and send an email notifying 
the consumer that the statement is available. The Bureau notes that it 
is a common practice for a financial institution to contact a customer 
to let them know a message is available on a secure Web site. The 
Bureau also notes that notifying a consumer of a message on a secure 
Web site presents less of a risk than emailing the message, with 
potentially sensitive personal information, directly to the consumer. 
Finally, the Bureau notes that if a servicer does not have the system 
to securely notify their consumers of the availability of a periodic 
statement on a secure Web site, such institution may continue to 
provide paper statements.
    Opting-out. Commenters expressed concerns about the notification 
requirement. Specifically two commenters suggested the Bureau allow 
alternative forms of notification, such as quarterly statements or text 
messages. Additionally, a number of commenters suggested that consumers 
be allowed to opt-out of receiving these notifications, or be allowed 
to opt-out of periodic statements altogether. Finally, a few commenters 
further suggested that consumers should be required to opt-in to 
receiving periodic statements.
    The Bureau carefully considered the comments suggesting a consumer 
either be able to opt-out of the periodic statement, or be required to 
opt-in to receiving a periodic statement. The Bureau has concerns that 
consumers may not be fully informed about their rights to periodic 
statements if they are either required to opt-in, or allowed to opt-out 
of statements altogether. However, the Bureau also understands that 
many consumers conduct their finances online and may prefer not to 
receive monthly reminders about their payments (either in paper or 
electronically). These consumers may become accustomed to disregarding 
information from their servicer, thus both decreasing the value of the 
periodic statement, and presenting the risk that these consumers may 
accidentally ignore other important information. The Bureau is striking 
a balance in the final rule, as clarified by comment 41(a)-4. A 
consumer may not opt-out of receiving periodic statements altogether. 
However, a consumer who has demonstrated the ability to access 
statements online may opt out of receiving notification that their 
statement is available. If a consumer accidentally or inadvertently 
opts-out of receiving such notifications, they would still be able to 
access their periodic statements online. These consumers would be able 
to review past periodic statements to check for errors or proper 
payment application. However, this would allow consumers who do not 
feel they need a monthly reminder--for example, consumers enrolled in 
an auto-debit arrangement--to avoid receiving unwanted emails each 
month.
Sample Forms
    Proposed Sec.  1026.41(c) also stated that sample forms are 
provided in appendix H-28,\119\ and that appropriate use of these forms 
will be deemed to comply with the section. The sample forms 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.
---------------------------------------------------------------------------

    \119\ The final forms are in appendix H-30.
---------------------------------------------------------------------------

    While commenters were generally in favor of the sample forms, one 
industry commenter expressed concerns about the sample forms--mainly 
that certain elements such as printing on the back, legal-sized paper, 
or tear-off coupons on the bottom may be difficult for servicers to 
replicate. Additionally, the Bureau received stylistic comments on the 
sample forms, suggesting the payment due date and fee information 
should be more prominent. Some commenters requested greater flexibility 
in the forms, suggesting that not all the information would fit on the 
front page, and that the tabular format requirements should be 
eliminated. Other commenters addressed the importance of a standardized 
form: one consumer commenter noted that his current lender provides a 
statement, but because it is so disorganized they are unable to 
understand the statement.
    The Bureau considered the concerns about the sample forms, but 
notes that none of the details objected to are required by the 
regulation. For example, elements of the sample forms not specified in 
the regulation, such as the tear-off coupon and legal sized paper, are 
not required elements of the periodic statement. These elements are 
included in the sample forms to provide context, and while they show 
one way of demonstrating compliance, they are not required. These 
regulations were crafted to give servicers flexibility in

[[Page 10964]]

designing their periodic statements. Thus the Bureau is adopting the 
rule as proposed.
Legal Authority
    The Bureau is implementing Sec.  1026.41(a) and the related 
comments, in part through the form requirements set forth in Sec.  
1026.41(c) and the related sample forms provided in appendix H-30. The 
form requirements are authorized under TILA section 122, which requires 
the disclosures under TILA be clear and conspicuous, TILA section 
105(a) and Dodd-Frank Act sections 1032(a) and 1405(b). As discussed 
below, the Bureau concludes, pursuant to TILA section 105(a), that the 
form requirements are necessary and proper to effectuate the purposes 
of TILA. Specifically, Sec.  1026.41(c) promotes the meaningful 
disclosure of credit terms and protects the consumer against inaccurate 
and unfair credit billing practices by ensuring that the periodic 
statement sent to consumers is in a form that they can understand. In 
addition, consistent with Dodd-Frank Act section 1032(a), the Bureau 
believes that the 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 Dodd-Frank Act section 
1405(b), the Bureau believes that the form requirements will improve 
consumer awareness and understanding of their residential mortgage 
loans by ensuring 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.
41(d) Content and Layout of the Periodic Statement
    The proposed rule required certain items to be grouped together. 
The specific items of content are discussed below. The goal of the 
grouping and form requirements is to highlight key information such as 
the amount due, to organize information so the statement will not be 
overwhelming to the consumer, and to ensure the consumer will be 
presented with information in an easy to read format. The commentary to 
Sec.  1026.41(d), discussed below, reflects these goals.
    Proposed Sec.  1026.41(d) required 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. Proposed comment 41(d)-1 clarified 
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 certain information to be located 
immediately next to or directly above or below certain other 
information, without any intervening text or graphical displays.\120\
---------------------------------------------------------------------------

    \120\ See comments 24(b)-2 and 48-3, respectively.
---------------------------------------------------------------------------

    Proposed comment 41(d)-2 provided that information that is not 
applicable to the loan may be omitted from the periodic statement. For 
example, if a loan does not have a prepayment penalty, the periodic 
statement may omit the prepayment penalty disclosure.
    Proposed comment 41(d)-3 provided 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.\121\ 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.
---------------------------------------------------------------------------

    \121\ Macro Report, at 12.
---------------------------------------------------------------------------

    In addition to addressing the specific items of information 
required by the periodic statement (discussed below), commenters 
discussed the overall layout of the periodic statement. Some industry 
commenters expressed concern that there was not sufficient flexibility 
in the requirements on the periodic statement, and that servicers 
should be allowed to continue using their existing statements. In 
contrast, some commenters praised the organization of the periodic 
statement. Finally, some industry commenters expressed concern that 
requiring all the information to be on the front page of the periodic 
statement would prevent combined statements.
    In response to the concern about requiring too much information on 
the front page, the Bureau notes that not all the required content must 
be on the front page of the periodic statement. The amount due, 
explanation of amount due, past payment breakdown, and contact 
information must be on the front of the periodic statement. The 
messages and delinquency information will only be required at certain 
times, and may be provided as a separate disclosure at the servicer's 
option. An example of how all this information could fit on the front 
of the page is provided in the sample forms. As discussed above, the 
Bureau believes the periodic statement balances the need for 
information to be presented in a structured format against the 
flexibility required for servicers to continue the practices that suit 
their needs. For these reasons, the Bureau is adopting the proposed 
rule.
Legal Authority
    Section 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 Dodd-Frank Act sections 1032(a) and 
1405(b).
    More specifically, the content required by Sec.  1026.41(d) is 
authorized as follows:
     Statutorily-required content: TILA section 128(f)(1)(a) 
through (g) requires the inclusion of certain items of information in 
the periodic statement. The final regulation generally implements 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 promulgated under this authority.
    The grouping and other form requirements of the layout in Sec.  
1026.41(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 the requirement under TILA 
section 128(f)(2) for the Bureau to develop and prescribe a standard 
form for the periodic statement disclosure. The Bureau interprets the 
term ``standard form'' (a term not used elsewhere in TILA, nor in 
Regulation Z) to include sample forms, which are commonly

[[Page 10965]]

used in Regulation Z. In addition, as discussed above with respect to 
the form requirements under Sec.  1026.41(c) and for the reasons 
explained below, the grouping and form requirements under Sec.  
1026.41(d) are authorized under TILA section 105(a) and Dodd-Frank Act 
sections 1032(a) and 1405(b).
41(d)(1) Amount Due
    Proposed Sec.  1026.41(d)(1) would have required 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 had to be grouped 
together and located at the top of the first page of the statement. The 
amount due would have had to be more prominent than any information on 
the page.
    A primary purpose of the periodic statement is to alert the 
consumer to upcoming payment obligations. The Bureau interprets TILA 
section 129(f)(1)(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, the date 
the fees would be imposed if the payment has not been received, and 
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 and expect. Because of 
the importance of this information, the proposed ruled would have 
required it to be placed in the prominent position at the top of the 
first page, with the total amount as 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.\122\ If 
the consumer has a payment-option loan, the proposal would have 
required that each of the payment options must be displayed with the 
amount due information. An example of such a statement is included in 
appendix H-30(C).
---------------------------------------------------------------------------

    \122\ See Macro Report, at 6.
---------------------------------------------------------------------------

    Commenters were supportive of including the amount due information 
(amount due, due date, and late fee information) on the periodic 
statement, even though this amount was not specifically required by the 
Dodd-Frank Act. Thus, the Bureau is adopting the proposed provisions on 
amount due.
41(d)(2) Explanation of Amount Due
    Proposed Sec.  1026.41(d)(2) would have required periodic 
statements to include an explanation of the amount due, which would 
disclose the monthly payment amount, including the allocation of that 
payment to principal, interest and escrow (if applicable). 
Additionally, the statement would have had to provide the total fees or 
charges incurred since the last statement, and any amount past-due 
(which would include both overdue payments and overdue fees). This 
information would have had 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); 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 required by 
Sec.  1026.41(d)(4), discussed below.
    If the consumer has a payment-option loan, a breakdown of each of 
the payment options would have been required in the explanation of 
amount due. Additionally, the explanation of amount due would have 
required inclusion of information about how each of the payment options 
will affect the outstanding loan balance. A form with such a box was 
used 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.\123\ A sample form was 
provided in proposed appendix H-28(C).\124\
---------------------------------------------------------------------------

    \123\ Macro Report, at 15.
    \124\ The final forms are in appendix H-30(C).
---------------------------------------------------------------------------

    One credit union commenter stated that the breakdown of amount due 
is not necessary because consumers are only interested in knowing the 
full amount due, not the details. Some commenters expressed concern 
about difficulties in providing this payment breakdown, specifically in 
the context of daily simple interest loans, precomputed loans, and 
loans when the consumer is in bankruptcy. The Bureau also received 
comments asking that periodic statements continue to be sent during 
bankruptcy due to the importance of providing information to consumers 
in bankruptcy and creating a record of payment and applications. 
Finally, while commenters were generally supportive of the breakdown 
for payment option loans, two commenters suggested more information 
should be required.
    The Bureau believes information regarding the components of the 
amount due is important. Including a breakdown of the amount due allows 
a consumer to question an improper charge before making a payment. 
Additionally, a consumer can compare this amount to the past payment 
breakdown on the next statement to ensure the payment was properly 
applied.
    The Bureau understands the concerns about determining the breakdown 
for daily simple interest loans, as the breakdown would change 
depending on which day the consumer makes the payment. In determining 
the breakdown of amount due, the servicer may assume the consumer will 
make the payment on the due date. Servicers may include a note 
explaining this if they believe it is necessary. The Bureau considered 
the risk that this may cause confusion for consumers, but believes the 
consumer protection benefits of enabling the consumer to understand 
what they are being billed for, and thus to question improper charges, 
outweighs the risk of possible confusion. Further, the Bureau believes 
that if a consumer with a daily simple interest loan pays his or her 
loan late, the difference in the amount of the payment that goes to the 
principal under the amount due (shown on the earlier statement), and 
the amount of payment that goes to the principal under the application 
of payment (shown on the next statement) may highlight the additional 
cost of paying such loans late.
    Additionally, the Bureau considered the concerns regarding the 
breakdown of precomputed loans. The Bureau understands that precomputed 
loans do not apply payments to principal or interest, but rather to the 
entire amount due, which consists of both principal and interest for 
the length of the loan. The Bureau notes there are multiple accounting 
systems used to determine the outstanding amount when a precomputed 
loan is prepaid. The Bureau is not requiring a specific system for 
determining the allocation to principal and interest, but rather notes 
that any reasonable system for determining the breakdown of principal 
and interest from the total amount due would be acceptable for the 
breakdown

[[Page 10966]]

of amount due, as well as the breakdown of past payment application.
    Similarly, the Bureau understands the concerns about the 
complications involved in addressing consumers in bankruptcy, 
(including complicated accounting and rules on communication), but 
believes that the complexities of this scenario necessitate the 
information in the periodic statement being provided to the consumer. 
The Bureau understands that certain laws, such as the FDCPA or the 
Bankruptcy Code, may prevent attempts to collect a debt from a consumer 
in bankruptcy, but does not believe these laws prevent a servicer from 
sending a consumer a statement on the status of their loan. The final 
rule would allow servicers to make changes to the statement as they 
believe are necessary when a consumer is in bankruptcy; such servicers 
may include a message about the bankruptcy \125\ and alternatively 
present the amount due to reflect the payment obligations determined by 
the individual bankruptcy proceeding.
---------------------------------------------------------------------------

    \125\ For example, servicers may include a statement such as: 
``To the extent your original obligation was discharged, or is 
subject to an automatic stay of bankruptcy under Title 11 of the 
United States Code, this statement is for compliance and/or 
informational purposes only and does not constitute an attempt to 
collect a debt or to impose personal liability for such obligation. 
However, Creditor retains rights under its security instrument, 
including the right to foreclose its lien.''
---------------------------------------------------------------------------

    Finally, the Bureau carefully considered the comments requesting 
additional language on the effects of non-fully-amortizing payments. 
While the Bureau believes information explaining the different payment 
options may assist a consumer making a payment decision, the Bureau 
also notes that there is limited space on the periodic statement and 
that there is a risk of providing too much information that may 
overwhelm the consumer. The Bureau believes the proposed rule 
appropriately balances these concerns. For these reasons, the Bureau is 
adopting the proposed rule on explanation of amount due.
41(d)(3) Past Payment Breakdown
    Proposed paragraph (d)(3) would have required periodic statements 
to include a snapshot of how past payments have been applied. Proposed 
Sec.  1026.41(d)(3)(i) would have required 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 have required 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 had to be grouped together 
in close proximity, and located on the first page of the statement.
    Commenters expressed concern there may be operational difficulties 
in including the past payment breakdown on the periodic statement 
because not all servicer systems are set up to provide a breakdown of 
past payments, either for the past month or the year-to-date. This 
could be particularly difficult for daily simple interest loans, and 
precomputed loans. One commenter expressed concern that the year-to-
date calculation could be difficult if a loan was transferred to that 
servicer during the course of that year.
    Commenters questioned the value of the past payment breakdown, 
stating that consumers are not concerned with the breakdown of their 
past payments, and that this information could be found in the loan 
documents. Further, some commenters who saw value in the breakdown of 
payments from the past month questioned the value of the additional 
breakdown of all payments from the year-to-date. They stated that this 
information is duplicative as well as available on request, that it may 
be difficult to fit such information on the periodic statement, that 
the benefits of providing such information do not outweigh the costs, 
and that this information could be particularly difficult to compute if 
the loan is delinquent. Finally, one commenter expressed concern that 
the year-to-date breakdown would cause confusion if payments have been 
placed in a suspense account, and asked the Bureau to provide clarity 
that it is permissible to provide an actual suspense account balance 
rather than the one calculated year-to-date.
    While the Bureau understands there may be some challenges in 
importing information on the past payment breakdown to the periodic 
statement, the Bureau notes that because the past payment has been 
applied, the servicer must have this information. The Bureau also 
considered the concerns expressed about daily simple interest loans or 
precomputed loans; however for the reasons discussed above in the 
section-by-section analysis of explanation of amount due, the Bureau 
believes the breakdown of these loans can be disclosed on the periodic 
statement. The Bureau considered the concerns about calculating the 
year-to-date breakdown of loans which have been transferred from a 
previous servicer; however, the Bureau believes that all servicers 
should be able to accurately compute the year-to-date breakdown, and 
this information should transfer with the loan. Thus the Bureau does 
not believe that transfer of servicing will present a problem in 
providing the year-to-date breakdown.
    Further, the Bureau believes the past payment breakdown is an 
important disclosure on the periodic statement. This disclosure serves 
several purposes, 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 
Sec.  1026.41(d)(3)(i), showing all payments made since the last 
statement, would allow consumers to confirm that their payments were 
properly applied. If the payments were not properly applied, the 
breakdown would provide consumers the information needed to assert an 
error.
    Both the breakdown since the last billing cycle and the breakdown 
of the 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 testing participants were surprised by 
how much of their payment is going to interest or fees as opposed to 
principal. Aggregation over the year-to-date can bring this expense to 
a consumer's 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, 
as 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.
    Finally, the Bureau considered the concerns about disclosing 
suspense account information. Proposed comment 41(d)(3)-1 would have 
provided 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

[[Page 10967]]

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. This comment shows the breakdown should 
disclose both the amount of funds that were sent to a suspense account 
during the time reflected by the periodic statement, as well as the 
total amount currently held in the suspense account. The Bureau 
believes this addresses the concerns about displaying suspense account 
information. Consumer testing revealed that testing participants had 
very little understanding about how partial payments are handled.\126\ 
As discussed 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. For these reasons, the 
Bureau is finalizing the proposed provisions on the past payment 
breakdown.
---------------------------------------------------------------------------

    \126\ Macro Report, at 11.
---------------------------------------------------------------------------

41(d)(4) Transaction Activity
    Proposed Sec.  1026.41(d)(4) would have required 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 clarified that transaction activity 
includes any activity that credits or debits the outstanding loan 
balance. For example, proposed comment 41(d)(4)-1 stated 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 have provided 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. For 
additional clarity, the Bureau has amended the language in the final 
rule to state that transaction activity includes any transaction that 
credits or debits the amount currently due, and has amended comment 
41(d)(4)-1 to clarify this is the amount referred to by Sec.  
1026.41(d)(1)(iii).
    Proposed comment 41(d)(4)-2 clarified 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. Proposed comment 41(d)(4)-3 clarified 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 must be provided in the messages section. The messages 
section, discussed below, would have included an explanation of what 
the consumer must do to release the funds from the suspense account.
    Comments on transaction activity focused on what must be disclosed, 
and the logistics of fitting this information on the periodic 
statement. Commenters had questions about what items should be included 
on this list, asking if a charge is entered and reversed in the same 
month, may it be excluded; and, if funds sent to a suspense account 
must be listed on the transaction activity list (and noting a potential 
inconsistency with the National Mortgage Settlement on this point). One 
commenter also stated that servicers may not know third-party fees at 
the time they produce the periodic statement. Commenters also addressed 
the listing of fees: One commenter stated it might be difficult to list 
all the fees that are imposed, while a consumer advocate emphasized the 
importance of listing all the fees that were imposed. One commenter 
requested that sufficient information be given in the transaction item 
line such that the consumer could validate the charge. Another 
commenter expressed concern about being able to fit the entire list of 
transactions on the first page of the periodic statement. Finally, a 
commenter sought clarification on how corrections to errors on prior 
statements can be displayed.
    In response to the questions received, the Bureau notes that if a 
charge is entered and reversed in the same month, it would not affect 
the amount of the consumer's outstanding balance and both line items 
may be left off the transaction activity. Funds sent to a suspense 
account must be included in the transaction activity; it is essential 
for the consumer to know these funds were received by the servicer. If 
a servicer does not know the amount of a third-party fee, it cannot 
bill the consumer for that fee. When the servicer bills the consumer 
(and thus knows the exact amount of the fee), that fee should be 
included in the transaction activity. While the Bureau notes it may be 
difficult to list all the fees that are imposed, the Bureau believes it 
is essential for the consumer to have an accounting of any fee that is 
imposed. Further, the transaction description should include sufficient 
information such that the consumer can determine why the charge is 
imposed. Servicers may use any reasonable method for correcting errors; 
for example, they could use a new line item which explains the 
correction. Finally, the Bureau notes the transaction activity is not 
required to be on the first page, and servicers may use additional 
pages if necessary. For these reasons, the Bureau is finalizing the 
proposed provisions on the transaction activity.
41(d)(5) Partial Payment Information
    Proposed Sec.  1026.41(d)(5) would have required 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 sought comment on what, if any, additional messages 
should be required.
Partial Payment Disclosure
    Some commenters appreciated the clarification of suspense account 
information for consumers, while other commenters felt this was 
unnecessary and difficult to achieve. Two commenters suggested that 
there was not sufficient space on the periodic statement to explain the 
suspense account and requested the information be included in a 
separate letter. One commenter suggested the consumer should receive 
disclosures during the life of the loan, specifically annual notices 
during the first three years of the loan.
    While the Bureau does not believe it is appropriate to require 
servicers to send an annual disclosure on the

[[Page 10968]]

suspense account procedures for the first three years, the Bureau 
acknowledges that information on the suspense account may be better 
disclosed in a separate letter. Thus, the Bureau is modifying the rule 
to provide that if funds are being held in a suspense account, the 
amount held in any suspense account must be disclosed in the past 
payment breakdown on the periodic statement, but the servicer may move 
the message about what must be done for the funds to be applied to a 
separate page of the statement, or may send this disclosure as a 
separate letter. The servicer still has the option of including this 
disclosure on the periodic statement itself. The final rule reflects 
this additional flexibility. If the servicer has the benefit of the 
small servicer exemption in Sec.  1026.41(e)(4), the servicer need not 
send this separate letter.
Additional Messages
    Some commenters expressed concerns about the logistics of including 
a messages box on the periodic statement. These commenters explained 
that dynamic information created operational difficulties for the 
creation of the periodic statement. Commenters had mixed responses to 
any additional dynamic messages that should be required. Some 
commenters specifically said there should be no additional messages 
because this might distract the consumer from other important 
information. Several commenters suggested the periodic statement should 
be required to include additional information on escrow accounts, but 
one commenter argued that a complete escrow breakdown is already 
provided annually under RESPA, and questioned if this additional 
information would help consumers. Commenters also suggested additional 
information about force-placed insurance should be included on the 
periodic statement. One commenter urged the Bureau to require servicers 
to include force-placed insurance charges in regular invoice statements 
that are sent to a consumer so that a consumer is constantly reminded 
of how much of their payments are going toward paying for such 
insurance. Another consumer group submitted similar comments 
recommending that the Bureau require servicers to identify force-placed 
insurance charges specifically in proposed periodic statements so that 
consumers could easily recognize when force-placed insurance has been 
obtained. Finally, one commenter recommended a message about consumers' 
obligations to pay community assessments.
    The Bureau carefully considered requiring additional messages, but 
decided that none should be required, particularly in light of the 
additional burden this dynamic feature would add to the periodic 
statement. The Bureau believes that the additional escrow information 
is provided through the annual escrow disclosure, and that monthly 
escrow information would be confusing because, although escrow accrues 
monthly, payments are often made at discrete times throughout the year 
to pay taxes and insurance premiums. Additionally, the amount paid into 
escrow will be shown each month. The Bureau believes that sufficient 
information on force-placed insurance is provided through the final 
rule. Charges for force-placed insurance, like any other charge, must 
be listed in the transaction activity section of the periodic 
statement. Further, detailed notification about force-placed insurance 
is included in the disclosures required by the force-placed insurance 
provisions of the 2013 RESPA Servicing Final Rule. Finally the Bureau 
believes the suggested message on community assessment obligations 
would be inappropriate due to the relatively low benefit this message 
would provide to consumers, and the relatively high costs to servicers 
of determining and tracking which consumers are members of community 
associations.
41(d)(6) Contact Information
    Proposed Sec.  1026.41(d)(6) would have required that the periodic 
statement contain contact information specifying where a consumer may 
obtain information regarding the mortgage. Proposed comment 41(d)(6)-2 
clarified that this contact information must be the same as the contact 
information for asserting errors or requesting information. Proposed 
Sec.  1026.41(d)(6) provided that the contact information provided must 
include a toll-free telephone number. Proposed comment 41(d)(6)-1 
clarified that the servicer may provide additional information, such as 
a Web address, at its option. Proposed Sec.  1026.41(d)(6) did not 
require that 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 have allowed servicers to 
include this information with their company name and logo at the top of 
the page or elsewhere on the statement.
    Comments on the contact information focused on concerns about 
disclosing the number associated with the oral error resolution 
procedures in the 2012 RESPA Servicing Proposal. Additionally, one 
commenter requested that in place of a toll-free number, servicers be 
allowed to provide a number where the consumer can contact the servicer 
at no cost.
    Because the proposed oral error resolution procedures are not being 
finalized, proposed comment 41(d)(6)-2 has been removed from the 
provision requiring the contact information. The Bureau believes it is 
important for consumers to be able to request information or report 
errors without incurring a fee, and that it is consistent with standard 
industry practice to provide a toll-free phone number. The Bureau 
determined that proposed comment 41(d)(6)-1 provided minimal guidance; 
thus, this comment is not being finalized. The proposed rule is being 
adopted, subject to these modifications.
41(d)(7) Account Information
    Proposed Sec.  1026.41(d)(7) would have required that the following 
information about the mortgage, as required by TILA section 128(f)(1), 
be included on the statement: The amount of the principal obligation, 
the current interest rate in effect for the loan, the date on which the 
interest rate may next reset or adjust, the amount of any prepayment 
penalty, and information on homeownership counselors and counseling 
organizations.\127\ This information may be included anywhere on the 
statement. This information may, but need not be, grouped together. 
While the sample forms display this information on the first page, the 
servicer is not required to include this information on the first page.
---------------------------------------------------------------------------

    \127\ TILA section 128(f)(1)(E) also requires a ``description of 
any late payment fees.'' As noted above, the Bureau is requiring 
this information to be disclosed in the ``amount due'' section of 
the periodic statement. See Sec.  1026.41(d)(1).
---------------------------------------------------------------------------

    Overall, commenters focused on the disclosure of prepayment penalty 
information and homeownership counselor information, as discussed 
below. Additionally, some commenters stated that the disclosure of 
basic account information was unnecessary. Certain commenters objected 
to the inclusion of information that would also be provided in other 
disclosures. In particular, they stated the date on which the interest 
rate will next reset is already on the Sec.  1026.20(c) and 20(d) 
notices (discussed above in the section-by-section analysis of Sec.  
1026.20(c)), as is the prepayment penalty disclosure, and that the 
outstanding balance, interest rate, and late fees are included in the 
loan documents.\128\ Commenters

[[Page 10969]]

pointed out that including the account information may require 
programing changes, and distract from other more important information 
on the statement.
---------------------------------------------------------------------------

    \128\ One commenter objected to the disclosure of the maturity 
date, saying that consumers are generally not interested and that 
few consumers keep their loans up to the full maturity date. The 
Bureau notes that neither the proposed rule nor the final rule 
requires disclosure of the maturity date of the loan on the periodic 
statement.
---------------------------------------------------------------------------

    The Bureau acknowledges that while some of this information may be 
available in other documents, some of these documents may not be easily 
accessible to the consumer. The Bureau believes that one of the 
purposes of the periodic statement is to serve as a dashboard for the 
consumer, bringing together important information into a single 
location. Reminding the consumer of this information on a recurring 
basis, including particularly the date of an interest rate reset, can 
help consumers plan their affairs before receiving the notice of a 
reset. The Bureau believes the consumer protection benefits of these 
disclosures outweigh the costs of potential duplication, and thus the 
Bureau is finalizing the proposed provisions requiring disclosure of: 
The date the interest rate will next reset, the outstanding balance, 
the current interest rate, and the prepayment penalty (modified to 
require the existence rather than the amount of such penalty). For 
these reasons, the Bureau is adopting the proposed rule on account 
information as final with the minor change that Sec.  
1026.41(d)(7)(iii) now requires the date after which the interest rate 
may next change,\129\ and subject to the modifications to the 
prepayment penalty and homeownership counselor disclosures discussed 
below.
---------------------------------------------------------------------------

    \129\ This change is made to conform with the Sec.  1026.20(c) 
and (d) ARM disclosures.
---------------------------------------------------------------------------

    Prepayment penalty. Proposed Sec.  1026.41(d)(7)(iv) would have 
required the periodic statement to disclose the amount of any 
prepayment penalty, and defined 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 was further 
clarified in the proposed commentary, and substantially incorporated 
the definitions of and guidance on prepayment penalties from other 
rulemakings addressing mortgages and, as necessary, reconciled their 
differences. The Bureau coordinated 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.
    Commenters had two major concerns with the prepayment penalty 
provision--disclosing the amount of the penalty, and the definition of 
a penalty. First, a number of commenters expressed concern over 
difficulties in calculating and providing the amount of the prepayment 
penalty. These commenters explained that the amount is determined by a 
number of dynamic factors, and is often computed by hand. Further, this 
information may be stored in a separate system. These commenters 
suggested the periodic statement disclose the existence of a prepayment 
penalty, with a note to call for the amount, rather than the amount of 
the prepayment penalty. Next, several commenters raised concerns about 
including in the definition of prepayment penalty FHA interest accrual 
amortization payments (the FHA requirement that interest be paid for a 
full month if the loan is paid off on the first day of the month) and 
closing costs reimbursed to the lender for early payoff. Finally, 
commenters stated that this information should not be included in the 
periodic statement because it would be inaccurate, it is only relevant 
to certain consumers, and consumers have not requested it.
    The Bureau carefully considered the concerns about providing the 
amount of the prepayment penalty. The exact amount of the prepayment 
penalty provides value only to consumers considering refinancing or 
otherwise paying off their loan. Only a fraction of the consumers who 
receive the periodic statement will be considering this and will need 
the exact amount. Such consumers could contact their servicer and, 
using the information request procedures in the 2013 RESPA Servicing 
Final Rule, request the exact amount of the prepayment penalty. 
Requiring the servicer to disclose the existence of the prepayment 
penalty, rather than the amount, would be far less burdensome to 
servicers; additionally this modification would result in only a 
minimal decrease in consumer protection. Thus, the Bureau is making 
this modification to the final rule.
    Additionally, the Bureau considered the definition of the 
prepayment penalty. The other proposals related to the Title XIV 
Rulemakings proposed the same definition of prepayment penalty and 
received comments raising the same concerns about the definition of 
prepayment penalty as the comments in response to the 2012 TILA 
Servicing Proposal. The definition of a prepayment penalty has been 
coordinated across the Title XIV Rulemakings and was in the 2013 ATR 
Final Rule. In the interest of consistency across the Title XIV 
Rulemakings, the 2013 TILA Servicing Final Rule cites to the definition 
of prepayment penalty found in the 2013 ATR Final Rule, rather than re-
define prepayment penalty or offer an alternative definition of 
prepayment penalty. The final rule includes this modification; 
accordingly, as the comments to the prepayment definition are found in 
the commentary to the 2013 ATR Final Rule, the duplicative commentary 
to Sec.  1026.41(d)(7)(iv) has not been finalized.
    Legal authority. TILA section 128(f)(1)(D) requires the periodic 
statement to include the amount of any prepayment penalty that may be 
charged. For the reasons discussed above, the Bureau is using its 
authority under TILA section 105(a) and (f) to exempt servicers from 
having to include this information in periodic statements and to 
instead require the periodic statement to include the existence of any 
prepayment penalty. This adjustment is additionally authorized under 
Dodd-Frank Act section 1405(b).
Homeownership Counselors and Counseling Organizations
    TILA section 128(f)(1)(G) requires the periodic statement to 
include the name, 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 HUD 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 homeownership counselors and counseling organizations 
during the application process for mortgage loan. To facilitate 
compliance, 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.\130\ The Bureau 
also stated that it 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. This will allow creditors to access 
lists of the homeownership counselors and counseling organizations with 
a minimum amount of effort.\131\
---------------------------------------------------------------------------

    \130\ See 2012 HOEPA Proposal, 77 FR 49090, 49097-99 (Aug. 15, 
2012).
    \131\ The list provided by the lender pursuant to the 2013 HOEPA 
Final Rule 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 77 FR 49090, 49098.

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

[[Page 10970]]

    In connection with the periodic statement requirement, however, the 
Bureau proposed 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. Proposed 
Sec.  1026.41(d)(7)(v) would have required the periodic statement to 
include contact information for any State housing finance authority for 
the State in which the property is located, and information enabling 
the consumer to access either the Bureau or the HUD list of 
homeownership counselors and counseling organizations. The Bureau 
suggested that this approach may appropriately balance consumer and 
servicer interests based on several considerations.
    First, the Bureau was 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 homeownership 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 each billing 
cycle would have been significantly higher than with the one-time 
requirement in the HOEPA rulemaking. Space on the periodic statements 
is limited, and importing updated information from the Bureau Web site 
each cycle would involve more programming burden than simply listing 
Web site information in the first instance.
    To address these concerns, the proposal would have required that 
the periodic statements include the contact information to access the 
State housing finance authority for the State in which the property is 
located, and the Web site and telephone number to access either the 
Bureau list or the HUD list of homeownership counselors and counseling 
organizations.\132\ Directing consumers to this information would allow 
them to choose a program or agency conveniently located for them, and 
would allow consumers to locate other programs or agencies if those 
contacted initially could not help them at that time.
---------------------------------------------------------------------------

    \132\ At the time of publication, the Bureau list was not yet 
available and the HUD list is available at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm.
---------------------------------------------------------------------------

    The Bureau coordinated the homeownership counselor information 
requirement in Sec.  1026.41(d)(7)(v) with the other pending 
rulemakings concerning mortgage loans that address homeownership 
counselors. The Bureau believes that, to the extent doing so is 
consistent with consumer protection objectives, adopting a consistent 
approach to providing homeownership counselor information across its 
various pending rulemakings will facilitate compliance.
    Overall, commenters praised the Bureau's proposal on providing Web 
site information, rather than individual homeownership counselors and 
counseling organizations. However, commenters had remaining concerns 
about providing information for the relevant State housing finance 
authority in addition to information on how to access the HUD list or 
the Bureau list. Finally, the Bureau received comments from the 
National Council of State Housing Agencies, expressing concern about 
including contact information for State housing finance authorities on 
the periodic statements. The Council stated that, while the State 
housing agencies will always be willing to assist struggling 
homeowners, including their contact information on the periodic 
statement may increase consumer confusion by misdirecting consumers 
away from entities more likely to be able to assist them. The Council 
stated that not all State housing agencies offer counseling programs 
and, because of limited resources, State housing agencies may not be 
well-equipped to handle the increased number of inquiries they would 
receive.
    Additional comments focused on the difficulty of providing 
information for the individual State authority, and reconciling which 
state's authority should be provided. Several commenters stated that it 
would be difficult to have information for different State authorities 
appear on different statements, and asked if they could provide contact 
information to a location where a consumer could find a list of all the 
State housing finance authorities. Additionally, some commenters 
expressed concern about the inconsistency between the periodic 
statement disclosure and the Sec.  1026.20(d) ARM initial interest rate 
reset disclosure. While the periodic statement would have required 
disclosure of the State housing finance authority for the State in 
which the property is located, the Sec.  1026.20(d) ARM disclosure 
would have required the State authority for the State in which the 
consumer has primary residence. Commenters expressed concern this would 
create difficulties and asked that these discrepancies be reconciled 
or, as above, that they be allowed to provide a link to a full list of 
the State housing finance authorities.
    The Bureau carefully considered the comments expressing concern 
about providing the contact information of the correct State housing 
finance authority, particularly the comment from the State housing 
finance authority association expressing this concern. These comments 
were also raised in connection with the Sec.  1026.20(d) ARM initial 
interest rate adjustment disclosure. As discussed above in the section-
by-section analysis of Sec.  1026.20(d), requiring the contact 
information for the individual State housing finance authority provides 
minimal benefit to the consumer (because not all State housing finance 
authorities provide counseling, and this information is available 
elsewhere), and imposes a large burden on the servicer (i.e., 
determining which State housing finance authority's information should 
be included, and including dynamic information on the statement). For 
these reasons, the Bureau is removing the requirement to disclose 
contact information for the State housing finance authority for the 
State in which the property is located.
    Legal authority. The Bureau uses its authority under TILA section 
105(a) and (f) and Dodd-Frank Act 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 (i.e., State 
Housing Finance Authorities), and to instead require that periodic 
statements disclose information enabling the consumer to access either 
the Bureau list or HUD list of homeownership counselors and 
organizations. For the reasons discussed above, the Bureau believes 
that this exception and addition are 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

[[Page 10971]]

the amount of the loan, the status of the consumer (including related 
financial arrangements, financial sophistication, and the importance to 
the consumer of the loan), or whether the loan is secured by the 
principal residence of the consumer. Further, the Bureau believes that 
the exemption will simplify the periodic statement, and improve the 
homeownership counselor information provided to the consumer, thus 
furthering the consumer protection purposes of the statute. In 
addition, consistent with Dodd-Frank Act section 1405(b), the Bureau 
believes that the 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 Information
    Proposed Sec.  1026.41(d)(8) would have required 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 when the loan is delinquent. The 
combination of fees, partial payments being sent to suspense accounts, 
and application of payments to the outstanding amounts due can quickly 
lead to confusion. The early intervention provisions of the 2013 RESPA 
Servicing Final Rule require servicers to disclose information about 
loss mitigation or loan modification, but this information is not 
customized to individual consumers. The proposed delinquency notice on 
the periodic statement, discussed below, would have provided 
information that is tailored to the specific consumer. This information 
would have benefited the consumer in several ways.
    First, this notice would have ensured that the consumer is aware of 
the delinquency as well as potential consequences. Second, this 
information would have ensured that the consumer has the information 
specific to his or her loan. For example, certain loan modification 
programs are tied to specific timelines in delinquency. This 
delinquency information would ensure that consumers understand the 
timelines so they can benefit from the programs. Finally, the 
delinquency information would have created 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. The 
proposed rule would have required the following information:
     Delinquency date and risks. Proposed Sec.  
1026.41(d)(8)(i) would have required 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, a consumer 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 Sec.  1026.41(d)(8)(ii) would have required the 
periodic statement to include a statement reminding the consumer of 
potential risks of delinquency, for example, that late fees may be 
assessed or, after a number of months, the consumer can be subject to 
foreclosure.
     A recent account history. Proposed Sec.  
1026.41(d)(8)(iii) would have required 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 a consumer 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 payment allocations. Although some of this 
information would be available from previous periodic statements, the 
Bureau believed that providing a separate recent account history is 
warranted under the circumstances.
    The Bureau further believed 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 Sec.  
1026.41(d)(8)(iii) would have required 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 was 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 six 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 Sec.  
1026.41(d)(8)(iv) would have required the periodic statement to include 
as part of the delinquency information notice of any acceptance into a 
modification program, either trial or permanent, to create a record of 
acceptance into the modification program. For consistency with the loss 
mitigation provisions of the 2013 RESPA Servicing Final Rule, the final 
rule amends this to require notice of a loss mitigation program to 
which a consumer has agreed.
     Notice if the loan has been referred to foreclosure. 
Proposed Sec.  1026.41(d)(8)(v) would have required 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. For 
consistency with the loss mitigation provisions of the 2013 RESPA 
Servicing Final Rule, the final rule amends this to require notice of 
the first notice or filing required by applicable law for any judicial 
or non-judicial foreclosure process.
     Total amount to bring the loan current. Proposed Sec.  
1026.41(d)(8)(vi) would have required that the total amount needed to 
bring the loan current be included in the delinquency information to 
ensure that consumers know how much money they must pay to bring the 
loan back to current status.
     Homeownership counselor information reference. Proposed 
Sec.  1026.41(d)(8)(vii) would have required that the delinquency 
notice also contain a statement directing the consumer to the 
homeownership counselor information located on the statement, as 
proposed by Sec.  1026.41(d)(7)(v). For example, if the homeownership 
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.
    The delinquency information was intended to assist consumers who 
have fallen behind on their mortgage payments. The proposal would not 
have required provision of this information until the consumer is 45 
days delinquent. The Bureau recognized that not all delinquencies 
indicate troubled consumers; a single missed payment

[[Page 10972]]

may be the result of other factors such as misdirected mail or 
inadvertence. Such consumers would likely be notified of a single 
missed payment by their servicer, and the missed payment 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. Thus, the 
delinquency information would have been required at 45 days to ensure 
receipt of this information by a consumer who missed two consecutive 
payments.
    Commenters expressed concern that a number of factors would make 
the proposed delinquency information difficult to implement, including 
the volume of loan-specific information that would have to be coded, 
the dynamic nature of the information, the fact that such information 
is often stored on multiple systems, the lack of space on the periodic 
statement, the difficulties in determining when a consumer was accepted 
into a loan modification program, and, as one commenter stated, the 
fact that the delinquency date calculation is a ``nightmare.''
    Commenters also stated that the information in the delinquency 
notice would be unnecessary, as this information is already provided in 
investor-required notices, required by the Early Intervention 
provisions proposed in Sec.  1024.39 and other provisions of the 2012 
RESPA Servicing Proposal, the delinquency date is obvious, and the 
information is required in state-law notices in the foreclosure 
process. Some commenters went further to say this information should 
not be provided to the consumer, as the total outstanding balance may 
cause confusion or depress consumers, any mention of the risk of 
foreclosure may be considered notice of collection or default in 
violation of the FDCPA or other laws, and that 45 days is too short a 
timeline, such that habitually late payers will often receive these 
messages. One commenter suggested 60 days would be a more appropriate 
timeline. Another commenter asked if the delinquency information must 
be provided once, or on each statement.
    Other commenters were supportive of the delinquency notice, and 
even suggested that more information be included. Such commenters said 
the account history should extend back 12 months, rather than 6 months, 
there should be information on loss mitigation, there should be more 
information on the delinquent payment and the effect of delinquencies, 
and that payment history should be provided in excel format, mirroring 
current bankruptcy law.
    Finally, some commenters provided specific recommendations. Two 
commenters suggested the periodic statement note the fact that the loan 
is more than 45 days delinquent and request the consumer contact the 
servicer. Additionally, two commenters suggested this information might 
be better contained in a letter--one commenter suggested this should be 
in the breech letter or a right-to-cure, and the other suggested a 
payment history and explanation letter. Finally, one commenter 
suggested the delinquency notice be limited to past due amounts and the 
dates the payments were owed, and should only be provided up to the 
point of referral to foreclosure.
    The Bureau carefully considered the difficulties of implementing 
the delinquency information. The Bureau recognizes the difficulties of 
adding dynamic boxes to the periodic statement, and so--as in the case 
of the partial payment disclosure discussed above--is affording 
servicers the flexibility to provide the delinquency information on the 
periodic statement, on a separate page included with the periodic 
statement, or in a separate letter.
    The Bureau recognizes there is a large amount of loan specific data 
that may be included on separate systems; however, the Bureau notes the 
importance of bringing all this information together into one place for 
the consumer. The Bureau does not believe that any item of information 
required is unobtainable. In response to the comment that calculating 
the delinquency date can be a nightmare, the Bureau notes the confusion 
around this calculation is the very reason such a date should be 
included in the delinquency information. Finally, in response to 
concerns about determining the status of a loan modification program, 
the Bureau notes the 2013 RESPA Servicing Final Rule establishes 
procedures relating to loss mitigation, including identifying when a 
borrower has agreed to a loss mitigation program.
    The Bureau considered the comment that the delinquency information 
is unnecessary, but respectfully disagrees, in particular for the 
reasons expressed in the proposed rule and the supportive comments 
above. While the Bureau agrees that some of this information is 
available through other disclosures and in other locations, the Bureau 
believes it is important to bring this information together in a single 
place. In particular, while the Bureau acknowledges that delinquency 
information is provided in the early intervention notice required by 
the 2013 RESPA Servicing Final Rule, the Bureau notes that this 
information is generic, while the information in the periodic statement 
is specific to the individual loan. These two notices are designed to 
complement each other--for example, the early intervention notice 
information may discuss an option that is only available to consumers 
who are 60 days delinquent, and the periodic statement information 
would inform an individual consumer of the exact date they were 
considered delinquent. The Bureau considered the comment that the total 
amount outstanding may depress or confuse consumers, but the Bureau 
believes the value of transparent disclosure of information outweighs 
such concerns. The Bureau considered the concerns that mentioning the 
risks of foreclosure may violate the FDCPA, but the Bureau notes that 
specific language is not required by the regulation--if a servicer 
feels that mention of foreclosure is inappropriate when a consumer is 
45 days delinquent, at that time they could warn the consumer instead 
of the imposition of late fees.\133\ Finally, in response to the 
comments that 45 days is too early to require this disclosure, the 
Bureau notes that a 45 day delinquency corresponds to two missed 
payments. Delaying the delinquency notice to 60 days or more would mean 
a consumer would not receive this information until they had missed 
three payments. The Bureau notes the delinquency notice information 
complements the early intervention information, and that these notices 
should be provided on a similar timeframe. The Bureau notes the 
delinquency information must be provided on, or accompanying, each 
periodic statement sent when a consumer is at least 45 days delinquent. 
The Bureau notes that much of the information on the delinquency notice 
will change as time passes, and thus a single statement will quickly 
become outdated.
---------------------------------------------------------------------------

    \133\ A servicer may believe foreclosure language is more 
appropriate later in the process when the servicer is preparing to 
file the first filing required for the foreclosure process.
---------------------------------------------------------------------------

    The Bureau carefully considered the above recommendations to 
streamline the notice to delinquent consumers. The Bureau believes 
merely noting the delinquency and instructing the consumer to contact 
the servicer is insufficient; further this information (and more) is 
provided by the early intervention information required by the 2013 
RESPA Servicing Final Rule. The

[[Page 10973]]

goal of the enhanced and customized disclosures in the periodic 
statement is, in part, to provide delinquent consumers with additional 
information that might encourage them to contact their servicer. As 
discussed above, the Bureau believes the 45-day timeline is proper for 
the delinquency notice. The Bureau has adopted the proposed rule as 
final, with the additional flexibility of allowing such information to 
be contained on a separate page of the periodic statement, or in a 
separate letter.
41(e) Exemptions
41(e)(1) Reverse Mortgages
    Proposed Sec.  1026.41(e)(1) would have exempted reverse mortgages, 
as defined by Sec.  1026.33(a), from the periodic statement 
requirement. The Bureau proposed 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 significant alterations to the form and 
regulation. The Bureau believed that it is more appropriate to address 
consumer protections relating to reverse mortgages in a separate 
comprehensive rulemaking.
    The Bureau received few comments on reverse mortgages--two 
commenters suggested that reverse mortgages should not be exempted, a 
third commenter suggested that reverse mortgage with escrow accounts 
should be brought in, and one commenter specifically praised the 
reverse mortgage exemption. For the reasons expressed in the proposal, 
the Bureau believes the consumer protections relating to reverse 
mortgages would be more appropriately addressed in a separate 
comprehensive rulemaking. Thus, the Bureau is adopting the proposed 
rule exempting reverse mortgages.
Legal Authority
    The Bureau uses its authority under TILA sections 105(a) and (f) 
and Dodd-Frank Act 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 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 consumer (including related financial arrangements, financial 
sophistication, and the importance to the consumer of the loan), or 
whether the loan is secured by the principal residence of the consumer. 
Additionally, in the estimation of the Bureau, the 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. Further, consistent with Dodd-Frank Act section 1405(b), 
the Bureau believes that the 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) Timeshare Plans
    Proposed Sec.  1026.41(e)(2) would have clarified that timeshare 
plans as defined by 11 U.S.C. 101 (53D) 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 timeshare plans do not fall under this 
definition. Because no comments were received on the proposed timeshare 
plan exemption, this provision is being finalized without any changes.
41(e)(3) Coupon Book
    Proposed Sec.  1026.41(e)(3) would have implemented the statutory 
exemption in TILA section 128(f)(3) 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 sought 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 proposed an exemption requiring certain information in the 
coupon book, certain information to be made available upon request, and 
certain information to be provided at delinquency.
    Proposed comment 41(e)(3)-1 defined ``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 explained what a coupon 
book is.
Information in the Coupon Book
    Proposed Sec.  1026.41(e)(3)(i) would have required 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 Sec.  1026.41(e)(3)(ii) would have required 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 penalty that may be 
charged, the contact information for the servicer, and homeownership 
counselor information. Each of these items is discussed above in the 
section-by-section analysis of proposed Sec.  1026.41(d). The coupon 
book would also have been required to disclose information on how the 
consumer may obtain the dynamic information discussed below. The 
information described above may be, 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 clarified that a coupon book need 
only include the outstanding principal balance at the beginning of that 
time period.

[[Page 10974]]

Information Made Available
    Due to the static nature of the coupon book, certain dynamic 
information that would have been required to be included on periodic 
statements could not have been included in coupon books. Thus, proposed 
Sec.  1026.41(e)(3)(iii) would have required that certain dynamic 
information be made available upon the consumer's request. The servicer 
could provide the information orally, in writing, in person, or 
electronically, if the consumer consents. Proposed Sec.  
1026.41(e)(3)(iii) would have required 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.
    Many commenters praised the coupon book exemption and suggested it 
be finalized as proposed. Other commenters expressed concerns about 
requirements of the coupon book exemption, saying these requirements 
were too expansive. Finally commenters requested clarification as to 
what would trigger the requirement for servicers using coupon books to 
provide the information that is made available.
    The Bureau carefully considered the comments received on the coupon 
book exemption. As an initial matter, the Bureau clarifies the 
information made available under Sec.  1026.41(e)(3)(iii). Such 
information would have to be provided to the consumer at the consumer's 
request. The Bureau does not believe an excessive amount of information 
is required on the periodic statement, and for the reasons discussed 
above in the section-by-section analysis of 41(d), believes the 
required items of information should be disclosed to the consumer. 
However, in light of the difficulties of having dynamic information on 
a coupon book, the Bureau believes this information should be provided 
at the consumer's request.
Delinquency Information
    Proposed Sec.  1026.41(e)(3)(iv) would have required that to 
qualify for the coupon book exception, the delinquency information 
required by proposed Sec.  1026.41(d)(8), discussed above, must 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. Due to the static nature of the coupon book, such 
information would likely have to be provided in a separate letter. 
Commenters expressed concern about the requirement to provide the 
delinquency information, saying this information would be difficult to 
provide, and unnecessary.
    The Bureau believes the delinquency information is even more 
important to a consumer who is not receiving periodic statements due to 
the coupon book exemption. Coupon books are generally only updated on 
an annual basis-a consumer who becomes delinquent during the year will 
not have any other guaranteed source of up-to-date information on the 
status of their loan of the type that those receiving periodic 
statements will receive under the rule. For these reasons, the Bureau 
is adopting the rule as proposed (subject to the modifications that 
have been made to the portions of Sec.  1026.41(d) that are referenced 
in the coupon book exemption).\134\
---------------------------------------------------------------------------

    \134\ For example, paragraph 41(e)(3)(ii)(A) references the 
information required by paragraph 41(d)(7), which includes 
prepayment penalty information. Whereas the proposed rule required 
disclosure of the amount of any prepayment penalty, the final rule 
requires disclosure only of the existence of such a penalty. 
Accordingly, under final paragraph 41(e)(3)(ii)(A), a coupon book 
must likewise include only information regarding the existence of a 
prepayment penalty.
---------------------------------------------------------------------------

Legal Authority
    The Bureau uses 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 uses its TILA section 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 
at the consumer's request. Additionally, the delinquency information 
must be provided in a separate letter when appropriate, as required by 
Sec.  1026.41(e)(3)(iv). The Bureau believes this exemption is 
necessary and proper to facilitate compliance.
41(e)(4) Small Servicers
    Proposed paragraph (e)(4) would have exempted certain small 
servicers from the duty to provide periodic statements. The proposal 
defined ``small servicer'' 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 proposed this exemption after careful consideration of 
the benefits and burdens of the periodic statement requirement. The 
Bureau explained that it believed that the proposed periodic statement 
would have been helpful to consumers because it would have provided 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 believed 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 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 recognized 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 consumer's statement for each 
billing cycle. The Bureau recognized that certain 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 Small 
Business Review Panel process confirming the technological and 
operational challenges faced by small servicers, as well as postage and 
other

[[Page 10975]]

expenses that would be associated with providing periodic statements on 
an ongoing basis. Because small servicers maintain small portfolios, 
the Small Entity Representatives 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 explained that 
it believed 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-centric 
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 to the customers for whom they 
service mortgages.\135\ Because those servicers generally have a long-
term relationship with the consumers, their incentives with regard to 
charging fees and other servicing practices may be more aligned with 
consumer interests. These motivations help to ensure a good 
relationship and incentivize good customer service--including making 
available information about upcoming payments, fees charged and payment 
history, as well as other information needed by distressed consumers. 
At the same time, consumers generally have easy access to these small, 
community-based servicers, to obtain any information they desire.
---------------------------------------------------------------------------

    \135\ See Lori J. Pinto et al., Prime Alliance Loan Servicing, 
Re-Thinking Loan Serving, at 8 (Apr. 2010) (``Pinto Paper''), 
available at http://cuinsight.com/media/doc/WhitePaper_CaseStudy/wpcs_ReThinking_LoanServicing_May2010.pdf.
---------------------------------------------------------------------------

    In proposing the small servicer exemption, the Bureau believed that 
both of these conditions were 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 originate the loans and retain either ownership or 
servicing rights. Larger servicers are likely to be much more reliant 
on, and sophisticated users of, computer technology 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 did 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 ownership or servicing rights, without regard to size.
    The proposed exemption is consistent with feedback that the Bureau 
received from Small Entity Representatives during the Small Business 
Review Panel process regarding the potentially significant burdens that 
would be imposed by a periodic statement requirement. Participants 
explained that they already provide much of the information in the 
proposed periodic statement through alternative means, including 
correspondence, more limited periodic statements, coupon books, 
passbooks, and telephone conversations.\136\ According to the Small 
Entity Representatives, even where small servicers do not affirmatively 
provide particular items of information to consumers, they 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.\137\
---------------------------------------------------------------------------

    \136\ Small Business Review Panel Report, at 16-19.
    \137\ Small Business Review Panel Report, at 16-19.
---------------------------------------------------------------------------

    The Small Entity Representatives 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.\138\ 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 Small Entity Representatives stated that mailing periodic 
statements could cost thousands of dollars per month beyond some of 
their current alternative communication channels, such as coupon books 
or passbooks.
---------------------------------------------------------------------------

    \138\ Small Business Review Panel Report, at 17.
---------------------------------------------------------------------------

Small Servicer Defined
    At the time of the proposal, the Bureau had only roughly estimated 
the amount of burden that would be imposed by the periodic statement 
requirement on servicers of different sizes. However, the Bureau 
believed that a threshold of 1,000 loans serviced may be an appropriate 
approximation to limit the proposed exemption to smaller servicers in 
the market.
    In addition to the 1,000 loan threshold, the exemption from the 
periodic statement would have been limited to entities that exclusively 
service loans that they or an affiliate own or originated. The proposed 
exemption was limited to these servicers because of the incentives 
discussed above. The proposed commentary clarified the application of 
the small servicer definition. Proposed comment 41(e)(4)-1 stated 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 stated that in determining whether a small 
servicer services 1,000 mortgage loans or less, a servicer would be 
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 during a calendar year would 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 gave 
examples for calculating when a servicer that crosses the 1,000 loan 
threshold would need to begin sending periodic statements. The purpose 
of this provision was to permit a servicer that crossed 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 requirements for 
which the servicer was previously exempt.
    Proposed comments 41(e)(4)-3 clarified the circumstances in which 
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 
clarified that, 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 stated that permitting an 
exemption in such circumstances could potentially exempt a larger 
master servicer from the obligation to provide periodic

[[Page 10976]]

statements, even if it has master servicing responsibility for several 
thousand loans.
Scope of the Small Servicer Exemption
    The Bureau received comments both supporting and disagreeing with 
the small servicer exemption. Commenters who supported the small 
servicer exemption agreed that, for the reasons expressed in the 
proposed rule, the large burden on small servicers and small decrease 
in consumer benefits justified the small servicer exemption to the 
periodic statement requirement. Many of these commenters felt the scope 
of the exemption should be expanded, and small servicers should be 
exempt from other provisions of the servicing rules. A few commenters 
disagreed with any small servicer exemption, because they felt all 
consumers should benefit from the protection of the rules, regardless 
of their servicer's size. One commenter suggested that if small 
servicers are exempt, they should have strict liability for any errors.
    The Bureau considered the comments objecting to a small servicer 
exemption to the periodic statement, but believes that, for the reasons 
discussed above, such an exemption is appropriate in the periodic 
statement context. The Bureau also considered if a small servicer 
exemption would be appropriate for other provisions of the mortgage 
servicing rules. A discussion of small servicers is included in the 
discussion above of each section of the rule. In general, the Bureau 
has decided not to exempt small servicers from obligations to which 
they are already subject (such as the requirement to provide an ARM 
adjustment notice or payoff statement or to promptly credit payments). 
The Bureau also has decided not to exempt small servicers from 
providing the new, initial ARM adjustment notice, as that notice is 
required only once in the life of any ARM and should not require large 
incremental expense to deliver for servicers who already are providing 
the annual adjustment notices. Finally, the small servicer exemption 
overall is discussed in more detail in the Dodd-Frank Act section 1022 
analysis and Final Regulatory Flexibility Analysis below.
    Size of the small servicer exemption. As discussed below in the 
Dodd-Frank Act section 1022 analysis, commenters almost unanimously 
stated that the size of the small servicer exemption was too small--
most of the commenters suggested somewhere between 5,000 and 10,000 
loans would be more appropriate. Some commenters also proposed 
alternative definitions of a small servicer. Some commenters suggested 
that only the nation's largest servicers should be required to provide 
the periodic statement. One commenter suggested that all portfolio 
loans should receive the benefit of the small servicer exemption. One 
commenter suggested this should be determined by the charged-off/
delinquency ratio. One commenter suggested that entities exempt from 
the Home Mortgage Disclosure Act (HMDA) reporting requirements should 
be considered small servicers. Two commenters suggested that only 
institutions under direct Bureau supervision should be required to 
provide periodic statements. One commenter suggested that small 
servicer status should be determined solely by loan count, and the 
second prong of the test (requiring that the servicer owns or 
originated the loan) should be removed. Some commenters suggested that 
the small servicer definition should consider the type of entity-two 
suggested that State housing finance authorities should be exempt, and 
another commenter suggested all bona fide non-profits should be exempt. 
Several comments suggested that all credit unions should be exempt.
    The Bureau carefully considered the comments discussing the size of 
the small servicer exemption. The Bureau believes that, in general, 
loan count is the appropriate measure for a small servicer. The Bureau 
prefers loan count to asset threshold because the Bureau believes scale 
is better defined by the number of loans rather than the size of those 
loans. Further, these numbers will not need to be adjusted due to 
inflation. While the Bureau is hesitant to exempt entire classes of 
entities because of concerns about keeping a level playing field, the 
Bureau notes that certain classes of entities face special challenges 
when it comes to providing periodic statements, and have presented 
persuasive reasons why they should be exempt. In particular, the Bureau 
has decided to include Housing Finance Agencies in the small servicer 
exemption.
    In light of comments received and additional analysis of the data, 
the Bureau has expanded the loan threshold to 5,000 loans in the final 
rule. See the Dodd-Frank Act section 1022 analysis below for a full 
discussion of the loan threshold.
    The Bureau received several requests for clarification in counting 
the number of loans. One commenter asked if this meant 1,000 or fewer 
of the type of loans covered by this requirement, or 1,000 or fewer of 
all types of mortgages serviced. Another commenter asked if HELOCs 
serviced should be included in the count. One commenter asked about 
interim servicing loans--loans only held for a very short period of 
time. The Bureau also received requests for clarifications about 
servicers who sell loans they originated as servicing released, and 
about creditors who qualify for the exemption and if they may continue 
to send their current periodic statements which do not meet all the 
requirements of the periodic statement provisions.
    The loan threshold is determined by counting loans that would be 
subject to the periodic statement requirement, thus any HELOCs would 
not be included in the count (because HELOCs are not subject to the 
periodic statement requirement). The Bureau notes that if a servicer 
sells a loan servicing released, it would no longer be a servicer for 
that loan, and thus that loan would have no effect on the determination 
of small servicer status. Finally, the Bureau notes that a small 
servicer not subject to the periodic statement requirements of Sec.  
1026.41 would be free to continue sending periodic statements at its 
discretion, regardless of if those periodic statements conform to the 
periodic statement requirements. For these reasons, the Bureau is 
adopting the proposed exemption for periodic statements, but modifying 
the definition of small servicer in the manner discussed above.
Housing Finance Agencies
    Certain commenters, including the National Council of State Housing 
Agencies, requested that the Bureau exempt loans financed by State 
housing finance agencies. These commenters observed that State housing 
finance agencies operate as public entities in every State and that, as 
instrumentalities of government, they have a unique mission to provide 
safe and affordable financing. In addition, the commenters stated, 
loans financed by such agencies tend to perform better than other 
loans.
    The Bureau agrees with the commenters that the risk of exempting 
loans from high-cost mortgage coverage where a State housing finance 
authority is the creditor should be low, given the agencies' mission to 
provide safe and affordable financing to consumers and the protections 
provided by the agencies' lending practices. The burdens placed on such 
agencies would take away from their mission and might render the 
agencies unable to originate the loans. In turn, consumers likely would 
turn to more expensive forms of credit, such as credit cards or 
unsecured debt. The Bureau notes that it recognized the special status 
of State housing finance agencies in the 2013

[[Page 10977]]

HOEPA Final Rule which exempts such agencies from the provision in 
Sec.  1026.32(a)(5) prohibiting a creditor from being affiliated with a 
homeownership counseling entity.
    Upon further consideration, the Bureau is adopting in the final 
rule an exemption for mortgage transactions originated by a Housing 
Finance Agency, as that term is defined in 24 CFR 266.5. The Bureau 
uses this definition to coordinate with the similar exemption in the 
2013 HOEPA Final Rule. The Bureau is adopting this exemption pursuant 
to its authority under TILA section 105(a) to exempt all or any class 
of transactions where necessary or proper to effectuate the purposes of 
TILA, to prevent evasion, or to facilitate compliance. The Bureau 
believes that this exemption is necessary and proper to effectuate the 
purposes of TILA.
    Legal authority. The Bureau exercises its authority under TILA 
section 105(a) and (f), and Dodd-Frank Act 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 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 consumer (including related financial 
arrangements, financial sophistication, and the importance to the 
consumer of the loan), or whether the loan is secured by the principal 
residence of the consumer. In addition, consistent with Dodd-Frank Act 
section 1405(b), for the reasons discussed above, the Bureau believes 
that the 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 is exercising its authority under TILA section 105(c) to 
issue model and sample forms for Sec.  1026.20(c) and (d).
Appendix H-4(D) to Part 1026
    The Bureau is exercising its authority under TILA section 105(c) to 
issue 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 have added the 
appendix sections that 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 which format may not be 
changed by creditors. It also would have clarified that reference to 
creditors in the commentary would have been applicable to creditors, 
assignees, and servicers with regard to Sec.  1026.20(c) and (d). The 
final rule is issued without this proposed revision and, thus, the 
comment is unchanged. Because both Sec.  1026.20(c) and (d) explicitly 
state that their requirements, as well as those of other regulations in 
subpart C that govern Sec.  1026.20(c) and (d), apply to creditors, 
assignees, and servicers, including the reference in this commentary 
would be redundant and unnecessary. For a discussion of the decision to 
remove Sec.  1026.20(c) and (d) from the list of model and sample forms 
that do not permit formatting changes, see the section-by-section 
analysis of Sec.  1026.20(c)(3)(i) and (d)(3)(i).
Appendix H--Closed-End Model Forms and Clauses-7
    The Bureau is issuing appendix H-7 with technical changes to 
conform to the final rule.
Appendix H--Closed-End Model Forms and Clauses-7(i)
    Proposed revisions to appendix H-7(i) would have included 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 have 
added text so that the provision stated that appendix H-4(D) included 
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. Having received no comments on this topic, the Bureau 
is adopting the commentary as proposed.

VI. Effective Date

    This final rule is effective on January 10, 2014. The Bureau 
believes that this approach is consistent with the timeframes 
established in section 1400(c) of the Dodd-Frank Act and, on balance, 
will facilitate the implementation of the Title XIV Rulemakings' 
overlapping provisions, while also affording covered persons sufficient 
time to implement the more complex or resource-intensive new 
requirements. Certain of the regulations set forth in the Final 
Servicing Rules are required under title XIV. Specifically, section 
1420 of the Dodd-Frank Act, which requires the periodic statement, 
states that the Bureau ``shall develop and prescribe a standard form 
for the disclosure required under this subsection, taking into account 
that the statements required may be transmitted in writing or 
electronically.'' 15 U.S.C. 1638(f)(2). Other regulations set forth in 
the Final Servicing Rules, while implementing amendments under title 
XIV of the Dodd-Frank Act, are not regulations required under title 
XIV. Pursuant to section 1400(c)(2) of the Dodd-Frank Act, the 
effective dates of these regulations need not be within one year of 
issuance.
    The Bureau received approximately 60 comments from industry 
participants with respect to the appropriate effective date. As stated 
above, comments from consumer advocacy groups generally urged earlier 
effective dates. A number of industry trade associations, as well as a 
large bank and a small credit union indicated that the Bureau should 
provide a sufficient amount of time, but did not express an opinion 
regarding an appropriate timeframe. The majority of servicers, 
including large and small banks, non-bank servicers, and numerous 
credit unions, as well as their trade associations, indicated that the 
Bureau should establish an effective date of between 12 and 18 months 
after issuance.\139\ Some large banks, a bank servicer, numerous trade 
associations, the SBA, and the GSEs stated that the Bureau should 
consider an implementation period of approximately 18-24 months for 
certain of the requirements. Further, three banks and numerous trade 
associations for banks and manufactured housing servicers stated that 
the Bureau should consider an effective date between 24 and 36 months 
after issuance. Each of the industry commenters generally stated that 
the requested time was

[[Page 10978]]

necessary to effectively implement the regulations because of the 
complexity of the proposed rules, the impact on systems changes and 
staff training, and the cumulative impact of the proposed mortgage 
servicing rules when combined with other requirements imposed by the 
Dodd-Frank Act or proposed by the Bureau. These letters provide some 
basis to believe that implementing the regulations within 12 months is 
challenging for many firms. They do not establish, however, that 
implementation in 12 months is impracticable.
---------------------------------------------------------------------------

    \139\ In addition, a force-placed insurer stated that it would 
be require between 6-12 months to implement regulations relating to 
force-placed insurance requirements.
---------------------------------------------------------------------------

    For the reasons already discussed above, the Bureau believes that 
an effective date of January 10, 2014 for this final rule and most 
provisions of the other title XIV final rules will ensure that 
consumers receive the protections in these rules as soon as reasonably 
practicable, taking into account the timeframes established by the 
Dodd-Frank Act, the need for a coordinated approach to facilitate 
implementation of the rules' overlapping provisions, and the need to 
afford covered persons sufficient time to implement the more complex or 
resource-intensive new requirements.

VII. Dodd-Frank Act Section 1022(b)(2) Analysis

A. Overview

    In developing the final rule, the Bureau has considered potential 
benefits, costs, and impacts.\140\ The Proposal set forth a preliminary 
analysis of these effects, and the Bureau requested and received 
comments on the topic. In addition, the Bureau has consulted, or 
offered to consult with, the prudential regulators, HUD, the FHFA, the 
Federal Trade Commission, and the Federal Emergency Management Agency, 
with respect to consistency with any prudential, market, or systemic 
objectives administered by such agencies. 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 final rule on 
those entities' loan programs.
---------------------------------------------------------------------------

    \140\ 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 amends Regulation Z, which 
implements TILA, and the official interpretation to the regulation, as 
part of its implementation of the Dodd-Frank Act amendments to TILA's 
mortgage servicing rules. The amendments to Regulation Z implement 
Dodd-Frank Act sections 1418 (initial interest rate adjustment notice 
for ARMs), 1420 (periodic statements), and 1464 (prompt crediting of 
mortgage payments and response to requests for payoff amounts). The 
final rule also revises 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 2013 RESPA Servicing Final Rule that implements Dodd-
Frank Act section 1463. The RESPA rule implements requirements 
regarding 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 an initial matter, in response to a comment, the Bureau 
considers whether the statute explicitly or implicitly addresses a 
market failure. Part II.A of the final rule (``Overview of the Mortgage 
Servicing Market and Market Failures'') discusses the servicing market 
and servicer incentives. As noted in the proposed rule, a fundamental 
feature of the market for servicing is that borrowers generally do not 
choose their own servicers.\141\ It is therefore difficult for 
borrowers to protect themselves from shoddy service or harmful 
practices. A borrower may select a servicer at origination by choosing 
a lender that pledges to service the loans that it originates. However, 
relatively few lenders commit to servicing the loans that they 
originate, most borrowers do not choose a servicer at origination, and 
some borrowers who do choose a servicer at origination may find that 
the servicer retains a subservicer that interacts with the borrower. A 
borrower may refinance a mortgage loan to receive a new servicer. 
However, refinancing is an expensive and generally impractical way for 
a homeowner to obtain a new servicer, and, similar to origination, the 
borrower does not generally select the new servicer.
---------------------------------------------------------------------------

    \141\ See 77 FR 57318, 57321 (Sept. 17, 2012).
---------------------------------------------------------------------------

    The Bureau recognizes that certain servicers have incentives to 
service well. Servicers that rely on a local reputation--their ability 
to attract new consumers depends on how well they treat current 
consumers--have incentives to provide high quality servicing. This 
describes many of the small servicers that the Bureau consulted as part 
of a process required under SBREFA. They described their businesses as 
requiring a ``high touch'' model of customer service, both to ensure 
loan performance and to maintain a strong reputation in their local 
communities. The vast majority of smaller servicers are community banks 
and credit unions, which tend to operate in narrowly defined geographic 
areas, depend deeply on the economies of these communities for their 
profitability, offer a range of products and services in both deposits 
and loans, are known for a ``relationship'' model that depends on 
repeat business to obtain more deposits and extend more loans, and 
could suffer significant harm to their business from any major failure 
to treat customers properly because they are particularly vulnerable to 
``word of mouth.'' These small servicers also generally service only 
loans they either originated or hold on portfolio.
    The Bureau believes that servicers that service relatively few 
loans, all of which they either originated or hold on portfolio, 
generally have incentives to service well: foregoing the returns to 
scale of a large servicing portfolio indicates that the servicer 
chooses not to profit from volume, and owning or having originated all 
of the loans serviced indicates a stake in either the performance of 
the loan or in an ongoing relationship with the borrower.
    In general, however, mortgage servicing is influenced by the 
absence of avenues through which consumers can effectively reward or 
penalize servicers for the quality of servicing. A consumer cannot 
readily leave a servicer if the quality of servicing proves to be 
unsatisfactory, and the consumer cannot generally control the selection 
of the new servicer. Consumers also generally do not have other ways of 
imposing financial consequences on servicers for poor servicing. 
Markets are incomplete between consumers and servicers, and such 
incomplete markets are a form of market failure. This market failure 
leaves many servicers with only limited incentives to engage in certain 
activities of value to consumers.\142\
---------------------------------------------------------------------------

    \142\ See Joseph E. Stiglitz. Economics of the Public Sector, at 
85 ch.4 (3d ed., 2000). An alternative way to view the market 
failure is that servicers are both the agents of investors and, as a 
practical matter, monopoly providers of information to consumers 
about details of the loan and consumer payments. Market failures 
need not be mutually exclusive.

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

[[Page 10979]]

    Of particular relevance to this rulemaking is the fact that 
servicers receive very little benefit from developing disclosures that 
are valuable to consumers. That is to say, the market provides 
servicers with limited incentives to conduct (or pay others to conduct) 
the research necessary to discover information that consumers find 
useful at different decision points and the ways to present this 
information to consumers. Servicers do have an incentive to provide 
borrowers with information and services that keep collection costs low. 
Thus, they have an incentive to make sure consumers know the payment 
due in each period, the date the payment is due, and where to send it. 
Servicers also have some incentive to limit customer inquiries, and so 
servicers may provide additional information that consumers want. The 
Bureau knows that certain servicers have experimented with improving 
their disclosures (and these instances are discussed below). However, 
this work does not appear to be widespread and the Bureau received only 
a small number of comments about efforts to improve disclosures. These 
facts are consistent with the fact that servicers receive minimal 
consequential feedback from consumers about the quality of servicing in 
general and the quality of servicing disclosures in particular. The 
market failure in mortgage servicing provides an economic rationale for 
establishing national servicing standards, including standards for 
disclosures, with a limited number of exceptions.
    Congress included in the Dodd-Frank Act the mortgage servicing 
provisions described above in response to pervasive and profound 
consumer protection problems in mortgage servicing. The new protections 
in the rules promulgated under TILA and RESPA will 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.

B. Provisions To Be Analyzed

    The analysis below considers the benefits, costs, and impacts of 
the following major provisions:
    1. Changes in the format, content, and timing of the existing 
interest rate adjustment disclosures for most closed-end adjustable-
rate mortgages as required by revised Sec.  1026.20(c).
    2. New initial interest rate adjustment disclosures for most 
closed-end adjustable-rate mortgages as required by new Sec.  
1026.20(d).
    3. 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 as required by revised Sec.  1026.36(c).
    4. New periodic statement disclosure requirements for most consumer 
credit transactions secured by a dwelling as required by new Sec.  
1026.41.
    With respect to each major provision, the analysis considers the 
benefits and costs to consumers and covered persons, and in certain 
instances considers other impacts. The analysis also addresses comments 
the Bureau received on the proposed Dodd-Frank Act section 1022 
analysis as well as certain other comments on the benefits or costs of 
provisions of the proposed rule when doing so is helpful to 
understanding the Dodd-Frank Act section 1022 analysis. Comments that 
mention the benefits or costs of a provision of the proposed rule in 
the context of commenting on the merits of that provision are addressed 
in the section-by-section analysis of that provision. The analysis also 
addresses certain alternative provisions that were considered by the 
Bureau in the development of the proposed rule, the final rule, or in 
response to comments.

C. Data and Quantification of Benefits, Costs and Impacts

    Section 1022 of the Dodd-Frank Act requires that the Bureau, in 
adopting the rule, consider potential benefits and costs to consumers 
and covered persons resulting from the rule, including the potential 
reduction of access by consumers to consumer financial products or 
services resulting from the rule, as noted above; it also requires the 
Bureau to consider the impact of proposed rules on covered persons and 
the impact on consumers in rural areas. These potential benefits and 
costs, and these impacts, however, are not generally susceptible to 
particularized or definitive calculation in connection with this rule. 
The incidence and scope of such potential benefits and costs, and such 
impacts, will be influenced very substantially by economic cycles, 
market developments, and business and consumer choices that are 
substantially independent from adoption of the rule. No commenter has 
advanced data or methodology that it claims would enable precise 
calculation of these benefits, costs, or impacts. Moreover, the 
potential benefits of the rule on consumers and covered persons in 
creating market changes anticipated to address market failures are 
especially hard to quantify.
    In considering the relevant potential benefits, costs, and impacts, 
the Bureau has utilized the available data discussed in this preamble, 
where the Bureau has found it informative, and applied its knowledge 
and expertise concerning consumer financial markets, potential business 
and consumer choices, and economic analyses that it regards as most 
reliable and helpful, to consider the relevant potential benefits and 
costs, and relevant impacts. The data relied upon by the Bureau also 
include the public comment record established by the proposed rule. The 
Bureau recognizes that some parties may have different perspectives or 
consider potential benefits and costs differently.
    However, the Bureau notes that for some aspects of this analysis, 
there are limited data available with which to quantify the potential 
costs, benefits, and impacts of the final rule. Regarding costs to 
covered persons, the Bureau would need data on the one-time and ongoing 
costs of modifying existing disclosures and creating new disclosures. 
Further, as discussed below, these costs depend on the size of the 
servicer, whether it prepares disclosures in-house or uses a vendor, 
and (if it uses a vendor) the terms of the contract with the vendor. 
Some of this data is proprietary and not generally available. 
Quantifying consumer benefits would require data on the impact of the 
new disclosures on housing finance decisions like refinancing and the 
cost savings and other benefits of these decisions.
    In light of these data limitations, the analysis below generally 
provides a qualitative discussion of the benefits, costs, and impacts 
of the final rule. General economic principles, together with the 
limited data that are available, provide insight into these benefits, 
costs, and impacts. Where possible, the Bureau has made quantitative 
estimates based on these principles and the data that are available. 
For the reasons stated in this preamble, the Bureau considers that the 
rule as adopted faithfully implements the purposes and objectives of 
Congress in the statute. Based on each and all of these considerations, 
the Bureau has concluded that the rule is appropriate as an 
implementation of the Dodd-Frank Act.\143\
---------------------------------------------------------------------------

    \143\ The Bureau noted in the proposals associated with the 
Title XIV Rulemakings that it sought to obtain additional data to 
supplement its consideration of the rulemakings, including 
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. Each of these data sources was not necessarily relevant to 
each of the rulemakings. The Bureau used the additional data from 
NMLS and NMLS Mortgage Call Report data to better corroborate its 
estimate of the contours of the non-depository segment of the 
mortgage market. The Bureau has received loan file extracts from 
three lenders, but at this point, the data from one lender is not 
usable and the data from the other two is not sufficiently 
standardized nor representative to inform consideration of the final 
rules. Additionally, the Bureau has thus far not yet received data 
from the National Mortgage Database pilot phases. The Bureau also 
requested that commenters submit relevant data. All probative data 
submitted by commenters were discussed in this document.

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

[[Page 10980]]

D. Baseline for Analysis

    The above-discussed amendments to TILA in the Dodd-Frank Act are 
self-effectuating, and the Dodd-Frank Act generally does not require 
the Bureau to adopt regulations to implement these amendments. For 
example, certain provisions of the final rule 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 provisions arise largely or entirely from 
those amendments, not from the final rule. These provisions of the 
final rule provide substantial benefits to servicers, compared to 
allowing the TILA amendments to take effect without implementing 
regulations, by clarifying parts of those amendments that are 
ambiguous. Greater clarity on these amendments, as provided by the 
final rule, should reduce the compliance burdens on covered persons by, 
for example, reducing costs for attorneys and compliance officers as 
well as potential costs of over-compliance and unnecessary 
litigation.\144\
---------------------------------------------------------------------------

    \144\ In response to a comment, the Bureau notes that it is 
focused here on the fact that regulatory provisions that clarify 
ambiguous statutory provisions mitigate certain compliance costs 
associated with uncertainty over what the statutory provisions 
require. While it is possible that some clarifications would put 
greater burdens on servicers as compared to what the statute would 
ultimately be found to mandate, the Bureau believes that the rule's 
clarifying provisions generally mitigate burden.
---------------------------------------------------------------------------

    Dodd-Frank Act section 1022 permits the Bureau to consider the 
benefits, costs, and impacts of the final rule solely compared to the 
state of the world in which the statute takes effect without 
implementing regulations. 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 new initial 
interest rate adjustment notice and the periodic statement disclosure 
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 Bureau has discretion in future 
rulemakings to choose the most appropriate baseline for that particular 
rulemaking.
    The provisions of the final rule regarding prompt crediting of 
payments and response to requests for payoff amounts also implement 
self-effectuating amendments to TILA and the benefits, costs, and 
impacts of these provisions are also considered against a pre-statutory 
baseline. However, these amendments to TILA largely codify existing 
Regulation Z provisions in Sec.  1026.36(c). Thus, the pre-statute and 
post-statute baselines are substantially the same. The final rule 
largely clarifies servicer \145\ duties that are ambiguous under the 
statute and existing regulations.
---------------------------------------------------------------------------

    \145\ Reference in parts VII, VIII, and IX to ``servicers'' with 
regard to the final rule for requests for payoff amounts means 
creditors, assignees, and servicers.
---------------------------------------------------------------------------

    Finally, the provisions regarding the Sec.  1026.20(c) disclosure 
for adjustable-rate mortgages impose obligations on servicers \146\ 
that are authorized, but not required, under TILA sections 105(a) and 
128(f) and Dodd-Frank Act section 1405(b). Accordingly, with respect to 
Sec.  1026.20(c), the Bureau considers the benefits, costs, and impacts 
of the provisions against the baseline provided by the current 
provisions of Sec.  1026.20(c).
---------------------------------------------------------------------------

    \146\ Reference in parts VII, VIII, and IX to ``servicers'' with 
regard to the final rules for adjustable-rate mortgages means 
creditors, assignees, and servicers.
---------------------------------------------------------------------------

E. Coverage of the Final Rule

    Each provision covers certain consumer credit transactions secured 
by a dwelling, as described further in each section below.
Size of the Small Servicer Exemption
    As discussed above, the Bureau believes that servicers that service 
relatively few loans, all of which they either originated or hold on 
portfolio, generally have incentives to service well: Foregoing the 
returns to scale of a large servicing portfolio indicates that the 
servicer chooses not to profit from volume, and owning or having 
originated all of the loans serviced indicates a stake in either the 
performance of the loan or in an ongoing relationship with the 
borrower. The vast majority of smaller servicers are community banks 
and credit unions, which tend to operate in narrowly defined geographic 
areas, depend deeply on the economies of these communities for their 
profitability, offer a range of products and services in both deposits 
and loans, are known for a ``relationship'' model that depends on 
repeat business to obtain more deposits and extend more loans, and 
could suffer significant harm to the business from any major failure to 
treat customers properly because they are particularly vulnerable to 
``word of mouth.'' These small servicers generally maintain ``high-
touch,'' customer-centric customer service models. They also generally 
service only loans they either originated or hold on portfolio.
    Where small servicers already have incentives to provide high 
levels of customer contact and information, the Bureau believes that 
the circumstances warrant exempting those servicers from complying with 
certain provisions. For community banks and credit unions in 
particular, affirmative communications with consumers help them (and 
their affiliates) to ensure loan performance, market other consumer 
financial products and services to the customers for whom they service 
mortgages and have a relationship, and protect their reputations in 
their local communities.\147\ Because these servicers generally have a 
long-term relationship with their customers, their incentives with 
regard to charging fees and other servicing practices tend to be more 
aligned with consumer interests. At the same time, consumers generally 
have easy access to these small community-based servicers to obtain any 
information they desire.
---------------------------------------------------------------------------

    \147\ See Pinto Paper, at 8.
---------------------------------------------------------------------------

    The Bureau believes that these two conditions are necessary to 
warrant a possible exemption from a provision of the rule--that is, 
that an exemption may be appropriate only for servicers that service a 
relatively small number of loans and either own or originated the loans 
they service. 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, compliance is likely 
to be somewhat easier to accomplish. Further, larger servicers also 
generally operate in a larger number of communities under circumstances 
in which the ``high touch'' model of customer service is not practical 
or service many loans in which they do not have as much a stake in the 
long-term performance.
    In order to implement the small servicer exemption, the Bureau 
defines a small servicer to be any servicer that, together with any 
affiliates, services 5,000 or fewer mortgages loans, all of which the 
servicer or affiliates

[[Page 10981]]

originated or own.\148\ The definition incorporates the requirement 
that the servicer or affiliates originated or own the loans because, as 
explained above, the Bureau believes that this is a key indicator of 
servicers that generally have incentives to provide high levels of 
customer contact and information. To develop the loan count threshold, 
the Bureau computed loan counts for insured depository institutions 
using data on aggregate unpaid principal balance and a measure the 
Bureau derived for the average loan unpaid principal balance at insured 
depositories.\149\ The Bureau's methodology takes into account the fact 
that servicers that service smaller numbers of loans also tend to 
service loans with smaller unpaid principal balances. For example, the 
Bureau finds that the average unpaid principal balance on mortgage 
loans at insured depositories and credit unions is about $160,000, but 
it is only about $80,000 at insured depositories and credit unions with 
under $1 billion in assets.
---------------------------------------------------------------------------

    \148\ The 5,000-loan threshold reflects the purposes of the 
exemption that the rule establishes for these servicers and the 
structure of the mortgage servicing industry. The Bureau's choice of 
5,000 in loans serviced for purposes of Regulation Z does not imply 
that a threshold of that type or of that magnitude would be an 
appropriate way to distinguish small firms for other purposes or in 
other industries.
    \149\ Credit Unions report the number and aggregate balance of 
mortgages held in portfolio on their Call Report. Using these 
reports the Bureau calculated the average unpaid principal balance 
of portfolio mortgages by State for credit unions with less than $1 
billion in assets and applied the State specific figures to banks 
and thrifts under $10 billion in assets. For banks and thrifts with 
over $10 billion in assets, the Bureau relied on the OCC Mortgage 
Metrics Report, which showed an average unpaid principal balance 
estimate of $175,000. For securitized loans, the Bureau relied on 
the FHFA's Home Loan Performance database, which provides data by 
size of securitized loan book; this yielded average unpaid principal 
balances ranging from $141,000 to $189,000.
---------------------------------------------------------------------------

    The Bureau believes that the 5,000 mortgage loan threshold further 
identifies the group of servicers that make loans only or largely in 
their local communities or more generally have incentives to provide 
high levels of customer contact and information. The Bureau also 
believes, in light of the available data, that no other threshold is 
superior in balancing potential over-inclusion and under-inclusion. 
With the threshold set at 5,000 loans, the Bureau estimates that over 
98% of insured depositories and credit unions with under $2 billion in 
assets fall beneath the threshold. In contrast, only 29% of such 
institutions with over $2 billion in assets fall beneath the threshold 
and only 11% of such institutions with over $10 billion in assets do 
so. Further, over 99.5% of insured depositories and credit unions that 
meet the traditional threshold for a community bank--$1 billion in 
assets--fall beneath the threshold.\150\ The Bureau estimates there are 
about 60 million closed-end mortgage loans overall, with about 5.7 
million serviced by insured depositories and credit unions that qualify 
for the exemption.\151\
---------------------------------------------------------------------------

    \150\ The Bureau notes, however, that the FDIC recently released 
a new set of empirical criteria for identifying community banks in 
which some banks with under $1 billion in assets are excluded and 
some banks with over $1 billion in assets are included. See Fed. 
Deposit Ins. Corp., FDIC Community Banking Study, at 1-5 (Dec. 
2012), available at http://www.fdic.gov/regulations/resources/cbi/study.html. The study is somewhat critical of using a $1 billion 
threshold to define community banks, as has been traditional. The 
Bureau's rule equates roughly to a $2 billion threshold to the 
extent that the rule covers 98% of insured depositories and credit 
unions with fewer assets.
    \151\ To obtain estimates of loan counts, the Bureau aggregated 
mortgage loan counts obtained or derived from the FHFA ``Home Loan 
Performance'' data described above, the Board's Flow of Funds 
Accounts of the United States (statistical release z.1), the data 
from the credit union Call Report and the bank and thrift Call 
Report, the CoreLogic mortgage loan servicing data set, and the BBx 
data set from BlackBox Logic.
---------------------------------------------------------------------------

    The Bureau believes that the insured depositories and credit unions 
that fall below the 5,000 loan threshold consist overwhelmingly of 
entities that make loans in their local communities and have incentives 
to provide high levels of customer contact and information. Further, 
while some such entities may service more than 5,000 loans, the Bureau 
believes that relatively few do, so expanding the loan count above 
5,000 is more likely to include entities that use a different servicing 
model. If the loan count threshold were set at 10,000 mortgage loans, 
for example, over 99.5% of insured depositories and credit unions with 
under $2 billion in assets would fall beneath the threshold. However, 
50% of insured depositories with over $2 billion in assets and 20% of 
those with over $10 billion in assets would fall beneath the threshold. 
The Bureau recognizes that some of these servicers may not qualify as 
small servicers because some may not own or have originated all of the 
loans they service. However, the Bureau believes that these figures 
give a fair representation of the types of servicers that would qualify 
as small servicers given the respective thresholds.\152\
---------------------------------------------------------------------------

    \152\ The Bureau believes that almost all insured depositories 
and credit unions that service 5,000 or fewer loans own or 
originated those loans. Entities servicing loans they did not 
originate and do not own most likely view servicing as a stand-alone 
line of business, and they would choose to service substantially 
more than 5,000 loans in order to obtain a profitable return on 
their investment in servicing. To the extent the assumption does not 
hold, it is more likely not to hold for insured depositories and 
credit unions servicing more than 5,000 loans.
---------------------------------------------------------------------------

    The Bureau concludes that the 5,000 mortgage loan threshold, 
coupled with the requirement to service only loans owned or originated, 
provides a reasonable balance between the goal of including a 
substantial number of servicers that make loans only or largely in 
their local communities or more generally have incentives to provide 
high levels of customer contact and information and excluding servicers 
that use a different, less personal business model. The Bureau further 
believes that it is appropriate for a definition of small servicers, 
for purposes of an exemption to servicing rules, to include conditions 
specifically associated with the incentives and business model of 
servicers, such as owning or originating all loans. There is no perfect 
way, however, to identify servicers that have chosen a business model 
in which an essential component is providing high levels of customer 
contact and information.\153\
---------------------------------------------------------------------------

    \153\ The Bureau received comments from two credit unions 
recommending a 5,000 mortgage loan threshold. Two bank trade 
associations recommended a 10,000 loan threshold, one bank 
recommended 15,000, and the Small Business Administration 
recommended 5,000 to 10,000. One bank trade association recommended 
that a small servicer should be either any servicer that services 
only loans that it owns or originated, without limit, or any 
servicer that services 10,000 loans or fewer. For the reasons 
described above, the Bureau believes that the 5,000 loan count 
threshold coupled with the requirement that the servicer owns or 
originated the loans provide an appropriate definition of small 
servicer for purposes of the exemption.
---------------------------------------------------------------------------

    Finally, the Bureau estimates that there are about 13.9 million 
closed-end mortgage loans serviced by non-depositories. The data is not 
available with which to accurately estimate the number of exempt non-
depository servicers or the number of loans they service. However, the 
Bureau believes that the number of loans serviced is a small percentage 
of this total given the financial advantages of servicing large numbers 
of loans. The Bureau has therefore decided not to distinguish, in the 
definition of a small servicer, whether a mortgage servicer is an 
insured depository or credit union or has some other business form.
Size of the Small Servicer Exemption in the Proposed Rule
    The Bureau proposed 1,000 mortgage loans for the threshold in the 
definition of a small servicer. At the time of the proposal, the Bureau 
understood that a significant number of servicers that maintained 
``high touch'' customer service models would have qualified for

[[Page 10982]]

the proposed exemption. This understanding was based in part on 
estimates of the number of loans serviced by banks, thrifts and credit 
unions derived from data on the aggregate unpaid principal balance in 
Call Reports and an assumed average unpaid principal balance on 
mortgage loans of $175,000.\154\
---------------------------------------------------------------------------

    \154\ This is the average unpaid principal balance for first-
lien residential mortgages at the largest national banks, which at 
the time of the report accounted for 63 percent of all outstanding 
mortgages; See Office of the Comptroller of the Currency, OCC 
Mortgage Metrics Report, Second Quarter 2011 (Sept. 2011) (``OCC 
Mortgage Metrics Report''), available at http://www.occ.treas.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/mortgage-metrics-q2-2011.pdf.
---------------------------------------------------------------------------

    A number of industry commenters provided information about the 
unpaid principal balance on mortgage loans at their institutions and 
indicated that the average unpaid principal balance was much smaller. 
One commenter stated that the principal balance on its loans at 
origination was less than half the Bureau's figure; for 2011 
originations the principal balance was $81,600. Another commenter 
stated that its average loan amount was about $56,000 and that the 
average mortgage in the State of Oklahoma mid-2012 was about $106,000. 
Yet another commenter stated that the median size of the loans on its 
portfolio was about $70,000. One commenter stated that the Bureau's 
approach penalized servicers that specialize in moderately priced 
homes. The Bureau seriously considered these comments. In response, the 
Bureau developed the methodology described above to estimate the number 
of loans serviced by insured depositories and credit unions.

F. Potential Benefits and Costs to Consumers and Covered Persons

1. 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), a notice of interest rate 
adjustment for variable-rate transactions subject to Sec.  1026.19(b) 
must be mailed or delivered to consumers whose payments will change as 
a result of an interest rate adjustment 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 final rule eliminates the annual disclosure. Thus, the 
discussion below relates exclusively to the payment change disclosure 
required under Sec.  1026.20(c).\155\ The final rule also changes the 
minimum time for providing advance notice to consumers from 25 days to 
60 days before the first payment at a new level is due, with an 
accommodation for ARMs with look-back periods of less than 45 days 
originated before January 10, 2015. The maximum time for advance notice 
remains the same: 120 days prior to the due date of the first payment 
at a new level. The revised Sec.  1026.20(c) disclosure also contains 
additional content, as described in part V. The format and content of 
the revised Sec.  1026.20(c) disclosure closely tracks the format and 
content of the initial interest rate adjustment disclosure under Sec.  
1026.20(d), discussed below.
---------------------------------------------------------------------------

    \155\ As discussed in part V, the Bureau believes that the 
annual notice is duplicative given that the periodic statement 
required by Sec.  1026.41 provides much of the same information. 
Thus, eliminating the annual notice reduces costs for servicers with 
little or no loss in benefits to consumers.
---------------------------------------------------------------------------

    Potential 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 
the first payment at a new level is due would more closely reflects the 
time needed for consumers to refinance a loan.\156\
---------------------------------------------------------------------------

    \156\ A comment on timing is discussed below under costs to 
consumers.
---------------------------------------------------------------------------

    The benefits to consumers from the content of the revised Sec.  
1026.20(c) disclosure are measured against a baseline provided by the 
current Sec.  1026.20(c) disclosure. Thus, the benefits of the rule 
flow entirely from changes to the disclosure; for the sake of clarity, 
however, the discussion mentions certain key features of the disclosure 
that are unchanged. For qualitative analysis, the revisions to the 
Sec.  1026.20(c) disclosure may be broadly categorized as facilitating 
(a) the choice of an alternative to making the new payment, including 
refinancing; (b) the budgeting of household resources; and (c) 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 benefits of 
these disclosures are discussed further in part V.
    The current and revised Sec.  1026.20(c) disclosures both provide 
the current and upcoming interest rate and payment (not an estimate) 
and the date the first payment at the new rate is due. This may alert 
the consumer to a problem with affordability and the need to assess 
alternatives. However, only the revised disclosure provides notice of a 
prepayment penalty and explains the circumstances under which any 
prepayment penalty may be imposed. This notice may be useful to some 
consumers facing a problem with affordability and needing to assess 
alternatives. For example, the notice may prompt a consumer who is 
unclear about whether a penalty is still in effect to contact her 
servicer; a consumer must know if a penalty exists and (if so) the 
amount to properly assess alternatives that require paying off the 
existing loan.
    In addition, the disclosure of the persistent features of the loan 
facilitates consumer evaluation of the longer-term benefits of the loan 
compared to alternatives. For instance, the revised disclosure includes 
an explanation of how the new interest rate and payment are determined, 
including the index or formula used and any adjustment to the index 
such as any margin added. The revised disclosure also states any limits 
on the interest rate or payment increase at each adjustment and over 
the life of the loan and the earliest date at which any foregone 
interest increase could be applied. In contrast, the current Sec.  
1026.20(c) disclosure provides only the index value without any 
explanation and does not provide information about limits on interest 
rate or payment increases. The additional information facilitates 
comparisons with alternative loans and any reevaluation of the 
consumer's housing finance decisions and comparisons with alternative 
financing options. All of this information is also useful to consumers 
for the budgeting of household resources.
    The revised Sec.  1026.20(c) disclosure provides additional 
information to consumers with interest-only or negatively-amortizing 
loans that addresses the accumulation of equity. For these loans, the 
revised disclosure states the amount of the current and new payment 
allocated to pay principal, interest, and taxes and insurance in 
escrow, as applicable, and information on how these payments will 
affect the balance of the loan. 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

[[Page 10983]]

rate. The 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 discussed in part V, 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.\157\ In particular, the periodic statement will provide consumers 
with some of the same information as that in the revised Sec.  
1026.20(c) disclosure. However, the differences in the timing of the 
two disclosures makes the periodic statement less useful than the 
revised Sec.  1026.20(c) disclosure for facilitating comparisons 
between the current and new payment before the new payment is due. 
Similarly, while the periodic statement presents the new payment due 
and the amount paid the previous month, it does not compare the two as 
explicitly as the revised Sec.  1026.20(c) disclosure does. Finally, 
since the revised Sec.  1026.20(c) disclosure is provided only if the 
payment changes, the benefit to consumers from receiving important 
information on both disclosures is likely greater than the benefit of 
receiving this information only on the periodic statement 
disclosure.\158\
---------------------------------------------------------------------------

    \157\ The Bureau received comments from industry that also made 
this point.
    \158\ Of course, a consumer who receives the prescribed Sec.  
1026.20(c) disclosure may derive little additional benefit from 
shortly thereafter receiving some of the same information on the 
periodic statement disclosure. There would, however, likely be 
little cost saving for servicers in not having to provide the 
information on the periodic statement disclosure that also appears 
on the Sec.  1026.20(c) disclosure for just one or two months.
---------------------------------------------------------------------------

    The Bureau is also prescribing formatting requirements for the 
Sec.  1026.20(c) disclosure. As discussed above, these requirements 
benefit consumers by facilitating consumer understanding of the 
information in the disclosures. The final 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 model forms provided with the final rule. The Bureau's testing 
of certain information in the Sec.  1026.20(d) notice (that is the same 
as certain information in the Sec.  1026.20(c) notice) showed that the 
participants readily understood the information in the notice when the 
terms and calculations were presented in the logical order contained in 
the model forms. While there is no formula for producing the ideal 
disclosure, the Bureau believes that disclosures that satisfy the 
prescribed formatting requirements likely provide greater benefits to 
consumers than disclosures that do not satisfy these requirements. The 
Bureau also believes that there is some consumer benefit in harmonizing 
the Sec.  1026.20(c) and (d) notices, so they present similar 
information in a similar format.\159\
---------------------------------------------------------------------------

    \159\ 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, Fed. Reserve 
Bull., Aug. 2011, at 1 (``Hogarth & Merry'').
---------------------------------------------------------------------------

    Although the Bureau does not have the data necessary to quantify 
the consumer benefits of the revisions to the Sec.  1026.20(c) 
disclosure required by the rule, the following hypothetical illustrates 
how consumers are likely to benefit from the disclosures.\160\ The 
Bureau estimates that approximately 650,000 adjustable-rate mortgages 
may have an interest rate adjustment in each of the next three years. 
Suppose that just 5 percent of the consumers with these mortgages are 
sent the disclosure (this occurs only if the payment adjusts) and, 
because of the change in the timing from 25 days to 60 days before the 
first payment at a new level is due, refinance one month sooner. If 
these consumers reduce their monthly payment by $50, then the annual 
savings to consumers would be over $1.6 million or about $2.50 per 
disclosure.\161\
---------------------------------------------------------------------------

    \160\ One commenter suggested that the Bureau conduct a 
``breakeven'' analysis, referring to OMB's Circular A-4 guidance 
that it issued in connection with Executive Order 12866. Section 
1022(b)(2)(A) requires the Bureau to consider the potential benefits 
and costs to consumers and covered persons. By its terms, section 
1022(b)(2)(A) does not require the Bureau to quantify the benefits 
and costs of the rule; limit its consideration to quantifiable 
benefits and costs; or determine whether the benefits outweigh the 
costs. Rather, the Bureau is required to ``consider'' the benefits 
and costs of the rule. The Bureau believes that there are multiple 
reasonable approaches for conducting the consideration called for by 
Dodd-Frank Act section 1022(b)(2)(A) and that the approach it has 
taken in this analysis is reasonable and that, particularly in light 
of the difficulties of reliably estimating certain benefits and 
costs and the Bureau's resource constraints, it has discretion to 
decline to undertake additional or different forms of analysis.
    \161\ Although the reduction in monthly payment would last for 
more than one month, the benefit attributable to the change in 
timing of the disclosure would be the one month of savings.
---------------------------------------------------------------------------

    The Bureau received comments that questioned the benefits to 
consumers of the proposed changes to the Sec.  1026.20(c) notice both 
broadly and in respect to particular changes. The Bureau disagrees with 
these assessments of the value of the modifications to the Sec.  
1026.20(c) notice. The belief that the current notice is adequate may 
be based on the fact (explained above) that consumers cannot provide 
the standard market signal that a servicer is inadequate, i.e., finding 
another service provider. Since servicers receive minimal consequential 
feedback from consumers about the quality of servicing disclosures, 
they have little incentive to incur the costs of researching and 
discovering the information consumers want in the payment adjustment 
notice and the ways to present this information that consumers find 
most useful. The Bureau disagrees with the assertion that the Bureau 
failed to cite any research supporting the proposed revisions of the 
Sec.  1026.20(c) notice. On the contrary, the proposal noted that the 
Bureau worked closely with ICF Macro (Macro) to develop the closely 
related Sec.  1026.20(d) model disclosure, conducted three rounds of 
consumer testing, and revised the disclosure on the basis of the test 
results. Based on this anecdotal evidence and the Bureau's own judgment 
and expertise about the marketplace and consumer needs and behavior, 
the Bureau believes that the benefits to the vast majority of consumers 
from national servicing standards for disclosures provided by the rule 
are substantial.
    The Bureau did receive five comments from industry referring to 
efforts by servicers to improve consumer disclosures. One commenter 
discussed its general commitment to provide customers with clear, 
simple information about their loans. Another discussed a successful 
effort to improve its interest rate adjustment disclosure in an effort 
to increase consumer awareness, improve loss mitigation, and facilitate 
early interventions where delinquency could be caused by a payment 
increase. This commenter said it provided simple, low-tech forms but 
with a longer notice period and achieved significant results and 
response rates. One commenter from a credit union described an effort 
to provide earlier rate adjustment disclosures to members so they would 
have more time to make decisions about obtaining a new loan or 
continuing with their current one. The initial attempt at this 
enhancement was difficult and the commenter had to add a staff member 
to manage the project, but after some adjustments to the timing of the 
disclosures the enhancement seems to have been successful. A fourth 
industry

[[Page 10984]]

commenter requested permission to continue to use its ``consumer-tested 
and appreciated'' periodic billing statement. A fifth industry 
commenter argued against including delinquency information in the 
periodic statement since, in the commenter's experience, this 
information was more effective in collection letters.
    The Bureau recognizes that certain servicers have experimented with 
improving their disclosures. However, this work does not appear to be 
widespread; as noted, the Bureau received only a small number of 
comments about efforts to improve disclosures. The Bureau recognizes 
that servicers have an incentive to keep collection costs low and 
therefor to make sure consumers know the payment due in each period, 
the date the payment is due, and where to send it. Servicers also have 
some incentive to limit customer inquiries, and they may therefore 
provide some additional information that consumers want. Some consumers 
receive disclosures, however, given the market failure described above, 
the Bureau does not believe that the aforementioned incentives are 
sufficient to generate better disclosures that would benefit consumers.
    Potential costs to consumers. As explained further in the 
discussion of costs to covered persons, the cost to covered persons is 
expected to be about 83 cents per disclosure. This estimate takes into 
account both one-time additional costs (amortized over five years) and 
additional annual production and distribution costs.\162\
---------------------------------------------------------------------------

    \162\ 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. The Bureau is 
using five years because Section 1022(d) of the Dodd-Frank Act 
provides that the Bureau shall assess significant rules adopted by 
the Bureau within five years of the effective date of the rule.
---------------------------------------------------------------------------

    Given the small additional cost per disclosure, the Bureau believes 
that this cost will not be passed on to consumers in the form of 
increased fees or charges. Servicers may in general attempt to shift a 
cost increase onto others, such as creditors, who may in turn attempt 
to pass on such costs to consumers, so consumers may ultimately bear 
part of a cost increase that falls nominally on servicers. For the 
prescribed Sec.  1026.20(c) disclosure, however, the costs to be 
shifted are very small. Thus, the disclosure is not likely to cause any 
material cost increase on consumers.
    An industry association commented that the change in the timing of 
the ARM disclosure would increase the pricing of ARMs. As one industry 
commenter explained, committing earlier to an interest rate to provide 
consumers with earlier notice of the new rate and payment would 
increase interest rate risk. While the Bureau agrees with this point in 
general, the Bureau disagrees with the relevance of the point in this 
instance. First, as discussed in part V, the Bureau believes that the 
majority of ARMs already commit to an interest rate early enough to 
provide consumers with the earlier notice.\163\ Thus, the requirement 
for earlier notice would not, in fact, require an earlier commitment to 
the interest rate for the majority of ARMs. Second, as also discussed 
in part V, the Bureau believes it is unlikely that, for the minority of 
ARM products with a look-back period of less than 45 days, the 
adjustment to a slightly longer look-back period will meaningfully 
impact the manner in which the product is priced. The slight increase 
in the period is not a sufficiently long enough time for a material 
change in interest rates except in the most unusual circumstances.
---------------------------------------------------------------------------

    \163\ Any ARM with a 45 day (or longer) look-back period could 
comply with the requirement to provide earlier notice. In 2011, 
approximately 10% of new home-purchase loans were ARMs and most had 
loan contracts with 45-day look-back periods. Approximately 88% of 
the ARMs guaranteed by Fannie Mae and Freddie Mac have 45-day look-
back periods.
---------------------------------------------------------------------------

    As noted above, the final rule adds commentary to explain that 
servicers have the flexibility to modify the disclosures to accommodate 
certain situations and consumer credit transactions not addressed by 
the model forms. Still, servicers must present the required information 
in a format substantially similar to the format of the prescribed 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 these costs are substantial. As 
discussed above, very few commenters described efforts to test and 
develop superior disclosures. Nor does the Bureau believe that 
servicers' current disclosures generally are superior to the prescribed 
disclosure, and the Bureau is unaware of general efforts by servicers 
to develop interest rate adjustment notices that provide the benefits 
to consumers of the prescribed model forms. The Bureau worked closely 
with Macro to develop the closely related Sec.  1026.20(d) model 
disclosure, conducted three rounds of consumer testing, and revised the 
disclosure on the basis of the test results. Based on this anecdotal 
information, the comment letters, and the Bureau's own expertise in 
disclosure and consumer behavior, the Bureau believes that the risk of 
precluding servicers from using disclosures that might provide greater 
benefits to their customers is relatively small.
    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. Servicers that 
handle such ARMs contractually will not be able to comply with the 
requirement to provide the Sec.  1026.20(c) disclosure between 60 and 
120 days before the first payment at a new level is due. Accordingly, 
the Bureau is grandfathering these existing ARMs, if originated before 
January 10, 2015. Going forward, however, ARMs must be structured to 
permit compliance with the prescribed 60- to 120-day timeframe.
    It is possible that ARMs with look-back periods shorter than 45 
days may have certain cost advantages to servicers or investors in 
certain interest rate environments (e.g., when rates are rising 
quickly). In such environments, competition among servicers for 
servicing rights may translate the cost advantage into a benefit to 
originators and consumers; and, in that event, the required 60- to 120-
day timeframe may impose a cost on consumers by making mortgages with 
such shorter look-back periods unavailable. The Bureau believes that 
because very few consumers have such ARMs, very few consumers would 
experience such costs.
    Potential benefits to covered persons. The Bureau has carefully 
considered whether there are any significant benefits to covered 
persons from this provision. The Bureau has determined that there are 
not.
    Potential costs to covered persons. The modifications to the Sec.  
1026.20(c) disclosure will result in certain compliance costs to 
covered persons. Based on discussions with servicers and software 
vendors, the Bureau believes that, in general, servicers of all sizes 
will incur minimal one-time costs to learn about the final rule. They 
will generally use vendors for one-time software and IT upgrades and 
for producing the disclosure. The revised disclosure provides to 
consumers 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

[[Page 10985]]

information is stored in a database that is not regularly accessed by 
systems that produce the current disclosures.
    The Bureau believes that under existing vendor contracts, large- 
and medium-sized servicers may not be charged for the upgrades but will 
be charged for producing and then distributing (i.e., mailing or 
electronically providing) the disclosure. Vendors will likely pass 
along all of these costs to small servicers.\164\ However, when most 
servicers simultaneously need an upgrade, the one-time cost is 
mitigated by the fact that the costs of a single vendor may be spread 
among a large number of servicers.\165\
---------------------------------------------------------------------------

    \164\ In discussions such as this of costs to covered persons, 
``small servicers'' are servicers that meet the size standard for 
that business established by the Small Business Administration. 
Banks, thrifts, and credit unions that service mortgage loans must 
have $175 million or less in assets and other servicers must have $7 
million or less in average annual receipts.
    \165\ This analysis considers the benefits, costs, and impacts 
of disclosures assuming that all servicers use vendors for this 
purpose. The Bureau believes that virtually all servicers, 
regardless of size, use vendors for disclosures.
---------------------------------------------------------------------------

    Extrapolating from FHFA data, the Bureau estimates that 
approximately 639,000 adjustable-rate mortgages will have an interest 
rate adjustment in each of the next three years.\166\ Consumers with 
these mortgages will receive the revised Sec.  1026.20(c) disclosure, 
however, only if the interest rate and payment adjusts; thus, this 
figure is most likely an overestimate of the number of consumers that 
would receive the revised Sec.  1026.20(c). The Bureau believes there 
are essentially no distribution costs attributable to the rule. In the 
absence of the rule, servicers would nonetheless be required to provide 
the current Sec.  1026.20(c) payment change disclosure, and the current 
and revised payment change disclosures have essentially the same number 
of recipients.\167\ The remaining annual costs attributable to the rule 
are production costs associated with the additional content and 
formatting. Based on discussions with industry, the Bureau believes the 
annual production costs passed along to servicers would be about 
$128,000 (20 cents production cost per disclosure). Finally, based on 
discussions with industry and extrapolating from FHFA data, the Bureau 
estimates the one-time cost of modifying the existing Sec.  1026.20(c) 
disclosure for all 12,600 servicers to be about $2 million.\168\ 
Amortizing the one-time cost over five years and combining it with the 
annual cost gives an aggregate annual cost of about $528,000.\169\ 
Thus, the cost of the modifications is $42 annually per servicer or 83 
cents per disclosure.
---------------------------------------------------------------------------

    \166\ For these estimates, the Bureau used the Home Loan 
Performance data from the FHFA. Home Loan Performance is a 
supervisory loan-level database of all guaranteed Fannie Mae and 
Freddie Mac mortgages. It includes characteristics of the loans at 
origination and then a quarterly time-series of performance 
throughout the life of the loan.
    \167\ Furthermore, by eliminating the annual Sec.  1026.20(c) 
disclosure, the rule reduces certain production and distribution 
costs relative to the baseline.
    \168\ The Bureau makes the following assumptions, based on 
discussions with industry. All 12,600 servicers familiarize 
themselves with the rule for a total one-time cost of $750,000. 
Approximately 8,000 small servicers (i.e., servicers that meet the 
Small Business Administration size standard) use 100 vendors, each 
of which spends 80 hours to revise the existing disclosure and 
another 80 hours validating it, all at $72 per hour. This gives an 
additional one-time cost of $1 million. Thirty-one very large 
servicers perform these tasks in-house, for an additional one-time 
cost of $250,000. This gives total one-time costs of $2 million. The 
remaining servicers have contracts with vendors under which the 
vendor absorbs all one-time costs of a disclosure mandated by 
regulation.
    \169\ $528,000 = ($2,000,000/5) + $128,000.
---------------------------------------------------------------------------

    Of the $2 million just described, about $1.65 million is the one-
time costs for small servicers of revising the existing disclosure. 
Amortizing this cost over five years requires a payment of $41 by each 
small servicer in each of five years. The Bureau is not aware of any 
representative and reasonably obtainable data on the prevalence of ARMs 
in the loan portfolios of small servicers, so it is not possible to 
estimate the number of disclosures that small servicers would produce 
each year. Thus, it is not possible to quantify the total annual cost 
of the modifications specifically for small servicers.
    The Bureau has taken a number of additional steps to mitigate the 
costs to covered persons, including: Exempting certain types of loans 
where appropriate, such as ARMs with terms of one year or less; 
eliminating the requirement that an annual notice be sent when there is 
no change in rate and payment; and grandfathering loans with a look-
back period of less than 45 days originated prior to January 10, 2015; 
and requiring disclosure of the existence of a prepayment penalty 
rather than the amount of any prepayment penalty. See the section-by-
section analysis for Sec.  1026.20(c).
    One industry association commenter quoted a similar but less 
detailed analysis in the proposed rule and stated that the Bureau did 
not adequately identify the types of costs or the amount of those costs 
that servicers will incur. In response, the Bureau has provided the 
additional detail above.
    This commenter also provided a description of the types of costs 
that bank servicers would incur, ``as part of engaging vendors for * * 
* technology-related projects.'' \170\ According to the commenter, a 
servicer undertaking this activity would incur costs for project 
identification and planning, vendor selection and due diligence, 
customized programming, adjustments prior to launch, and costs for new 
hardware and software. The commenter provided the example of a 
community bank that was changing its vendor-provided loan processing 
software.
---------------------------------------------------------------------------

    \170\ U.S. Consumer Fin. Prot. Bureau, Doc ID No. 0151, Public 
Comment Submission on CFPB-2012-0033, at 9 (Oct. 9, 2012) (comment 
from Robert Davis, Exec. VP, American Bankers Association).
---------------------------------------------------------------------------

    While the Bureau appreciates the commenter's detailed analysis of 
the one-time costs associated with engaging vendors for technology-
related projects, the Bureau does not believe that the revisions to the 
Sec.  1026.20(c) payment change disclosure qualify as a technology-
related project on the scale described by the commenter. For servicers 
that use vendors, changes to an existing disclosure will require 
software updates from the existing vendor and some monitoring by the 
servicer. In contrast, the commenter appears to describe the selection 
of a vendor to produce an entirely new loan processing system. While 
the loan processing system must communicate accurately with the 
servicing system, the discussion and example have no direct connection 
to the costs that would be incurred by a servicer from implementing the 
revised Sec.  1026.20(c) disclosures. The commenter informed the Bureau 
that the vendor that produces the disclosures for the community bank in 
the example (i.e., the core provider) is different from the one 
providing the loan processing system which further indicates that these 
two activities are quite distinct.
    Only two comments provided specific estimates for costs associated 
with revising the Sec.  1026.20(c) disclosure. One credit union 
commented that it expects this disclosure to cause an additional annual 
expense of over $75,000. One industry association referenced a $1 
million upfront cost estimate included in a comment by two unidentified 
large servicers on an earlier proposal by the Board. However, neither 
commenter provided additional information necessary for interpreting 
these figures, determining whether they are consistent with the 
Bureau's cost analysis, or using them in that analysis. Such additional 
information would include the number of ARMs serviced, how frequently 
the payments are likely to adjust, and

[[Page 10986]]

whether the servicer uses vendors or does all work in-house.
    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. 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 receives a benefit. On the other hand, if a consumer refinances 
from an adjustable-rate mortgage to a 15-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 consumers (or investors) if the notice helps 
consumers avoid delinquency.
    Finally, some of the information provided in the revised Sec.  
1026.20(c) disclosure is also provided in the initial interest rate 
adjustment disclosure discussed below. The Bureau believes that 
harmonizing the two disclosures mitigates these compliance burdens for 
servicers and reduces the aggregate production costs to servicers.
2. New Initial Interest Rate Adjustment Notice for Adjustable-Rate 
Mortgages
    Dodd-Frank Act section 1418 requires servicers and creditors to 
provide a new, one-time disclosure to consumers who have hybrid ARMs. 
The disclosure concerns the initial interest rate adjustment and, 
unlike the disclosure in Sec.  1026.20(c), is not provided for interest 
rate adjustments after the first adjustment. The Dodd-Frank Act section 
1418 disclosure 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 savings clause in TILA 
section 128A(c) confers authority on the Bureau to extend the notice 
requirement to non-hybrid ARMs in addition to hybrid ARMs.
    The final rule implements this provision by requiring that the 
disclosure be provided 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, is broadening the scope of the final rule, as 
proposed, to include ARMs that are not hybrid. The disclosure includes 
the content required by the statute, with modification to the housing 
counselor and state housing finance authority information. The 
disclosure includes certain additional information not required by the 
statute, including notice of the existence of any prepayment penalty 
(but not the amount). Finally, as explained above, the Bureau conducted 
three rounds of consumer testing on these disclosures. The disclosure 
forms were revised after each round of testing to improve their 
effectiveness with consumers.
    Potential benefits to consumers. Decades of research shows that 
consumers make important decisions about housing finance at the initial 
interest rate adjustment. Consumers often choose to prepay at or before 
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.\171\
---------------------------------------------------------------------------

    \171\ 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 (Fed. Reserve Bd., 
Staff Working Paper 2006-63, 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. One published analysis 
of data from the 2000s does not find a causal relationship between 
payment shock at the initial interest rate adjustment and default.\172\ 
However, for consumers with certain hybrid ARMs originated in the 
2000s, a substantial number experienced an increase in monthly payment 
of at least 5 percent 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.\173\
---------------------------------------------------------------------------

    \172\ Christopher Mayer et al., The Rise in Mortgage Defaults, 
23 J. Econ. Persps. 27, 37 (2009) (``Mayer et al.'').
    \173\ Anthony Pennington-Cross & Giang Ho, The Termination of 
Subprime Hybrid and Fixed-Rate Mortgages, 38 Real Est. Econs. 399, 
420 (2010).
---------------------------------------------------------------------------

    The information in the interest rate adjustment notice would 
provide a number of benefits to consumers with closed-end adjustable-
rate mortgages. These benefits may be broadly categorized as 
facilitating (a) the choice of an alternative to making the new 
payment, including refinancing; (b) the budgeting of household 
resources; and (c) 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 final rule requires 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 gives consumers a 
significant amount of time in which to pursue alternatives to making 
payments 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 ARMs may benefit from disclosure of any 
potential new interest rate and payment (or estimates of these amounts) 
well before the first payment at the adjusted level 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.\174\ 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

[[Page 10987]]

to address a problem with affordability. Thus, consumers facing the 
initial interest rate adjustment may benefit from the notice through 
both the information it provides regarding the potentially new interest 
rate and payment and the additional time it provides consumers to 
adapt.
---------------------------------------------------------------------------

    \174\ See Mayer et al., at 37.
---------------------------------------------------------------------------

    A number of items on the disclosure may help the consumer who 
anticipates having problems making the new payment. In addition to 
information on the amount of the new payment, the disclosure lists 
alternatives to making the new payment and gives a brief explanation of 
each alternative. It discloses if a prepayment penalty applies, and if 
so provides information about when that prepayment penalty may be 
imposed. 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 where a consumer can access certain lists of homeownership 
counselors and SHFAs. All of this information benefits a consumer who 
anticipates having problems with making the new payment.
    Finally, certain items on the 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.\175\ The disclosure 
provides information about how these payments will affect the loan 
balance. 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 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.
---------------------------------------------------------------------------

    \175\ The current payment allocation would also appear on the 
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, Sec.  1026.20(d) includes 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 final 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 final 
rule. The Bureau's testing showed that the consumers who participated 
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 formatting requirements are generally 
informed by decades of consumer testing. Based on this anecdotal 
evidence and the Bureau's own judgment and expertise about the 
marketplace and consumer needs and behavior, the Bureau believes that 
disclosures that satisfy the formatting requirements likely provide 
greater benefits to consumers than disclosures that do not satisfy 
these requirements.\176\
---------------------------------------------------------------------------

    \176\ For a general discussion of disclosure formatting, 
disclosure testing, and consumer benefits, see Hogarth & Merry.
---------------------------------------------------------------------------

    The Bureau does not have the data necessary to quantify the 
benefits of the initial interest rate adjustment notice to consumers. 
Certain consumers with ARMs 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, 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 
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.
    Although the Bureau does not have the data necessary to quantify 
the consumer benefits of the initial interest rate adjustment notice, 
the following hypothetical illustrates how consumers are likely to 
benefit from the disclosures. The Bureau estimates that approximately 
280,000 adjustable-rate mortgages will have an initial interest rate 
adjustment in each of the next three years. If the new initial interest 
rate adjustment notice prompts just 1 percent of the consumers who 
receive the new notice to refinance six months earlier than they 
otherwise would, and they reduce their monthly mortgage payment by $50, 
then the annual savings to consumers would be over $1.6 million per 
year, or about $6 per disclosure.\177\ More generally, consumers may 
benefit whether interest rates are rising or falling if the consumer 
would qualify for a mortgage with better terms and the notice prompts 
the consumer to shop for one somewhat sooner; however, the benefits are 
more likely to occur when interest rates are rising since acting sooner 
would benefit the most consumers.
---------------------------------------------------------------------------

    \177\ Although the reduction in monthly payment would likely 
last for more than six months, the benefit unambiguously 
attributable to the disclosure would be the savings in each of six 
months.
---------------------------------------------------------------------------

    In response to the proposed rule, the Bureau received general 
comments asserting that existing interest rate adjustment disclosures 
are adequate, the new disclosures would provide no consumer benefits, 
or the new disclosures would produce fewer benefits than costs. One 
industry association commented that the existing system of interest 
rate adjustment disclosures provided ``substantial notice'' to 
consumers and no research referenced by the Bureau produced evidence 
that the present system needed improvement. Another industry 
association commenter similarly stated it was not aware of any 
deficiencies in the current ARM adjustment notices, and that the Bureau 
had not provided sufficient explanation that dictates specific 
information and formatting requirements. Others argued that, even if 
consumers with hybrid ARMs might benefit from the initial interest rate 
adjustment notice, consumers with non-hybrid ARMs would receive at most 
small benefits that did not justify the costs.
    The Bureau notes that the statute specifically requires an early 
notice of the initial interest rate adjustment. As discussed above, the 
earlier notice may benefit consumers over and above the benefit of the 
60 day notice because many consumers may be particularly unlikely to 
anticipate the very first payment adjustment. Two advance notices may 
catch the attention of more consumers than one.

[[Page 10988]]

    The Bureau did receive five comments from industry referring to 
efforts by servicers to improve consumer disclosures. These comments, 
which are relevant to both proposed Sec.  1026.20(c) and (d), and the 
Bureau's response, are discussed above in the section-by-section 
analysis of Sec.  1026.20(c).
    Potential costs to consumers. As explained further in the 
discussion of costs to covered persons, the cost to covered persons is 
expected to be about $2.67 cents per disclosure. This estimate takes 
into account both one-time additional costs (amortized over five years) 
and additional annual production and distribution costs.
    Given the moderate cost per disclosure and the fact it is given 
just once over the life of the loan, 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 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 that event, lenders 
or investors may bear some of the cost. Servicers may also attempt to 
obtain higher compensation for servicing from creditors. Creditors 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, 
but not necessarily all of the costs. The relative sensitivity of 
supply and demand in these interrelated markets would determine the 
proportion of the cost increase borne by different parties, including 
consumers.
    The final rule limits how servicers may present the required 
information in the initial interest rate adjustment notice. Servicers 
must present the required information in a format substantially similar 
to the format of the prescribed 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 these costs are substantial. As 
discussed above, very few commenters described efforts to test and 
develop superior disclosures, and the Bureau is unaware of 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 prescribed model forms. In contrast, the Bureau 
worked closely with Macro to develop the model disclosures, conducted 
three rounds of consumer testing, and revised the disclosure after each 
round.
    The Bureau received numerous comments that disclosing an estimate 
of the new monthly payment would confuse consumers or lead them to make 
poor decisions. The Bureau received similar comments from the Small 
Entity Representatives during the Small Business Review Panel process. 
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 confusion on this point. The Bureau notes that Dodd-Frank Act 
section 1418 requires disclosure of a good faith estimate of the new 
monthly payment. In addition, servicers must provide the actual amount 
of the new monthly payment in the notice if it is available; and if it 
is not available, then consumers will be notified of the actual amount 
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 prescribed Sec.  1026.20(c) 
disclosure.
    Potential benefits to covered persons. The Bureau has carefully 
considered whether there are any significant benefits to covered 
persons from this provision. The Bureau has determined that there are 
not.
    Potential costs to covered persons. The initial interest rate 
adjustment notice will result in certain compliance costs to covered 
persons. Based on discussions with servicers and software vendors, the 
Bureau believes that, in general, servicers of all sizes will incur 
minimal one-time costs to learn about the final rule. They will 
generally use vendors for one-time software and IT upgrades and for 
producing the disclosure. The new disclosure provides consumers 
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 believes that under existing vendor contracts, large- 
and medium-sized servicers may not be charged for the upgrades but will 
be charged for producing and then distributing (i.e., mailing or 
electronically providing) the disclosure. Vendors will likely pass 
along all of these costs to small servicers.\178\ However, when most 
servicers simultaneously need an upgrade, the one-time cost is 
mitigated by the fact that the costs of a single vendor may be spread 
among a large number of servicers.
---------------------------------------------------------------------------

    \178\ In discussions such as this of costs to covered persons, 
``small servicers'' are servicers that meet the size standard for 
that business established by the Small Business Administration. 
Banks, thrifts, and credit unions that service mortgage loans must 
have $175 million or less in assets and other servicers must have $7 
million or less in average annual receipts.
---------------------------------------------------------------------------

    Extrapolating from FHFA data, the Bureau estimates that about 
280,000 ARMs will adjust for the first time in each of the next three 
years. Based on discussions with industry, the Bureau believes the 
annual production and distribution costs for the disclosure is $140,000 
(50 cents per disclosure). The small ongoing costs reflect the fact 
that there will be relatively few initial interest rate adjustments on 
adjustable-rate mortgages over the next few years. Using both these 
data sources, the Bureau estimates the one-time cost of the disclosure 
for the 12,600 servicers is about $3 million.\179\ Amortizing the one-
time cost over five years and combining it with the annual cost gives 
an aggregate annual cost of about $740,000.\180\ Thus, the cost of new 
disclosure is $58 annually per servicer or $2.67 per disclosure.
---------------------------------------------------------------------------

    \179\ The Bureau makes the following assumptions, based on 
discussions with industry. 12,600 servicers familiarize themselves 
with the rule for a total one-time cost of $523,000. The 8,000 small 
servicers (i.e., servicers that meet the Small Business 
Administration size standard) use 100 vendors, each of which spends 
160 hours developing the new disclosure (double the amount of 
revising an existing disclosure) and another 160 hours validating it 
(double the amount of validating an existing disclosure), all at $72 
per hour. This gives an additional one-time cost of $2.3 million. 
Thirty-one very large servicers perform these tasks in-house, for an 
additional one-time cost of $178,000. This gives total one-time 
costs of about $3 million. The remaining servicers have contracts 
with vendors under which the vendor absorbs all one-time costs of a 
disclosure mandated by regulation.
    \180\ $740,000 = ($3,000,000/5) + $138,500.
---------------------------------------------------------------------------

    Using a similar methodology, the Bureau estimates the one-time cost 
for small servicers of the new disclosure is

[[Page 10989]]

about $2.7 million. Amortizing this cost over five years requires a 
payment of $58 by each small servicer in each of five years. The Bureau 
is not aware of any representative and reasonably obtainable data on 
the loan portfolios of small servicers, so it is not possible to 
estimate the number of disclosures that small servicers would produce 
each year. Thus, it is not possible to quantify the total annual cost 
of the modifications specifically for small servicers.
    The Bureau attempted to reduce the burden to servicers where it 
could be done with minimal impact on the consumer protection purposes 
of the rule. The Bureau mitigates the burden of the disclosure, among 
other ways, by requiring the contact information for the list of home 
ownership counselors or counseling organization in place of a list of 
individual counseling agencies or programs required by the statute, and 
by requiring disclosure of the existence of a prepayment penalty in 
place of the maximum amount of the prepayment penalty. Additionally, 
the Bureau attempted to harmonize the Sec.  1026.20(c) and (d) 
disclosures both to reduce the burden on servicers, and to facilitate 
comprehension by consumers. In addition, relative to the statute, the 
Bureau has included an exemption for ARMs with a term of one year or 
less. Further, relative to the statute, the Bureau has drafted the rule 
such that rate changes occasioned by a consumer's acceptance into a 
loss mitigation arrangement will not trigger the requirement for the 
rate change notification. Finally, the Bureau has interpreted the 
statutory requirement that the notice be ``separate and distinct from 
all other correspondence'' \181\ to mean that, while the notice must be 
provided as a separate document, that document may be placed in the 
same envelope as other communications (as opposed to requiring a 
separate envelope).
---------------------------------------------------------------------------

    \181\ TILA section 128A(b).
---------------------------------------------------------------------------

    One industry association cited a cost analysis similar to, but less 
detailed than, the cost analysis presented in the proposed rule and 
stated that the Bureau did not adequately identify the types of costs 
or the amount of those costs that banks will incur. This commenter 
provided a description of the types of costs that bank servicers would 
incur, ``as part of engaging vendors for * * * technology-related 
projects.'' In response, the Bureau has provided the additional detail 
above and a discussion of the comment in the consideration of the costs 
to covered persons of the revised Sec.  1026.20(c) disclosure, above. 
Although the disclosure is new, the Bureau believes that neither this 
fact nor the content of the disclosure would necessitate a technology-
related project on the scale described by the commenter.
    Another industry commenter referenced the $58 cost figure for small 
servicers, which consists of one-time costs paid in each of five years. 
The commenter claimed that this figure was too low and listed a number 
of one-time and ongoing activities her bank would need to undertake to 
comply. However, the commenter did not provide an alternative cost 
figure or explain how the activities she listed would constitute the 
alternative figure. The commenter did say her bank would have to 
produce over 100 notices per year. The Bureau notes that $58 was an 
average figure for one-time costs and that with 100 notices, a better 
estimate of her institution's costs (consistent with the Bureau's 
calculations) would be $2.67 per disclosure so $267 per year.
    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 receives 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. Similarly, if the notice helps 
consumers avoid delinquency, servicers may receive reduced fee income 
from delinquent consumers (or investors).
    Finally, as discussed in part V, the Bureau considered but decided 
not to exempt small servicers from the initial interest rate adjustment 
notice. The Bureau is not including an exemption for small servicers 
because an exemption would deprive certain consumers of the seven to 
eight months advance notice before the first payment at a new level is 
due that is provided by the disclosure, as well as the information 
about alternatives and how to contact various sources of assistance. 
Additionally, the Bureau notes that small servicers are exempt from the 
periodic statement requirement of final Sec.  1026.41--one other source 
of information on when an interest rate might adjust that is provided 
to consumers. Conversely, the Bureau believes that the benefit to small 
entities from an exemption 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 notice is given just once to 
each consumer with an adjustable-rate mortgage.
3. Prompt Crediting of Payments and Response to Requests for Payoff 
Amounts
    TILA section 129F (as added by Dodd-Frank Act section 1464(a)) 
generally codifies existing Regulation Z Sec.  1026.36(c)(1)(i) on 
prompt crediting of payments. The final rule requires periodic payments 
(defined as an amount sufficient to cover principal, interest and 
escrow (if applicable)) to be promptly credited, and provides 
clarification on the handling of partial payments (i.e., payments less 
than a periodic payment).
    The final rule clarifies that servicers have the option of holding 
partial payments in a suspense account. If servicers hold partial 
payments in a suspense account, the servicer must disclose the amount 
on the periodic statement if a periodic statement is required. If 
sufficient funds accrue in any suspense or unapplied funds account to 
cover a periodic payment, such funds must be credited as if a periodic 
payment were received.
    TILA section 129G (as added by Dodd-Frank Act 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.
    The Bureau did not receive comments on the proposed Dodd-Frank Act 
section 1022(b)(2) analysis or issues closely related to that analysis 
in connection with the proposed provisions in Sec.  1026.36(c). 
Comments on the provisions of the proposed rule are addressed in the 
section-by-section analysis.
    Potential benefits and costs to consumers. The statute largely 
codifies an existing regulation. While the existing regulation does not 
specifically address the handling of partial payments, the final rule 
requires practices regarding the handling of partial payments already 
followed by many servicers. Thus, the benefits and costs to consumers 
from a pre-statute baseline are likely small.
    Qualitatively, the provisions on prompt crediting, coupled with the 
disclosure on the periodic statement of the amount of funds being held 
in any

[[Page 10990]]

suspense account, should help consumers manage and reduce defaults. 
Consumers will better understand when their payments are being held in 
a suspense account rather than being applied and also when partial 
payments will be applied. Not including late fees in the definition of 
periodic payment requires servicers to credit a payment that covers 
principal, interest and escrow even if late fees are outstanding. 
Consumers who make such a payment benefit from having that payment 
credited. Overall, these provisions of the final rule ensure that 
consumers benefit from every effort that they make to pay their 
mortgage debt.
    Potential 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 likely small. However, 
neither current Regulation Z nor Dodd-Frank Act section 1464(a) define 
what constitutes a ``payment'' for purposes of the crediting 
requirement. Thus, the final rule benefits servicers by clarifying the 
meaning of this term. The Bureau believes that many servicers already 
credit payments as required by the final rule, and for those that do, 
this clarification is a benefit and is the only impact of the rule.
    The Bureau engaged in outreach and believes that many servicers 
already comply with the final rule. However, for servicers with 
different crediting practices, the final rule may delay the receipt of 
fee income or reduce some float income. The Bureau has no data with 
which to determine whether this is the case but believes these losses 
would generally be small. The Bureau has mitigated the burden of the 
payoff statement provision relative to the statute by including a 
clause allowing additional time when providing a payoff statement 
within seven days would not be feasible due to certain circumstances.
4. 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 \182\ 
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 if the consumer is given a coupon book containing 
substantially the same information as the statement.
---------------------------------------------------------------------------

    \182\ Reference in parts VII, VIII, and IX to ``servicers'' with 
regard to the final rule for the periodic statements, means 
creditors, assignees, and servicers.
---------------------------------------------------------------------------

    The final rule requires 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 final rule provides a coupon book exemption for fixed-
rate loans when the consumer is given a coupon book with certain 
information required by the periodic statement. The final rule also 
provides exemptions for small servicers, reverse mortgages, and 
timeshares. The periodic statement disclosure would be provided to all 
consumers with a closed-end residential mortgage, unless one of the 
exemptions applies.
    Potential 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 comply with the final rule.\183\ The Bureau assumes 
that servicers currently provide consumers with basic billing 
information since servicers have an incentive to keep collection costs 
low. This information likely includes the amount due, the payment due 
date, and the amount of any late payment fee; and it may also include 
information that would tend to prompt the consumer to contact the 
servicer if it were missing, like the current interest rate and perhaps 
the amount of the payment going into escrow (if any). Because such 
information is currently being provided, its presence on the periodic 
statement required by final Sec.  1026.41 likely provides no benefits 
or costs relative to the baseline. The benefits to consumers of these 
disclosures are discussed further in part V.
---------------------------------------------------------------------------

    \183\ The Bureau did receive one comment from an industry 
association stating that less than 10% of the members in one of its 
working groups regularly use coupon books as a billing method.
---------------------------------------------------------------------------

    There is other information that typically 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. 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 consumer makes an extra payment, provides a partial 
payment, or misses a payment entirely.
    All of the aforementioned information appears on the periodic 
statement required by final Sec.  1026.41. However, on the 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 
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. 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 separately to them) providing specific 
information about the delinquency of their loan. This is one way the 
servicer may catch the attention of the consumer.
    Accurate information about past due charges and how fees and 
charges accumulate over time is especially useful to distressed or 
delinquent 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. For example, a consumer 
with past due amounts on a mortgage, a car, and a credit card would 
need information about the past due amounts and how the fees and 
charges accumulate in order to determine whether a partial or full 
mortgage payment is the most advantageous way of reducing total debt. 
This information may also be inaccurate, and disclosing it on a 
periodic statement may facilitate the detection and correction of 
errors.
    The final rule includes grouping requirements for the format of the 
periodic statement. The grouping requirements present the information 
on the periodic statement in a logical format and may facilitate 
consumer understanding of the information in the

[[Page 10991]]

different components of the disclosure. The General Design Principles 
discussed in the Macro Final Report \184\ include grouping together 
related concepts and figures because consumers are likely to find it 
easier to absorb and make sense of financial disclosure 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.
---------------------------------------------------------------------------

    \184\ See Macro Report.
---------------------------------------------------------------------------

    There are two main exemptions to the periodic statement 
requirement. The first, provided by statute, is an exemption for 
consumers with fixed-rate mortgages who receive 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 than consumers 
with ARMs subject to the requirements to make additional payments, 
partial payments or miss a payment. Therefore, the Bureau cannot 
estimate the extent to which such consumers may be substantially worse 
off than consumers with ARMs subject to the requirements.
    The Bureau also provides an exemption for small servicers. A small 
servicer is defined as a servicer who either both (i) services 5,000 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; or who is a Housing Finance Agency, 
as defined in 24 CFR 266.5. Such small servicers will not have to 
provide the periodic statement.
    As discussed above and in the section-by-section analysis of 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 periodic statement required by final Sec.  1026.41, 
but possibly through other channels. Servicers who only service loans 
for which they or an affiliate is the owner or creditor face either a 
reduction in the value of an asset on their portfolios or the loss of 
an investment in the relationship with the consumer which was 
established by originating the loan 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 work to effectively provide their customers with ready 
access to comprehensive information about their payments, amounts due 
and other account information. Thus, the Bureau believes that the 
exemption produces at most a minimal reduction in benefits to the 
customers of small servicers.
    Using a range of data sources, the Bureau roughly estimates that 
approximately 52 million consumers would receive the periodic statement 
disclosure (taking into account the small servicer exemption).\185\ To 
illustrate the potential benefits of the periodic statements, suppose 
10 percent of these consumers save 15 minutes each year because the 
disclosure provides them with information about their loan or payments 
that is not provided by their current billing statements or coupon 
books (e.g., a past payment breakdown). These consumers might, for 
example, have to spend 15 minutes contacting their servicer by phone or 
some other means to obtain the same information. This is a savings of 
1.3 million hours per year, or about $22 million at the median wage of 
$17 per hour.
---------------------------------------------------------------------------

    \185\ The Bureau estimates there are about 60 million closed-end 
mortgage loans (first and subordinate liens) and about 8 million 
will be exempt from the periodic statement requirement. For these 
estimates, the Bureau aggregated mortgage loan counts obtained or 
derived from the FHFA ``Home Loan Performance'' data described 
above, the Board's Flow of Funds Accounts of the United States 
(statistical release z.1), the data from the credit union Call 
Report and the bank and thrift Call Report, the CoreLogic mortgage 
loan servicing data set, and the BBx data set from BlackBox Logic.
---------------------------------------------------------------------------

    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. The Bureau received numerous 
comments pointing out particular pieces of information on the periodic 
statement that are available to consumers on other disclosures such as 
IRS Form 1098; the annual escrow statement (for consumers who use 
escrow accounts); State mandated notices regarding referral to 
foreclosure, cures, and loss mitigation; bankruptcy disclosures; and 
notices associated with the early intervention, continuity of contact 
and loss mitigation provisions in the Bureau's companion proposed 
rulemaking on mortgage servicing, the 2013 RESPA Servicing Final Rule. 
Individual comments regarding disclosures on the periodic statement 
that are duplicative of disclosures provided in other documents are 
presented and discussed in part V.
    While consumers may not generally benefit from duplicative 
disclosures, the periodic statement consolidates key information 
related to their mortgages, including information about their payments 
and the implications of non-payment that is currently provided in 
different documents. Regardless of whether consumers should know which 
of the aforementioned documents provide the information they may need 
in a particular situation, and regardless of whether consumers should 
retain these documents and keep them readily available, a consolidated 
periodic statement benefits consumers who are poorly informed about 
where to find the information they may need or who did not retain the 
relevant documents. A consolidated disclosure also provides an overview 
of mortgage debt and payments that some consumers may find easier to 
understand and more informative about the financial condition of their 
households than a variety of separate documents. Overall, the Bureau 
believes that providing a single integrated document, in addition to a 
number of other communications that contain fragments of this 
information, can be more efficient for consumers.
    Potential costs to consumers. The Bureau received comments claiming 
that the periodic statement generally, or particular disclosures in it, 
could produce negative consequences for consumers. One industry 
commenter stated that requiring content that may be irrelevant to the 
consumer could detract from the actual relevant content. An industry 
association commenter stated that the entire periodic statement may be 
unwanted and could cause consumers to overlook other important 
information that is provided to them on a periodic basis, such as 
annual escrow or private mortgage insurance notices or late notices. 
Another argued that the periodic statement should present only a 
snapshot of the consumer's account and that disclosing general policies 
of the servicer would confuse consumers. An industry commenter argued 
that requiring information about any loan modification the consumer 
received would be confusing.
    The Bureau recognizes that consumers are heterogeneous, that some 
will benefit more than others from a new disclosure, and that some may 
even

[[Page 10992]]

experience negative, unintended consequences. However, the Bureau 
believes that the consolidated periodic disclosure it developed and 
tested provides consumer benefits. As discussed above, servicers 
receive minimal consequential feedback from consumers about the quality 
of servicing disclosures. Thus, they have little incentive to incur the 
costs of researching and discovering the information consumers want in 
a periodic disclosure. The Bureau did receive one comment from industry 
referring to its ``consumer tested and appreciated'' periodic statement 
and another arguing against including delinquency information in the 
periodic statement since, in the commenter's experience, this 
information was more effective in collection letters. The Bureau is 
aware of other efforts by certain servicers to improve their 
disclosures. However, this work does not appear to be widespread, and 
the Bureau received only a small number of comments about efforts to 
improve disclosures. In contrast, the Bureau worked closely with Macro 
to develop the model disclosures, conducted three rounds of consumer 
testing, and revised the disclosure based on the results of this 
testing. Based on this anecdotal evidence, the comment letters, and the 
Bureau's expertise in disclosure design and consumer behavior, the 
Bureau concludes that consumers in general will benefit from the 
periodic statement disclosure even if certain consumers may find the 
disclosure confusing.
    Some or all of the costs attributable to the periodic statement 
provisions may be passed through to consumers. As explained below, the 
Bureau believes that the annual cost per consumer is small. 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 new periodic statement disclosure, however, the 
costs to be shifted are small and so consumers would see at most a 
small cost increase.
    As discussed above, the Bureau is adopting grouping requirements 
for the periodic statement disclosure. 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 these costs are substantial. As 
discussed above, very few commenters described efforts to test and 
develop superior disclosures, and the Bureau is unaware of general 
efforts by servicers to develop a periodic statement that meets the 
requirements of the Dodd-Frank Act and provides the benefits to 
consumers of the prescribed model forms. In contrast, the Bureau worked 
closely with Macro to develop the model disclosures, conducted three 
rounds of consumer testing, and revised the disclosure based on the 
results of this testing.
    Potential benefits to covered persons. Providing the content in the 
periodic statement 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 
benefit to some extent when consumers detect errors quickly, and the 
information in the periodic statement may facilitate this. Servicers 
may also have reduced costs when they manage fewer partial payments and 
delinquencies and can resolve delinquencies sooner.
    Potential costs to covered persons. The periodic statement 
disclosure requirements will result in certain compliance costs to non-
exempt servicers. Regarding the scope of coverage, the Bureau believes 
that about 380 insured depositories and credit unions will not qualify 
for the small servicer exemption (and about 10,800 will qualify). The 
insured depositories and credit unions that do not qualify for the 
small servicer exemption service about 40.4 million loans (those that 
do qualify service about 5.7 million loans).
    Using data sources described in the analysis of the small servicer 
exemption, the Bureau estimates that there are about 13.9 million 
closed-end mortgage loans serviced by non-depositories. However, the 
Bureau does not have the data necessary to accurately estimate the 
number of exempt non-depository servicers or the number of loans they 
service. The Bureau believes that the number of loans serviced is a 
small percentage of this total given the financial advantages of 
servicing large numbers of loans.
    Regarding costs, based on discussions with servicers and software 
vendors, the Bureau believes that, in general, servicers of all sizes 
will incur minimal one-time costs to learn about the final rule. They 
will generally use vendors for one-time software and IT upgrades and 
for producing the disclosure. The revised disclosure provides to 
consumers 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 believes that under existing vendor contracts, large and 
medium sized servicers may not be charged for the upgrades but will be 
charged for producing and then distributing (i.e., mailing or 
electronically communicating) the disclosure. Vendors will likely pass 
along all of these costs to small servicers.\186\ However, when most 
servicers simultaneously need an upgrade, the one-time cost is 
mitigated by the fact that the costs of a single vendor may be spread 
among a large number of servicers.
---------------------------------------------------------------------------

    \186\ In discussions of costs to covered persons, ``small 
servicers'' are servicers that meet the size standard for that 
business established by the Small Business Administration. Banks, 
thrifts and credit unions that service mortgage loans must have $175 
million or less in assets and other servicers must have $7 million 
or less in average annual receipts.
---------------------------------------------------------------------------

    A particular challenge in estimating the cost of the periodic 
statement disclosure requirements comes from the lack of information on 
the extent to which servicers currently provide consumers with coupon 
books, billing statements, or periodic statements.\187\ This makes it 
impossible to quantify the impact of the rule and its cost. For 
example, servicers who do not currently provide billing statements to 
consumers with adjustable rate mortgages will have new production and 
distribution costs for servicing those loans. In contrast, servicers 
who already provide billing statements will have new production costs 
but not new distribution costs for servicing those loans. Servicers who 
provide coupon books to consumers with fixed rate mortgages may not 
have any new production or distribution costs for servicing those 
loans, depending on how frequently they revise their coupon books.\188\
---------------------------------------------------------------------------

    \187\ A further complication comes from the use of ``combined'' 
periodic statements. The Bureau received a number of comments on 
this topic. Combined periodic statements may contain information 
about mortgage loans and open-end loans along with information about 
savings and checking accounts. The timing of the periodic statement 
may limit the ability of servicers to combine all of this 
information in one disclosure. Servicers who currently send a 
billing statement in a combined disclosure may therefore incur 
additional distribution costs along with additional production 
costs. See the section-by-section analysis of Sec.  1026.41(b) for a 
full discussion of the timing issue and comments.
    \188\ However, servicers who provide coupon books to consumers 
with fixed rate mortgages are required to provide a delinquency 
notice (see Sec.  1026.41(e)(3)(iv)). Since servicers already 
provide some kind of delinquency notice, the costs attributable to 
the rule are most likely small.
---------------------------------------------------------------------------

    The lack of information on these current servicing practices makes 
it impossible to determine the impact of the rule on the production and

[[Page 10993]]

distribution of disclosures. Thus, it is not possible to accurately 
determine the cost of the rule to covered persons. However, the Bureau 
received a few comments that presented costs associated with the new 
periodic statement disclosure: \189\
---------------------------------------------------------------------------

    \189\ Other comments on the costs of providing the periodic 
statement disclosure are discussed in the section-by-section 
analysis.
---------------------------------------------------------------------------

     An industry association commenter stated that for larger 
credit unions, the mailing costs alone may exceed $500,000.00 per year. 
For smaller credit unions these costs would likely be upwards of 
$75,000 to $100,000 per year. The commenter also reported that one 
credit union servicing 5,500 mortgages stated it would incur an 
additional $70,000 in expenses to prepare and mail the periodic 
statement. Initial programming and development charges could be $65,000 
to more than $100,000.
     A credit union servicing 11,000 mortgage loans commented 
it would have up-front costs of $45,000 to $65,000 and monthly 
production and mailing costs of $6,800.
     A multi-bank financial holding company commented that its 
subsidiary banks would have costs of 72 cents per statement each month, 
so $172,800 annually.
     A non-depository financial services company servicing 
4,000 loans commented it would incur an initial cost of over $5,000 and 
ongoing costs of $40,000.
     An industry association commenter stated that a large 
credit union in North Carolina reported annual costs of $500,000 if it 
cannot use a combined statement; smaller credit unions reported $10,000 
to $25,000 additional annual costs.
    From these five comments, the Bureau can derive the following four 
estimates of annual costs per loan (assuming 12 disclosures per year) 
and three estimates of one-time costs per loan:\190\
---------------------------------------------------------------------------

    \190\ When a range of costs is reported, these estimates use the 
higher figure.
---------------------------------------------------------------------------

    Annual costs: $7.42, $8.64, $10.00, $12.73.
    One-time costs: $1.25, $5.25, $18.18.

Regarding the annual costs, the commenters do not provide enough detail 
for the Bureau to know if they are accurately computing the cost of the 
periodic statement requirement relative to the proper baseline. For 
example, if commenters currently produce and mail a billing statement, 
then they should deduct the current production and mailing costs from 
those they expect to incur from the rule. For both one-time and annual 
costs, the Bureau would need to know whether these servicers are using 
vendors and (if so) the contract terms with those vendors to know if 
the commenters are accurately computing the cost of the rule.

    Setting aside these issues, however, the Bureau notes that the 
median of the total annual costs reported by the commenters (assuming a 
five-year amortization) is $10.25 per loan. Thus, for loans that 
refinance every five years, the periodic statement requirement would 
add about $50 to the cost of the loan. The Bureau notes that this 
amount could be recovered at origination with a minor fee or through a 
very small increase in the cost of credit to consumers. However, the 
Bureau believes that this figure sharply overstates the cost of the 
periodic statement requirement relative to the proper baseline. Many of 
these consumers already receive billing statements, so there would not 
be any additional distribution costs from the disclosure, and a cost 
currently incurred is not properly attributed to the rule.
    Finally, the Small Business Review Panel stated that a periodic 
statement requirement would impose significant burdens on small 
servicers.\191\ The panel explained that while much of the information 
in the 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 
would be difficult for small servicers. The Small Entity 
Representatives 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 
believed 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 would be unable to gain cost efficiencies and 
could not 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).
---------------------------------------------------------------------------

    \191\ As in the previous discussions of costs in part VII, 
``small servicer'' means servicers that meet the Small Business 
Administration size standard.
---------------------------------------------------------------------------

    The Bureau believes that the small servicer exemption in Sec.  
1026.41(e)(4) covers essentially all small insured depositories and 
credit unions. The Bureau has only a rough estimate of the number of 
small non-depository servicers covered by the exemption, but the 
estimate supports the view that vast majority would be exempt. Further 
discussion of the impact of the rule on small business is discussed in 
part VIII below.
    The Bureau is mitigating the burden of the periodic statement 
requirement relative to the statute by including exemptions and 
relaxing certain provisions. In addition to the reverse mortgage 
exemption, the Bureau has expanded the small servicer exemption both by 
increasing the loan threshold from the proposed 1,000 loans to 5,000 
loans, and by including Housing Finance Agencies in the small servicer 
exemption. Further, the Bureau has made modifications to the 
statutorily required information that must be disclosed on the periodic 
statement, including requiring the existence of any prepayment penalty 
(in place of the amount), and by requiring Web site information on 
housing counselors (in place of a list of specific housing counselors).

G. Potential Specific Impacts of the Final Rule

1. Depository Institutions and Credit Unions With $10 Billion or Less 
in Total Assets, as Described in Dodd-Frank Act 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, and taking into account the expanded small servicer exemption 
from the periodic statement requirement, the Bureau believes that 
larger depositories and credit unions will incur only minimal costs 
from this rulemaking. The following analysis focuses on depository 
institutions and credit unions with total assets between $175 million 
and $10 billion; the impact of the rule on depository institutions and 
credit unions with less than $175 million in total assets is discussed 
above and in the Final Regulatory Flexibility Analysis.
    The initial interest rate adjustment notice is a new disclosure. 
The Bureau believes that depository institutions and credit unions with 
total assets between $175 million and $10 billion 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,

[[Page 10994]]

and based on discussions with industry the Bureau understands that 70-
80 percent 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 depository institutions and credit unions with total 
assets between $175 million and $10 billion from the revised Sec.  
1026.20(c) disclosure will also be minimal. The Bureau expects that the 
information collection and data processing costs will largely be 
absorbed by third-party vendors. The mailing costs of the revised Sec.  
1026.20(c) will be the same as the mailing costs of the current 
disclosure.
    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 provisions for prompt crediting of 
payments and response to requests for payoff amounts.
    Thus, most of the impact of the final rule on depository 
institutions and credit unions with total assets between $175 million 
and $10 billion comes from the periodic statement disclosure. The 
Bureau believes that a significant number of these institutions will 
qualify for the small servicer exception adopted in the final rule. 
Using FHFA and Call Report data, the Bureau estimates that 92% of 
institutions in this range and all but one of those with assets of $175 
million and below will qualify for the exception.
    For those institutions with total assets between $175 million and 
$10 billion that do not qualify for the exception, the Bureau expects 
that the information collection and data processing costs will largely 
be absorbed by third-party vendors. Thus, the main cost factor for 
these institutions is the mailing (or more generally, the distribution) 
costs. For the reasons discussed above, the Bureau cannot accurately 
estimate this cost. It is reasonable to suppose, however, that there 
would be no new distribution costs associated with fixed rate mortgages 
that currently receive billing statements. There may also be no new 
distribution costs associated with fixed rate mortgages that currently 
receive coupon books; however, servicers who provide these consumers 
with coupon books that do not comply with the new rule would need to 
provide them with revised coupon books that do comply with the new 
rule. Similarly, it is reasonable to suppose that there would be no new 
distribution costs associated with adjustable rate mortgages that 
currently receive billing statements. There would, however, be new 
mailing costs for adjustable-rate mortgages that currently receive 
coupon books.
2. Impact of the Provisions on Consumer Access to Credit and Consumers 
in Rural Areas
    The consideration of the cost of each provision of the final rule 
above found that these costs were extremely small for the Sec.  
1026.20(c) disclosure, the new initial interest rate adjustment notice, 
and the prompt crediting requirement. Thus, these provisions will have 
no significant impact on consumer access to credit. The Bureau cannot 
accurately estimate the cost of the periodic statement requirement, and 
there is a substantial difference between the Bureau's rough estimate 
of this cost and the higher cost figures submitted in comments. 
However, even the higher cost figures should not materially reduce 
consumer access to credit given that such costs may be recovered at 
origination through a relatively minor fee.
    Consumers in rural areas may experience impacts from the final 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 local banks and credit unions that service 5,000 
loans or fewer and only service loans which they originated or own. For 
reason discussed above, these servicers likely already provide many of 
the benefits to consumers that the final rule is designed to provide. 
These servicers will benefit from the exemption to the periodic 
statement requirement in the final rule by not incurring the costs 
associated with modifying an existing disclosure or creating a new 
disclosure to comply with this requirement. Borrowers in turn may 
benefit, either as mortgagees or as customers at these insured 
depositories and credit unions, through continued access to a lending 
and servicing model they prefer.

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (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.\192\ The Bureau also is subject 
to certain additional procedures under the RFA involving the convening 
of panel to consult with small business representatives prior to 
proposing a rule for which an IFRA is required.\193\
---------------------------------------------------------------------------

    \192\ For purposes of assessing the impacts of the final rule on 
small entities, ``small entities'' is defined in the RFA to include 
small businesses, small not-for-profit organizations, and small 
government jurisdictions. 5 U.S.C. 601(6). A ``small business'' is 
determined by application of Small Business Administration 
regulations and reference to the North American Industry 
Classification System (NAICS) classifications and size standards. 5 
U.S.C. 601(3). A ``small organization'' is any ``not-for-profit 
enterprise which is independently owned and operated and is not 
dominant in its field.'' 5 U.S.C. 601(4). A ``small governmental 
jurisdiction'' is the government of a city, county, town, township, 
village, school district, or special district with a population of 
less than 50,000. 5 U.S.C. 601(5).
    \193\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    An entity is considered ``small'' if it has $175 million or less in 
assets for the banks, and $7 million or less in revenue for non-bank 
mortgage lenders, mortgage brokers, and mortgage servicers.\194\ The 
Bureau did not certify that the proposed rule would not have a 
significant economic impact on a substantial number of small entities. 
Thus, the Bureau convened a Small Business Review Panel to obtain 
advice and recommendations of representatives of the regulated small 
entities. The 2012 TILA Servicing Proposal preamble included detailed 
information on the Small Business Review Panel.\195\ The Panel's advice 
and recommendations are found in the Small Business Review Panel 
Report; \196\ several of these recommendations were incorporated into 
the proposed rule. The 2012 TILA Servicing Proposal also included a 
discussion of each of the panel's recommendations in the section-by-
section analysis of each section.
---------------------------------------------------------------------------

    \194\ The current SBA size standards are found on SBA's Web site 
at http://www.sba.gov/content/table-small-business-size-standards.
    \195\ 77 FR 57318, 57376-77 (Sept. 17, 2012).
    \196\ See Small Business Review Panel Report.
---------------------------------------------------------------------------

    The 2012 TILA Servicing Proposal contained an Initial Regulatory 
Flexibility Analysis (IRFA),\197\ pursuant to section 603 of the RFA. 
In this IRFA the Bureau solicited comment on whether the burden imposed 
on small entities by the initial interest rate adjustment disclosure 
outweighed the consumer protection benefits it would afford as well as 
whether the proposed rule would have any impact on the cost of credit 
for small entities. Comments addressing the initial rate adjustment 
disclosure are addressed in the section-by-section analysis above. 
Comments addressing the impact on the cost of credit are discussed 
below. Elsewhere in the proposal, the Bureau sought comment on the 
small servicer exemption, specifically if ``small servicer'' was 
properly defined, and if the small servicer exemption should be

[[Page 10995]]

extended to other provisions of the proposed rules. These comments are 
addressed in the section-by-section analysis of each provision.
---------------------------------------------------------------------------

    \197\ 77 FR 57318, 57376-83 (Sept. 17, 2012).
---------------------------------------------------------------------------

    Based on the comments received, and for the reasons stated below, 
the Bureau is not certifying that the final rule will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, the Bureau has prepared the following final regulatory 
flexibility analysis pursuant to section 604 of the RFA.

1. A Statement of the Need for, and Objectives of, the Rule

    The Bureau is publishing final rules to establish new regulatory 
protections for consumers relating to mortgage servicing. The final 
rule amends Regulation Z to implement amendments to TILA that were 
added by sections 1418, 1420, and 1464 of the Dodd-Frank Act. Congress 
included sections 1418, 1420, and 1464 in the Dodd-Frank Act to address 
consumer harms relating to mortgage servicing.
    The overall objective of the disclosure requirements and the payoff 
statement provision is to ensure that consumers can obtain basic, 
accurate information about their mortgage loan obligations in a timely 
manner. The amendments to Regulation Z are, among other things, 
intended to protect consumers by ensuring that a consumer receives 
disclosures in advance of an interest rate adjustment with sufficient 
time to explore options available to the consumer, if necessary, to 
avoid payment shock. The Bureau also proposes to revise the content and 
timeframe of the Regulation Z Sec.  1026.20(c) disclosure for interest 
rate adjustments that result in an accompanying payment change, from 
the current between 25 and 120 days before the first payment at a new 
level is due, to between 60 and 120 days before the first payment at a 
new level is due.
    Further the amendments are intended to ensure that a consumer 
receives a monthly mortgage statement that discloses the current status 
of the consumer's mortgage loan obligation. The required 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 transactions to aid in error 
detection and resolution, and providing information to distressed or 
delinquent consumers.
    Finally, the amendments are intended to protect consumers by 
imposing requirements clarifying the crediting of consumer mortgage 
loan payments and by requiring a servicer to provide a consumer with a 
payoff statement within a reasonable timeframe. The objective of the 
prompt crediting requirement is to ensure that consumers benefit from 
every effort that they make to pay their mortgage debt. The final rule 
clarifies the meaning of ``payment'' for purposes of the crediting 
requirement but does not require immediate crediting of partial 
payments.

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

    In accordance with section 3(a) of the RFA, the Bureau prepared an 
IRFA. In the IFRA, the Bureau estimated the possible compliance costs 
for small entities from each major component of the rule against a pre-
statute baseline.\198\ The Bureau requested comments on the IRFA. An 
industry association submitted a comment letter that referred in 
passing to the Regulatory Flexibility Analysis. It did, however, raise 
three significant issues regarding the impact of the proposed rule on 
small servicers. First, the commenter stated that it would not be 
effective public policy to require servicers smaller than those in the 
top-50 to incur the costs of complying with the proposed rule. The 
commenter observed that the top-50 servicers service 80 percent of 
outstanding mortgage loans and compliance with the rule would impose 
significant costs on the well over 12,000 servicers that service the 
remaining 20 percent. The commenter states that small servicers' costs 
are disproportionate to their share of the market. Second, the 
commenter states that neither the proposed Dodd-Frank Act section 1022 
analysis nor the IRFA adequately identifies the types of costs or the 
amount of those costs that bank servicers will incur as a result of the 
servicing rulemakings. Third, the commenter states that given the 
servicing performance of community banks and the incentives that drive 
their high level of customer service, there is no demonstrated need to 
apply to small servicers those elements of the proposal that are not 
required by the Dodd-Frank Act.\199\
---------------------------------------------------------------------------

    \198\ See part VII.B. for an explanation of pre-statute 
baseline.
    \199\ The commenter does not define small servicer, but the 
commenter does request that the Bureau increase the loan threshold 
in Sec.  1026.41(e)(4) to 10,000. The Bureau notes that about 200 
insured depositories and credit unions service over 10,000 loans and 
others service some loans for others.
---------------------------------------------------------------------------

    The Bureau has carefully considered these comments and responds as 
follows. First, while the Bureau agrees that it should be aware of 
imposing a disproportionate share of compliance costs on a particular 
segment of a market, it believes that doing so may be necessary under 
certain circumstances. The consequences of compliance costs for covered 
persons depend on the size of these costs relative to other costs and 
the ability of covered persons to absorb or shift these costs. The 
consequences for consumers depend on these factors as well as the 
improvements in products and services from compliance by servicers. 
These consequences are not summarized by the share of aggregate costs 
imposed on a particular segment. The Bureau also notes that the fact 
that a large number of small servicers will require new and revised 
disclosures means that each vendor will likely spread the one-time 
costs of developing and validating disclosures over a large number of 
servicers.\200\
---------------------------------------------------------------------------

    \200\ This point was made in the proposed Dodd-Frank Act section 
1022 analysis, see 77 FR 57318, 57369 (Sept. 17, 2012), and is 
discussed further in the final Dodd-Frank section 1022 analysis.
---------------------------------------------------------------------------

    Second, the proposed Dodd-Frank Act section 1022 analysis and IRFA 
both briefly described the one-time and ongoing costs that bank 
servicers would incur as part of the servicing rulemaking. Both also 
provided limited quantification of the costs attributable to the rule, 
from a pre-statutory baseline, in light of the limited amount of data 
that was reasonably available. As discussed in the final Dodd-Frank Act 
section 1022 analysis, the Bureau does not believe that the changes 
required of servicers in this rulemaking would impose the types of 
costs that the commenter describes.\201\
---------------------------------------------------------------------------

    \201\ See part VII.B and the consideration of costs to covered 
persons from the revised Sec.  1026.20(c) notice in part VII.D.1.
---------------------------------------------------------------------------

    Finally, the Bureau notes that it has offered good reasons for 
requiring all servicers to provide the revised Sec.  1026.20(c) 
disclosure. The additional content, clear formatting and earlier 
disclosure will benefit consumers who need to refinance or move. The 
Bureau also notes that applying the modified Sec.  1026.20(c) 
disclosure to only certain servicers may create confusion as the 
servicers not covered by the new rule would still be required to 
provide the existing notices on the existing timeframe; having 
servicers send very similar notices on different timeframes may be 
confusing for the marketplace.
    The Bureau received numerous comments describing in general terms 
the impact of the proposed rule on small servicers and the need for 
exemptions

[[Page 10996]]

for small servicers from various provisions of the proposed rule. These 
comments, and the Bureau's responses, are discussed in the section-by-
section analysis, element 5 of this FRFA (regarding the small servicer 
exception to the periodic statement requirement) and element 6-1 of 
this FRFA.

3. Response to the Small Business Administration Office of Advocacy 
Comment

    The Small Business Administration Office of Advocacy (Advocacy) 
provided a formal comment letter to the Bureau in response to the 
proposed rules on mortgage servicing. Among other things, this letter 
expressed concern about the following issues: Inadequate notice of the 
proposed rules, small servicer exemptions, and the effective date of 
the regulation.
    First, Advocacy expressed concern that small entities did not have 
adequate notice of the proposed rules, because although the proposed 
rules were posted on the Bureau Web site on August 10, 2012 with 
comments due 60 days later, the rules were not published in the Federal 
Register until September 17, 2012. Advocacy was concerned that small 
entities that relied on the Federal Register for notice of proposed 
rules would not have sufficient time to prepare comments in response to 
the proposed rule.
    The Bureau believes that small entities were given adequate notice 
and a full opportunity to comment on the proposed rule. The rules were 
press released and published on the Bureau's Web site a full 60 days 
before the close of the comment period.\202\ The Bureau engaged in 
industry outreach, including a publicity campaign around the Regulation 
Room project encouraging and facilitating public participation in the 
rulemaking process.\203\ Further, the Bureau believes that, in light of 
the recent attention on the industry, including the National Mortgage 
Settlement and market changes, small entities would be aware that the 
Dodd-Frank Act mandated changes to the servicing industry and proposed 
rules would be forthcoming; particularly given that trade associations 
have taken an active role in the rulemaking. The Bureau believes such 
trade associations have helped to inform small entities of the proposed 
rulemaking.\204\ In light of all this, the Bureau believes that small 
entities were given adequate notice of the proposed rules, as evidenced 
by the large number of small entities who submitted formal comments.
---------------------------------------------------------------------------

    \202\ See CFPB Press Release on Servicing Proposal.
    \203\ See e.g., Nat'l Ass'n of Fed. Credit Unions, CFPB Proposes 
Mortgage Servicing Rule Changes (Aug. 12, 2012) (``NAFCU Compliance 
Blog''), available at http://www.nafcu.org/News/2012_News/August/CFPB_proposes_mortgage_servicing_rule_changes/.
    \204\ See e.g., NAFCU Compliance Blog.
---------------------------------------------------------------------------

    Second, Advocacy encouraged the Bureau to use its exception 
authority to exempt small servicers from as much of the proposed rule 
as possible, including specific requests for exemptions from the ARM 
disclosure and periodic statement provisions. The Advocacy letter 
expressed concerns that the new Sec.  1026.20(d) initial interest rate 
adjustment notice would be confusing to consumers because the rate 
could change during the six month period between when the estimate was 
provided and when the rate actually changes, such that this would not 
provide meaningful notice to the consumer. Additionally, Advocacy 
encouraged the Bureau to exempt small entities from the rate change 
notification for non-hybrid ARMs because the changes are not required 
by the statute. Finally, Advocacy encouraged the Bureau to exempt all 
small entities from the periodic statement requirements.
    The Bureau carefully considered a small servicer exemption in light 
of each of the proposed rules, and a complete discussion of the 
consideration of a small servicer exemption is found in the respective 
section of the section-by-section analysis. The Bureau believes the 
earlier notification of the initial rate change will help to ensure a 
consumer who would have difficulty making payments at the adjusted rate 
has sufficient time to pursue the alternatives suggested in the 
notification. As discussed above, the Bureau believes benefits of the 
earlier timeframe outweigh the potential confusion the estimate may 
cause. Further, the Bureau believes that, because both hybrid and non-
hybrid ARMs are subject to the same risk of payment shock, it is 
appropriate to expand the scope of the rule to include non-hybrid ARMs, 
as contemplated by the savings clause in TILA section 128A(c). Finally, 
the Bureau is finalizing the proposed small servicer exemption for the 
periodic statement requirement, with an expanded threshold (5,000 
loans). For the reasons discussed above in the section-by-section 
analysis, the Bureau believes this is the appropriate scope of the 
small servicer exemption.
    Third, Advocacy encouraged the Bureau to provide Small Entity 
Representatives with a sufficient amount of time for them to comply 
with the requirements of the proposal, and expressed this could take 
18-24 months. A complete discussion of the effective date is found in 
part VI above. While the Bureau understands the new rules will take 
time to implement, the Bureau also believes that consumers should have 
the benefit of the additional protections as soon as practical. In 
light of the comments received, the Bureau believes that 12 months is 
an appropriate implementation period. This time period is consistent 
with (1) the period requested by the vast majority of comments, (2) 
outreach conducted by the Bureau with vendors and systems providers 
regarding timeframes for updating core systems, and (3) the 
implementation period for other requirements imposed by the Dodd-Frank 
Act or regulations issued by the Bureau that may also impact creditors, 
assignees, and servicers. Further, the Bureau believes that an 
approximately 12-month implementation period appropriately balances the 
needs of industry to adjust operations to implement the Final Servicing 
Rules with the goal of providing consumers the benefit of the 
protections implemented by the Final Servicing Rules.

4. A Description of and an Estimate of the Number of Small Entities to 
Which the Rule Will Apply

    As discussed in the Small Business Review Panel 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.\205\ A ``small business'' is determined by application 
of SBA regulations and reference to the North American Industry 
Classification System (NAICS) classifications and size standards.\206\ 
Under such standards, insured depositories and credit unions 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.\207\
---------------------------------------------------------------------------

    \205\ 5 U.S.C. 601(6).
    \206\ See SBA Size Standards.
    \207\ See SBA Size Standards.
---------------------------------------------------------------------------

    During the Small Business Review 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 \208\ (NAICS 522110 and 522120), credit unions (NAICS 
522130), firms providing real estate credit (NAICS 522292), firms 
engaged in other activities related to

[[Page 10997]]

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.
---------------------------------------------------------------------------

    \208\ 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.
    The following table provides the Bureau's estimate of the number 
and types of entities to which the rule will apply:
[GRAPHIC] [TIFF OMITTED] TR14FE13.000

    For commercial banks, savings institutions, and credit unions, the 
number of entities and asset sizes were obtained from December 2011 
Call Report data as compiled by SNL Financial.\209\ 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.
---------------------------------------------------------------------------

    \209\ The Bureau has updated these figures from the Initial 
Regulatory Flexibility Analysis, which used December 2010 Call 
Report data as compiled by SNL Financial.
---------------------------------------------------------------------------

    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 
Licensing System and Registry (NMLS) 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.
    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 
Bureau has not been able to separately estimate the number of non-
profits and small non-profits engaged in mortgage loan servicing. These 
non-profits may list loan servicing income on the IRS Form 990 
Statement of Revenue, but it is not possible to search public databases 
on non-profit entities according to what they list on the Statement of 
Revenue.
    The Bureau is exempting servicers that service 5,000 mortgage loans 
or less, all of which the servicer or an affiliate owns or originated, 
from the new periodic statement disclosure requirements in Sec.  
1026.41. The Bureau estimates that all but one insured depository or 
credit union that meets the SBA asset threshold will qualify for the 
exemption. The Bureau's methodology for this estimate is 
straightforward in the case of credit unions. The credit union Call 
Report presents the number of mortgages held in credit union portfolios 
and the amount of assets. The Bureau could readily determine which 
credit union small servicers (as defined by the SBA asset threshold) 
serviced 5,000 mortgage loans or less. In contrast, the bank and thrift 
Call Report does not present the number of mortgages, only the 
aggregate unpaid principal balance, and the amount of assets. The 
Bureau developed estimates of the average unpaid principal balance at 
banks and thrifts of different sizes and use this with the information 
on aggregate unpaid principal balance to derive loan counts at each 
bank and thrift.\210\ The Bureau could then determine which bank and 
thrift small servicers (as defined by the SBA asset threshold) serviced 
5,000 mortgage loans or less.
---------------------------------------------------------------------------

    \210\ For banks and thrifts with under $10 billion in assets, 
the Bureau calculated the average unpaid principal balance of 
portfolio mortgages by State for credit unions with less than $1 
billion in assets and applied the State specific figures to these 
banks and thrifts. For banks and thrifts with over $10 billion in 
assets, the Bureau relied on the OCC Mortgage Metrics Report, which 
showed an average unpaid principal balance estimate of $175,000. For 
securitized loans, the Bureau relied on the FHFA's Home Loan 
Performance database, which provides data by size of securitized 
loan book; this yielded average unpaid principal balances ranging 
from $141,000 to $189,000.
---------------------------------------------------------------------------

    It is not possible to observe whether the loans that servicers are 
servicing for others were originated by those servicers. However, the 
Bureau believes that all insured depositories and credit

[[Page 10998]]

unions that meet both the SBA asset threshold and the loan count 
threshold likely qualify for the exception. In principle, these 
entities may not qualify for the exception because they do not meet the 
other conditions of the exception, i.e., they service loans that they 
did not originate and do not own. The Bureau believes that this is 
extremely unlikely, however. First, most entities servicing loans they 
did not originate and do not own most likely view servicing as a stand-
alone line of business. In this case they would most likely choose to 
service substantially more than 5,000 loans in order to obtain a 
profitable return on their investment in servicing. Additionally, the 
Bureau believes it is highly unlikely that insured depositories and 
credit unions with $175 million in assets or less choose to make this 
investment, preferring to use their assets to support other activities. 
Taking both factors into account, the Bureau believes that essentially 
all insured depositories and credit unions that meet the SBA threshold 
and the loan count condition qualify for the exception.
    The Bureau does not have the data necessary to accurately estimate 
the number of small entity non-depositories that would be covered by 
the exemption.\211\ To obtain a rough estimate, the Bureau notes that 
$7 million in servicing revenue would be generated from an aggregate 
unpaid principal balance of $2 billion.\212\ The Bureau estimates that 
all but 4 percent of insured depositories and credit unions servicing 
an aggregate unpaid principal balance of $2 billion or less service 
5,000 loans or less. Assuming a similar relationship between servicing 
revenue and loan counts holds for non-depository servicers, at least 
for relatively small depository and non-depository servicers, all but 4 
percent of non-depository servicers would service 5,000 loans or less. 
This estimate and the limited data available imply that 768 (all but 4 
percent of 800, or 32) non-depository servicers would service 5,000 
loans or less. The Bureau considers these figures to be the best 
available approximations to the number of non-depository servicers that 
would and would not qualify for the exemption.
---------------------------------------------------------------------------

    \211\ In the proposed rule, the Bureau stated that it was 
working to gather data from the Nationwide Mortgage Licensing System 
and Registry (NMLS) that would be additional to the data used in 
Table 1. The Bureau considered that this additional data might allow 
the Bureau to refine its estimate of the number of small entity non-
depositories that would be covered by the proposed periodic 
statement exemption in the proposed 2012 TILA Servicing Proposal. 
The Bureau did obtain additional data from the NMLS. This data, 
however, does not contain information directly about mortgage 
servicing revenue and mortgage loans serviced and it has limited 
information with which to derive these amounts. The Bureau has 
therefore not used this additional NMLS data to estimate the number 
of small entity non-depositories that would be covered by the 
exemption in this final rule. The Bureau also requested that 
commenters submit relevant data. All probative data submitted by 
commenters were discussed in this document.
    \212\ This calculation assumes the servicer receives 35 basis 
points on each dollar of unpaid principal balance. Typical annual 
servicing fees are 25 basis points for prime fixed-rate loans, 37.5 
basis points for prime ARMs, 44 basis points for FHA loans, and 50 
basis points for subprime loans; See Larry Cordell et al., The 
Incentives of Mortgage Servicers: Myths and Realities, at 15 (Fed. 
Reserve Bd., Working Paper No. 2008-46, 2008). The conclusion of the 
analysis would be the same regardless of which figure is used.
---------------------------------------------------------------------------

5. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The final rule does not impose new reporting or recordkeeping 
requirements. The final rule does, however, impose new compliance 
requirements on certain small entities. The requirements on small 
entities from each major component of the rule are presented below. The 
Bureau discusses impacts against a pre-statute baseline.
    Compliance requirements. As discussed in detail in the section-by-
section analysis above, the final rule imposes new compliance 
requirements on servicers. The final rule requires initial interest 
rate adjustment notifications, revised subsequent interest rate 
adjustment notifications, new periodic statement disclosures, and 
certain changes to the prompt crediting and payoff balance provisions 
of Regulation Z. As discussed in the Dodd-Frank Act section 1022 
analysis in part VII above, the Bureau believes that small servicers 
will incur one-time costs to learn about the final rule and will 
generally use vendors for one-time software and IT upgrades. Small 
servicers will also generally use vendors for producing and 
distributing (i.e., mailing or electronically communicating) the 
disclosures. The Bureau believes that vendors will likely pass along 
all of these costs to small servicers. However, the one-time cost to 
each small servicer will be mitigated by the fact that the costs of a 
single vendor will be spread among a large number of servicers. The 
ongoing costs of the ARM disclosures to each small servicer will be 
mitigated by the relatively small number of ARMs that currently exist. 
The one-time and ongoing costs of the periodic statement disclosure 
will be mitigated by the exemption for smaller servicers (as defined in 
Sec.  1026.41(e)(4)).
    Section 1026.20(c) generally amends the timing and content 
requirement for ARMs to provide a disclosure prior to each interest 
rate adjustment that effects a change in payment. This change will 
likely impose a one-time cost on small entities to update their system 
to comply with this provision. The Bureau reduces the burden on small 
entities, among other ways, by providing model forms which can be used 
to ease compliance, by providing exemptions for loans with a term of 
one year or less, by requiring similar information to that in the Sec.  
1026.20(d) notice, and by entirely eliminating the current annual 
disclosure that is required when over the course of a year, no interest 
rate adjustment causes a payment change.
    Section 1026.20(d) generally requires a new disclosure for the 
initial interest rate adjustment of an adjustable-rate mortgage. 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 Small Entity Representative 
reported the changes could take two to four days of IT support; these 
would be one-time costs. The Bureau reduces the burden on small 
entities, among other ways, by providing model forms which can be used 
to ease compliance, ensuring similarities between this and the Sec.  
1026.20(c) notice, and by providing exemptions for loans with a term of 
one year or less.
    Section 1026.36(c)(1) requires prompt crediting of periodic 
payments, and allows that partial payments may be held in suspense 
accounts subject to certain requirements. Compliance with this 
provision should impose minimal additional costs as prompt crediting of 
payments is already required by existing Regulation Z. Although many 
small entities reported they do not use suspense accounts, small 
servicers who do use suspense accounts may be required to update their 
systems to comply with this provision.
    Section 1026.36(c)(3) requires payoff balances to be provided 
within seven business days unless exceptional circumstances apply. 
Compliance with this provision should impose no significant additional 
cost as this essentially codifies existing Regulation Z Sec.  
1026.36(c)(1)(iii) provisions on payoff statements, except that the 
current provision requires payoff statements to be provided within a 
reasonable time and creates a safe harbor for responses provided within 
five business days.
    Section 1026.41 generally requires servicers to provide a periodic 
statement. Servicers may be required to update their systems to comply 
with this provision. The periodic statement requirement imposes one-
time and ongoing costs on small servicers. The

[[Page 10999]]

specific types of costs incurred by a servicer depend on whether the 
servicer produces the 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 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 consumers 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 Bureau reduces the burden on small 
entities, among other ways, by providing sample forms which can be used 
to ease compliance with the final rule, by providing a coupon book 
exemption for certain fixed-rate mortgages, and by providing a small 
servicer exemption for certain small entities.
    The Small Entity Representatives who use vendors stated that they 
did not know what their vendors would charge to enable them to comply 
with the new periodic statement requirement. The Small Entity 
Representatives 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.
    In accordance with Dodd-Frank Act section 1420, the final rule 
includes 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 exemption. Many of the Small Entity 
Representatives reported that they provide consumers with coupon books 
for ARMs. However, there is no data with which to estimate the 
percentage of small servicer portfolio loans that are in fixed-rate 
mortgages. Based on anecdotal reports, the Bureau understands that many 
small servicer portfolio loans are adjustable-rate mortgages.
    Finally, the rule includes a small servicer exemption. In the 
proposed rule, the Bureau provided an exemption from the periodic 
statement requirement for servicers that serviced 1,000 or fewer loans, 
all of which they either owned or had originated. The initial 
regulatory flexibility analysis provided a preliminary analysis of the 
exemption and stated that all but 13 small insured depositories and 
credit unions and 65 percent of small entity non-depositories would be 
covered by the exemption. As was explained in the section-by-section 
analysis of proposed paragraph 41(e)(4), this calculation was based on 
the assumption that the average unpaid principal balance on the 1,000 
loans was $175,000.\213\ Data from the bank and thrift Call Report on 
total unpaid principal balance of loans serviced by each bank or thrift 
then allowed the Bureau to estimate the number of small insured 
depositories and credit unions that would be covered by the exemption. 
The Bureau solicited comment on all aspects of the proposed exemption 
and asked interested parties to provide information relating to the 
exemption.
---------------------------------------------------------------------------

    \213\ This is the average unpaid principal balance for first-
lien residential mortgages at the largest national banks, which at 
the time of the report accounted for 63 percent of all outstanding 
mortgages; See OCC Mortgage Metrics Report.
---------------------------------------------------------------------------

    Comments received. The Bureau received a number of comments from 
banks and thrifts regarding the average unpaid principal balance of 
loans they originate or service. One industry commenter stated that the 
average size of loans it serviced was about $55,000 and that the 
average mortgage in the State of Oklahoma was about $106,000. Another 
stated that the average size of loans in its portfolio was less than 
half the Bureau's figure and that at origination it would lend only 
about $120,000 on the median-valued house in the zip code of its main 
office. Another stated that it serviced 1,800 loans with an average 
loan size of just under $70,000, and that the proposed threshold 
penalizes banks that specialize in moderately-priced homes.\214\
---------------------------------------------------------------------------

    \214\ On the other hand, one industry commenter reported holding 
2,555 loans totaling $440 million, so approximately $172,000 per 
loan. The Bureau notes that only one of these four commenters meets 
the Small Business Association threshold for a small servicer.
---------------------------------------------------------------------------

    In response to these comments, the Bureau performed additional 
analysis of Call Report data from banks, thrifts and credit unions. In 
particular, careful examination of loan count information from the 
credit union Call Report allowed the Bureau to improve its estimate of 
the likely average unpaid principal balance of loans serviced by banks 
that meet the SBA threshold for a small servicer. The Bureau has 
concluded that the likely average unpaid principal balance of loans 
serviced by insured depositories and credit unions that meet the SBA 
threshold is closer to $70,000.\215\ The Bureau also concludes that 
about 100 servicers meeting the threshold likely service more than 
1,000 loans.
---------------------------------------------------------------------------

    \215\ Credit Unions report the number and aggregate balance of 
mortgages held in portfolio on their Call Report. From these reports 
the Bureau calculated the average unpaid principal balance of 
portfolio mortgages by State for credit unions with less than $1 
billion in assets and applied the State specific figures to banks 
and thrifts under $10 billion in assets. For securitized loans the 
Bureau derived the average unpaid principal balance based upon the 
size of the securitized loan book using the FHFA's Home Loan 
Performance database, which yielded balances ranging from $141,000 
to $189,000.
---------------------------------------------------------------------------

    On the basis of this additional analysis, the final rule increases 
the loan count threshold for the exemption from 1,000 loans to 5,000 
loans. The Bureau's estimate of the number of small bank and small non-
bank mortgage servicers that will be exempt under the new threshold 
were presented in element 4 of this FRFA, above.
    Estimate of the classes of small entities which will be subject to 
the requirement. 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.4.
    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. 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 small entities that will 
be affected by the rule will require continued performance of the basic 
functions that they perform today: Generating disclosure forms, 
crediting partial payments from consumers either immediately or when 
they constitute a full payment, and responding to requests for payoff 
statements.

6-1. Description of the Steps the Agency Has Taken To Minimize the 
Significant Economic Impact on Small Entities

    The Bureau understands the new provisions will impose a cost on 
small entities, and has attempted to mitigate the burden wherever it 
can be done without unduly diminishing consumer protection. The 
section-by-section analysis of each provision contains a complete 
discussion of the following steps taken to minimize the burden.

[[Page 11000]]

Regulation Z Sec.  1026.20(c) Disclosure for Adjustable-Rate Mortgages
    The Bureau is making changes to the existing Sec.  1026.20(c) 
disclosure for ARMs. The Bureau has attempted to mitigate the burden of 
the changes to the Sec.  1026.20(c) notice by modifying the final rule 
from the proposed requirements on prepayment penalties and housing 
counselors, and by increasing the flexibility in the model forms, for 
the same reasons discussed in the discussion of Sec.  1026.20(d) 
immediately below. Additionally, the Bureau is mitigating the burden by 
including exemptions in the Sec.  1026.20(c) rule for loans with terms 
of one year or less. Finally, the Bureau is eliminating the annual 
Sec.  1026.20(c) notice for interest rate adjustments that do not cause 
changes in payment. The Bureau considered but decided not to exempt 
small servicers, as they are currently providing this disclosure.
Regulation Z Sec.  1026.20(d) New Initial Interest Rate Adjustment 
Notice for Adjustable-Rate Mortgages
    Dodd-Frank Act section 1418 requires servicers to provide a new 
disclosure to consumers who have hybrid ARMs regarding the initial 
interest rate adjustment. The Bureau requires the initial interest rate 
adjustment notice for hybrid (1/3, 1/5, etc.) as well as ARMs that are 
not hybrid (1/1, 3/3, 5/5, etc.). The Bureau has attempted to mitigate 
the burden of the notice by modifying the final rule from the proposed 
requirements on prepayment penalties and housing counselors, and by 
increasing the flexibility in the model forms.
    First, due to the nature of prepayment penalties, disclosing the 
amount of a prepayment penalty is significantly more burdensome than 
disclosing the existence of a prepayment penalty and the date it 
expires. Only certain consumers are interested in the amount of the 
prepayment penalty; such consumers can obtain this information by 
contacting their servicer. Thus, the final rule requires only the 
existence of a prepayment penalty (as well as the expiration date, and 
servicer contact information) in place of the amount. Second, the 
Bureau is amending the final rule by removing the requirement to 
include contact information for the State housing authority for the 
State where the consumer resides (as required by the proposal), or the 
even more burdensome requirement of providing a list of individual 
counselors (as required by the statute). Instead the Bureau is 
requiring disclosure of: (1) The HUD or Bureau Web site on 
homeownership counselors and counseling agencies, (2) the HUD toll free 
telephone number for the HUD list of homeownership counselors and 
counseling agencies, and (3) the Bureau Web site for locating State 
housing finance authorities. Third, as discussed in the section-by-
section analysis of the initial interest rate adjustment disclosure, 
the Bureau has included commentary highlighting the flexibility of the 
model forms to allow for other types of products and consumer 
situations. The Bureau believes these changes reduce the burden on 
small servicers, without greatly diminishing the consumer protection 
provided by this rule. Finally, the Bureau has drafted the initial ARM 
interest rate adjustment notice to parallel the ongoing Sec.  
1026.20(c) ARM disclosures to further reduce the implementation and 
compliance burden.
    Additionally, the Bureau considered but decided not to adopt 
certain alternatives, including the following: Eliminating the notice 
altogether, eliminating the estimate from the notice, exempting small 
servicers from the notice, and limiting the notice to only hybrid ARMs 
(rather than all ARMs). The Bureau reached this decision based on the 
following considerations. First, the Bureau believes the statutorily-
required good-faith estimate provides important information to 
consumers; the Bureau believes the value of this information outweighs 
the potential risk of confusion. Second, the Bureau has decided it 
would not be appropriate to exempt small servicers from the Sec.  
1026.20(d) notice. As discussed above in the section-by-section 
analysis of Sec.  1026.20(d), an exception would deprive certain 
consumers of advance notice seven to eight months before the first 
payment at a new level would be due. Without this advance notice, 
consumers may not have sufficient time to weigh their alternatives and 
pursue alternative actions. Finally, the Bureau believes it is 
appropriate to require the Sec.  1026.20(d) notice for all ARMs. Both 
hybrid ARMs and those that are not hybrid may subject consumers to the 
same payment shock that the ARM disclosure was designed to address. 
Accordingly, the Bureau believes that the underlying rationale for the 
Sec.  1026.20(d) notice is equally applicable to all ARMs, whether 
hybrid or non-hybrid, and should be extended to all ARMs.
Prompt Crediting and Request for Payoff Amounts
    The rules on prompt crediting and payoff statements clarify the 
definition and crediting of payments, the handling of partial payments, 
the use of suspense accounts, and the time permitted for providing a 
payoff statement. Small servicers are generally already in compliance 
with these rules. For this reason, among others, the Bureau did not 
adopt a small servicer exemption.
    The Bureau has attempted to mitigate the burden of the rules by 
including flexibility in the rule which allows, but does not mandate, 
suspense accounts and by including an exemption to the requirement to 
provide payoff statements within seven business days when circumstances 
make that timeline infeasible. First, the final rule allows, but does 
not require suspense accounts. This flexibility allows the variety of 
current business practices to continue. Servicers who currently use 
suspense accounts will not have to eliminate this practice. Likewise, 
servicers who currently credit or return partial payments will not have 
to incur the burden of establishing suspense accounts. Second, the 
Bureau included an exemption in the provision addressing payoff 
statements. This exemption allows payoff statements to be provided in a 
reasonable time when seven business days is not feasible because a loan 
is in bankruptcy or foreclosure, because the loan is a reverse mortgage 
or shared appreciation mortgage, or due to natural disasters or other 
similar circumstances. This exemption eases the burden of the provision 
addressing payoff statements. Finally, the Bureau considered but 
decided not to require prompt crediting of partial payments, and 
requiring application of an accumulated full payment in a suspense 
account to the oldest outstanding amount due. Instead, the final rule 
gives servicers the option of allowing partial payments to be sent to a 
suspense account. The Bureau believes this flexibility is less 
burdensome than requiring immediate application of partial payments.
Periodic Statements
    Dodd-Frank Act section 1420 requires servicers to provide a new 
periodic statement to the consumer for each billing cycle. The rule 
would generally require the content listed in the statute, additional 
billing information, and payment application information. Thus, the 
statutory disclosure requirements would impose a smaller economic 
burden on small servicers than would the Bureau's regulatory disclosure 
requirements.
    As discussed above in element four of this FRFA, the Bureau 
believes it has largely mitigated the burden of the periodic statement 
requirement on servicers that meet the size standards

[[Page 11001]]

established by the SBA. For servicers who do not receive the benefit of 
this exemption, the Bureau has mitigated the burden by modifying the 
requirements on the disclosure of the prepayment penalty and the 
information on housing counselors, as discussed above. Additionally, 
the Bureau considered, but decided not to adopt the following 
alternatives: Limiting the periodic statement disclosure to the DFA 
requirements, requiring the use of a specific form, limiting the small 
servicer exemption to servicers servicing 1,000 or fewer loans, and 
requiring alternative compliance for smaller servicers who have the 
advantage of the small servicer exemption.

6-2. Description of the Steps the Agency Has Taken To Minimize Any 
Additional 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.\216\ To satisfy 
these statutory requirements, the Bureau provided notification to the 
Chief Counsel for Advocacy of the Small Business Administration on 
April 9, 2012 that the Bureau would collect the advice and 
recommendations of the same Small Entity Representatives identified in 
consultation with the Chief Counsel through the Small Business Review 
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. The Bureau sought to collect the 
advice and recommendations of the Small Entity Representatives during 
the Small Business Review Panel outreach meeting regarding these issues 
because, as small financial service providers, the Small Entity 
Representatives could provide valuable input on any such impact related 
to the proposed rule.
---------------------------------------------------------------------------

    \216\ 5 U.S.C. 603(d).
---------------------------------------------------------------------------

    At the time the Bureau circulated the Small Business Review Panel 
materials to the Small Entity Representatives in advance of the Small 
Business Review 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.
    At the Small Business Review Panel outreach meeting, the Bureau 
asked the Small Entity Representatives a series of questions regarding 
cost of business credit issues. The questions were focused on two 
areas. First, the Small Entity Representatives 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 Small Entity Representatives 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 Small Entity Representatives' cost of credit.
    The Small Entity Representatives 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 Small Entity Representative mentioned 
that at times people may use a home-secured loan to finance a business, 
which was corroborated by a different Small Entity Representative based 
on his personal experience with starting a business.
    In the IRFA, the Bureau asked interested parties to provide data 
and other factual information regarding the use of personal home-
secured credit to finance a business. The Bureau received only one 
comment on this issue. The commenter stated that more than 52 percent 
of the 27.9 million small businesses in the United States are home-
based and close to 80 percent of small businesses file taxes as 
individuals. The commenter further stated that, according to the SBA, 
73.2 percent of small businesses in the United States are sole 
proprietors. Thus, in some instances, an increase in the cost of 
consumer credit is also an increase in the cost of business 
credit.\217\
---------------------------------------------------------------------------

    \217\ Email from Tom Sullivan, U.S. Chamber of Commerce, to 
Mitch Hochberg, U.S. Consumer Fin. Protection Bureau (Nov. 13, 2012) 
(ex-parte communication available at http://www.regulations.gov/#!documentDetail;D=CFPB-2012-0033-0183).
---------------------------------------------------------------------------

    Regarding the impact of the rule on the cost of consumer credit, 
the Bureau does not believe that the frequency or content of the new 
initial rate adjustment notice or the changes in the frequency and 
content of the Sec.  1026.20(c) disclosure create significant one-time 
costs or significant additional ongoing costs for servicers. The new 
initial rate adjustment disclosure is a one-time disclosure. The 
revised Sec.  1026.20(c) disclosure will be given less frequently than 
the disclosures required by in current Sec.  1026.20(c), much of the 
content of the revised disclosure is provided in the current 
disclosure, and the Bureau has worked to mitigate the cost of the 
additional content in the revised disclosure. Certain one-time and 
ongoing costs will likely be absorbed by vendors, as discussed above. 
The periodic statement disclosure is given much more frequently and the 
additional costs may be significantly larger than the additional costs 
for other disclosures. However, the Bureau is mitigating the cost of 
this disclosure with the exemption for almost all small servicers, as 
described above.
    If vendors passed along all of the minimal costs associated with 
this rule to servicers, then the cost of servicing would rise by this 
amount. Servicers may attempt to collect this revenue by increasing 
penalties for missed payments or other charges outside of origination, 
in which case individuals who incur these charges may make much larger 
one-time payments than they do now. Over time, however, it is just as 
likely that servicers will seek to recover these costs at origination. 
All of the additional costs of servicing could be met by an origination 
fee or an increment to the cost of credit equal to the additional cost 
of servicing multiplied by the expected number of years the loan would 
be serviced. The Bureau believes that this cost would be minimal as 
well.
    The impact of an increase in the cost of mortgage loan servicing on 
other forms of consumer credit that may be used to fund a business, and 
on business credit itself, would be even smaller. If a lender has made 
optimal (profit maximizing) decisions in one line of business, a change 
in the costs of another line of business would not disrupt or alter the 
optimal decisions in the first line of business absent some shared 
inputs or platforms (``economies of scope'') or other important 
interdependencies that are not obvious in regards to consumer credit. 
This is especially clear if there is competition in the other line of 
business, in this case business credit lending, from firms that do not 
service mortgage loans and therefore did not experience a cost 
increase. Absent collusion, firms that

[[Page 11002]]

did not experience an increase in the costs have the ability and the 
incentive to underprice any firm that attempts to pass along a cost 
increase.
    In summary, the Bureau believes that the effect of the mortgage 
servicing rule on the cost of credit for small businesses is at most 
negligible. Furthermore, this cost is negligible whether the small 
business consumer is relying on a consumer mortgage loan, some other 
type of consumer credit, or a small business loan.

IX. Paperwork Reduction Act

    The Bureau's information collection requirements contained in this 
rule, and identified as such, were 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). Notwithstanding any other 
provision of the law, 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 OMB control number for this collection is 
3170-0028.
    This rule amends 12 CFR part 1026 (Regulation Z). Regulation Z 
currently contains collections of information approved by OMB, and the 
Bureau's OMB control number for Regulation Z is 3170-00015. The 
collection title is: Truth in Lending Act (Regulation Z) 12 CFR 1026.
    On September 17, 2012, the proposed rule was published in the 
Federal Register (77 FR 57317). The Bureau invited comment on: (1) 
Whether the proposed collection of information is necessary for the 
proper performance of the Bureau's functions, including whether the 
information has practical utility; (2) the accuracy of the Bureau's 
estimate of the burden of the proposed information collection, 
including the cost of compliance; (3) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (4) ways 
to minimize the burden of information collection on respondents, 
including through the use of automated collection techniques or other 
forms of information technology. The comment period for the burden 
analysis sections of the proposed rule expired on November 16, 2012. 
The Bureau did not receive any comments on the burden of the proposed 
information collection. However, the Bureau did receive comment on the 
more general consideration of certain costs in the proposed Dodd-Frank 
Act section 1022 analysis, this comment is addressed in the final Dodd-
Frank Act section 1022 analysis above.
    The title of this information collection is Mortgage Servicing 
Amendment (Regulation Z). The frequency of response is on occasion. The 
information collection required provides benefits for consumers and is 
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 rule, the Bureau generally accounts 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 respondents), and certain non-depository servicers (the 
Bureau non-depository respondents). The Bureau and the Federal Trade 
Commission (FTC) generally both have enforcement authority over non-
depository institutions under Regulation Z. Accordingly, the Bureau has 
allocated to itself half of the total estimated burden from 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 changes to Regulation Z for the roughly 
12,643 institutions, including Bureau respondents,\218\ that are 
estimated to service consumer mortgages subject to the rule would be 
approximately 25,000 one-time burden hours and 65,000 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.
---------------------------------------------------------------------------

    \218\ 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 making four changes to the information collection 
requirements in Regulation Z. First, amended Sec.  1026.20(c) regarding 
adjustable-rate mortgages changes the format, content, and timing of 
the existing rate adjustment disclosures. The rule changes the minimum 
time for providing advance notice to consumers from 25 days to 60 days 
before the first payment at a new level is due when an interest rate 
adjustment causes a payment change. Servicers will 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. Second, as previously discussed, Sec.  
1026.20(d) regarding adjustable-rate mortgages requires creditors, 
assignees, or 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.
    Third, Sec.  1026.36 makes changes to the existing requirements on 
servicers to promptly credit payments that satisfy payment rules 
specified by a servicer. Amended Sec.  1026.36 also makes changes to 
the existing requirements to provide an accurate payoff balance upon 
request. This modifies the timeline on the existing information 
collection of the requirement to provide accurate payoff statements.
    Fourth, Sec.  1026.41 requires 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 adjust, outstanding principal balance, etc.; and other 
information that may be helpful to troubled consumers. Certain small 
servicers (those servicing 5,000 mortgages or less and who own or 
originated all the loans they are servicing) are exempt from this 
requirement. Fixed-rate mortgages are exempt if the servicer provides 
the consumer with a coupon book that contains certain information, and 
makes

[[Page 11003]]

other information available to the consumer.

B. Burden Analysis Under the Four Information Collection Requirements 
219
---------------------------------------------------------------------------

    \219\ Based on discussions with industry participants, 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. Changes in the Regulation Z Sec.  1026.20(c) Disclosure for 
Adjustable-Rate Mortgages
    All Bureau respondents will have a one-time burden under this 
requirement associated with reviewing the regulation. Certain Bureau 
respondents will 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 Bureau 
depository respondents and 1,050 hours and $58,000 for Bureau non-
depository respondents.\220\
---------------------------------------------------------------------------

    \220\ Dollar figures include estimated costs to vendors.
---------------------------------------------------------------------------

    Regarding ongoing burden, the Bureau is requiring 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 Sec.  1026.20(c) 
disclosure. The Bureau recognizes that there is content in the 
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 considered a burden for purposes of PRA. The 
Bureau estimates the ongoing burden to be 1,250 hours for Bureau 
depository respondents and 180 hours and $22,000 for Bureau non-
depository respondents.
2. New Initial Interest Rate Adjustment Notice for Adjustable-Rate 
Mortgages
    All Bureau respondents will have a one-time burden under this 
requirement associated with reviewing the regulation. Certain Bureau 
respondents will 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 Bureau depository respondents and 
1,500 hours and $115,000 for Bureau non-depository respondents.
    Certain Bureau respondents will have ongoing burden associated with 
the IT used in producing the disclosure. All Bureau respondents will 
have ongoing costs associated with distributing (e.g., mailing) the 
disclosure. The Bureau estimates this ongoing burden to be 530 hours 
and $57,000 for Bureau depository respondents and 80 hours and $5,600 
for Bureau non-depository respondents.
3. Prompt Crediting of Payments and Response to Requests for Payoff 
Amounts
    All Bureau respondents will have a one-time burden under this 
requirement associated with reviewing the regulation. The Bureau 
estimates this one-time burden to be 110 hours for Bureau depository 
respondents and 1,375 hours for Bureau non-depository respondents.
    Regarding ongoing burden, the Bureau understands that the payoff 
statement requirement amends the timeline of 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 Bureau depository 
respondents and 250 hours and $17,000 for Bureau non-depository 
respondents.
4. New Periodic Statements
    All Bureau respondents that are not exempt will have a one-time 
burden under this requirement associated with reviewing the regulation. 
Certain Bureau respondents will have a one-time burden from creating 
software and IT capability to modify existing periodic disclosures or 
produce a new disclosure. The disclosure incorporates the usual and 
customarily provided 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 Bureau depository 
respondents and 800 hours for Bureau 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 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 periodic statement disclosure beyond what may be usual 
and customary to provide in existing billing statements. The Bureau 
estimates the ongoing burden to be 47,000 hours and $5,065,000 for 
Bureau depository respondents and 4,600 hours and $330,000 for Bureau 
non-depository respondents.

C. Summary of Burden Hours for Bureau Respondents

[[Page 11004]]

[GRAPHIC] [TIFF OMITTED] TR14FE13.001

    Between the proposed and final rule the Bureau improved its 
methodology for estimating the average unpaid principal balance of 
outstanding mortgages. In addition, the Bureau updated the institution 
counts from 2010 year-end to 2011 year-end figures.

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 amends Regulation Z, 12 
CFR part 1026, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority: 12 U.S.C. 2601; 2603-2605, 2607, 2609, 2617, 5511, 
5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart C--Closed-End Credit

0
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. The 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, 
Sec.  1026.20(c) and (d), or Sec.  1026.47. The disclosures required by 
Sec.  1026.20(d) shall be provided as a separate document from all 
other written materials. 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) and (d). 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.
* * * * *

0
3. Section 1026.20 is amended by revising the heading and paragraphs 
(c) and (d) to read as follows:


Sec.  1026.20  Disclosure requirements regarding post-consummation 
events.

* * * * *
    (c) Rate adjustments with a corresponding change in payment. The 
creditor, assignee, or servicer of an adjustable-rate mortgage shall 
provide consumers with disclosures, as described in this paragraph (c), 
in connection with the adjustment of interest rates pursuant to the 
loan contract that results in a corresponding adjustment to the 
payment. To the extent that other provisions of this subpart C govern 
the disclosures required by this paragraph (c), those provisions apply 
to assignees and servicers as well as to creditors. The disclosures 
required by this paragraph (c) 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.
    (1) Coverage. (i) In general. For purposes of this paragraph (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) Exemptions. The requirements of this paragraph (c) do not 
apply to:
    (A) ARMs with terms of one year or less; or

[[Page 11005]]

    (B) The first interest rate adjustment to an ARM if the first 
payment at the adjusted level is due within 210 days after consummation 
and the new interest rate disclosed at consummation pursuant to Sec.  
1026.20(d) was not an estimate.
    (2) Timing and content. Except as otherwise provided in paragraph 
(c)(2) of this section, the disclosures required by this paragraph (c) 
shall be provided to consumers at least 60, but no more than 120, days 
before the first payment at the adjusted level is due. The disclosures 
shall be provided to consumers at least 25, but no more than 120, days 
before the first payment at the adjusted level is due for ARMs with 
uniformly scheduled interest rate adjustments occurring every 60 days 
or more frequently and for ARMs originated prior to January 10, 2015 in 
which the loan contract 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. The disclosures 
shall be provided to consumers as soon as practicable, but not less 
than 25 days before the first payment at the adjusted level is due, for 
the first adjustment to an ARM if it occurs within 60 days of 
consummation and the new interest rate disclosed at consummation 
pursuant to Sec.  1026.20(d) was an estimate. The disclosures required 
by this paragraph (c) shall include:
    (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 the interest rate and 
mortgage payment will change;
    (B) The effective date of the interest rate adjustment and when 
additional future interest rate adjustments 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
    (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 the payment allocation for the last 
payment prior to the date of the disclosure. The new payment allocation 
disclosed shall be 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 interest rate 
adjustments and a source of information about the index or formula; and
    (B) The type and amount of any adjustment to the index, including 
any margin and an explanation that the margin is the addition of a 
certain number of percentage points to the index, and any application 
of previously foregone interest rate increases from past interest rate 
adjustments.
    (iv) Any limits on the interest rate or payment increases at each 
interest rate 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 rate increases may apply 
to 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) Any adjustment to the index or formula, such as the addition of 
a margin or the application of any previously foregone interest rate 
increases from past interest rate adjustments;
    (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 and any change in the term of the loan 
caused by the adjustment.
    (vi) If applicable, a statement that the new payment will not be 
allocated to pay loan principal and will not reduce the loan balance. 
If the new payment will result in negative amortization, a statement 
that the new payment will not be allocated to pay loan principal and 
will pay only part of the loan interest, thereby adding to the balance 
of the loan. If the new payment will result in negative amortization as 
a result of the interest rate adjustment, the statement shall set forth 
the payment required to amortize fully the remaining balance at the new 
interest rate over the remainder of the loan term.
    (vii) The circumstances under which any prepayment penalty, as 
defined in Sec.  1026.32(b)(6)(i), may be imposed, such as when paying 
the loan in full or selling or refinancing the principal dwelling; the 
time period during which such a penalty may be imposed; and a statement 
that the consumer may contact the servicer for additional information, 
including the maximum amount of the penalty.
    (3) Format. (i) The disclosures required by this paragraph (c) 
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)(1) and 
(2) in appendix H to this part; and
    (ii) The disclosures required by paragraph (c)(2)(ii) of this 
section 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.
    (d) Initial rate adjustment. The creditor, assignee, or servicer of 
an adjustable-rate mortgage shall provide consumers with disclosures, 
as described in this paragraph (d), in connection with the initial 
interest rate adjustment pursuant to the loan contract. To the extent 
that other provisions of this subpart C govern the disclosures required 
by this paragraph (d), those provisions apply to assignees and 
servicers as well as to creditors. The disclosures required by this 
paragraph (d) shall be provided as a separate document from other 
documents provided by the creditor, assignee, or servicer. The 
disclosures shall be provided to consumers 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. (i) In general. For purposes of this paragraph (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) Exemptions. The requirements of this paragraph (d) do not 
apply to ARMs with terms of one year or less.
    (2) Content. 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 calculation of the index reported 
in the source of information described in paragraph (d)(2)(iv)(A) of 
this section within fifteen business days prior to the date of the 
disclosure. The disclosures required by this paragraph (d) shall 
include:

[[Page 11006]]

    (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 adjustments 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 the payment allocation for the last 
payment prior to the date of the disclosure. The new payment allocation 
disclosed shall be 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 interest rate 
adjustments and a source of information about the index or formula; and
    (B) The type and amount of any adjustment to the index, including 
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 
interest rate 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 rate increases may apply 
to 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) Any adjustment to the index or formula, such as the addition of 
a margin;
    (C) The loan balance expected on the date of the interest rate 
adjustment;
    (D) The length of the remaining loan term expected on the date of 
the interest rate adjustment and any change in the term of the loan 
caused by the adjustment; 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 between 
two and four months before the first payment at the adjusted level is 
due for interest rate adjustments that result in a corresponding 
payment change.
    (vii) If applicable, a statement that the new payment will not be 
allocated to pay loan principal and will not reduce the loan balance. 
If the new payment will result in negative amortization, a statement 
that the new payment will not be allocated to pay loan principal and 
will pay only part of the loan interest, thereby adding to the balance 
of the loan. If the new payment will result in negative amortization as 
a result of the interest rate adjustment, the statement shall set forth 
the payment required to amortize fully the remaining balance at the new 
interest rate over the remainder of the loan term.
    (viii) The circumstances under which any prepayment penalty, as 
defined in Sec.  1026.32(b)(6)(i), may be imposed, such as when paying 
the loan in full or selling or refinancing the principal dwelling; the 
time period during which such a penalty may be imposed; and a statement 
that the consumer may contact the servicer for additional information, 
including the maximum amount of the penalty.
    (ix) The telephone number of the creditor, assignee, or servicer 
for consumers to call if they anticipate not being able to make their 
new payments.
    (x) The following alternatives to paying at the new rate that 
consumers may be able to pursue and a brief explanation of each 
alternative, expressed in simple and clear terms:
    (A) Refinancing the loan with the current or another creditor or 
assignee;
    (B) Selling the property and using the proceeds to pay the loan in 
full;
    (C) Modifying the terms of the loan with the creditor, assignee, or 
servicer; and
    (D) Arranging payment forbearance with the creditor, assignee, or 
servicer.
    (xi) The Web site to access either the Bureau list or the HUD list 
of homeownership counselors and counseling organizations, the HUD toll-
free telephone number to access the HUD list of homeownership 
counselors and counseling organizations, and the Bureau Web site to 
access contact information for State housing finance authorities (as 
defined in Sec.  1301 of the Financial Institutions Reform, Recovery, 
and Enforcement Act of 1989).
    (3) Format. (i) Except for the disclosures required by paragraph 
(d)(2)(i) of this section, the disclosures required by this paragraph 
(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) of this 
section shall appear outside of and above the table required in 
paragraph (d)(3)(i) of this section; and
    (iii) The disclosures required by paragraph (d)(2)(iii) of this 
section 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.

Subpart E--Special Rules for Certain Home Mortgage Transactions


0
4. Section 1026.36 is amended by revising paragraph (c) to read as 
follows:


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

* * * * *
    (c) Servicing practices. 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) Periodic payments. No servicer shall fail to credit a periodic 
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 periodic payment, as used in this paragraph (c), is an 
amount sufficient to cover principal, interest, and escrow (if 
applicable) for a given billing cycle. A payment qualifies as a 
periodic payment even if it does not include amounts required to cover 
late fees, other fees, or non-escrow payments a servicer has advanced 
on a consumer's behalf.
    (ii) Partial payments. Any servicer that retains a partial payment, 
meaning any payment less than a periodic

[[Page 11007]]

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 as 
required by Sec.  1026.41(d)(3), if a periodic statement is required; 
and
    (B) On accumulation of sufficient funds to cover a periodic payment 
in any suspense or unapplied funds account, treat such funds as a 
periodic payment received in accordance with paragraph (c)(1)(i) of 
this section.
    (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 five 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 periodic payment received on the 
due date, or within any applicable courtesy 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 sent 
within a reasonable time, but in no case more than seven business days, 
after receiving a written request from the consumer or any person 
acting on behalf of the consumer. When a creditor, assignee, or 
servicer, as applicable, is not able to provide the statement within 
seven business days of such a request because a loan is in bankruptcy 
or foreclosure, because the loan is a reverse mortgage or shared 
appreciation mortgage, or because of natural disasters or other similar 
circumstances, the payoff statement must be provided within a 
reasonable time. A creditor or assignee that does not currently own the 
mortgage loan or the mortgage servicing rights is not subject to the 
requirement in this paragraph (c)(3) to provide a payoff statement.
* * * * *

0
5. Section 1026.41 is added to read as follows:


Sec.  1026.41  Periodic statements for residential mortgage loans.

    (a) In general. (1) Scope. This section applies to a closed-end 
consumer credit transaction secured by a dwelling, unless an exemption 
in paragraph (e) of this section applies. Such transactions are 
referred to as mortgage loans for the purposes of this section.
    (2) Periodic statements. A servicer of a transaction subject to 
this section shall provide the consumer, for each billing cycle, a 
periodic statement meeting the requirements of paragraphs (b), (c), and 
(d) of this section. If a mortgage 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 includes the creditor, assignee, or 
servicer, as applicable. A creditor or assignee that does not currently 
own the mortgage loan or the mortgage servicing rights is not subject 
to the requirement in this section to provide a periodic statement.
    (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 courtesy period provided 
for the previous billing cycle.
    (c) Form of the periodic statement. The 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-30. Proper use of these forms complies with the 
requirements of this paragraph (c) and the layout requirements in 
paragraph (d) of this section.
    (d) Content and layout of the periodic statement. The periodic 
statement required by this section shall include:
    (1) Amount due. Grouped together in close proximity to each other 
and 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, shown more prominently than other disclosures 
on the page and, if the transaction has multiple payment options, the 
amount due under each of the payment options.
    (2) Explanation of amount due. The following items, 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 and, 
if a mortgage loan has multiple payment options, a breakdown of each of 
the payment options along with information on 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, 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 the amount, if any, that was applied to 
principal, interest, escrow, fees and charges, and the amount, if any, 
sent to any suspense or unapplied funds account; and
    (ii) The total of all payments received since the beginning of the 
current calendar year, including a breakdown of that total showing the 
amount, if any, that was applied to principal, interest, escrow, fees 
and charges, and the amount, if any, currently held in any suspense or 
unapplied funds account.
    (4) Transaction activity. A list of all the transaction activity 
that occurred since the last statement. For purposes of this paragraph 
(d)(4), transaction activity means any activity that causes a credit or 
debit to the amount currently due. This list 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) Partial payment information. If a statement reflects a partial 
payment that was placed in a suspense or unapplied funds account, 
information explaining what must be done for the funds to be applied. 
The information must be on the front page of the statement or, 
alternatively, may be included on a separate page enclosed with the 
periodic statement or in a separate letter.
    (6) Contact information. A toll-free telephone number and, if 
applicable, an electronic mailing address that may be used by the 
consumer to obtain information about the consumer's account, located on 
the front page of the statement.
    (7) Account information. The following information:
    (i) The amount of the outstanding principal balance;
    (ii) The current interest rate in effect for the mortgage loan;

[[Page 11008]]

    (iii) The date after which the interest rate may next change;
    (iv) The existence of any prepayment penalty, as defined in Sec.  
1026.32(b)(6)(i), that may be charged;
    (v) The Web site to access either the Bureau list or the HUD list 
of homeownership counselors and counseling organizations and the HUD 
toll-free telephone number to access contact information for 
homeownership counselors or counseling organizations; and
    (8) Delinquency information. If the consumer is more than 45 days 
delinquent, the following items, grouped together in close proximity to 
each other and located on the first page of the statement or, 
alternatively, on a separate page enclosed with the periodic statement 
or in a separate letter:
    (i) The date on which the consumer became delinquent;
    (ii) A notification of possible risks, such as foreclosure, and 
expenses, that may be incurred if the delinquency is not cured;
    (iii) An account history showing, for the previous six months or 
the period since the last time the account was current, whichever is 
shorter, the amount remaining past due from each billing cycle or, if 
any such payment was fully paid, the date on which it was credited as 
fully paid;
    (iv) A notice indicating any loss mitigation program to which the 
consumer has agreed, if applicable;
    (v) A notice of whether the servicer has made the first notice or 
filing required by applicable law for any judicial or non-judicial 
foreclosure process, if applicable;
    (vi) The total payment amount needed to bring the account current; 
and
    (vii) A reference to the homeownership counselor information 
disclosed pursuant to paragraph (d)(7)(v) of this section.
    (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 plans. Transactions secured by consumers' interests 
in timeshare plans, as defined by 11 U.S.C. 101(53D), are exempt from 
the requirements of this section.
    (3) Coupon books. The requirements of paragraph (a) of this section 
do not apply to fixed-rate loans if the 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 available upon request to the consumer by telephone, in 
writing, in person, or electronically, if the consumer consents, the 
information listed in paragraph (d)(2) through (5) of this section; and
    (iv) Provides the consumer the information listed in paragraph 
(d)(8) of this section in writing, for any billing cycle during which 
the consumer is more than 45 days delinquent.
    (4) Small servicers. (i) Exemption. A creditor, assignee, or 
servicer is exempt from the requirements of this section for mortgage 
loans serviced by a small servicer.
    (ii) Small servicer defined. A small servicer is a servicer that 
either:
    (A) Services 5,000 or fewer mortgage loans, for all of which the 
servicer (or an affiliate) is the creditor or assignee; or
    (B) Is a Housing Finance Agency, as defined in 24 CFR 266.5.
    (iii) Small servicer determination. In determining whether a small 
servicer services 5,000 or fewer mortgage loans, a servicer is 
evaluated based on the number of mortgage loans serviced by the 
servicer and any affiliates as of January 1 for the remainder of the 
calendar year. A servicer that crosses the threshold will have six 
months after crossing the threshold or until the next January 1, 
whichever is later, to comply with any requirements for which a 
servicer is no longer exempt as a small servicer.


0
6. Appendix H to Part 1026 is amended by:
0
A. Removing the entry for H-4(D) and adding entries in alphanumerical 
order for H-4(D)(1) through H-4(D)(4), and H-30(A), through H-30(D), in 
the table of contents at the beginning of the appendix;
0
B. Republishing the note to H-4(C);
0
C. Removing H-4(D);
0
D. Adding model and sample forms H-4(D)(1) through H-4(D)(4), and H-
30(A) through H-30(C), and sample clause H-30(D), in alphanumerical 
order; and
0
E. Republishing H-4(E) and H-4(F).
    The additions and republications read as follows:

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

* * * * *

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))
* * * * *
H-30(A) Sample Form of Periodic Statement (Sec.  1026.41)
H-30(B) Sample Form of Periodic Statement with Delinquency Box 
(Sec.  1026.41)
H-30(C) Sample Form of Periodic Statement for a Payment-Options Loan 
(Sec.  1026.41)
H-30(D) Sample Clause for Homeownership Counselor Contact 
Information (Sec.  1026.41)
* * * * *
BILLING CODE 4810-AM-P
[GRAPHIC] [TIFF OMITTED] TR14FE13.002


[[Page 11009]]


[GRAPHIC] [TIFF OMITTED] TR14FE13.003


[[Page 11010]]


[GRAPHIC] [TIFF OMITTED] TR14FE13.004


[[Page 11011]]


[GRAPHIC] [TIFF OMITTED] TR14FE13.005


[[Page 11012]]


[GRAPHIC] [TIFF OMITTED] TR14FE13.006


[[Page 11013]]


[GRAPHIC] [TIFF OMITTED] TR14FE13.007

* * * * *

[[Page 11014]]

[GRAPHIC] [TIFF OMITTED] TR14FE13.008


[[Page 11015]]


[GRAPHIC] [TIFF OMITTED] TR14FE13.009


[[Page 11016]]


[GRAPHIC] [TIFF OMITTED] TR14FE13.010

BILLING CODE 4810-AM-C
H-30(D) Sample Clause for Homeownership 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 homeownership counselors or counseling organizations 
in your area, go to http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm 
or call 800-569-4287.
* * * * *
0
7. In Supplement I to Part 1026--Official Interpretations:
0
A. Under Section 1026.17--General Disclosure Requirements:
0
i. Under Paragraph 17(a)(1), paragraph 2.ii is revised.
0
ii. Under Paragraph 17(c)(1), paragraph 1 is revised.

[[Page 11017]]

0
B. Under Section 1026.19--Certain Mortgage and Variable-Rate 
Transactions:
0
i. Under 19(b) Certain variable-rate transactions, paragraphs 4 and 
5.i.C are revised.
0
ii. Under Paragraph 19(b)(2)(xi), paragraph 1 is revised.
0
C. The heading for Section 1026.20 is revised.
0
D. Under newly designated Section 1026.20:
0
i. Paragraph 20(c) Variable-rate adjustments is revised.
0
ii. Paragraph 20(d) Initial rate adjustment is added.
0
E. Under Section 1026.36--Prohibited Acts or Practices in Connection 
With Credit Secured by a Dwelling, under 36(c) Servicing practices:
0
i. Paragraph 36(c)(1)(i), paragraph 2, and Paragraph 36(c)(1)(ii), 
Paragraph 36(c)(1)(iii), and Paragraph 36(c)(2) are revised.
0
ii. Paragraph 36(c)(3) is added.
0
F. Section 1026.41--Periodic Statements for Residential Mortgage Loans 
is added.
0
G. Under Appendix H--Closed-End Model Forms and Clauses, paragraphs 7 
introductory text and 7.i are revised.
    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 Sec.  
1026.19(b) 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) and (d), 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 1026.19--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). 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. * * *
    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)(1)(ii)-3.ii, 20(d)(1)(ii)-2.ii, 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) and (d) regarding notices of 
adjustments.) For example, the disclosure provided pursuant to Sec.  
1026.20(d) might state, ``You will be notified at least 210, but no 
more than 240, days before the first payment at the adjusted level 
is due after the initial interest rate 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 at least 60, but no more than 120, days before the first 
payment at the adjusted level is due after any interest rate 
adjustment resulting in a corresponding payment change. This notice 
will contain information about the adjustment, including the 
interest rate, payment amount, and loan balance.''
* * * * *

Section 1026.20--Disclosure Requirements Regarding Post-Consummation 
Events

* * * * *
    20(c) Rate adjustments with a corresponding change in payment.
    1. Creditors, assignees, and servicers. Creditors, assignees, 
and servicers that own either the applicable adjustable-rate 
mortgage or the applicable mortgage servicing rights or both are 
subject to the requirements of Sec.  1026.20(c). Creditors, 
assignees, and servicers are also subject to the requirements of any 
provision of subpart C that governs 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. While creditors, assignees, and 
servicers are all subject to the requirements of Sec.  1026.20(c), 
they may decide among themselves which of them will provide the 
required disclosures.
    2. Loan modifications. Under Sec.  1026.20(c), the interest rate 
adjustment disclosures are required only for interest rate 
adjustments occurring pursuant to the loan contract. Accordingly, 
creditors, assignees, and servicers need not provide the disclosures 
for interest rate adjustments occurring in loan modifications made 
for loss mitigation purposes. Subsequent interest rate adjustments 
resulting in a corresponding payment change occurring pursuant to 
the modified loan contract, however, are subject to the requirements 
of Sec.  1026.20(c).
    3. Conversions. In addition to the disclosures required for 
interest rate adjustments under an adjustable-rate mortgage, Sec.  
1026.20(c) also requires the disclosures for an ARM converting to a 
fixed-rate transaction when the conversion changes the interest rate 
and results in a corresponding payment change. When an open-end 
account converts to a closed-end adjustable-rate mortgage, the Sec.  
1026.20(c) disclosure is 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, i.e., an ARM with a 
fixed rate of interest for the first three years after which the 
interest rate adjusts annually, the first Sec.  1026.20(c) 
disclosure would not be required until three years after the 
conversion, and only if that first adjustment resulted in a payment 
change.
    Paragraph 20(c)(1)(i).
    1. In general. An adjustable-rate mortgage, as defined in Sec.  
1026.20(c)(1)(i), is a variable-rate transaction as that term is 
used in subpart C, except as distinguished by comment 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. Short-term ARMs. Under Sec.  1026.20(c)(1)(ii), construction, 
home improvement, bridge, and other loans with terms of one year or 
less are not subject to the requirements in Sec.  1026.20(c). 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.

[[Page 11018]]

    2. First new payment due within 210 days after consummation. 
Section 1026.20(c) disclosures are not required if the first payment 
at the adjusted level is due within 210 days after consummation, 
when the new interest rate disclosed at consummation pursuant to 
Sec.  1026.20(d) is not an estimate. 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 an ARM 
interest rate adjusts if the first payment at the adjusted level was 
due 120 days after consummation and the adjusted interest rate 
disclosed at consummation pursuant to Sec.  1026.20(d) was not an 
estimate.
    3. Non-adjustable-rate mortgages. The following transactions, if 
structured as fixed-rate and not as adjustable-rate mortgages based 
on an index or formula, 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; and
    v. Preferred-rate loans.
    Paragraph 20(c)(2).
    1. Timing. The requirement that Sec.  1026.20(c) disclosures be 
provided to consumers within a certain timeframe means that the 
creditor, assignee, or servicer must deliver the notice or place it 
in the mail within that timeframe, excluding any grace or courtesy 
periods. The requirement that the Sec.  1026.20(c) disclosures must 
be provided between 25 and 120 days before the first payment at the 
adjusted level is due for frequently-adjusting ARMs, applies to ARMs 
that adjust regularly at a maximum of every 60 days.
    Paragraph 20(c)(2)(ii)(A).
    1. 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.'' The requirements of Sec.  1026.20(c)(2)(ii)(A) do not 
preclude creditors, assignees, and servicers from rounding the 
interest rate, pursuant to the requirements of the ARM contract.
    Paragraph 20(c)(2)(iv).
    1. Rate limits and foregone interest rate increases. Interest 
rate carryover, or foregone interest rate increases, is the amount 
of interest rate increase foregone at any ARM interest rate 
adjustment that, subject to rate caps, can be added to future 
interest rate adjustments to increase, or to offset decreases in, 
the rate determined by using the index or formula. The disclosures 
required by Sec.  1026.20(c)(2)(iv) regarding foregone interest rate 
increases apply only to transactions permitting interest rate 
carryover.
    Paragraph 20(c)(2)(v)(B).
    1. Application of previously foregone interest rate increases. 
The disclosures regarding the application of previously foregone 
interest rate increases apply only to transactions permitting 
interest rate carryover.
    Paragraph 20(c)(2)(vi).
    1. Amortization statement. For ARMs requiring the payment of 
interest only, such as 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 ARMs, 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 principal balance.
    2. Amortization payment. Disclosure of the payment needed to 
amortize fully the outstanding balance at the new interest rate over 
the remainder of the loan term is required only when negative 
amortization occurs as a result of the interest rate 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 amortize fully 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(c)(2)(vii).
    1. Prepayment penalty. The creditor, assignee, or servicer of an 
ARM with no prepayment penalty, as that term is used in Sec.  
1026.20(c)(2)(vii), may decide to exclude the prepayment section 
from the Sec.  1026.20(c) disclosure, retain the prepayment section 
and insert after the heading ``None'' or other indication that there 
is no prepayment penalty, or indicate there is no prepayment penalty 
in some other manner. See also comment 1.vi to Appendices G and H--
Open-End and Closed-End Model Forms and Clauses.
    Paragraph 20(c)(3)(i).
    1. Format of disclosures. The requirements of Sec.  
1026.20(c)(3)(i) and (ii) to provide the Sec.  1026.20(c) 
disclosures in the same order as, and with headings and format 
substantially similar to, the model and sample forms do not preclude 
creditors, assignees, and servicers from modifying the disclosures 
to accommodate particular consumer circumstances or transactions not 
addressed by the forms. For example, in the case of a consumer 
bankruptcy or under certain State laws, the creditor, assignee, or 
servicer may modify the forms to remove language regarding personal 
liability. Creditors, assignees, and servicers providing the 
required notice to a consumer whose ARM is converting to a fixed-
rate mortgage, may modify the model language to explain that the 
interest rate will no longer adjust. Creditors, assignees, and 
servicers electing to provide consumers with interest rate notices 
in cases where the interest rate adjusts without a corresponding 
change in payment may modify the forms to fit that circumstance. A 
payment-option ARM, which is an ARM permitting consumers to choose 
among several different payment options for each billing period, is 
an example of a loan that may require modification of the Sec.  
1026.20(c) model and sample forms. See appendix H-30(C) for an 
example of an allocation table for a payment-option loan.
    20(d) Initial rate adjustment.
    1. Creditors, assignees, and servicers. Creditors, assignees, 
and servicers that own either the applicable adjustable-rate 
mortgage or the applicable mortgage servicing rights or both are 
subject to the requirements of Sec.  1026.20(d). Creditors, 
assignees, and servicers are also subject to the requirements of any 
provision of subpart C that governs Sec.  1026.20(d). For example, 
the form requirements of Sec.  1026.17(a) apply to Sec.  1026.20(d) 
disclosures and thus, assignees and servicers, as well as creditors, 
are subject to those requirements. While creditors, assignees, and 
servicers are all subject to the requirements of Sec.  1026.20(d), 
they may decide among themselves which of them will provide the 
required disclosures.
    2. Loan modifications. Under Sec.  1026.20(d), the interest rate 
adjustment disclosures are required only for the initial interest 
rate adjustment occurring pursuant to the loan contract. 
Accordingly, creditors, assignees, and servicers need not provide 
the disclosures for interest rate adjustments occurring in loan 
modifications made for loss mitigation purposes. The initial 
interest rate adjustment occurring pursuant to the modified loan 
contract, however, is subject to the requirements of Sec.  
1026.20(d).
    3. Timing and form of initial rate adjustment. The requirement 
that Sec.  1026.20(d) disclosures be provided in writing, separate 
and distinct from all other correspondence, means that the initial 
ARM interest rate adjustment notice must be provided to consumers as 
a separate document but may, in the case of mailing the disclosure, 
be in the same envelope with other material and, in the case of 
emailing the disclosure, be a separate attachment from other 
attachments in the same email. The requirement that the disclosures 
be provided to consumers between 210 and 240 days ``before the first 
payment at the adjusted level is due'' means the creditor, assignee, 
or servicer must deliver the notice or place it in the mail between 
210 and 240 days prior to the due date, excluding any grace or 
courtesy periods, of the first payment calculated using the adjusted 
interest rate.
    4. Conversions. When an open-end account converts to a closed-
end adjustable-rate mortgage, the Sec.  1026.20(d) disclosure is 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, i.e., an ARM with a 
fixed rate of interest for the first three years after which the 
interest rate adjusts annually, the Sec.  1026.20(d) disclosure 
would not be required until three years after the conversion when 
the interest rate adjusts for the first time.
    Paragraph 20(d)(1)(i).

[[Page 11019]]

    1. In general. An adjustable-rate mortgage, as defined in Sec.  
1026.20(d)(1)(i), is a variable-rate transaction as that term is 
used in subpart C, except as distinguished by comment 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. Short-term ARMs. Under Sec.  1026.20(d)(1)(ii), construction, 
home improvement, bridge, and other loans with terms of one year or 
less are not subject to the requirements in Sec.  1026.20(d). 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. The following transactions, if 
structured as fixed-rate and not as adjustable-rate mortgages based 
on an index or formula, 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; and
    v. Preferred-rate loans.
    Paragraph 20(d)(2)(i).
    1. Date of the disclosure. The date that must appear 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. Current and new interest rates. The current interest rate is 
the interest rate that applies on the date of the disclosure. 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 payment, if calculated from an estimated new interest rate, will 
also be an estimate. The ``new interest rate'' has the same meaning 
as the ``adjusted interest rate.'' The requirements of Sec.  
1026.20(d)(2)(iii)(A) do not preclude creditors, assignees, and 
servicers from rounding the interest rate, pursuant to the 
requirements of the ARM contract.
    Paragraph 20(d)(2)(v).
    1. Rate limits and foregone interest rate increases. Interest 
rate carryover, or foregone interest rate increases, is the amount 
of interest rate increase foregone at the first ARM interest rate 
adjustment that, subject to rate caps, can be added to future 
interest rate adjustments to increase, or to offset decreases in, 
the rate determined by using the index or formula. The disclosures 
required by Sec.  1026.20(d)(2)(v) regarding foregone interest rate 
increases apply only to transactions permitting interest rate 
carryover.
    Paragraph 20(d)(2)(vii).
    1. Amortization statement. For ARMs requiring the payment of 
interest only, such as 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 ARMs, 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 be added to the principal balance.
    2. Amortization payment. Disclosure of the payment needed to 
amortize fully the outstanding balance at the new interest rate over 
the remainder of the loan term is required only when negative 
amortization occurs as a result of the interest rate 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 amortize fully 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. Prepayment penalty. The creditor, assignee, or servicer of an 
ARM with no prepayment penalty, as that term is used in Sec.  
1026.20(d)(2)(viii), may decide to exclude the prepayment section 
from the Sec.  1026.20(d) disclosure, retain the prepayment section 
and insert after the heading ``None'' or other indication that there 
is no prepayment penalty, or indicate there is no prepayment penalty 
in some other manner. See also comment to Appendices G and H--Open-
End and Closed-End Model Forms and Clauses--1.vi.
    Paragraph 20(d)(3)(i).
    1. Format of disclosures. The requirements of Sec.  
1026.20(d)(3)(i) and (iii) to provide the Sec.  1026.20(d) 
disclosures in the same order as, and with headings and format 
substantially similar to, the model and sample forms do not preclude 
creditors, assignees, and servicers from modifying the disclosures 
to accommodate particular consumer circumstances or transactions not 
addressed by the forms. For example, in the case of a consumer 
bankruptcy or under certain State laws, the creditor, assignee, or 
servicer may modify the forms to remove language regarding personal 
liability. A payment-option ARM, which is an ARM permitting 
consumers to choose among several different payment options for each 
billing period, is an example of a loan that may require 
modification of the Sec.  1026.20(d) model and sample forms. See 
appendix H-30(C) for an example of an allocation table for a 
payment-option loan.
* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

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

* * * * *
    Paragraph 36(c)(1)(i).
* * * * *
    2. Method of crediting periodic payments. The method by which 
periodic payments shall be credited is based on the legal obligation 
between the creditor and consumer, subject to applicable law.
* * * * *
    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 or the legal obligation between the parties, the 
servicer may take any of the following actions:
    i. Credit the partial payment upon receipt.
    ii. Return the partial payment to the consumer.
    iii. Hold the payment in a suspense or unapplied funds account. 
If the payment is held in a suspense or unapplied funds account, 
this fact must be reflected on future periodic statements, in 
accordance with Sec.  1026.41(d)(3). When sufficient funds 
accumulate to cover a periodic payment, as defined in Sec.  
1026.36(c)(1)(i), they must be treated as a periodic payment 
received in accordance with Sec.  1026.36(c)(1)(i).
    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 properly negotiable form, or by 
electronic fund transfer if the servicer and consumer have so 
agreed.
    Paragraph 36(c)(2).
    1. Pyramiding of late fees. The prohibition on pyramiding of 
late fees in Sec.  1026.36(c)(2) should be construed consistently 
with the ``credit practices rule'' of the Federal Trade Commission, 
16 CFR 444.4.
    Paragraph 36(c)(3).
    1. Person acting on behalf of the consumer. For purposes of 
Sec.  1026.36(c)(3), a person acting on behalf of the consumer may 
include the consumer's representative, such as an

[[Page 11020]]

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 creditor, assignee or 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.
    2. Payment requirements. The creditor, assignee or servicer may 
specify reasonable requirements for making payoff requests, such as 
requiring requests to be directed to a mailing address, email 
address, or fax number specified by the creditor, assignee or 
servicer or any other reasonable requirement or method. If the 
consumer does not follow these requirements, a longer timeframe for 
responding to the request would be reasonable.
    3. Accuracy of payoff statements. Payoff statements must be 
accurate when issued.
* * * * *

Section 1026.41--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 closed-end consumer credit 
transaction secured by a dwelling, subject to Sec.  1026.41, the 
periodic statement may be sent 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 would separately list the upcoming 
payment due dates and amounts due, as required by Sec.  
1026.20(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 in Sec.  1026.41 applies to the ``creditor, assignee, or 
servicer as applicable.'' The creditor, assignee, and servicer are 
all subject to this requirement (but see comment 41(a)-4), but 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 which of them will send the statement.
    4. Opting out. A consumer may not opt out of receiving periodic 
statements altogether. However, consumers who have demonstrated the 
ability to access statements online may opt out of receiving 
notifications that statements are available. Such an ability may be 
demonstrated, for example, by the consumer receiving notification 
that the statements is available, going to the Web site where the 
information is available, viewing the information about their 
account and selecting a link or option there to indicate they no 
longer would like to receive notifications when new statements are 
available.
    41(b) Timing of the periodic statement.
    1. Reasonably prompt time. Section 1026.41(b) requires that the 
periodic statement be delivered or placed in the mail no later than 
a reasonably prompt time after the payment due date or the end of 
any courtesy period. Delivering, emailing or placing the periodic 
statement in the mail within four days of close of the courtesy 
period of the previous billing cycle generally would be considered 
reasonably prompt.
    2. Courtesy period. The meaning of ``courtesy period'' is 
explained in comment 7(b)(11)-1.
    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 Sec.  1026.41 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, 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. If 
statements are provided electronically, the creditor, assignee, or 
servicer may send a notification that a consumer's statement is 
available, with a link to where the statement can be accessed, in 
place of the statement itself.
    4. Presumed consent. Any consumer who is currently receiving 
disclosures for any account (for example, a mortgage or checking 
account) electronically from their servicer shall be deemed to have 
consented to receiving e-statements in place of paper statements.
    41(d) Content and layout of the periodic statement.
    1. Close proximity. Paragraph (d) requires several disclosures 
to be provided in close proximity to one another. 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 in appendix H-30, 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, 
referred to in Sec.  1026.41(d) as the ``escrow account,'' as an 
``impound account.''
    41(d)(3) Past payment breakdown.
    1. Partial payments. The disclosure of any partial payments 
received since the previous statement that were sent to a suspense 
or unapplied funds account as required by Sec.  1026.41(d)(3)(i) 
should reflect any funds that were received in the time period 
covered by the current statement and that were placed in such 
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 Sec.  1026.41(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 $1,000 is due, but the consumer sends in 
only $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 the suspense account, the January statement should 
reflect: Unapplied funds since last statement--$600. Unapplied funds 
YTD--$600.
    ii. Assume the same facts as in the preceding paragraph, 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. Assume the same facts as in the preceding paragraph, except 
that during March the consumer sends in $400. Of this payment, $100 
completes a full periodic payment when added to the $900 in funds 
already held in the suspense account. This $1,000 is applied to the 
January payment, and the remaining $300 remains 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 transaction that 
credits or debits the amount currently due. This is the same amount 
that is required to be disclosure under Sec.  1026.41(d)(1)(iii). 
Examples of such 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.

[[Page 11021]]

    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.
    41(e)(3) Coupon book exemption.
    1. Fixed rate. For guidance on the meaning of `fixed rate' for 
purpose of Sec.  1026.41(e)(3), see Sec.  1026.18(s)(7)(iii) and its 
commentary.
    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 
the outstanding principal balance. If the servicer makes use of a 
coupon book and the exemption in Sec.  1026.41(e)(3), 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.
    41(e)(4)(ii) Small servicer defined.
    1. Small servicers that do not qualify for the exemption. A 
servicer that services any mortgage loans for which a servicer or an 
affiliate is not the creditor or assignee is not a small servicer. 
For example, a servicer that owns mortgage servicing rights for 
mortgage loans that are not owned by the servicer or an affiliate, 
or for which the servicer or an affiliate was not the entity to whom 
the obligation was initially payable, is not a small servicer.
    2. Master servicing and subservicing. Both a master servicer and 
a subservicer, as those terms are defined in 12 CFR 1024.31, must 
meet the requirements of a small servicer. For example, if a master 
servicer meets the definition of a small servicer, but retains a 
subservicer that does not meet the definition of a small servicer, 
the subservicer is not a small servicer for the purposes of 
determining any exemption, and must comply with the requirements of 
a servicer.
    41(e)(4)(iii) Small servicer determination.
    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 is the 
creditor to which 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. Application of evaluation threshold. The following examples 
demonstrate when a servicer either is considered or is no longer 
considered a small servicer:
    i. A servicer that begins servicing more than 5,000 mortgage 
loans on October 1, and services more than 5,000 mortgage loans as 
of January 1 of the following year, would no longer be considered a 
small servicer on April 1 of that following year.
    ii. A servicer that begins servicing more than 5,000 mortgage 
loans on February 1, and services more than 5,000 mortgage loans as 
of January 1 of the following year, would no longer be considered a 
small servicer on January 1 of that following year.
    iii. A servicer that begins servicing more than 5,000 mortgage 
loans on February 1, but services less than 5,000 mortgage loans as 
of January 1 of the following year, is considered a small servicer 
for that following year.
* * * * *

Appendix H--Closed-End Model Forms and Clauses

* * * * *
    7. Models H-4(D) through H-4(J). These model clauses and sample 
and model forms illustrate certain notices, statements, and other 
disclosures required as follows:
    i. Model H-4(D)(1) illustrates the interest rate adjustment 
notice required under Sec.  1026.20(c) and Model H-4(D)(2) provides 
an example of a notice of interest rate adjustment with 
corresponding payment change. Model H-4(D)(3) illustrates the 
interest rate adjustment notice required under Sec.  1026.20(d) and 
Model H-4(D)(4) provides an example of a notice of initial interest 
rate adjustment.
* * * * *


    Dated: January 17, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-01241 Filed 2-1-13; 4:15 pm]
BILLING CODE 4810-AM-P